Test Bank For Business Essentials 9th Edition by Ebert

Business Essentials, 9e (Ebert/Griffin) Chapter 3 Entrepreneurship, New Ventures, and Business Ownership 1) The Small Business Administration is the government agency charged with owning small businesses. Answer: FALSE Explanation: The Small Business Administration is a government agency that assists small businesses. Page Ref: 60 Difficulty: Easy Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 2) Small businesses produce more patents per employee than large patenting firms. Answer: TRUE Explanation: Small businesses are an important source of innovation as evidenced by the production of patents. Page Ref: 61 Difficulty: Moderate Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 3) Most businesses in the United States are large businesses with more than 500 employees. Answer: FALSE Explanation: Almost 86 percent of all U.S. businesses have no more than 20 employees. Page Ref: 61 Difficulty: Moderate Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 4) Major innovations are most likely to come from large corporations. Answer: FALSE Explanation: Most major innovations come from small businesses. Page Ref: 61 Difficulty: Moderate Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 1 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 5) Manufacturing is overwhelmingly handled by big business. Answer: TRUE Explanation: Small business manufacturers account for less than 5 percent of the manufacturing industry. Page Ref: 63 Difficulty: Easy AACSB: Dynamics of the global economy Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Application 6) People who assume the risk of business ownership with a primary goal of growth and expansion are called entrepreneurs. Answer: TRUE Explanation: Entrepreneurs are people who assume the risk of business ownership. Page Ref: 64 Difficulty: Easy Objective: 3.2 Learning Outcome: Explain the entrepreneurship process Skill: Concept 7) Most successful entrepreneurs have a strong desire to be their own bosses. Answer: TRUE Explanation: Many entrepreneurs are attracted to small business because of opportunities for independence. Page Ref: 64 Difficulty: Easy Objective: 3.2 Learning Outcome: Explain the entrepreneurship process Skill: Concept 8) A business plan demonstrates how an entrepreneur's business strategy will be implemented. Answer: TRUE Explanation: A business plan documents business strategy and implementation procedures. Page Ref: 65 Difficulty: Easy Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 2 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 9) Franchisees may be obligated to contribute a percentage of sales to parent corporations. Answer: TRUE Explanation: The obligation to contribute a percentage of sales is a disadvantage from the franchisee's perspective. Page Ref: 67 Difficulty: Moderate Objective: 3.3 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 10) Loans are the most important sources of money for new businesses. Answer: FALSE Explanation: According to the National Federation of Independent Business, personal resources are the most important sources of money for new businesses. Page Ref: 67 Difficulty: Moderate Objective: 3.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 11) Lending institutions are more likely to help finance the purchase of an existing business rather than the start-up of a business from scratch. Answer: TRUE Explanation: This is the case because the risks are typically better understood for an existing business. Page Ref: 67 Difficulty: Moderate AACSB: Dynamics of the global economy Objective: 3.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Application 12) A group of small investors who invest money in companies in return for partial ownership is known as a small-business development company. Answer: FALSE Explanation: A group of small investors who invest money in companies in return for partial ownership is called a venture capital company. Page Ref: 68 Difficulty: Easy Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 3 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 13) Small-business investment companies (SBICs) may be sponsored by the federal government. Answer: TRUE Explanation: SBICs are federally licensed to borrow money from the SBA and to invest it in or lend it to small businesses, and they are themselves investments for their shareholders. Page Ref: 68 Difficulty: Moderate Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 14) The least common type of partnership is the general partnership. Answer: FALSE Explanation: The most common type of partnership is the general partnership. Page Ref: 73 Difficulty: Easy Objective: 3.5 Learning Outcome: Explain the entrepreneurship process Skill: Concept 15) A limited liability corporation is a hybrid of a publicly held corporation and a partnership. Answer: TRUE Explanation: A limited liability corporation combines features of a publicly held corporation which benefits from limited liability and a partnership in which owners are taxed as partners. Page Ref: 77 Difficulty: Easy Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 16) Many new businesses are started by people who have left big corporations. Answer: TRUE Explanation: More and more businesses are being started by people who have left big corporations and who want to put their experience to work. Page Ref: 69 Difficulty: Moderate AACSB: Dynamics of the global economy Objective: 3.4 Learning Outcome: Explain the entrepreneurship process Skill: Application 4 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 17) The failure rate among small businesses has been increasing in recent years. Answer: FALSE Explanation: The failure rate for small businesses has been decreasing in recent years. Page Ref: 69 Difficulty: Moderate Objective: 3.4 Learning Outcome: Explain the entrepreneurship process Skill: Concept 18) Neglect is a major factor that contributes to small business failure. Answer: TRUE Explanation: Other factors include managerial incompetence, inexperience, weak control systems, and insufficient capital. Page Ref: 70 Difficulty: Moderate Objective: 3.4 Learning Outcome: Explain the entrepreneurship process Skill: Concept 19) Low start-up costs and tax benefits are advantages of sole proprietorships. Answer: TRUE Explanation: Sole proprietorships can vary widely in size; a sole proprietorship is merely defined as a business owned and operated by one person. Page Ref: 72 Difficulty: Moderate Objective: 3.5 Learning Outcome: Explain the entrepreneurship process Skill: Concept 20) By law, each general partner is liable for all debts incurred in the name of the partnership. Answer: TRUE Explanation: Each general partner can be seen as a sole proprietor in terms of taxation and the repaying of debt. Page Ref: 73 Difficulty: Moderate Objective: 3.5 Learning Outcome: Explain the entrepreneurship process Skill: Concept 5 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 21) Corporations generate sales revenues proportionate to their number. Answer: FALSE Explanation: Corporations account for about 20 percent of all U.S. businesses but generate about 85 percent of all sales revenues. Page Ref: 74 Difficulty: Moderate AACSB: Dynamics of the global economy Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 22) Corporations enjoy significant tax benefits when compared to sole proprietorships or partnerships. Answer: FALSE Explanation: The biggest disadvantage of regular corporations is double taxation, wherein the company pays income tax on profits and stockholders pay taxes on income from their investments in the company. Page Ref: 76 Difficulty: Moderate Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 23) An S corporation has stock that is widely held and available for sale to the general public. Answer: FALSE Explanation: An S corporation is a hybrid of a closely held corporation and a partnership. It is organized and operates like a corporation, but it is treated like a partnership for tax purposes. Page Ref: 77 Difficulty: Moderate Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 24) The board of directors of a corporation reports to the officers of the corporation. Answer: FALSE Explanation: The officers of the corporation report to the board of directors; the board of directors is elected by stockholders. Page Ref: 77 Difficulty: Moderate Objective: 3.6 Learning Outcome: Discuss the factors that influence decisions about organizational structure Skill: Concept 6 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 25) The Small Business Administration (SBA) may consider a business with many employees to be small as long as it has low annual revenues. Answer: TRUE Explanation: A government agency that assists small businesses, the SBA regards some companies with as many as 1,500 employees as small, but only if the business has relatively low annual revenues. Page Ref: 60 Difficulty: Moderate Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 26) Entrepreneurs often enjoy working for large organizations. Answer: FALSE Explanation: Most entrepreneurs enjoy being their own bosses. Page Ref: 64 Difficulty: Easy Objective: 3.2 Learning Outcome: Explain the entrepreneurship process Skill: Concept 27) A good rule of thumb for individuals starting a new business is to not rely on personal resources. Answer: FALSE Explanation: The most common funding source for new business start-ups is personal resources. Page Ref: 67 Difficulty: Moderate Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 28) Most venture capital companies do not lend money. Answer: TRUE Explanation: Venture capital companies invest money in exchange for partial ownership or representation on the board of directors. Page Ref: 68 Difficulty: Easy Objective: 3.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 7 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 29) The number of minority-owned businesses has decreased in recent years. Answer: FALSE Explanation: African American-owned businesses have grown at a rate of about 48 percent during the most recent five-year period for which data were available, and Hispanic-owned businesses have grown at 31 percent. Page Ref: 69 Difficulty: Moderate AACSB: Multicultural and diversity understanding Objective: 3.3 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 30) Many entrepreneurs are finding new opportunities in foreign markets. Answer: TRUE Explanation: Foreign markets are often targets for small businesses. Page Ref: 69 Difficulty: Easy Objective: 3.4 Learning Outcome: Explain the entrepreneurship process Skill: Concept 31) The Internal Revenue Service taxes partners as individuals. Answer: TRUE Explanation: Because partnerships have no legal standing as a distinct entity, the IRS taxes each partner as an individual. Page Ref: 73 Difficulty: Moderate Objective: 3.5 Learning Outcome: Explain the entrepreneurship process Skill: Concept 32) General partnerships generate a substantial percentage of total sales revenue in the United States. Answer: FALSE Explanation: Overall, U.S. partnerships are responsible for sales revenue of less than 6 percent of the total. Page Ref: 74 Difficulty: Moderate Objective: 3.5 Learning Outcome: Explain the entrepreneurship process Skill: Concept 8 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 33) The Small Business Development Center program consolidates information from various disciplines and institutions for use by new and existing businesses. Answer: TRUE Explanation: It is one of a number of SBA programs available to aid small businesses. Page Ref: 68 Difficulty: Moderate Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 34) Which entity is defined as independent and has little influence on its market? A) corporation B) joint venture C) small business D) partnership E) government agency Answer: C Explanation: C) A small business is defined as independent with marginal influence in its market. Page Ref: 60 Difficulty: Easy Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 35) Entrepreneurs often have more than one goal for starting a business and becoming self- employed. Which of the following reasons is the LEAST common goal of entrepreneurs? A) to seek independence and be their own boss B) to earn a comfortable living for a period of time C) to grow and expand a current business D) to meet community or social obligations E) to provide for their financial needs Answer: D Explanation: D) Some entrepreneurs may start a business with the goal of meeting community or social obligations, but the other goals are far more common. Page Ref: 64 Difficulty: Moderate Objective: 3.2 Learning Outcome: Explain the entrepreneurship process Skill: Concept 9 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 36) What is the name of the document in which an entrepreneur summarizes his or her business strategy for a proposed new venture? A) success chart B) director's guideline C) financial blueprint D) business plan E) balance sheet Answer: D Explanation: D) A business plan is a summary of the business strategy for the proposed new venture and how that strategy will be implemented. Page Ref: 65 Difficulty: Easy Objective: 3.3 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 37) What is the most significant disadvantage of owning a franchise? A) start-up costs B) operational guidelines C) difficulty obtaining loans D) double taxation E) competition Answer: A Explanation: A) Start-up costs are considered one of the most significant disadvantages of owning a franchise. Page Ref: 66 Difficulty: Easy Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 38) Which of the following is the most significant disadvantage of starting a business from scratch? A) having few employees B) inability to franchise C) having competition D) coming up with new ideas E) the risk of failure Answer: E Explanation: E) There is much greater risk involved in starting a new business from scratch than in acquiring an already-existing business. Page Ref: 67 Difficulty: Easy AACSB: Dynamics of the global economy Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 10 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 39) What is the most important source of money for new business start-ups? A) banks B) the SBA C) personal resources D) government grants E) venture capital Answer: C Explanation: C) Most individuals starting a new business have to rely on personal finances to do so. Page Ref: 67 Difficulty: Easy Objective: 3.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 40) Who constitutes the membership of SCORE? A) retired executives B) venture capitalists C) company officers D) commercial lenders E) successful entrepreneurs Answer: A Explanation: A) The Service Corps of Retired Executives is made up of retired executives who volunteer to help entrepreneurs start new businesses. Page Ref: 68 Difficulty: Easy Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 11 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 41) Which of the following represents the fastest-growing segment of minority business ownership? A) African Americans B) Asians C) Hispanics D) Pacific Islanders E) Europeans Answer: A Explanation: A) The number of businesses owned by African Americans increased by 48 percent during the most recent five-year period for which data is available. Page Ref: 69 Difficulty: Easy AACSB: Multicultural and diversity understanding Objective: 3.4 Learning Outcome: Explain the entrepreneurship process Skill: Concept 42) Which of the following types of businesses is most common in the United States? A) sole proprietorships B) general partnerships C) cooperatives D) corporations E) limited partnerships Answer: A Explanation: A) About 72 percent of all U.S. businesses are sole proprietorships. Page Ref: 72 Difficulty: Easy Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 43) What percent of a business is the least amount that a master partner will retain? A) 10 percent B) 25 percent C) 50 percent D) 75 percent E) 80 percent Answer: C Explanation: C) The master partner retains at least 50 percent ownership and runs the business, while minority partners have no management voice. Page Ref: 74 Difficulty: Easy Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 12 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 44) In which business sector are cooperatives still important? A) manufacturing B) automotive C) public utilities D) agriculture E) health care Answer: D Explanation: D) Although cooperatives make up only a minor segment of the U.S. economy, the role of cooperatives is important in agriculture. Page Ref: 74 Difficulty: Moderate AACSB: Dynamics of the global economy Objective: 3.5 Learning Outcome: Explain the entrepreneurship process Skill: Concept 45) Which form of business ownership generates the most sales in the United States? A) sole proprietorship B) general partnership C) cooperative D) corporation E) limited partnership Answer: D Explanation: D) Corporations generate up to 85 percent of the total sales revenue of all businesses. Page Ref: 75 Difficulty: Moderate Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 46) Which type of business is legally considered a separate entity from its owners and is liable for its own debts? A) sole proprietorship B) corporation C) limited partnership D) cooperative E) general partnership Answer: B Explanation: B) A corporation is a business that is legally considered an entity separate from its owners and is liable for its own debts. The liability of the owners extends to the limits of their investments. Page Ref: 75 Difficulty: Easy Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 13 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 47) Who are the owners of a corporation? A) board of directors B) financial officers C) stockholders D) top managers E) entrepreneurs Answer: C Explanation: C) Stockholders are the owners of shares of stock in a corporation. Page Ref: 77 Difficulty: Easy Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 48) What are shares in a business that the business sells called? A) bonds B) profits C) stocks D) dividends E) loans Answer: C Explanation: C) Shares in a corporation are called stocks. Page Ref: 77 Difficulty: Easy Objective: 3.6 Learning Outcome: Describe the goals and stages of financial management for companies Skill: Concept 49) Suppose BrightLights Online Video purchases another company, QuikFlix. What is this an example of? A) merger B) spin-off C) divestiture D) acquisition E) collapse Answer: D Explanation: D) An acquisition is when one company buys another company outright. Page Ref: 78 Difficulty: Easy Objective: 3.6 Learning Outcome: Describe the goals and stages of financial management for companies Skill: Application 14 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 50) The U.S. Department of Commerce considers a business "small" if it has fewer than how many employees? A) 10 B) 50 C) 100 D) 500 E) 1,500 Answer: D Explanation: D) The U.S. Department of Commerce considers a business "small" if it has fewer than 500 employees. Page Ref: 60 Difficulty: Moderate Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 51) Which of the following industry groups is the fastest growing segment of small business enterprise? A) manufacturing B) wholesaling C) retailing D) transportation E) services Answer: E Explanation: E) Services is the fastest growing segment, probably because services require few resources. Page Ref: 62 Difficulty: Moderate AACSB: Dynamics of the global economy Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 52) Which of the following types of venue is favored by small-business retailers? A) superstore B) catalog showroom C) specialty shop D) department store E) studio workroom Answer: C Explanation: C) Usually, people who start small retail businesses favor specialty shops that let them focus limited resources on narrow market segments. Page Ref: 62 Difficulty: Moderate Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 15 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 53) What does a start-up company need in order to estimate the required size of a plant, store, or office, to decide how much inventory to carry, and to determine how many employees to hire? A) sales forecast B) tax estimate C) business objective D) stock options E) funding source Answer: A Explanation: A) In addition, a sales forecast helps the entrepreneur demonstrate an understanding of the current market, the strengths and weaknesses of existing firms, and the means by which the new venture will compete. Page Ref: 65 Difficulty: Moderate Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 54) What are specific locations of Ramada, McDonald's, and Subway examples of? A) government entities B) university sponsored businesses C) franchises D) networking businesses E) cooperatives Answer: C Explanation: C) All of these businesses represent an agreement between a franchisee and a franchiser. The franchisee buys the rights for a location from the franchiser, and runs the business independently. Page Ref: 66 Difficulty: Moderate AACSB: Dynamics of the global economy Objective: 3.3 Learning Outcome: Describe the role of small businesses in the economy Skill: Application 16 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 55) Which of the following is the most significant disadvantage of franchising? A) high start-up costs B) risk of failure C) difficulty in obtaining financing D) lengthy contracts E) high cost of operation Answer: A Explanation: A) Start-up franchise prices tend to be high—the start-up fee for a McDonald's franchise is $45,000. Page Ref: 66 Difficulty: Moderate Objective: 3.3 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 56) What is the major drawback of accepting venture capital? A) sharing company control B) having to pay high interest rates C) limiting expansion D) facing a short repayment period E) having to write a proposal Answer: A Explanation: A) Venture capitalists focus on turning a profit on their investments. In order to better ensure that they do, they typically invest in a business on the condition that they be given some control over the company. Page Ref: 68 Difficulty: Moderate AACSB: Reflective thinking skills Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 17 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 57) Which of the following are groups of small investors seeking to make profits on companies with rapid growth potential? A) community banks B) venture capital companies C) equity managers D) government securities dealers E) stock brokers Answer: B Explanation: B) Most venture capital companies do not lend money; instead, they supply capital in return for partial ownership or representation on boards of directors. Page Ref: 68 Difficulty: Moderate Objective: 3.3 Learning Outcome: Discuss the functions of different types of financial institutions in the monetary system Skill: Concept 58) Which of the following is federally licensed to borrow money from the Small Business Administration to invest in or lend to small businesses? A) SCORE B) SBICs C) SBDC D) FDIC E) SEC Answer: B Explanation: B) In addition, small-business investment companies are themselves investments for their shareholders. Page Ref: 68 Difficulty: Moderate Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 18 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 59) Which of the following helps entrepreneurs gain skills that are essential for running a business? A) ESOP B) SBICs C) SEC D) LLC E) SBA Answer: E Explanation: E) The Small Business Administration helps entrepreneurs improve their management skills. Page Ref: 68 Difficulty: Moderate Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 60) Which of the following is the most significant recent trend in small-business start-ups? A) entrepreneurs who cross over from big business B) increased opportunities for minorities C) increased opportunities for women D) emergence of e-commerce E) global economic downturn Answer: D Explanation: D) Because the Internet provides fundamentally new ways of doing business, entrepreneurs have created and expanded new businesses faster than ever before. Page Ref: 68 Difficulty: Moderate AACSB: Dynamics of the global economy Objective: 3.4 Learning Outcome: Explain the entrepreneurship process Skill: Concept 19 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 61) According to SBA estimates, what percent of all new businesses can expect to survive for at least four years? A) 14 percent B) 24 percent C) 44 percent D) 64 percent E) 84 percent Answer: C Explanation: C) During the 1960s and 1970s, less than half of all new start-ups survived more than 18 months; only one in five lasted 10 years. Now, however, 44 percent can expect to survive for at least four years. Page Ref: 69 Difficulty: Moderate Objective: 3.4 Learning Outcome: Explain the entrepreneurship process Skill: Concept 62) Which of the following factors most contributes to small business failure? A) managerial incompetence or inexperience B) bad product design C) legal problems D) time spent raising capital E) personnel issues Answer: A Explanation: A) The four main reasons for small business failure are managerial incompetence, neglect, weak control systems, and insufficient capital. Page Ref: 70 Difficulty: Moderate Objective: 3.4 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 63) A new business should have enough capital to operate at least how many months without earning a profit? A) 1 B) 2 C) 4 D) 6 E) 9 Answer: D Explanation: D) In addition, some experts recommend having enough capital to last one year. Page Ref: 70 Difficulty: Moderate Objective: 3.4 Learning Outcome: Explain the entrepreneurship process Skill: Concept 20 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 64) Which of the following legal forms of business is owned and usually operated by a person who is responsible for its debts? A) cartel B) corporation C) general partnership D) sole proprietorship E) limited partnership Answer: D Explanation: D) About 72 percent of all businesses are sole proprietorships; however, they account for only about 5 percent of total business revenues. Page Ref: 72 Difficulty: Easy Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 65) What is a major drawback of sole proprietorships? A) limited funding B) work flexibility C) low start-up costs D) unlimited liability E) structured hours Answer: D Explanation: D) A sole proprietor is responsible for all debts incurred by the business, which increases the risk involved in doing business. Page Ref: 72 Difficulty: Moderate Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 66) When can a sole proprietorship legally be dissolved? A) sales exceed $1 million B) the partners reorganize the firm's structure C) earnings are less than $500,000 D) the owner donates profits E) the owner dies Answer: E Explanation: E) Although the business can be reorganized by a successor, executors or heirs must otherwise sell its assets. Page Ref: 72 Difficulty: Moderate Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 21 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 67) What resources does a sole proprietorship primarily depend on? A) the corporation B) foreign investors C) capital markets D) those of the owner E) a committed clientele Answer: D Explanation: D) Therefore, sole proprietors often find it hard to borrow money to start up or expand; many bankers fear that they will not be able to recover loans if owners become disabled or insolvent. Page Ref: 72 Difficulty: Moderate Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 68) What type of business has two or more owners who share in the operation of the firm and are financially responsible for its debts? A) corporation B) partnership C) cooperative D) conglomerate E) nonprofit Answer: B Explanation: B) Partners may invest equal or unequal sums of money and may earn profits that bear no relation to their investments. Page Ref: 73 Difficulty: Moderate Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 69) What is the most common type of partnership? A) limited partnership B) corporate partnership C) general partnership D) sole partnership E) cooperative partnership Answer: C Explanation: C) A general partnership is similar to a sole proprietorship but is owned by more than one person. Page Ref: 73 Difficulty: Moderate Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 22 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 70) Who invests all of the funds needed for a business but plays no role in its management? A) silent partner B) sole proprietor C) general partner D) principal E) director Answer: A Explanation: A) A silent partner is a partner who invests all of the funds needed for a business and therefore gets a return on the investment if the business earns a profit, but plays no role in its management. Page Ref: 73 Difficulty: Moderate Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 71) What is the most important advantage of general partnerships? A) the unlimited liability of the partnership B) the ability to grow with the addition of new talent and money C) the ease of implementing an effective control system D) the increased role of luck E) the need for minority partners Answer: B Explanation: B) New partners can join a general partnership at any time by investing their time and money. Page Ref: 73 Difficulty: Moderate Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 72) What do both sole proprietorships and partnerships lack? A) trust B) legal standing C) continuity D) shared vision E) adaptable processes Answer: C Explanation: C) When one partner dies or leaves, the original partnership dissolves, even if one or more of the other partners want it to continue. Page Ref: 73 Difficulty: Moderate Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 23 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 73) Which of the following is a partner who actively manages a firm and has unlimited liability for its debts? A) limited partner B) general partner C) stockholding partner D) public partner E) silent partner Answer: B Explanation: B) A general partner is also known as an active partner because he or she plays an active role in the management of the partnership. Page Ref: 74 Difficulty: Moderate Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 74) What percent of all businesses in the United States are corporations? A) 15 percent B) 20 percent C) 50 percent D) 75 percent E) 85 percent Answer: B Explanation: B) There are about 4.93 million corporations in the United States; this accounts for about 20 percent of all U.S. businesses. Page Ref: 74 Difficulty: Moderate AACSB: Dynamics of the global economy Objective: 3.6 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 75) What type of company has stock that is widely held and available for sale to the general public? A) private corporation B) public corporation C) general partnership D) limited liability corporation E) professional corporation Answer: B Explanation: B) When shares are publicly issued, the firm becomes a publicly held (or public) corporation; stock is widely held and available for sale to the public. Page Ref: 76 Difficulty: Moderate Objective: 3.6 Learning Outcome: Describe the goals and stages of financial management for companies Skill: Concept 24 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 76) What type of corporations are those comprised of doctors, lawyers, or accountants most likely to be? A) private B) public C) subchapter S D) professional E) multinational Answer: D Explanation: D) While the corporate structure protects members from unlimited financial liability, they are not immune from unlimited liability and are subject to partnership taxation. Page Ref: 77 Difficulty: Moderate Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 77) Two businesses, Rio Books and Devereaux Holdings, collaborate to create and run a new bookselling business. What is this action called? A) corporatization B) vertical merger C) joint venture D) strategic alliance E) institutional investment Answer: C Explanation: C) Joint ventures abound in numerous industries. Unlike in a strategic alliance, each partner in a joint venture owns a share of the new enterprise. Page Ref: 78 Difficulty: Moderate AACSB: Reflective thinking skills Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Application 25 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 78) Which of the following occurs when two firms combine to create a new company? A) acquisition B) takeover C) venture D) divestiture E) merger Answer: E Explanation: E) A merger occurs when Company A, for example, merges with Company B to create Company C. Page Ref: 78 Difficulty: Easy Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 79) Why is it difficult to compare relative job growth for different-sized businesses? A) Sourcing up-to-date employment figures is difficult. B) Many small businesses experience rapid unreported growth. C) Spheres of influence overlap between the small and big business sectors. D) Staff size of small businesses tends to change faster than staff size of big businesses. E) It is hard to determine the cutoff point at which a small business becomes a large business. Answer: E Explanation: E) Relative job growth among businesses of different sizes is not easy to determine. There are different parameters governing the size of a small versus a big business and additionally there is no precise point where such a differentiation can be clearly identified. Page Ref: 61 Difficulty: Difficult AACSB: Analytic skills Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 26 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 80) Why do attitudes about entrepreneurship vary internationally? A) Decision making in big business can overlook local customs. B) Attitudes towards risk-taking in business are culturally determined. C) Consumer attitudes are influenced by economic cycles. D) Foreign-owned companies can be unresponsive to local markets. E) International business is creating a global village. Answer: B Explanation: B) In many cultures, such as the United States, the entrepreneurial spirit is highly valued. However, in some Asian countries, the entrepreneurial spirit is often tempered by the need for consensus. Page Ref: 63 Difficulty: Difficult AACSB: Multicultural and diversity understanding Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 81) Olivia has found a viable business, a small furniture store, she is interested in purchasing. She has learned that the store is supplied by reliable vendors and has a steady stream of local and online buyers. What should be Olivia's next step at this point? A) Analyze the furniture store's past financial statements. B) Start negotiating a purchase price with the current owner. C) Approach a banking institution about financing her purchase. D) Consult a marketing agency about ways to reach more customers. E) Search for vendors that can provide similar products at lower costs. Answer: A Explanation: A) While what Olivia has learned about the state of the business is positive, it is still in her best interest to continue to do due diligence and more closely examine the business. Page Ref: 66 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Application 27 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 82) Viola wants to be a business owner, and is contemplating whether to start her own business or open a franchise. Which of the following, if true, would be a compelling reason for Viola to open a franchise rather than start a new business? A) The franchiser requires $3,000 in start-up costs and a 5 percent monthly royalty fee. B) The franchiser tightly controls and monitors the service protocol. C) The franchisee is responsible for developing all marketing materials. D) The company has only recently become a franchise. E) There are several other franchises with the same company in the area. Answer: A Explanation: A) The start-up cost for most franchises is around $50,000 and the royalty fee is usually between 6 and 10 percent. The substantially lower costs of $3,000 and 5 percent would be a compelling reason to take on a franchise if it also has acceptable growth potential. Page Ref: 66 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Critical Thinking 83) Approximately what percent of all U.S. businesses employ 20 or fewer people? A) 86 percent B) 66 percent C) 46 percent D) 26 percent E) 16 percent Answer: A Explanation: A) According to 2006 census data, 85.95 percent of all businesses employ 20 or fewer people; this illustrates how important small business is to the U.S. economy. Page Ref: 60 Difficulty: Difficult Objective: 3.4 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 28 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 84) Each year, between 600,000 and 650,000 new businesses are launched in the United States. Approximately how many businesses fail each year? A) 50,000 to 100,000 B) 100,000 to 250,000 C) 250,000 to 500,000 D) 500,000 to 700,000 E) 700,000 to 1 million Answer: D Explanation: D) For example, in 2009, 627,200 new firms started and another 595,600 closed down. Page Ref: 68 Difficulty: Moderate Objective: 3.4 Learning Outcome: Explain the entrepreneurship process Skill: Concept 85) By what percent has the number of African American-owned businesses increased over the past five-year period? A) 18 percent B) 28 percent C) 48 percent D) 68 percent E) 78 percent Answer: C Explanation: C) The number of businesses owned by African Americans increased by 48 percent during the most recent five-year period for which data are available and now totals 2 million. Page Ref: 69 Difficulty: Moderate AACSB: Multicultural and diversity understanding Objective: 3.4 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 29 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 86) Which figures reflect the current size and the growth in Hispanic-owned businesses for the last five years? A) 2.25 million and 31 percent B) 2.75 million and 41 percent C) 3.15 million and 71 percent D) 3.55 million and 81 percent E) 4.25 million and 85 percent Answer: A Explanation: A) Figures of 31 percent totaling about 2.25 million businesses reflect strong growth for this group. Page Ref: 69 Difficulty: Difficult AACSB: Multicultural and diversity understanding Objective: 3.4 Learning Outcome: Describe the role of small businesses in the economy Skill: Application 87) What is the main reason why women start new businesses? A) need to earn more money B) preference for working alone C) opportunities for family members D) control in organizing their time E) desire to employ other women Answer: D Explanation: D) Some 46 percent of woman cite being able to gain control over their schedule as the reason why they are attracted to starting their own businesses. Page Ref: 69 Difficulty: Difficult AACSB: Multicultural and diversity understanding Objective: 3.4 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 88) What is the most effective way for an entrepreneur to become a competent manager? A) working alone B) relying on luck C) getting a college degree D) being open to opportunities E) working for a successful company first Answer: E Explanation: E) Few successful business owners succeed alone or straight out of college. Most spend time in successful companies or partner with others to bring expertise to a new business. Page Ref: 71 Difficulty: Moderate Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 30 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 89) Lucy has organized her craft shop as a sole proprietorship. Her sister has warned Lucy about the legal principle holding her responsible for paying off all of the debts of the business. What is the name of this principle? A) unlimited liability B) limited liability C) privity D) unrestricted debt E) accountability Answer: A Explanation: A) Sole proprietors face unlimited liability, meaning that they are liable for paying all debts incurred by the business. Page Ref: 72 Difficulty: Difficult Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Application 90) Shirley is opening a flower shop and has decided to operate as a sole proprietorship. Which of the following is NOT an advantage Shirley will have in operating her business? A) freedom B) simplicity of operation C) limited liability D) low start-up costs E) choice of location Answer: C Explanation: C) A major drawback for sole proprietors is unlimited liability, whereby a sole proprietor is personally liable for all debts incurred by the business. Page Ref: 73 Difficulty: Moderate Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Application 31 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 91) Kent and Patrick have decided to start a landscaping business. One of the first things that they do is sign a document that describes the investments and responsibilities of the partners and makes provisions for the allocation of profits and dissolution of the business. What is the name of this document? A) articles of incorporation B) partnership charter C) partnership agreement D) corporate charter E) financial proposal Answer: C Explanation: C) The partnership agreement is strictly a private document; no laws require partners to file agreements with any government agency. Page Ref: 73 Difficulty: Moderate AACSB: Reflective thinking skills Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Application 92) Today, what percent of all businesses in the United States are registered as sole proprietors? A) 94 percent B) 72 percent C) 54 percent D) 28 percent E) 10 percent Answer: B Explanation: B) However, sole proprietors account for only 5 percent of total revenues. Page Ref: 75 Difficulty: Moderate Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 93) Why are lenders most willing to loan to corporations? A) Continuity and legal status are assured. B) Links with owners and founders are established. C) Professional management teams can be changed. D) Commitment to expansion is readily available. E) Brand and marketing strategies can be diversified. Answer: A Explanation: A) The biggest advantage of being a corporation is limited liability. Another advantage is continuity, as a corporation can, in theory, continue forever. Page Ref: 75 Difficulty: Difficult Objective: 3.5 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 32 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 94) American Business Machines is organized as a corporation. Its income will be taxed at the corporate level and also on shareholder returns as dividends. What is this situation known as? A) dual costs B) double taxation C) regulatory costs D) double ownership E) financial balancing Answer: B Explanation: B) The biggest disadvantage of incorporation is double taxation. First, a corporation pays income taxes on company profits; in addition, stockholders then pay taxes on income returned by their investments in the corporation. Page Ref: 76 Difficulty: Moderate Objective: 3.6 Learning Outcome: Describe the role of small businesses in the economy Skill: Application 95) What is a small business? Answer: A small business is an independently owned business that has relatively little influence on its market. Explanation: A small business is considered to be an independent business which has relatively little influence on its market. Page Ref: 60 Difficulty: Easy Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 96) What is an entrepreneur? Answer: An entrepreneur is a business person who accepts both the risks and the opportunities involved in creating and operating a new business venture. Explanation: Entrepreneurs are people who assume the risk associated with business ownership. Page Ref: 62 Difficulty: Easy Objective: 3.2 Learning Outcome: Explain the entrepreneurship process Skill: Concept 97) What is a merger? Answer: A merger occurs when two firms combine to create a new company. Explanation: An example of a merger is the recent merging of United Airlines and Continental to form the world's largest airline. Page Ref: 78 Difficulty: Easy Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 33 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 98) What is a divestiture? Answer: With a divestiture, a corporation decides to sell part of its existing business operations to another corporation, for example to focus more specifically on its core business. Explanation: In a divestiture, a corporation decides to sell part of its existing business operations to another corporation. Page Ref: 79 Difficulty: Easy Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 99) Why might an entrepreneur wish to purchase an existing business rather than start one from scratch? Answer: An entrepreneur may wish to purchase an existing business because of an increased chance for success. An existing business will have established working relationships with lenders, suppliers, and the community. The track record of an existing business gives potential buyers a much clearer picture of what to expect than any estimate of new business prospects. Explanation: The advantage of buying an existing business is better chances of success, as business relationships have already been established and past records give an indication of future business possibilities. Page Ref: 66 Difficulty: Moderate AACSB: Reflective thinking skills Objective: 3.2 Learning Outcome: Explain the entrepreneurship process Skill: Concept 100) What are the advantages and disadvantages for a franchisee? Answer: The advantages of franchising include access to managerial and financial help, the benefits of the selling corporation's expertise and experience, and reduced chances of failure. The disadvantages of franchising include significant start-up costs and continued obligations to contribute a percentage of sales to parent corporations. Explanation: Advantages include access to managerial and financial help, and the benefits of the selling corporation's expertise and experience, which can support increased chances of success. The disadvantages include significant start-up costs and ongoing commitments to contribute a percentage of sales to parent corporations. Page Ref: 66 Difficulty: Moderate AACSB: Reflective thinking skills Objective: 3.2 Learning Outcome: Explain the entrepreneurship process Skill: Concept 34 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 101) Describe three disadvantages of operating a business as a sole proprietorship. Answer: The disadvantages of sole proprietorships include unlimited liability, lack of continuity, and limited financing options. A sole proprietor is totally responsible for all of the debts of the business and may have to give up personal assets to repay those debts. A sole proprietorship lacks continuity because the business dissolves with the death of the owner. Finally, sole proprietors have a limited ability to secure financing, relying mostly on their personal resources. Explanation: The disadvantages of sole proprietorships include unlimited liability, lack of continuity, and limited financing options. Page Ref: 72 Difficulty: Moderate AACSB: Reflective thinking skills Objective: 3.5 Learning Outcome: Explain the entrepreneurship process Skill: Concept 102) Discuss the advantages and disadvantages of partnerships. Answer: Advantages of partnerships include their ability to grow with the addition of new talent and money, ease of organization, and independent legal status. Disadvantages are unlimited liability, potential lack of continuity, difficulty of transferring ownership, and little or no guidance for resolving internal conflicts. Explanation: Advantages of partnerships include their ability to grow with the addition of new talent and money, ease of organization, and independent legal status. Disadvantages include unlimited liability, potential lack of continuity, difficulty of transferring ownership, and little or no guidance for resolving internal conflicts. Page Ref: 73 Difficulty: Moderate AACSB: Reflective thinking skills Objective: 3.5 Learning Outcome: Explain the entrepreneurship process Skill: Concept 103) Explain limited liability in a corporation. Answer: Limited liability is the legal principle holding investors liable for a firm's debts only to the limits of their personal investment in it. Explanation: The biggest advantage of corporations is limited liability: Investor liability is limited to personal investment (through stock ownership) in the corporation. In the event of failure, the courts may seize and sell a corporation's assets but cannot touch the investors' personal possessions. Page Ref: 75 Difficulty: Moderate Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Synthesis 35 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 104) Explain a tender offer. Answer: A tender offer is an offer to buy shares made by a prospective buyer directly to a corporation's shareholders. A corporation can be taken over against the will of its managers through a tender offer. Explanation: A tender offer is an offer to buy shares made by a prospective buyer directly to a corporation's shareholders, who then make individual decisions about whether to sell. Page Ref: 75 Difficulty: Moderate Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 105) A corporation must be managed on the principles of corporate governance. Explain what this is. Answer: Corporate governance is the role of shareholders, directors, and other managers in corporate decision making and accountability. This governance is established by a firm's bylaws and usually involves stockholders, the board of directors, and officers. Explanation: Corporate governance is the role of shareholders, directors, and other managers in corporate decision making and accountability. Page Ref: 77 Difficulty: Moderate Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 106) Explain the role of a corporation's board of directors. Answer: The board of directors is responsible for communicating with shareholders and other stakeholders and for setting financial policy on issues such as dividends, major spending, and executive compensation. Explanation: The board is legally responsible and accountable for corporate actions. Page Ref: 78 Difficulty: Moderate Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Application 36 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 107) How is the U.S. economy affected by small businesses? Answer: Small businesses affect the U.S. economy through job creation and innovation, and by making products for and selling products made by big businesses. Small businesses are an important source of new jobs in the United States. Innovations are as likely to come from small businesses as big businesses. Finally, most of the products made by big businesses are sold to consumers by small businesses. Big businesses often depend on small businesses as suppliers as well. Explanation: By creating jobs, fostering innovation, and providing goods and services, small businesses have a positive effect on the U.S. economy. Page Ref: 60-61 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Application 108) Discuss four sources of financing for starting up a small business. Answer: Financing for starting up a new business may come from personal resources, bank loans, venture capital firms, or small-business investment companies (SBICs). The most important source of financing for a small business is the owner's personal resources. Bank loans are a second source of financing. Venture capital firms invest money in a business in return for stock. These firms are groups of small investors seeking to make profits on companies with rapid growth potential. SBICs take a more balanced approach in their choices than do venture capital firms. SBICs are federally licensed to borrow money from the SBA to invest in or lend to small businesses. Explanation: Financing for starting up a new business may come from personal resources, bank loans, venture capital firms, or SBICs. Page Ref: 67-68 Difficulty: Difficult Objective: 3.3 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 109) Discuss the advantages and disadvantages of corporations. Answer: The advantages include limited liability, continuity, and the ability to raise money. Among the disadvantages are transferring ownership such as through a tender offer, higher start- up costs, and double taxation. Explanation: The biggest advantage of incorporation is limited liability: Investor liability is limited to personal investment (through stock ownership) in the corporation. The biggest disadvantage of incorporation is double taxation. Page Ref: 75 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 3.6 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 37 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 110) Describe the three distinct bodies of corporate governance that are specified in a corporation's bylaws. Answer: Stockholders are the owners of a corporation who buy shares of ownership. The board of directors is a group of people elected by stockholders to oversee the management of the corporation. Corporate officers are top managers hired by the board to run the corporation on a day-to-day basis. Explanation: Corporate governance covers the roles of shareholders, directors, and other managers in corporate decision making and accountability. Page Ref: 77 Difficulty: Difficult Objective: 3.6 Learning Outcome: Describe the role of small businesses in the economy Skill: Concept 111) Explain entrepreneurship and describe key entrepreneurial characteristics. Answer: Entrepreneurs are people who assume the risk of business ownership. Entrepreneurship is the process of seeking business opportunities under conditions of risk. Some entrepreneurs have a goal of independence and financial security, whereas others want to launch a new venture that can be grown into a large business. Most successful entrepreneurs are resourceful and concerned for customer relations. They have a strong desire to be their own bosses and can handle ambiguity and surprises. Today's entrepreneur is often an open-minded leader who relies on networks, business plans, and consensus and is just as likely to be female as male. Finally, although successful entrepreneurs understand the role of risk, they do not necessarily regard what they do as being risky. Page Ref: 64 Difficulty: Easy AACSB: Reflective thinking skills Objective: 3.2 Learning Outcome: Explain the entrepreneurship process Skill: Concept 38 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 112) Describe the business plan and the start-up decisions made by small businesses. Identify sources of financial aid available to small businesses. Answer: The starting point for virtually every new business is a business plan, in which the entrepreneur summarizes business strategy for the new venture and shows how it will be implemented. Entrepreneurs must also decide whether to buy an existing business, operate a franchise, or start from scratch. Further, common funding sources include personal funds, family and friends, savings, lenders, investors, and government agencies. Venture capital companies are groups of small investors seeking to make a profit on companies with rapid growth potential. Most of these firms do not lend money but rather invest it, supplying capital in return for partial ownership. Lending institutions are more likely to finance an existing business than a new business because the risks are better understood. Page Ref: 65-66 Difficulty: Easy AACSB: Reflective thinking skills Objective: 3.3 Learning Outcome: Explain the entrepreneurship process Skill: Concept 113) Explain sole proprietorships and partnerships. Discuss the advantages and disadvantages of each. Answer: The sole proprietor is owned and usually operated by one person. There are tax benefits for new businesses that are likely to suffer losses in early stages. One drawback is unlimited liability. Another disadvantage is lack of continuity. Finally, a sole proprietorship depends on the resources of a single individual. The general partnership is a sole proprietorship multiplied by the number of partner-owners. The biggest advantage is its ability to grow by adding new talent and money. A partnership is not a legal entity. It is just two or more people working together. Partners are taxed as individuals, and unlimited liability is a drawback. Partnerships may lack continuity, and transferring ownership may be hard. No partner may sell out without the consent of the others. Page Ref: 72-73 Difficulty: Moderate AACSB: Reflective thinking skills Objective: 3.5 Learning Outcome: Explain the entrepreneurship process Skill: Concept 39 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 114) Describe corporations. List their advantages and disadvantages. Answer: A corporation is a business that is legally considered a separate entity from its owners. They may sue and be sued; buy, hold, and sell property; make and sell products; and be tried and punished for crimes. An advantage of incorporation is limited liability: Investor liability is limited to personal investments in the firm. Another advantage is continuity. Corporations also have advantages in raising money. By selling stock, they expand the number of investors and available funds. One disadvantage is that a corporation can be taken over against the managers' will. Also, start-up costs are high. Corporations are regulated and must meet legal requirements in the states in which they are chartered. A drawback to incorporation is double taxation. Different kinds of corporations help businesses take advantage of incorporation without assuming all of the disadvantages. Page Ref: 75-76 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 115) Explain the basic issues involved in managing a corporation. Answer: Corporations sell shares, called stock, to investors who then become stockholders and the real owners. Profits are distributed among stockholders in the form of dividends, and managers serve at their discretion. The governing body of a corporation is its board of directors. Most board members do not participate in day-to-day management but rather hire a team of managers. This team, called officers, is usually headed by a chief executive officer, or CEO, who is responsible for overall performance. Page Ref: 77-78 Difficulty: Difficult AACSB: Reflective thinking skills Objective: 3.6 Learning Outcome: Explain the entrepreneurship process Skill: Concept 40 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall The Miller brothers (Jack, Bill, and Evan) are about to fulfill a lifelong dream. They are buying a thousand-acre farm and plan to grow cotton. Seeking independence, they are not interested in bringing in any outside owners. They have obtained financing from the Farm Credit Bureau that will allow them to finance the purchase of the farm and some equipment. The brothers are realistic and expect to work very long hours. However, they have a few critical decisions left to make. 116) Should the Miller brothers' farm be considered a small business? Answer: The Miller brothers' farm should be considered a small business. A small business is independently owned and managed. It cannot be a part of another business and must have little influence in its market. A family farm would definitely meet these standards. As there are hundreds, if not thousands, of farms growing cotton in the United States, the Miller brothers' farm will have little to no influence in the market for cotton. Page Ref: 60 Difficulty: Easy AACSB: Reflective thinking skills Objective: 3.1 Learning Outcome: Describe the role of small businesses in the economy Skill: Application 117) Should the Miller brothers develop a business plan? Why or why not? Answer: A business plan would help the brothers develop and describe their business strategy and demonstrate how it will be implemented. It would also describe the abilities and experiences ea