AF2 Business financial planning Practice Exam
Question 1: Which business entity is owned and run by one individual?
A. Sole Trader
B. Partnership
C. Limited Company
D. LLP
Answer: A
Explanation: A sole trader is the simplest form of business where one individual owns and operates the
business, bearing all risks and rewards.
Question 2: In which business structure does the owner have unlimited liability?
A. Limited Company
B. LLP
C. Sole Trader
D. Partnership
Answer: C
Explanation: Sole traders have unlimited liability, meaning the owner is personally responsible for all
debts and obligations.
Question 3: Which entity is formed by two or more individuals agreeing to share profits and losses?
A. Limited Company
B. Partnership
C. Sole Trader
D. LLP
Answer: B
Explanation: A partnership involves two or more individuals who agree to share the profits, losses, and
responsibilities of the business.
Question 4: Which legal form offers limited liability to its owners?
A. Sole Trader
B. Partnership
C. Limited Company
D. General Partnership
Answer: C
Explanation: Limited companies provide limited liability, meaning the owners’ personal assets are
protected beyond their investment in the company.
Question 5: What is one major advantage of forming a Limited Liability Partnership (LLP)?
A. No requirement for a partnership agreement
B. Unlimited liability for partners
C. Limited liability protection with flexible internal arrangements
D. Higher tax rates than sole traders
Answer: C
Explanation: LLPs offer limited liability for partners while allowing flexible internal management
structures similar to traditional partnerships.
,Question 6: Which business structure typically requires incorporation and compliance with company
law?
A. Sole Trader
B. Partnership
C. Limited Company
D. Informal Association
Answer: C
Explanation: Limited companies must be formally incorporated and adhere to strict company laws and
regulations.
Question 7: What is a key legal obligation of a sole trader in business management?
A. Filing annual incorporation documents
B. Managing all aspects of the business personally
C. Creating complex partnership agreements
D. Appointing a board of directors
Answer: B
Explanation: A sole trader manages every aspect of the business personally and is directly responsible
for its operations and obligations.
Question 8: Which of the following is a common disadvantage of operating as a sole trader?
A. High setup costs
B. Complex legal requirements
C. Unlimited personal liability
D. Excessive regulatory oversight
Answer: C
Explanation: Sole traders face the disadvantage of unlimited personal liability, meaning personal assets
are at risk if the business fails.
Question 9: In a partnership, what is typically established to define each partner’s rights and
responsibilities?
A. Articles of Incorporation
B. Partnership Agreement
C. Shareholders’ Agreement
D. Operating Manual
Answer: B
Explanation: A partnership agreement outlines each partner’s roles, responsibilities, and profit-sharing
arrangements, helping to avoid disputes.
Question 10: Which entity is most suitable for a business owner seeking to limit personal financial
risk?
A. Sole Trader
B. Partnership
C. Limited Company
D. Unincorporated Association
Answer: C
,Explanation: A limited company is designed to protect personal assets by limiting financial risk to the
amount invested in the business.
Question 11: Which structure is most likely to require ongoing compliance with both directors’ and
shareholders’ regulations?
A. LLP
B. Sole Trader
C. Partnership
D. Limited Company
Answer: D
Explanation: Limited companies must comply with regulations set out for both directors and
shareholders, including meetings, filings, and governance requirements.
Question 12: What is the main difference between a traditional partnership and an LLP?
A. LLPs do not require a formal agreement
B. Traditional partnerships offer limited liability
C. LLPs provide limited liability protection for all partners
D. Traditional partnerships are incorporated entities
Answer: C
Explanation: LLPs are structured to provide limited liability protection to all partners, unlike traditional
partnerships where partners have joint and several liabilities.
Question 13: Which of the following best describes the establishment process for a limited company?
A. Informal verbal agreement among partners
B. Registration with a governmental body and adherence to statutory requirements
C. Sole decision by one owner with minimal paperwork
D. No legal documentation required
Answer: B
Explanation: Establishing a limited company involves registering with the appropriate governmental
authority and meeting statutory requirements, including drafting articles of association.
Question 14: In terms of taxation, which business structure is generally taxed separately from its
owner?
A. Sole Trader
B. Partnership
C. Limited Company
D. Informal Co-operative
Answer: C
Explanation: Limited companies are considered separate legal entities and are taxed on their profits
independently of their owners’ personal income.
Question 15: Which business structure allows for a simple management system without the need for a
board of directors?
A. Limited Company
B. Sole Trader
C. Corporation
D. Public Limited Company
, Answer: B
Explanation: A sole trader manages the business alone without the need for a board of directors or
complex management structures.
Question 16: What is one key regulatory consideration when comparing different business structures?
A. The color of the company logo
B. The level of personal liability for business debts
C. The number of employees
D. The location of the business premises
Answer: B
Explanation: Different business structures have varying levels of personal liability; this is a crucial
regulatory consideration when choosing a structure.
Question 17: Which business entity often faces fewer regulatory requirements and simpler tax filings?
A. Limited Company
B. LLP
C. Sole Trader
D. Public Corporation
Answer: C
Explanation: Sole traders typically encounter fewer regulatory requirements and simpler tax filing
processes compared to more formal structures like limited companies.
Question 18: How does a partnership differ from a sole trader in terms of management?
A. Only one person manages all operations
B. Management is shared among two or more partners
C. There is no management in a partnership
D. Partnerships require a board of directors
Answer: B
Explanation: In a partnership, management responsibilities are shared among the partners as per the
partnership agreement.
Question 19: Which factor is critical when comparing business structures?
A. The business logo design
B. Liability, taxation, and regulatory compliance
C. The interior decoration of the office
D. The personal hobbies of the owner
Answer: B
Explanation: When comparing business structures, factors such as liability, taxation, and regulatory
compliance are critical for making an informed decision.
Question 20: Which business structure typically involves the highest level of public disclosure?
A. Sole Trader
B. Private Partnership
C. Limited Company
D. Informal Group
Answer: C
Question 1: Which business entity is owned and run by one individual?
A. Sole Trader
B. Partnership
C. Limited Company
D. LLP
Answer: A
Explanation: A sole trader is the simplest form of business where one individual owns and operates the
business, bearing all risks and rewards.
Question 2: In which business structure does the owner have unlimited liability?
A. Limited Company
B. LLP
C. Sole Trader
D. Partnership
Answer: C
Explanation: Sole traders have unlimited liability, meaning the owner is personally responsible for all
debts and obligations.
Question 3: Which entity is formed by two or more individuals agreeing to share profits and losses?
A. Limited Company
B. Partnership
C. Sole Trader
D. LLP
Answer: B
Explanation: A partnership involves two or more individuals who agree to share the profits, losses, and
responsibilities of the business.
Question 4: Which legal form offers limited liability to its owners?
A. Sole Trader
B. Partnership
C. Limited Company
D. General Partnership
Answer: C
Explanation: Limited companies provide limited liability, meaning the owners’ personal assets are
protected beyond their investment in the company.
Question 5: What is one major advantage of forming a Limited Liability Partnership (LLP)?
A. No requirement for a partnership agreement
B. Unlimited liability for partners
C. Limited liability protection with flexible internal arrangements
D. Higher tax rates than sole traders
Answer: C
Explanation: LLPs offer limited liability for partners while allowing flexible internal management
structures similar to traditional partnerships.
,Question 6: Which business structure typically requires incorporation and compliance with company
law?
A. Sole Trader
B. Partnership
C. Limited Company
D. Informal Association
Answer: C
Explanation: Limited companies must be formally incorporated and adhere to strict company laws and
regulations.
Question 7: What is a key legal obligation of a sole trader in business management?
A. Filing annual incorporation documents
B. Managing all aspects of the business personally
C. Creating complex partnership agreements
D. Appointing a board of directors
Answer: B
Explanation: A sole trader manages every aspect of the business personally and is directly responsible
for its operations and obligations.
Question 8: Which of the following is a common disadvantage of operating as a sole trader?
A. High setup costs
B. Complex legal requirements
C. Unlimited personal liability
D. Excessive regulatory oversight
Answer: C
Explanation: Sole traders face the disadvantage of unlimited personal liability, meaning personal assets
are at risk if the business fails.
Question 9: In a partnership, what is typically established to define each partner’s rights and
responsibilities?
A. Articles of Incorporation
B. Partnership Agreement
C. Shareholders’ Agreement
D. Operating Manual
Answer: B
Explanation: A partnership agreement outlines each partner’s roles, responsibilities, and profit-sharing
arrangements, helping to avoid disputes.
Question 10: Which entity is most suitable for a business owner seeking to limit personal financial
risk?
A. Sole Trader
B. Partnership
C. Limited Company
D. Unincorporated Association
Answer: C
,Explanation: A limited company is designed to protect personal assets by limiting financial risk to the
amount invested in the business.
Question 11: Which structure is most likely to require ongoing compliance with both directors’ and
shareholders’ regulations?
A. LLP
B. Sole Trader
C. Partnership
D. Limited Company
Answer: D
Explanation: Limited companies must comply with regulations set out for both directors and
shareholders, including meetings, filings, and governance requirements.
Question 12: What is the main difference between a traditional partnership and an LLP?
A. LLPs do not require a formal agreement
B. Traditional partnerships offer limited liability
C. LLPs provide limited liability protection for all partners
D. Traditional partnerships are incorporated entities
Answer: C
Explanation: LLPs are structured to provide limited liability protection to all partners, unlike traditional
partnerships where partners have joint and several liabilities.
Question 13: Which of the following best describes the establishment process for a limited company?
A. Informal verbal agreement among partners
B. Registration with a governmental body and adherence to statutory requirements
C. Sole decision by one owner with minimal paperwork
D. No legal documentation required
Answer: B
Explanation: Establishing a limited company involves registering with the appropriate governmental
authority and meeting statutory requirements, including drafting articles of association.
Question 14: In terms of taxation, which business structure is generally taxed separately from its
owner?
A. Sole Trader
B. Partnership
C. Limited Company
D. Informal Co-operative
Answer: C
Explanation: Limited companies are considered separate legal entities and are taxed on their profits
independently of their owners’ personal income.
Question 15: Which business structure allows for a simple management system without the need for a
board of directors?
A. Limited Company
B. Sole Trader
C. Corporation
D. Public Limited Company
, Answer: B
Explanation: A sole trader manages the business alone without the need for a board of directors or
complex management structures.
Question 16: What is one key regulatory consideration when comparing different business structures?
A. The color of the company logo
B. The level of personal liability for business debts
C. The number of employees
D. The location of the business premises
Answer: B
Explanation: Different business structures have varying levels of personal liability; this is a crucial
regulatory consideration when choosing a structure.
Question 17: Which business entity often faces fewer regulatory requirements and simpler tax filings?
A. Limited Company
B. LLP
C. Sole Trader
D. Public Corporation
Answer: C
Explanation: Sole traders typically encounter fewer regulatory requirements and simpler tax filing
processes compared to more formal structures like limited companies.
Question 18: How does a partnership differ from a sole trader in terms of management?
A. Only one person manages all operations
B. Management is shared among two or more partners
C. There is no management in a partnership
D. Partnerships require a board of directors
Answer: B
Explanation: In a partnership, management responsibilities are shared among the partners as per the
partnership agreement.
Question 19: Which factor is critical when comparing business structures?
A. The business logo design
B. Liability, taxation, and regulatory compliance
C. The interior decoration of the office
D. The personal hobbies of the owner
Answer: B
Explanation: When comparing business structures, factors such as liability, taxation, and regulatory
compliance are critical for making an informed decision.
Question 20: Which business structure typically involves the highest level of public disclosure?
A. Sole Trader
B. Private Partnership
C. Limited Company
D. Informal Group
Answer: C
