Chapter 5

Due to several years of poor performance, Scrappy's Metal Fabrication, Inc., is closing. Through the use of debt financing, workers plan to purchase the company's stock from current shareholders, in order to buy the firm, improve company performance, and save jobs. a) True b) False

a

The debts of a business operated as a sole proprietorship are considered to be the personal debts of the owner of the business. a) True b) False

a

Which of the following statements about S corporations is most accurate? a) The major attraction of S corporations is that they avoid the problem of double taxation. b) S Corporations are similar to C corporations, except that the majority of owners are foreign investors. c) Any corporation willing to pay the necessary fees and fill out the required paperwork can become an S Corporation. d) Only large corporations with operations in more than one state can qualify to be classified as S corporations.

a

A group of medical doctors are interested in incorporating their business. There is no advantage due to the costs involved. a) True b) False

b

A leveraged buyout is an attempt by top management to gain control of a company by issuing a large amount of new stock. a) True b) False

b

Although franchise arrangements are a good source of income for the franchisee, these businesses do not contribute significantly toward job creation. a) True b) False

b

Although sole proprietors do not pay any special taxes, as the owner of the business you are also an employee of the business which requires you to: a) Pay income tax only one time each year. b) Pay self-employment taxes. c) Pay for the right to get an employee identification number. d) File an income tax return for the business.

b

In the late 1990s, firms found it easier to grow market share by: a) Switching from the corporate form of ownership to the partnership form of ownership. b) Merging with other companies or acquiring new companies. c) Downsizing their operations. d) Avoiding problems with antitrust regulations.

b

In today's economy, only large business enterprises should operate as corporations. a) True b) False

b

Joshua wants to run his own business. A friend suggested that an inexpensive way to get started is to buy a franchise, where he will have the freedom to run it exactly as he sees fit. As a recent student of business, you concur with this advice. a) True b) False

b

One of the major disadvantages of a partnership is that profits must be divided equally. a) True b) False

b

Randy and Mandy plan to pool their money and musical talents to form a general partnership and begin booking weekend gigs. One of the first things Randy and Mandy should do is: a) Seal the deal with at least five night spots where they can book three months worth of gigs. b) Consult an attorney and put their agreement in writing. c) Pay the partnership formation fee to their state's commerce commission. d) File the limited liability paperwork at the court house in the county in which their partnership will be formed.

b

A separation between ownership and management is most likely to occur in a: a) Sole proprietorship. b) General partnership. c) Corporation. d) Limited liability partnership.

c

_____________ are companies that are similar to S Corporations but are not restricted with similar eligibility requirements. a) Regulated equity companies b) Corporate cooperatives c) Limited liability companies d) Private drawing companies

c

When comparing general partnerships to sole proprietorships, an advantage of partnerships is that they: a) Are less risky, because each partner is responsible for only a specified fraction of the firm's debts. b) Are easier to terminate. c) Cost less to organize. d) Give the firm a stronger financial foundation.

d