,Chapter 1: The Corporation
Multiple-Choice Questions (50 Questions)
1. A sole proprietorship is a business owned by:
A) Multiple partners
B) A single individual
C) Shareholders
D) A board of directors
Correct Answer: B
Rationale: A sole proprietorship is owned and run by one person, with no legal separation between the
owner and the business .
2. Which of the following organization forms accounts for the greatest number of firms?
A) "C" corporation
B) Limited partnership
C) Sole proprietorship
D) Limited liability company
Correct Answer: C
Rationale: Sole proprietorships account for the greatest number of firms, though they account for a
much smaller share of total revenue .
3. Which of the following organization forms accounts for the most revenue?
A) "S" corporation
B) Limited partnership
C) "C" corporation
D) Limited liability company
Correct Answer: C
Rationale: "C" corporations account for the most revenue because they are typically large, publicly
traded companies .
4. Which of the following is NOT an advantage of a sole proprietorship?
A) Single taxation
B) Ease of setup
C) Limited liability
D) No separation of ownership and control
Correct Answer: C
Rationale: A disadvantage of a sole proprietorship is unlimited personal liability—the owner is personally
responsible for all business debts .
5. A limited partnership is a partnership with:
A) Only general partners
B) Only limited partners
C) Both general and limited partners
D) No partners
,Correct Answer: C
Rationale: A limited partnership has at least one general partner and one or more limited partners .
6. In a limited partnership, the liability of a limited partner is limited to:
A) The amount of their investment
B) All of their personal assets
C) The amount of the general partner's investment
D) Nothing; they have no liability
Correct Answer: A
Rationale: A limited partner's liability is limited to the amount of their investment in the partnership .
7. Which of the following statements regarding limited partnerships is TRUE?
A) There is no limit on a limited partner's liability
B) A limited partner is not liable until all the assets of the general partners have been exhausted
C) A general partner's liability is limited by the amount of their investment
D) A limited partner's liability is limited to the amount of their investment
Correct Answer: D
Rationale: Limited partners have limited liability up to their investment amount, while general partners
have unlimited liability .
8. A limited liability company (LLC) is essentially:
A) A limited partnership without limited partners
B) A limited partnership without a general partner
C) Just another name for a limited partnership
D) Just another name for a corporation
Correct Answer: B
Rationale: An LLC is like a limited partnership but without a general partner—all owners have limited
liability .
9. The distinguishing feature of a corporation is that:
A) There is no legal difference between the corporation and its owners
B) It is a legally defined, artificial being, separate from its owners
C) It spreads liability for its corporate obligations to all shareholders
D) It provides limited liability only to small shareholders
Correct Answer: B
Rationale: A corporation is a legally defined, artificial being separate from its owners, providing limited
liability to all shareholders .
10. Which of the following is an advantage of incorporation?
A) Access to capital markets
B) Limited liability
C) Unlimited life
D) All of the above
, Correct Answer: D
Rationale: Incorporation provides access to capital markets, limited liability for owners, and unlimited life
for the business .
11. Which of the following organization forms for a business does NOT avoid double taxation?
A) Limited partnership
B) "S" corporation
C) "C" corporation
D) Limited liability company
Correct Answer: C
Rationale: "C" corporations are subject to double taxation—corporate earnings are taxed, then dividends
are taxed again at the shareholder level .
12. An advantage to incorporation is that it allows for:
A) Less regulation of the business
B) More regulation of the business
C) No regulation of the business
D) The same regulation as partnerships
Correct Answer: B
Rationale: Corporations face more regulations when compared to partnerships, including SEC
requirements and Sarbanes-Oxley compliance .
13. An "S" corporation is different from a "C" corporation because an "S" corporation:
A) Has publicly traded stock
B) Is taxed like a partnership
C) Has unlimited shareholders
D) Is subject to double taxation
Correct Answer: B
Rationale: "S" corporations are taxed like partnerships—income is passed through to shareholders and
taxed only once .
14. A "C" corporation differs from an "S" corporation in that a "C" corporation:
A) Has no more than 100 shareholders
B) Has privately traded stock
C) Is subject to double taxation
D) Is taxed like a partnership
Correct Answer: C
Rationale: "C" corporations are subject to double taxation—corporate income is taxed, and dividends are
taxed again .
15. You own 100 shares of an "S" corporation. The corporation earns $5.00 per share before taxes. The
corporate tax rate is 40% and your personal tax rate on dividend income is 30%. How much money is left
for you after all taxes have been paid?
Multiple-Choice Questions (50 Questions)
1. A sole proprietorship is a business owned by:
A) Multiple partners
B) A single individual
C) Shareholders
D) A board of directors
Correct Answer: B
Rationale: A sole proprietorship is owned and run by one person, with no legal separation between the
owner and the business .
2. Which of the following organization forms accounts for the greatest number of firms?
A) "C" corporation
B) Limited partnership
C) Sole proprietorship
D) Limited liability company
Correct Answer: C
Rationale: Sole proprietorships account for the greatest number of firms, though they account for a
much smaller share of total revenue .
3. Which of the following organization forms accounts for the most revenue?
A) "S" corporation
B) Limited partnership
C) "C" corporation
D) Limited liability company
Correct Answer: C
Rationale: "C" corporations account for the most revenue because they are typically large, publicly
traded companies .
4. Which of the following is NOT an advantage of a sole proprietorship?
A) Single taxation
B) Ease of setup
C) Limited liability
D) No separation of ownership and control
Correct Answer: C
Rationale: A disadvantage of a sole proprietorship is unlimited personal liability—the owner is personally
responsible for all business debts .
5. A limited partnership is a partnership with:
A) Only general partners
B) Only limited partners
C) Both general and limited partners
D) No partners
,Correct Answer: C
Rationale: A limited partnership has at least one general partner and one or more limited partners .
6. In a limited partnership, the liability of a limited partner is limited to:
A) The amount of their investment
B) All of their personal assets
C) The amount of the general partner's investment
D) Nothing; they have no liability
Correct Answer: A
Rationale: A limited partner's liability is limited to the amount of their investment in the partnership .
7. Which of the following statements regarding limited partnerships is TRUE?
A) There is no limit on a limited partner's liability
B) A limited partner is not liable until all the assets of the general partners have been exhausted
C) A general partner's liability is limited by the amount of their investment
D) A limited partner's liability is limited to the amount of their investment
Correct Answer: D
Rationale: Limited partners have limited liability up to their investment amount, while general partners
have unlimited liability .
8. A limited liability company (LLC) is essentially:
A) A limited partnership without limited partners
B) A limited partnership without a general partner
C) Just another name for a limited partnership
D) Just another name for a corporation
Correct Answer: B
Rationale: An LLC is like a limited partnership but without a general partner—all owners have limited
liability .
9. The distinguishing feature of a corporation is that:
A) There is no legal difference between the corporation and its owners
B) It is a legally defined, artificial being, separate from its owners
C) It spreads liability for its corporate obligations to all shareholders
D) It provides limited liability only to small shareholders
Correct Answer: B
Rationale: A corporation is a legally defined, artificial being separate from its owners, providing limited
liability to all shareholders .
10. Which of the following is an advantage of incorporation?
A) Access to capital markets
B) Limited liability
C) Unlimited life
D) All of the above
, Correct Answer: D
Rationale: Incorporation provides access to capital markets, limited liability for owners, and unlimited life
for the business .
11. Which of the following organization forms for a business does NOT avoid double taxation?
A) Limited partnership
B) "S" corporation
C) "C" corporation
D) Limited liability company
Correct Answer: C
Rationale: "C" corporations are subject to double taxation—corporate earnings are taxed, then dividends
are taxed again at the shareholder level .
12. An advantage to incorporation is that it allows for:
A) Less regulation of the business
B) More regulation of the business
C) No regulation of the business
D) The same regulation as partnerships
Correct Answer: B
Rationale: Corporations face more regulations when compared to partnerships, including SEC
requirements and Sarbanes-Oxley compliance .
13. An "S" corporation is different from a "C" corporation because an "S" corporation:
A) Has publicly traded stock
B) Is taxed like a partnership
C) Has unlimited shareholders
D) Is subject to double taxation
Correct Answer: B
Rationale: "S" corporations are taxed like partnerships—income is passed through to shareholders and
taxed only once .
14. A "C" corporation differs from an "S" corporation in that a "C" corporation:
A) Has no more than 100 shareholders
B) Has privately traded stock
C) Is subject to double taxation
D) Is taxed like a partnership
Correct Answer: C
Rationale: "C" corporations are subject to double taxation—corporate income is taxed, and dividends are
taxed again .
15. You own 100 shares of an "S" corporation. The corporation earns $5.00 per share before taxes. The
corporate tax rate is 40% and your personal tax rate on dividend income is 30%. How much money is left
for you after all taxes have been paid?
