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Exam 5: How to Form a Business

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Question 31

Multiple Choice

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When a sole proprietor dies:

A) The sole proprietor's heirs have the option of taking over the business.
B) The business is sold to a larger corporation.
C) The company continues to function as it always has.
D) The company always closes down.

E) None of the above
F) C) and D)

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Question 32

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The major differences between an S-Corporation and a Limited Liability Company are limits on the number of owners, and, the citizenship status of individuals who are owners.

A) True
B) False

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Question 33

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An alien corporation does business abroad but is chartered in the U.S.

Jenna plans to invest in a cleaning service franchise called "Spare Time". At her first interview with the franchisor's selling agent, she learned that the parent company expects royalties of 5%. These are:

In a partnership, a(n) partner (owner) actively manages the company and has unlimited liability for claims against the firm.

Limited liability companies have both flexibility in tax treatment of earnings and limited liability protection for owners.

Marco is a limited partner in an e-commerce company. As a limited partner, Marco can be involved with the company for a maximum of five years.

Chipper's Golf Resort has the opportunity to buy 1000 acres of property adjacent to its 18-hole golf course. After talking with her banker, the owner is encouraged to begin the paperwork to change from a Limited Liability Company form of business ownership to a corporation. You applaud this strategy because she will eliminate the problem of double taxation.

An S corporation has fewer ownership rules than a limited liability company.

Cali owns Dog Trotters, a dog-walking business that she started to earn money after school and supplement her allowance. She planned to keep all the profits, and kept things simple, by putting a flier on the bulletin board at the local grocery store announcing that she was available to provide this service. Cali's business is a:

One method to avoid conflicts between partners is to solicit the services of a lawyer to create a well-written partnership agreement.

One reason many companies do not organize themselves as an S corporation is that this form of business:

The profits of a sole proprietorship are taxed as the personal income of the owner.

Hole in One Golf Company announced plans to purchase the property and assume the obligations of Champion Golf, Inc., one of its major competitors. Hole In One Golf Company's plans are an example of a merger.

A merger involving a software producer and a clothing manufacturer is an example of a:

A corporation can raise financial capital by selling shares of stock to interested investors.

A closed corporation is one whose stock is held by a few people and is not available to the general public.

Franchising has certainly become a key component of the U.S. economy. What are the major advantages and disadvantages of franchising?

Like stockholders of a C corporation, owners of a limited liability company (LLC) are free to sell their ownership without the approval of other members.

About 15 years ago, a well-known franchised food chain was brought to its knees when several customers got sick from tainted beef. Although the food chain recovered due to its quick and consistent action, several franchisees sued the parent company for loss of sales. The franchisees experienced the coattail effects of the bad publicity this event received.