Chapter 5: How to Form a Business

A business person concerned about startup costs of a business opportunity should consider a venture other than a(n) ______ which has this disadvantage.

Franchise

An entrepreneur would buy a ______ if they are uncomfortable starting their business from scratch.

Franchise

An investor concerned about failure should consider purchasing a(n) _____ due to the lower failure rate as compared to other business ventures.

Franchise

Financial advice and a nationally recognized name are both benefits of owning a(n) _____.

Franchise

If you are your own boss, you are responsible for paying your own wages/salary and for your own _____ _____.

Fringe benefits

Mark, Cal and Aidan have decided to form a business where are owners will share in operating the business and in assuming liability for the business debts. They are most likely forming a(n) ______ partnership.

General

When a soft drink company and a mineral water company merge and then are able to supply a variety of drinking products they have formed a(n) _____ merger.

Horizontal

When two firms join together to form one new company, it is called a _____.

Merger

One company's purchase of the property and obligations of another is called a(n) ______. A. Acquisition B. LLC C. Partnership D. Merger

A. Acquisition

A unique government creation that looks like a corporation but is taxes like sole proprietorships and partnerships is _____. A. An S corporation B. A partnership C. A sole proprietorship D. An unlimited liability company

A. An S corporation

A business owned and controlled through pooled resources by the people who use it is a(n) _____. A. Cooperative B. Limited liability company C. S corporation D. Limited partnership

A. Cooperative

Select the reasons why size is an advantage of the corporation. [multiple] A. Easier to raise funds to build modern facilities. B. Easier to attract experts for hire. C. The gift of double taxation. D. Easier to raise capital to acquire the latest equipment.

A. Easier to raise funds to build modern facilities. B. Easier to attract experts for hire. D. Easier to raise capital to acquire the latest equipment.

Which are considered disadvantages of incorporating? [multiple] A. Extensive paperwork B. Initial cost C. Limited liability D. Double taxation

A. Extensive paperwork B. Initial cost D. Double taxation

What are three advantages of franchising? A. Financial advice B. Recognized name C. Lower failure rate D. Shared profits E. Large up-front costs

A. Financial advice B. Recognized name C. Lower failure rate

An agreement that gives a business the right to use a business's name and sell a product or service in a given area is a(n) _____. A. Franchise B. Merger C. Acquisition D. Limited partnership

A. Franchise

Select all attributes that make the initial cost of incorporating a disadvantage. A. High start-up costs associated with documentation B. The ease of transfer of ownership from one investor to another C. Ensuring perpetual life of the corporation D. The high cost of hiring lawyers and accountants for the complex filings needed

A. High start-up costs associated with documentation D. The high cost of hiring lawyers and accountants for the complex filings needed

In terms of operating flexibility, what are three things that LLCs are not required to do? A. Hold annual meetings B. Keep minutes C. Pay self-employment taxes D. File written resolutions

A. Hold annual meetings B. Keep minutes D. File written resolutions

Because of the difficulty in ending a partnership, decisions regarding which two areas should be spelled out in a partnership agreement? A. How to distribute assets B. Whether to pay the taxes C. The marketing plan D. When a partner can retire

A. How to distribute assets D. When a partner can retire

An entrepreneur could choose to buy a franchise because: [multiple] A. It's a business brand with a proven track record. B. The franchisee has very few restrictions after paying startup costs C. It can be started as a sole proprietorship, partnership, or corporation. D. It is less stressful than starting a business from scratch.

A. It's a business bran with a proven track record. C. It can be started as a sole proprietorship, partnership, or corporation. D. It is less stressful than starting a business from scratch.

What are some of the disadvantages of operating a franchise? A. Large start-up costs B. Shared profit C. Management regulation D. Recognized name

A. Large start-up costs B. Shared profit C. Management regulation

A(n) ______ is an attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing. A. Leveraged buyout B. Acquisition C. Merger D. Horizontal merger

A. Leveraged buyout

An S corporation has the liability protections of a corporation but is taxed ______. A. Like a partnership or sole proprietorship B. At corporate rates for each year C. Twice D. As if it were a corporation

A. Like a partnership or sole proprietorship

Which is an advantage of the corporate form of business ownership? A. Limited liability B. Limited lifespan C. Unlimited liability D. Profits are not shared

A. Limited liability

Which of these are advantages of a limited liability companies? [multiple] A. Limited liability B. Flexible ownership rules C. Choice of taxation D. No stock

A. Limited liability B. Flexible ownership rules C. Choice of taxation

What are the advantages of the LLC form of organization? A. Limited liability B. Flexible ownership rules C. Double taxation D. No stock E. Choice of taxation

A. Limited liability B. Flexible ownership rules E. Choice of taxation

Many brick and mortar franchisees are using _____ to expand their businesses online to lower costs and better meet the needs of their customers. A. Technology B. Websites C. Mail kiosks D. Personal sales

A. Technology B. Websites

Because of the poor publicity at a fellow franchise location, you notice that sales at your location have decreased. The impact of the poor publicity on your company is referred to as: A. The coattail effect B. Unlimited liability C. Changes to the franchise agreement D. Reinforcement of the franchise agreement

A. The coattail effect

Many franchises are expanding internationally because ______. A. There are large new markets available. B. There is much more competition. C. Cultural barriers are not significant. D. It is expensive to adapt products.

A. There are large new markets available.

One company's purchase of the property and obligations of another company is a(n) _____.

Acquisition

In a franchise, having management support from the franchiser is a(n) _____, whereas the coattail effect is considered a _____.

Advantage, positive, or benefit Disadvantage, negative, or drawback

A(n) ______ is where one company purchases the property and obligations of another. A. Vertical merger B. Acquisition C. Buyout D. Horizontal merger

B. Acquisition

Bruce is meeting with his accountant to choose whether his LLC is to be taxed as partnership or a corporation. This advantage of forming an LLC is called: A. Outsourcing B. Choice of taxation C. Flexible distribution D. Indecision

B. Choice of taxation

A merger that joins firms in completely unrelated industries is a _____. A. Vertical merger B. Conglomerate merger C. Negative merger D. Horizontal merger

B. Conglomerate merger

Many minority business owners prefer the _____ form of business ownership because it offers business connections and support. A. Acquisition B. Franchise C. Merger D. Sole proprietorship

B. Franchise

Which of the following are true about the advantages and disadvantages of being a franchise owner: A. Financing for franchises are easier because they charge either a start up fee or a royalty fee. B. Having a nationally recognized name for your business in a franchise can help with marketing and awareness. C. While the upfront costs of a franchise may be steep, a franchise has a better chance of succeeding than starting a business from scratch. D. Once you are a franchise owner, you have complete control over the competition within your marketing area.

B. Having a nationally recognized name for your business in a franchise can help with marketing and awareness. C. While the upfront costs of a franchise may be steep, a franchise has a better chance of succeeding than starting a business from scratch.

Which are attributes of a conventional corporation? A. It has unlimited liability. B. It is a legal entity. C. It is state chartered. D. Corporate liability is separate from owners.

B. It is a legal entity. C. It is state chartered. D. Corporate liability is separate from owners.

LLC's are considered to have operational flexibility because while they must submit articles of organization, they are not required to _____. A. Provide employee benefits or pay taxes B. Keep minutes or hold annual meetings C. Distribute profits or keep meeting minutes D. Pay taxes or hold annual meetings

B. Keep minutes or hold annual meetings

What are two advantages of the corporate form of business? A. Easy to state and end B. Limited liability C. Ability to raise more money for investment D. No special taxes

B. Limited liability C. Ability to raise more money for investment

A form of business ownership that provides limited liability, as in a corporation, but has no special eligibility requirement is a(n) _____. A. Master limited partnership B. Limited liability company C. S corporation D. General partnership

B. Limited liability company

What are two advantages of home-based franchises? [multiple] A. Feeling more isolated B. Low overhead expenses C. Ease of obtaining financing D. Relief from the stress of commuting

B. Low overhead expenses D. Relief from the stress of commuting

Amy wants to start a business but is concerned with starting from scratch without much business experience. To alleviate her concern, Amy could _____. A. Incorporate B. Obtain a franchise C. Get a larger bank loan to start D. Start a sole proprietorship

B. Obtain a franchise

Select those items considered fringe benefits that people working for a company are likely to receive, but a sole proprietor has to develop on his own. A. Freedom to make your own hours. B. Paid sick or vacation leave time. C. A pension plan. D. Paid health insurance.

B. Paid sick or vacation leave time. C. A pension plan. D. Paid health insurance.

Flexible distribution of profits and losses is considered an advantage of an LLC because _____. A. Most people want to share equally in profit/losses regardless of what they have invested. B. Profits/losses do not have to be distributed in proportion to the money each person invests. C. Distribution of profits/losses can change on a daily basis. D. Profit and loss calculations can be ignored annually.

B. Profits/losses do not have to be distributed in proportion to the money each person invests.

Gathering leads on a company website, selling products and keeping up to date on news via email, and chat rooms all serve as examples of using _____ to assist franchisees and customers. A. Coattail effects B. Technology C. Diversity D. Franchise management

B. Technology

Which of following are true regarding the process of forming a corporation? A. The process is very inexpensive in all states B. The articles of incorporation are usually filed in the state in which the company will be incorporated C. The filing process for the articles of incorporation are very consistent from state to state D. The bylaws of the corporation describe how the firm is to be operated.

B. The articles of incorporated are usually filed in the state in which the company will be incorporated. D. The bylaws of the corporation describe how the firm is to be operated.

What two items are delineated in a franchise agreement? A. The royalty fee to be paid for each item sold. B. The right to use a specific business' name. C. The right to sell a business' products in a given territory. D. The right to place one's logo on another business's product.

B. The right to use a specific business' name. C. The right to sell a business' products in a given territory.

A franchise owner will experience the coattail effect when _____. A. Management assistance becomes a burden to the franchise owners. B. A fellow franchisee buys out another franchise. C. A fellow franchisee does something that has an impact on growth and profitability. D. They are required to pay a large share of their profits as a royalty.

C. A fellow franchisee does something that has an impact on growth and profitability.

An advantage of the separation of ownership from management in corporations is that the company can raise money from investors but the investors _____. A. Do not usually receive stock B. Control daily operations of the board C. Are not involved in daily operations D. Must receive dividends

C. Are not involved in daily operations

A corporation is formally formed with _____. A. Bylaws and union formation B. A partnership agreement C. Articles of incorporation and bylaws D. Very little paperwork or cost

C. Articles of incorporation and bylaws

Selling shares of stock to anyone allows a _____ to raise more money to grow. A. Limited liability corporation B. Partnership C. Corporation D. Sole proprietorship

C. Corporation

Low overhead costs are an advantage of which type of business? A. Restaurant franchises B. Sole proprietor retail store C. Home-bases businesses D. Large corporations

C. Home-bases businesses

A merger of two firms in the same industry that allows the companies to diversify or expand their products is a(n) ______. A. Conglomerate merger B. Vertical merger C. Horizontal merger D. Acquisition

C. Horizontal merger

The form of business ownership called _____ protects the person's personal assets from the debts of the business. A. General partnership B. Sole proprietorship C. Limited liability

C. Limited liability

The limited partners' risk of losing their personal assets in an LLP is _____. A. Limited to the general partner's share B. Limited to the master's share C. Limited to the outcomes of their own acts and omissions D. Unlimited and includes all of their liability

C. Limited to the outcomes of their own acts and omissions

The laws of which two states make the process of incorporation easier than it is in other states? A. New York B. California C. Nevada D. Delaware

C. Nevada D. Delaware

What can be said about the survival rate of partnerships as compared to sole proprietorships? A. Partnerships are less likely to succeed. B. Partnerships and sole proprietorships have about the same survival rate. C. Partnerships are more likely to succeed.

C. Partners are more likely to succeed.

If you start and manage a landscaping business on your own, you have likely started a ______. A. Franchise B. Corporation C. Sole proprietorship D. Partnership

C. Sole proprietorship

For a business to grow, prosper, and create economic opportunity, many people have to be willing to invest money in it. An advantage of a corporation is its ability to raise money through _____. A. Sponsorship B. The collection of dividends C. The sale of stock D. Donations of family and friends

C. The sale of stock

What are two reasons that franchises are attractive to minority populations? [multiple] A. They have a higher failure rate. B. They are often unknown beyond a local area. C. They provide personal ownership of a business. D. Some offer financial support to aspiring business owners.

C. They provide personal ownership of a business. D. Some offer financial support to aspiring business owners.

When the actions of other franchises have an affect on your business operation, this is called: A. Partnering B. Leveraging C. Incorporating D. Coattail effects

Coattail effects

If a software company and a snack food company merged, it would be called a(n) _____ merger.

Conglomerate

Because owners are only responsible for losses up to the amount they have invested in a corporation, limited liability is considered: A. An incidental benefit B. Unethical in the eyes of investors C. Illegal under contract law D. A major advantage

D. A major advantage

Which country is the most popular target for U.S.-based franchises to enter the global market? A. China B. Mexico C. Japan D. Canada

D. Canada

A state-chartered legal entity with authority to act and have liability separate from its owners is a _____. A. General Partnership B. Stakeholder C. Sole Proprietorship D. Corporation

D. Corporation

A company similar to an S corporation but without the special eligibility requirements is an _____. A. Corp B. MLP C. Inc D. LLC

D. LLC

The start-up costs of filing for incorporation are high because: A. Partnership agreements are lengthy B. The federal government charges very high fees C. Stockholders are very exacting D. Lawyers and accountants are needed to do the complex filings

D. Lawyers and accountants are needed to do the complex filings

Sole proprietors can leave their business to their heirs. This is called _____. A. Sharing management B. Being your own boss C. Pride of ownership D. Leaving a legacy

D. Leaving a legacy

Stockholders' liability for losses only up to the amount they invest is called _____. A. Unlimited liability B. Personal liability C. Complete liability D. Limited liability

D. Limited liability

The form of partnership that limits liability to the limited partner's own acts or those of the people they supervise is a _____. A. Master limited partnership B. General partnership C. Master partnership D. Limited liability partnership

D. Limited liability partnership

When the continued operation of the business is dependent on the life of the business owner, it is referred to as _____. A. Limited financial resources B. Limited growth C. Management difficulties D. Limited life span

D. Limited life span

How is the distribution of profit and losses handled in an LLC? A. Losses are distributed equally; profits are distributed on a percentage basis. B. There is no distribution of profits; losses are distributed equally. C. Each member receives both profits and losses equally. D. Members agree on the percentage to be distributed to each member.

D. Members agree on the percentage to be distributed to each member.

The result of two firms joining to form one is called a(n) ______. A. LLC B. Acquisition C. Partnership D. Merger

D. Merger

Termination of a partnership is difficult without a(n) _____ agreement. A. Employment B. Tax C. Corporate D. Partnership

D. Partnership

When a corporation is separate from its owners and does not terminate with the death of one owner, the corporation has: A. Limited life B. Perceptual life C. Unlimited value D. Perpetual life

D. Perpetual life

Unlimited liability as it relates to sole proprietorships is the risk of _____. A. Losing one's personal freedom to run the business. B. Losing money rather than making a profit. C. Unlimited taxation. D. The loss of personal assets.

D. The loss of personal assets.

A major disadvantage of the corporate form deals with the tax situation called _____ taxation.

Double

How are LLC's taxed? A. Either as a sole proprietorship or a partnership B. As a partnership C. As a corporation D. As a sole proprietorship E. Either as a partnership or a corporation

E. Either as a partnership or a corporation

True of False: Partnerships are less likely to survive than sole proprietorships.

False

True or False: Corporations must be large in size to benefit from the advantages of incorporating.

False

True or False: If producers, consumers, or workers with similar needs pool their resources for mutual gain, they have created a franchise.

False

True or False: In a limited partnership, the liability of the limited partners is unlimited and personal assets are at risk.

False

True or False: The coattail effect in franchising means that you will do well as long as other franchises are doing well, even if your particular franchise is not profitable.

False

The paperwork needed to start a corporation is extensive and a corporation must also keep detailed _____ records documenting all financial transactions in detail.

Financial or Accounting

When a sole proprietor leaves an ongoing business to future generations, it is said that the owner is leaving a _____.

Legacy

A _____ _____ can be initiated by employees, managers, or investors who borrow necessary funds to purchase all shares of a firm's stock.

Leveraged buyout

In a general partnership, all partners share the responsibility for operating the business and assume ______ for the business's debts.

Liability

A _____ partnership has partners who do not share in operating the business.

Limited

A key advantage of LLCs is _____ liability where personal assets are protected.

Limited

Don wanted to incorporate his business and liked the attributes of an S-corporation, however, he did not feel the eligibility requirements would work for his purposes. He is likely to choose to form a(n) _____ _____ company.

Limited liability

Limited liability, choice of taxation, flexible ownership rules, and operating flexibility are all advantages of a(n) _____ _____ company.

Limited liability

Rank the order in which members of a corporation are chosen in order to separate ownership from management. The top item in your list should be the top of the managerial hierarchy. Managers hire employees Owners/stockholder elect board of directors Officers hire managers of the corporation Board of Directors hire officers of the corporation

Owners/stockholders elect board of directors Board of Directors hire officers of the corporation Officers hire managers of the corporation Managers hire employees

Having _____ _____ means that a corporation's existence will not terminate if one or more owners die.

Perpetual life

Shareholders are not liable for the debts of a corporation beyond the money they invest in it by buying company _____.

Stock

True or False: The failure rate of franchises is lower than other business ventures.

True

True or False: The main advantage of a sole proprietorship is ease of start up.

True

True or False: While you are still your own boss as a franchise owner, your territory or selling boundaries may be regulated by the franchiser.

True

When you own a sole proprietorship, you and the business are considered one, so you have _____ liability for financial obligations such as debt.

Unlimited

A merger between a soft drink company and an artificial sweetener maker could be considered a(n) _____ merger.

Vertical

When two firms operating in different stages of related businesses join, it is called a(n) _____ merger.

Vertical

The joining of two firms in the same industry is a(n) _____ merger.

horizontal