1. The form of organization for a business is not an important issue, as this decision has very little
effect on the income and wealth of the firm's owners.
a. True
b. False
ANSWER: False
2. The major advantage of a regular partnership or a corporation as a form of business
organization is the fact that both offer their owners limited liability, whereas proprietorships do
not.
a. True
b. False
ANSWER: False
3. There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2)
limited life of the organization, and (3) difficulty of transferring ownership. These combine to
make it difficult for partnerships to attract large amounts of capital and thus to grow to a very
large size.
a. True
b. False
ANSWER: True
4. Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and
(2) the owner's unlimited personal liability for the business' debts.
a. True
b. False
ANSWER: True
5. One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's
value.
a. True
, b. False
ANSWER: True
6. The disadvantages associated with a proprietorship are similar to those under a partnership.
One exception relates to the more formal nature of the partnership agreement and the
commitment of all partners' personal assets. As a result, partnerships do not have difficulty
raising large amounts of capital.
a. True
b. False
ANSWER: False
7. The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily
and inexpensively formed, are two key advantages to that form of business.
a. True
b. False
ANSWER: True
8. Which of the following statements is CORRECT?
a. One of the disadvantages of incorporating a business is that the owners then become
subject to liabilities in the event the firm goes bankrupt.
b. Sole proprietorships are subject to more regulations than corporations.
c. In any type of partnership, every partner has the same rights, privileges, and liability
exposure as every other partner.
d. Sole proprietorships and partnerships generally have a tax advantage over many
corporations, especially large ones.
e. Corporations of all types are subject to the corporate income tax.
ANSWER: d
9. Which of the following statements is CORRECT?
a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to
unlimited liability.
, b. It is generally easier to transfer one's ownership interest in a partnership than in a
corporation.
c. One of the advantages of the corporate form of organization is that it avoids double
taxation.
d. One of the advantages of a corporation from a social standpoint is that every
stockholder has equal voting rights, i.e., "one person, one vote."
e. Corporations of all types are subject to the corporate income tax.
ANSWER: a
10. Which of the following statements is CORRECT?
a. It is generally more expensive to form a proprietorship than a corporation because,
with a proprietorship, extensive legal documents are required.
b. Corporations face fewer regulations than sole proprietorships.
c. One disadvantage of operating a business as a sole proprietorship is that the firm is
subject to double taxation, at both the firm level and the owner level.
d. One advantage of forming a corporation is that equity investors are usually exposed to
less liability than in a regular partnership.
e. If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to
the amount of his or her investment in the business.
ANSWER: d
11. Cheers Inc. operates as a partnership. Now the partners have decided to convert the business
into a regular corporation. Which of the following statements is CORRECT?
a. Assuming Cheers is profitable, less of its income will be subject to federal income
taxes.
b. Cheers will now be subject to fewer regulations.
c. Cheers' shareholders (the ex-partners) will now be exposed to less liability.
d. Cheers' investors will be exposed to less liability, but they will find it more difficult to
transfer their ownership.
e. Cheers will find it more difficult to raise additional capital.
ANSWER: c
12. Which of the following statements is CORRECT?
, a. It is usually easier to transfer ownership in a corporation than it is to transfer
ownership in a sole proprietorship.
b. Corporate shareholders are exposed to unlimited liability.
c. Corporations generally face fewer regulations than sole proprietorships.
d. Corporate shareholders are exposed to unlimited liability, and this factor may be
compounded by the tax disadvantages of incorporation.
e. Shareholders in a regular corporation (not an S corporation) pay higher taxes than
owners of an otherwise identical proprietorship.
ANSWER: a
13. Which of the following could explain why a business might choose to operate as a
corporation rather than as a sole proprietorship or a partnership?
a. Corporations generally find it relatively difficult to raise large amounts of capital.
b. Less of a corporation's income is generally subjected to taxes than would be true if the
firm were a partnership.
c. Corporate shareholders escape liability for the firm's debts, but this factor may be
offset by the tax disadvantages of the corporate form of organization.
d. Corporate investors are exposed to unlimited liability.
e. Corporations generally face relatively few regulations.
ANSWER: c
14. One drawback of switching from a partnership to the corporate form of organization is the
following:
a. It subjects the firm to additional regulations.
b. It cannot affect the amount of the firm's operating income that goes to taxes.
c. It makes it more difficult for the firm to raise additional capital.
d. It makes the firm's investors subject to greater potential personal liabilities.
e. It makes it more difficult for the firm's investors to transfer their ownership interests.
ANSWER: a
15. Which of the following statements is CORRECT?
effect on the income and wealth of the firm's owners.
a. True
b. False
ANSWER: False
2. The major advantage of a regular partnership or a corporation as a form of business
organization is the fact that both offer their owners limited liability, whereas proprietorships do
not.
a. True
b. False
ANSWER: False
3. There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2)
limited life of the organization, and (3) difficulty of transferring ownership. These combine to
make it difficult for partnerships to attract large amounts of capital and thus to grow to a very
large size.
a. True
b. False
ANSWER: True
4. Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and
(2) the owner's unlimited personal liability for the business' debts.
a. True
b. False
ANSWER: True
5. One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's
value.
a. True
, b. False
ANSWER: True
6. The disadvantages associated with a proprietorship are similar to those under a partnership.
One exception relates to the more formal nature of the partnership agreement and the
commitment of all partners' personal assets. As a result, partnerships do not have difficulty
raising large amounts of capital.
a. True
b. False
ANSWER: False
7. The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily
and inexpensively formed, are two key advantages to that form of business.
a. True
b. False
ANSWER: True
8. Which of the following statements is CORRECT?
a. One of the disadvantages of incorporating a business is that the owners then become
subject to liabilities in the event the firm goes bankrupt.
b. Sole proprietorships are subject to more regulations than corporations.
c. In any type of partnership, every partner has the same rights, privileges, and liability
exposure as every other partner.
d. Sole proprietorships and partnerships generally have a tax advantage over many
corporations, especially large ones.
e. Corporations of all types are subject to the corporate income tax.
ANSWER: d
9. Which of the following statements is CORRECT?
a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to
unlimited liability.
, b. It is generally easier to transfer one's ownership interest in a partnership than in a
corporation.
c. One of the advantages of the corporate form of organization is that it avoids double
taxation.
d. One of the advantages of a corporation from a social standpoint is that every
stockholder has equal voting rights, i.e., "one person, one vote."
e. Corporations of all types are subject to the corporate income tax.
ANSWER: a
10. Which of the following statements is CORRECT?
a. It is generally more expensive to form a proprietorship than a corporation because,
with a proprietorship, extensive legal documents are required.
b. Corporations face fewer regulations than sole proprietorships.
c. One disadvantage of operating a business as a sole proprietorship is that the firm is
subject to double taxation, at both the firm level and the owner level.
d. One advantage of forming a corporation is that equity investors are usually exposed to
less liability than in a regular partnership.
e. If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to
the amount of his or her investment in the business.
ANSWER: d
11. Cheers Inc. operates as a partnership. Now the partners have decided to convert the business
into a regular corporation. Which of the following statements is CORRECT?
a. Assuming Cheers is profitable, less of its income will be subject to federal income
taxes.
b. Cheers will now be subject to fewer regulations.
c. Cheers' shareholders (the ex-partners) will now be exposed to less liability.
d. Cheers' investors will be exposed to less liability, but they will find it more difficult to
transfer their ownership.
e. Cheers will find it more difficult to raise additional capital.
ANSWER: c
12. Which of the following statements is CORRECT?
, a. It is usually easier to transfer ownership in a corporation than it is to transfer
ownership in a sole proprietorship.
b. Corporate shareholders are exposed to unlimited liability.
c. Corporations generally face fewer regulations than sole proprietorships.
d. Corporate shareholders are exposed to unlimited liability, and this factor may be
compounded by the tax disadvantages of incorporation.
e. Shareholders in a regular corporation (not an S corporation) pay higher taxes than
owners of an otherwise identical proprietorship.
ANSWER: a
13. Which of the following could explain why a business might choose to operate as a
corporation rather than as a sole proprietorship or a partnership?
a. Corporations generally find it relatively difficult to raise large amounts of capital.
b. Less of a corporation's income is generally subjected to taxes than would be true if the
firm were a partnership.
c. Corporate shareholders escape liability for the firm's debts, but this factor may be
offset by the tax disadvantages of the corporate form of organization.
d. Corporate investors are exposed to unlimited liability.
e. Corporations generally face relatively few regulations.
ANSWER: c
14. One drawback of switching from a partnership to the corporate form of organization is the
following:
a. It subjects the firm to additional regulations.
b. It cannot affect the amount of the firm's operating income that goes to taxes.
c. It makes it more difficult for the firm to raise additional capital.
d. It makes the firm's investors subject to greater potential personal liabilities.
e. It makes it more difficult for the firm's investors to transfer their ownership interests.
ANSWER: a
15. Which of the following statements is CORRECT?
