Chapter 5 LearnSmart Quiz

At Sound Off!, a store that buys and sells used CDs, there is only one general partner, Sonia. She spends all her time running the business, and makes all the decisions. Sonia's mother and brother put up money for her to buy the store, but they work full time at other jobs and have no management say in the running of Sound Off!, but share in some of the profits. This is an example of a Multiple Choice general partnership. master limited partnership. S corporation. limited partnership.

Limited Partnership Explanation A limited partnership is a partnership with one or more general partners and one or more limited partners. Limited partners are owners who invest money but do not have any management responsibilities.

When Luke, Larry, and Lance lost their jobs during the recent recession, they pooled their resources, borrowed a little more, and bought a couple of houses to renovate. All three were concerned about the risk involved in owning their own business, particularly the risk of losing personal assets. As their advisor, which of the following forms of business ownership would you recommend? Multiple Choice sole proprietorship general partnership limited liability company master limited partnership

Limited liability company Explanation The advantage of the LLC, limited liability company, is limited liability (members are only liable for the funds each invested) and a choice of how the organization will be taxed. In this case, the partners were concerned with liability. The other three forms of ownership have unlimited liability.

Which of the following lists characteristics typical of a C corporation? Multiple Choice Shareholders must be U.S. citizens. Each business is limited to 100 shareholders. Limited liability, but taxed like a partnership or sole proprietorship Flexibility to be taxed in several different ways with a limited life Taxed separately from its owners who also enjoy limited liability

Taxed separately from its owners who also enjoy limited liability Explanation C corporations are taxed separately from their owners; and owners enjoy limited liability.

Twenty years ago, your parents invested in Apple. As the years have gone by, the investment has grown. However, if Apple should go out of business and declare bankruptcy, what would happen to your parent's investment? Multiple Choice Your parents will be responsible for some of the debt of Apple. Your parents will have to go to court to show they have no involvement in the firm. Your parents will only lose the value of their shares. Your parents will have to borrow money to pay for the value of their shares.

Your parents will only lose the value of their shares. Explanation A corporation's stockholders are its owners. A major advantage of corporations is the limited liability of their owners. Since limited liability means that the owners of a business are responsible for losses only up to the amounted invested, your parents would only lose the value of their shares.

International franchising is Multiple Choice a successful growth area for both small and large franchises. about the same as domestic franchising in terms of costs. becoming increasingly difficult and thus is not growing. easy because you do not have to adapt your product at all to different markets.

a successful growth area for both small and large franchises. Explanation International franchising is an area that offers good opportunities for both large, established franchises (i.e. McDonald's) and smaller, emerging franchises that offer distinctive products and opportunities.

When your profitable franchise fails simply because other similar franchisees have failed, this is known as the Multiple Choice royalty rate. coattail effect. participative failure rate. greenback ceiling.

coattail effect. Explanation The coattail effect is when the actions and success or failure of other franchises have an impact on your future growth and profitability, positively or negatively.

Partnerships refer to more than one owner. A limited partnership Multiple Choice is limited by the number of partners allowed. There can only be a total of 10 partners actively involved in the business. is taxed similar to a corporation, whereas a general partnership is taxed like a sole proprietorship. consists of general partners and limited partners, at least one of each. is a shadow firm for a much larger corporation. It is like a shell company to dispose of risky assets.

consists of general partners and limited partners, at least one of each. Explanation A limited partnership consists of at least one general partner actively involved in the business, and one limited partner who has invested in the business and seeks to realize a portion of the profits, but is not actively involved in the operational decision making.

In a ________, members democratically control the business by electing a board of directors that hires professional management to run the business. Multiple Choice corporation cooperative franchise master limited partnership

cooperative Explanation A cooperative is a business owned and controlled by the people who use it.

Joel and Mike would like to start a new business selling a product new to the U.S., the Peraves Monotracer. Joel and Mike have done a considerable amount of research on this product, and think it would be successful in the U.S. However, they are still concerned about the risk of a new venture and both would like to avoid losing any personal assets. They should organize their firm as a Multiple Choice corporation. limited partnership. general partnership. sole proprietorship.

corporation Explanation Joel and Mike would want to organize their firm as a corporation because of limited liability. They would also have the ability to raise more money for investment.

You inherited 500 shares of IBM stock from your Great Aunt Mabel. As you contemplate selling the shares, your accountant informs you that the company pays a generous dividend, and advises you to start watching the firm's profits. When you are awarded the first dividend, you learn that it is considered a source of income and you will be taxed on that amount. You find this bothersome because the firm paid the dividend from after-tax profits (these dollars were already taxed). This phenomenon is called Multiple Choice corporate taxation adjusting. double taxation. shareholder tax penalty points. entitlement tax.

double taxation Explanation Corporate income is taxed twice. First the corporation pays tax on its income before it can distribute any, as dividends, to stockholders. Then the stockholders pay income tax on the dividends they receive. This is known as double taxation.

When Betsy Blackwell bought a Mighty Maid franchise, she became a Multiple Choice franchisor. limited stockholder. venture capitalist. franchisee.

franchisee. Explanation Franchisees are the people who buy franchises.

A few years ago, in order to gain market share, Blackboard™, a well-known management system software company used by many colleges and universities, joined forces with WEB CT™, another management system software company. Both companies were in the same industry and originally competed against one another. In business, we would call the joining of these two firms a(n) Multiple Choice vertical merger. conglomerate merger. horizontal merger. applied acquisition.

horizontal merger. Explanation A horizontal merger is the joining of two firms in the same industry, often producing very similar products or services. This strategic move is usually for the purpose of the purchasing firm increasing its market share and competitive advantage.

If the employees of San Simeon Company successfully borrowed a large sum of money and purchased the firm from its current owners, we would call this event a Multiple Choice leveraged buyout. stock grab. management merger. hostile takeover.

leveraged buyout. Explanation Leveraged buyout (LBO) is an attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing. The funds borrowed are used to buy out the stockholders in the company. The employees, managers, or investors now become the owners of the firm. When managers buy all of the stock of a firm and take it off the open market, it is referred to as taking the firm private.

When Beck joined his uncle's oil exploration company in east Texas, he was given several hundred shares of stock in the firm, and was officially made a partner. The firm's accountant explained that the company paid taxes the same way as regular partnerships, by passing the profits through to each partner. Beck could purchase more shares of the company on a public stock exchange, as long as someone was willing to sell his/her shares. This firm was likely a special form of ownership called a Multiple Choice master limited partnership. limited partnership. generally acceptable partnership. strategic alliance.

master limited partnership. Explanation A master limited partnership pays taxes like other partnerships, by passing the profits through to the individual owners, and thus accounting for those profits on each owner's federal tax return. Similar to a corporation, the master limited partnership's shares actually trade on a stock exchange.

Advantages of ________ include reduced start-up fees and no territory restrictions. Multiple Choice fast-food franchising online franchising international franchising multiple sector franchising

online franchising Explanation Starting an online franchise has its advantages in reduced franchise fees, lower start-up costs, and no territory restrictions.

When going into a partnership, you should always Multiple Choice put all terms of the partnership into writing in a partnership agreement. make sure that you have limited liability while you are in charge. make sure all the profits are reinvested into the company. divide the profits equally.

put all terms of the partnership into writing in a partnership agreement. Explanation When starting a business, a good way to protect yourself and all partners is to put your partnership agreement in writing.

One of the key advantages of a franchise is Multiple Choice receiving management and marketing expertise from the franchisor. fewer restrictions on selling than in other forms of businesses. lower start-up costs than all other businesses. getting to keep all the profits of your business after taxes.

receiving management and marketing expertise from the franchisor. Explanation The advantages of a franchise include: (1) management and marketing assistance, (2) personal ownership, (3) nationally recognized name, (4) financial advice and assistance, and (5) lower failure rate.

In his search for a franchised business that would satisfy his passion for the outdoors and earn him a decent living, Andrew noted that the shared profit criterion required of franchisors had significant variance. Some required franchisees to pay 7% of their monthly revenues to the franchisor. Others required 4% of the profits. In business we refer to this obligation as a Multiple Choice royalty. penalty fee assessment. market use fee. franchise attachment.

royalty. Explanation Royalties are shared profit obligations that the franchisee agrees to pay the franchisor. This payment can be in the form of a percentage of the revenues or a percentage of the profits. Shared profits are usually considered a disadvantage of owning a franchised business.

Which form of business ownership is the most common in the United States? Multiple Choice sole proprietorship master limited partnership S corporation corporations

sole proprietorship Explanation A sole proprietorship is an easy form of business ownership to form with limited start-up expenses, unlimited liability, and no special taxes, meaning the profits from the business are taxed at the individual owner's personal income tax rate.

When Gene started his window-washing business, he wanted to keep things simple. He liked the idea of being his own boss and the possibility of leaving the business one day to his son. He chose the type of business that was easy to start, allowed him to keep company profits, and not have any special taxes. Gene's financial resources were limited, but so were his concerns; after all, "he was the business." Gene's business is most likely a(n) Multiple Choice corporation. master limited partnership. S Corporation. sole proprietorship.

sole proprietorship. Explanation A sole proprietorship is an easy form of business ownership to form with limited start-up expenses, unlimited liability, and no special taxes, meaning the profits from the business are taxed at the individual owner's personal income tax rate.

The owners of a corporation are called Multiple Choice trustees. stockholders. limited partners. proprietors.

stockholders Explanation Stockholders are the owners of corporations. However, they are not liable for the debts or other problems of the corporation beyond the money they invest.

A firm's management purchases all the issued and outstanding stock of the firm and takes the company off the stock market. The management of this company has engaged in Multiple Choice a leveraged buyout. a conglomerate merger. taking the firm private. forming a master limited partnership.

taking the firm private Explanation Taking a firm private involves the efforts of a group of stockholders or management to obtain all of the firm's stock for themselves.

Unlimited liability means Multiple Choice the business is responsible for the majority of debt it incurs, and filing bankruptcy is out of the question. the business is responsible for the debt it incurs. If the business cannot pay its bills, the debt burden transfers to the owner(s), and he/she/they are liable for all debt. the business is responsible for the debt. If the business cannot pay, the company files for bankruptcy. The debt does not fall on the shoulders of individual owners. They are safe from liability. that all forms of business are responsible for all the debts a business incurs in its everyday operations.

the business is responsible for the debt it incurs. If the business cannot pay its bills, the debt burden transfers to the owner(s), and he/she/they are liable for all debt. Explanation When the business accepts unlimited liability, any debt the business incurs is the burden of the owner(s). The owner assumes all liability for paying these bills.

A brother and sister team, Franco and Julietta, took over the family's Italian restaurant business when their father died. Julietta operated one of the three locations, kept the firm's books, and ordered supplies and equipment for all three locations. Franco operated the other two restaurants. Franco thought he should get 2/3 of the company profits because he was responsible for the profitability on two out of three locations. Julietta saw it differently because she felt her responsibilities spanned the entire business. What's important for them to remember in their situation is Multiple Choice the firm's limited liability status. the fact that Jack should get the profits from two locations because he also assumed all the liability from those locations. a 40/60 split with Julie getting the lion's share since she was spending lots of hours on the books and ordering. the fact they both shared unlimited liability, and if one or the other failed to meet his/her financial commitment, the other partner would also be liable for all debts.

the fact they both shared unlimited liability, and if one or the other failed to meet his/her financial commitment, the other partner would also be liable for all debts. Explanation Julietta and Franco are general partners because both are actively involved in the company. As such, both have unlimited liability. If the company is not able to pay its bills, the burden falls to both partners. If one or the other partner is unable to pay, the burden falls on the other partner to pay all.

Flexible Fittings was a small manufacturing company that made shut-off valves for gas pipe used in home and building construction. Flexible purchased the General Gas Pipeline Company, which was Flexible Fittings' largest customer. This strategic decision bringing the two companies together is called a Multiple Choice conglomerate merger. vertical merger. horizontal merger. hostile acquisition.

vertical merger. Explanation A vertical merger is the joining of two firms at different stages of related businesses.