Business Foundations: Chapter 4

Marleen was considering buying stock in a publicly traded corporation. She reviewed the sales statistics for two companies with the goal of determining which company would be the best for investment purposes. Company A had annual profits of $2 million a year at its five-year mark with profits increasing annually for five additional years to profits of $1.2 million. Company B had annual profits of $20,000 at its five-year mark, but profits increased annually for five additional years to $200,000 with these numbers climbing annually. Which of the following is most likely in light of these profit figures?

Company A has most likely expanded its operations over five years by selling new items or selling in new markets.

What type of merger would be represented by a merger of Coca Cola and Pepsi Co.?

Horizontal merger

Disputes among business associates occur most often in

partnerships

Heather was sole proprietor of her business until she passed away. Now the company

will cease to exist unless the heirs take it over or sell it.

Disney Corporation was incorporated in California but moved to another state because it offered the lowest organizational costs for corporations of any state in the United States. What state did it move to?

Deleware

The Bicycle Company has been incorporated and Rebekah and Andy have sold stock to 33 other individuals while retaining just over half of the stock for themselves. During a shareholder meeting, the shareholders unanimously agreed that they would like to have the profits and losses passed through to them just like they would in a partnership. All of the shareholders are individuals and citizens of the United States. The Bicycle Company could be converted into a(n)

S-corporation

Earl is having a party at his home because he is now a member of Earl's Hoses, Inc. board of directors. How did he get this position?

He was elected by the company's shareholders.

If Aloha Air Cargo Airlines united with Alaska Airlines to become Aloha Alaska Airlines and neither of the original companies remained, what kind of transaction would this be?

Horizontal merger

Fred Smith Auto is incorporated in California and has business in Kentucky, South Carolina, Georgia, Florida, Washington, and Oregon. In the states where he does business, except for California, how is Fred Smith Auto classified?

It is classified as a foreign corporation.

Jeeves and Elizabeth would like to form a business that gives them protection from liability but is taxed like a partnership. They have investigated S-corporations but rejected them as having too many government regulations. They should form a

LLC

Gary wants to form a business that has very little government regulation. He has investigated different forms of business and determined that he will avoid forming a ____ because it is the most heavily regulated by the government.

corporation

Jose and Juan would like to form a partnership to acquire land, develop a shopping center on it, and then sell the development to a builder. Jose is a real estate investor and Juan is a developer. To accomplish their goals, they should form a

joint venture.

There are different kinds of partnerships. In a limited partnership, the ___ partners have limited liability.

limited

The Union Rescue Mission, an organization that aids and feeds the homeless, and the American Heart Association are both examples of

not-for-profit corporations.

Risky and Smelly, Inc. discovered financial information about its prime competitor, Odors Inc., which it used to its advantage. Risky and Smelly did not obtain the information from any illegal source or through any illegal means. As discussed by the authors, which of the following disadvantages of having a corporate form of business is responsible for Risky and Smelly's knowledge of the details of its competitor's financial situation?

The reporting of specific corporate activities requiring a lack of secrecy

Carole has investigated the possible tax advantages of opening a business in the form of a sole proprietorship rather than one of the other forms of business. She discovers that

a sole proprietorship does not pay special state and federal taxes that corporations pay.

Which of the following forms of business create a double taxation situation?

corporation

Rogers and Hammers need to raise capital for their new start-up technology business. The most effective form of business organization for raising capital is the

corporation.

Kelsey has just received her distribution of earning from the stock she has in Chevron. That means she has received

dividends

Disney Corporation is incorporated in Delaware. In Delaware it is considered a(n)___ corporation.

domestic

How corporations are designated changes depending on where the corporation is doing business. When a corporation is in the state in which it is incorporated it is known as a(n)

domestic corporation

Harry, Moe, and Carol own a lawn mowing business. Moe invested 60 percent of the capital to start the business, Carol invested 25 percent of the capital, and Larry invested 5 percent. Their partnership agreement does not specify how profits should be divided therefore the profits shall be divided

equally.

Siegfried is a member of a partnership with 50 members. All of the other members have limited liability but he has unlimited liability. From this we know that Siegfried is the

general partner

If ABC Toys and Toys-R-Us merged, this would be known as a

horizontal merger

Sole proprietorships are the most prolific form of business in the United States, however, ___ businesses account for the highest percentage of all sales revenues.

incorporated

If Microsoft purchased Apple, leaving only one company remaining at the conclusion of the purchase, this would be referred to as a(n)

merger

The term preferred stock means that the owner

most likely does not have voting rights but has a claim on dividends that are paid before those of common-stock owners.

Freddie and Mack join together in a voluntary association to act as co-owners of a business. They have formed a(n)

partnership

A technique used to gather enough stockholder votes to control a targeted company is called a

proxy fight

If Bank of America, Wells Fargo, Union Bank, and USA Bank joined together to make an extremely large loan, this association would be referred to as a(n)

syndicate

Fred and Barney have decided to incorporate their quarry business. One of the first things they will do is submit their articles of incorporation to

the secretary of state.

Able, Baker, Charlie, Edward, and Frank decide to form a partnership. Their partnership is unusual because most partnerships have __ partners.

two

All of the following are advantages of a sole proprietorship except

unlimited liability

What percentage of businesses in the United States are sole proprietorships?

72

Eric, Frank, and Garek have a business they formed as a partnership. The business secures entertainment for parties that is compatible with the party theme. They named the business The Music Machine. They all majored in business in college and felt capable of running their business. Because they were in a hurry to get started, and were old friends, they did not put their articles of partnership in writing, but instead relied on mutual trust. To get the business started and operating, its first year, Eric contributed $100,000 to the business, Frank contributed $30,000 to the business, and Garek contributed $5,000 to the business. They discussed how profits and losses would be divided, but never came to a solid conclusion; therefore, Eric thought they would divide them according to the percentage of their contributions, but Frank and Garek thought they would be divided equally. Six months into operating the business they had a disagreement about whether they should limit their business to teen parties, proms, and college events, or should expand to include adult and corporate events. Eric wanted to expand to the adult and corporate market but Frank and Garek wanted to limit growth. By the end of the first year, the men were so divided that Frank and Garek decided to quit working with Eric and open their own business. They demanded that the business be sold and their contributions returned to them. Which of the following statements is true about the division of profits and losses?

Division of profits and losses is one of the benefits of forming a business as a partnership.

Lumel was elected to a position with Quark Industries. He has an office, and with other people in his position, is responsible for making decisions about the governance of the corporation. What position does Lumel hold with the corporation?

He is a member of the board of directors.

Shanice has been reading business publications about different forms of business. She reads that experts believe _____ will become the most popular type of business organization.

LLC

Rachel and Diane would like to form a business providing large-print books to homebound destitute senior citizens in Detroit. The books would be purchased from library book sales or donated to their business. Rachel and Diane would deliver the books. They would like the business to become international in scope. They will need to raise $100,000 to get their business running and will eventually have much greater capital needs. From the following choices, select the best form of business Rachel and Diane could adopt?

Non-profit corporation

Megan would like to start a sewing club for underprivileged children teaching them to make quilts and other creative items. She does not want to sell stock but would like to take donations to support the club. What would be the best business form for this club?

Not-for-profit corporation

Rebekah's business has been running very well but she feels she needs help and would like to share the ownership, control, profits, and responsibilities with another person and has drafted an agreement dividing responsibilities, outlining division of profits and losses, and other pertinent points. What type of business will she change the sole proprietorship into?

Partnership

When Warren Buffet began business, he did not have sufficient personal funds to own the businesses he operated so he brought in friends and family members to help with the funding. The businesses he operated were formed with an agreement, but no formal filing was required and taxes were passed through directly to the business owners. What business form did he use to create these businesses?

Partnerships

Becky's Booties, a shop that sells handmade baby booties and other items, has been operated as a sole proprietorship. Becky now wants to close the business. What must she do?

Pay creditors

Becky wants to form a business in the easiest way possible. What form of business should she use?

Sole proprietorship

Maven decides she wants to open a chicken and waffle restaurant. She rents a restaurant that was closed, gets a business license, opens a business checking account, buys dishes, silverware, cups, saucers and supplies; and opens the doors. She does all of the work herself, pays all the bills herself, owns it, and operates it herself. What is the business form she uses to operate her restaurant?

Sole proprietorship

Fred and Estelle want to start a dance instruction business together. They have discussed sole proprietorships, partnerships, and corporations and find the corporation to be attractive because it overcomes a primary disadvantage the other two forms do not overcome. What is that disadvantage?

Unlimited liability

Francis won $1 million in the lottery and wishes to start her own business. Her lawyer suggests she form a corporation rather than a sole proprietorship because

a sole proprietorship has unlimited liability.

Toyota is chartered as a corporation in Japan but does business in the United States. In the U.S. it is known as a(n) ____ corporation.

alien

Fred and Barney have decided to go into the quarry business together. They start by writing an agreement that explains the parameters of the business they will own and the responsibilities and roles each of them will have in the business. They have created

articles of partnership.

The best way to begin a partnership for a professional business practice is to

carefully draft a partnership agreement that states each partner's duties and investments.

Bobby and Brian, brothers, own a machine milling company that they incorporated. They are the only stockholders and have an agreement that upon the death or inability of either to work in the business any longer, the other has the right of first refusal to buy the deceased or disabled individual's stock. This corporation is known as a(n)

closed corporation

All of the following are disadvantages of a sole proprietorship except

double taxation

Luis has a trucking company that he would like to expand. To do so he will need more money but does not want to risk any more money of his own. He contacts a lawyer to see if all of the legal requirements have been met to begin the process of

incorporating.

A _______ is a partnership formed to operate for a specific time period or to accomplish a specific purpose.

joint venture

If Giuseppe, owner of a dairy, and Francis, owner of a milk processing plant and laboratory, join together to produce a cream that slows the aging process, this would be called a(n)

joint venture.

If Honda Motor Co. Ltd. and Harley Davidson engaged in a temporary alliance to manufacture and market certain models of motorcycles in order to gain access to one another country's national markets, this partnership would be known as a

joint venture.

Jim gave his grandchildren, Liz, Anne, and Ellis, stock in Disney Corporation for Christmas. He bought the stock through his stockbroker. That means Disney is a(n) ___ corporation.

open

After many months in business, Hank decides that there are some negative aspects of having a sole proprietorship. All of the following are negatives except

pride of ownership

Andrew receives a postcard in the mail from the corporation in which he owns stock. The postcard directs him to vote in the upcoming election of corporate directors and if he cannot vote then to complete the ____ form allowing someone else to vote for him.

proxy

Company A would like to gather enough stockholder votes to control Company B. To do this it could launch a

proxy fight

Jennifer bought an ownership interest in IBM. The name normally given to an ownership interest in a corporation is

stock

When Pepsi Co. merged with Kentucky Fried Chicken this was known as a

conglomerate merger.

Rebekah and her business partner, Andy, are reviewing their business and think they should add a bicycle tour business to their Bikes, Bytes, & Bagels business that will pick up riders at their hotels, take them to the shop for breakfast, and then provide them with a guide, bicycle helmets, transportation for those unable to complete the ride, and a pick-up of the bicycles and riders at the end of the ride to return them to their hotels. Because of the liability and need for more money to buy the vehicles, bicycles, and other equipment for the new business enterprise, they decide that it would be best to form the new business as a ___ named The Bicycle Company.

corporation

Timothy decides he needs cash and must sell his stock in Google, Inc. When he sells his stock he will discover that one of the benefits of a corporation as a business form is

the ease of transferring ownership.

Donald inherited an ownership interest in an open publicly traded corporation shortly after he graduated from high school. He is now graduated from college and would like to sell his ownership in order to purchase a house. Which of the following best describes the sale process?

Ease of transfer of ownership is one of the benefits of corporate ownership, therefore he should have no difficulty selling his ownership interest.

Consolidated Trucking operates in most states of the United States. If it decides to incorporate, which state could it elect to be its state of incorporation?

It could incorporate in any state in the United States.

Only Real Estate, Inc., Really Real Estate Broker, Inc., and Bigger Builders, Inc. form a business to purchase land to develop and build a strip center in Fort Wayne, Indiana. According to their agreement, the business will operate only until the strip center is built, then the strip center will be sold to Uptown Stores, Inc., an owner and operator of shopping centers across the United States. Once the sale is complete, their business will be dissolved. What type of business have they formed?

Joint venture

Philippe would like to open a fondue restaurant in San Francisco. He has determined that, due to the large population of upwardly mobile individuals, and the city's reputation for fine dining, the demand for such a restaurant should be high. He has studied the demographics of the area, the competing businesses, the costs of rent, electricity, gas, licensing, insurance, and all of the costs associated with payroll taxes and employee liabilities. He has determined that he can run the business with a minimum of 12 people if the restaurant does not open until 5 p.m. and closes at midnight. After completing all of his costs calculations and subtracting them from his projected income for the first year, he has determined that he will be about five thousand dollars a month short. He had decided to run the business as a sole proprietorship but is now reconsidering this decision. He needs money but he doesn't want to give up any control or go into debt. What would be the best form of business for him to have under these circumstances?

Limited partnership

Melville and Ishmael would like to form a fishing company that limits their personal liability but gives them complete control over its operations and allows them to share profits and losses. They do not mind filing documents with the secretary of state but would like to maintain privacy as well. What form of business would you recommend they utilize for this business?

Limited-liability company

Edward, Julio, and Zachery attended the same college and shared an apartment during their senior year. After graduating from college with degrees in business administration, they started a business consulting partnership. Before the end of the first year, the partners had a disagreement regarding the division of labor, the type of consulting work they should do, and whether to seek small businesses or branch out into large publicly held corporations as well. Which of the following best represents the problem they are experiencing?

Management disagreements

Moe, Harry, and Shepard have been operating a business together as partners without a partnership agreement for several years. Harry falls off of a roof and dies suddenly. What will most likely become of the partnership?

Moe and Shepard will be able to purchase Harry's interest from his estate.

What is the normal life span of a corporation that has not been limited in its corporate charter?

Perpetual life

f Miguel, Lawrence, and Joseph want to obtain limited liability for their business but want to avoid double taxation, they should form a(n) ______.

S-corporation

Geraldine is an officer at QBT Corporation. How did Geraldine become an officer?

She was appointed by the board of directors.

Rebekah, a former barista and bicyclist, loves to cook. She has decided that the best blend of these interests is to open a bicycle repair and bagel shop along a popular bicycle route in Napa, California, named Bikes, Bytes & Bagels. She has enough money to open the business and would like to open it quickly, have complete control over it, and face little government intervention. What business form will she most likely choose for this business?

Sole proprietorship

Gary's Towing Services, a partnership formed by Gary and Rick Smith in California, has been in operation for five years. Gary and Rick would like to convert the business to a corporation. They will transfer all of the assets of the partnership to the corporation once it is formed and dissolve the partnership. They are having a difficult time deciding where to incorporate the business. California seems to be the obvious choice because that is where they are located, but Arizona and Nevada are nearby, industrial rental space is inexpensive in Nevada, and the population would supply an adequate number of qualified employees. Arizona would be a good choice because the blowing sand and dry heat would cause cars to overheat and need towing which would possibly increase the workload and profits. Gary mentions that there are other considerations for selecting a state in which to incorporate a business. Which of the following is not a consideration for selecting a forum for incorporating a business?

The number of competing firms in the forum state

Inez Investor would like to buy stock in Apple, Inc. She wants to be able to vote and therefore is going to buy common stock. Of the rights listed below, which one will she not have with common stock?

The right to receive dividends before the other classes of stock

Helen and Joanne would like to form a corporation to provide string music education to children in their area and concerts in rest homes for the elderly who are unable to travel. Helen and Joanne will most likely form a

not-for-profit corporation.

Maurice recently graduated from college and would like to find employment with a large company where he will have the opportunity to advance. Maurice should seek employment with a(n)

open corporation

A for-profit corporation whose stock can be purchased by members of the public without restrictions is called a(n)

open corporation.

Hannah has been weighing the pros and cons of starting her business as a corporation. She has determined that all but ______ is a disadvantage of starting a business as a corporation.

perpetual life

Drusilla owns a large cosmetic store in San Francisco that employs about 25 people. She delegates some of the decision-making to two store managers but otherwise makes all of the decisions and is the only owner. Drusilla's business is organized as a

sole proprietorship.

Local residents have always thought that Mike & Ernie's Malt Shop was a partnership, but after Mike passed away it was discovered that he was the sole owner of the business. This means that the malt shop was most likely a

sole proprietorship.

Ofelia has opened a Central and South American food restaurant in the small town she just moved to. She opens the business at 7 a.m. every morning for breakfast. After she has been open three weeks, two patrons call her over to their table and tell her that a group of businesspersons used to meet at that location for breakfast at 6 a.m. every morning when the restaurant was owned by the previous owner. They suggest that if she opens an hour earlier, she can instantly pick up business. Ofelia opens the restaurant at 6 a.m. the next day and every day thereafter. Ofelia's business is most likely a

sole proprietorship.

Karolyn is considering starting a consulting business advising clients about the best ways to integrate social media into their businesses for low-cost advertising and promotions. She has determined that she will only need a computer and an Internet connection because she can consult and write from any location with an Internet connection. She would not need an office outside of the home because she could see clients at their place of business or talk to them via Skype or another conferencing modality. She does not want to share control of the business because she feels this would harm her creativity. There are no liabilities and very few start-up costs—she already has a computer and Internet connection. She would like to start the business tomorrow. She has prepared emails to send out to potential clients, has a web-site, and secured various social media sites to promote her business. What would be the best business form for Karolyn's business?

sole proproetorship

When an individual or company offers to purchase the stock of another company at a price that is just high enough to tempt the current stockholders, it is called a

tender offer

A closed corporation is one

that has a limited number of stockholders and sales and exchanges of the stock are restricted.

Two hundred U.S.-born citizens in the graduating class of Boonieville High School in Alabama all agree they would like to form an S-corporation. They are reading the rules for forming an S-corporation and discover they cannot form an S-corp because

the S-corporation can have no more than 100 stockholders.

Gunderson starts his own business as a sole proprietor. This form of business has the advantage of

the owner keeping all of the profits from the business.

Fannie and Mae decide to form a partnership after discussing it for a few days. They have determined that a partnership has all of the following advantages except

unlimited liability.

When Microsoft purchased SwiftKey, the maker of a predictive keyboard powered by artificial intelligence, this was an example of a(n)

vertical merger.