Ch13 Business Structure Options Legal, Tax, And Exam Prep

Chapter 13: Business Structure Options: Legal, Tax, and Risk Issues

= Correct answer

Multiple Choice/Fill in the Blank

1. Small businesses are defined as organizations with fewer than ________ workers.

A. 50

B. 100

C. 500

D. 1,000

Difficulty: Easy

1. Your company has 85 shareholders, and the owners account for taxes on the business income on their personal income tax returns. The owners also have the privilege of limited liability. What type of business structure best describes your company?

A. C corporation

B. not-for-profit corporation

C. S corporation

D. LLC

Difficulty: Moderate

1. You source some of your raw materials from a supplier located in the UK. Which category of risk should you be most concerned about?

A. economic risks

B. global risks

C. natural disaster risks

D. shipping risks

Difficulty: Easy

1. What is the first step in any entrepreneurial venture?

A. Compete in a pitch competition to try out the idea.

B. Establish the nature and purpose of the business.

C. Find the business name and get it trademarked.

D. Get grants or find investors to fund the business.

Difficulty: Easy

1. Procter & Gamble is an example of a(n) ________.

A. privately held corporation

B. public corporation

C. publicly held corporation

D. S corporation

Difficulty: Easy

1. Which of the following is also referred to as business structure from a legal perspective?

A. corporate identity

B. entity selection

C. legal definition

D. tax status

Difficulty: Easy

1. Why is the initial decision about the entity selection so important?

A. The selection impacts how many employees you can have at one time.

B. The business structure is set and cannot be changed later.

C. The government mandates that certain businesses have certain structures.

D. The business may have the potential to evolve into a much larger business.

Difficulty: Moderate

1. Which of the following is best if you want to manage the business yourself and protect your personal assets?

A. joint venture

B. partnership

C. single-member LLC

D. sole proprietor

Difficulty: Moderate

1. Which of the following is the reason the entrepreneur forms the company and determines who benefits from it?

A. business purpose

B. business structure

C. entity selection

D. legal definition

Difficulty: Easy

1. The first consideration for entity selection is ________.

A. how many lenders the business will have

B. how many employees the business will have

C. where the business will be located

D. if the business will be for-profit or not-for-profit

Difficulty: Moderate

1. The entity selection directly affects ________.

A. how many employees you can have

B. how many lenders you can have

C. how the entity is taxed

D. where the organization is located

Difficulty: Moderate

1. Not-for-profits are formed to ________.

A. avoid paying taxes

B. further a social cause

C. make a profit

D. only use volunteers

Difficulty: Easy

1. Which of the following formations have limited liability for all the owners?

A. general partnership

B. limited partnership

C. LLC

D. sole proprietorship

Difficulty: Easy

1. What do not-for-profit organizations do with surplus revenues?

A. give bonuses to staff members

B. invest back into the organization

C. offer bonuses to board members

D. pay back shareholders

Difficulty: Easy

1. Where do profits go in a for-profit business?

A. All profits are invested into the company.

B. All profits are donated to charity.

C. All profits are distributed to owners.

D. All profits are used to pay off debts.

Difficulty: Easy

1. Which entity determines if an organization is not-for-profit?

A. attorney general

B. director of taxation

C. governor of the state

D. secretary of state

Difficulty: Difficult

1. Which business structure operates as a separate legal entity apart from the owners?

A. corporation

B. LLC

C. partnership

D. sole proprietor

Difficulty: Easy

1. What is meant by “operates as a separate legal entity?”

A. has some of the same legal rights has an individual

B. owners’ name is not mentioned in the IRS filings

C. is exempt from taxes at the federal level

D. can have unlimited number of employees

Difficulty: Moderate

1. In which corporation type are the owners taxed at the individual level only?

A. C corporation

B. D corporation

C. not-for-profit

D. S corporation

Difficulty: Easy

1. A(n) ________ is created when two or more individuals agree to work together to operate a business for profit.

A. corporation

B. general partnership

C. LLC

D. sole proprietorship

Difficulty: Easy

1. Why should entrepreneurs be careful when working with others on their business venture?

A. A legal document is required to form a partnership.

B. A general partnership can be informally created by the actions of people pursing the business.

C. There are certain restrictions on who you can enter into a partnership with.

D. The IRS requires certain documents before you can begin working together.

Difficulty: Moderate

1. How is a joint venture different from a legal partnership?

A. Joint ventures are used during a limited period of time and for a single purpose.

B. Joint ventures are not legal agreements between partners and last indefinitely.

C. No profits can be made in a joint venture unlike in a partnership.

D. Ownership is split equally in a joint venture for the life of the project.

Difficulty: Moderate

1. An IT company and a pharmaceutical company collaborate to develop a product to better assess patient status in the emergency room. Which formation is this an example of?

A. general partnership

B. joint venture

C. limited partnership

D. not-for-profit venture

Difficulty: Difficult

1. What is the primary advantage of becoming an LLC entity?

A. allows managers to maintain all the decision making

B. provides the corporate shield of limited liability to the owners

C. allows the company to issues shares of stock to investors

D. permits the organization to have unlimited number of employees

Difficulty: Difficult

1. An entrepreneur who just starts doing business is automatically classified as the ________ business structure.

A. contractor

B. LLC

C. LLP

D. sole proprietor

Difficulty: Easy

1. What is the difference between a loan and an investment?

A. Loans are only available to corporations and LLCs.

B. Investments are not made to sole proprietors.

C. Loans must be paid back, but investments do not.

D. The investment is capped at a certain dollar amount, and a loan is not.

Difficulty: Moderate

True/False

1. True or false? Capital is required at every step of a business.

Difficulty: Moderate

1. True or false? An investment must be repaid with interest.

Difficulty: Easy

1. True or false? Most publicly traded companies go public when they first begin operations.

Difficulty: Difficult

1. True or false? There will be more than one round of financing needed in most companies.

Difficulty: Moderate

1. True or false? The business structure impacts the tax circumstances of the owners.

Difficulty: Moderate

1. True or false? The state in which you live is the state in which you must form your business.

Difficulty: Easy

1. True or false? Equity crowdfunding is raising capital through the online sale of securities.

Difficulty: Easy

1. True or false? Multistate businesses only collect sales tax in their home state.

Difficulty: Moderate

1. True or false? With an S corporation, you can have 150 shareholders.

Difficulty: Easy

1. True or false? An LP has an unlimited number of general and limited partners.

Difficulty: Easy

1. True or false? An organization need only consider short-term risks when starting out.

Difficulty: Moderate

1. True or false? Risk attitude is the amount of risk the business can support.

Difficulty: Easy

1. True or false? The most common type of legal risk is breach of contracts.

Difficulty: Easy

1. True or false? Large corporations employ the greatest percentage of the US workforce.

Difficulty: Moderate

1. True or false? If you think your business has a great deal of growth potential so that you might want to sell interest in the business, you should use the corporation business structure.

Difficulty: Difficult

1. True or false? The local state university is a for-profit business.

Difficulty: Difficult

1. True or false? Each state maintains its own taxation requirements for businesses and not-for-profits.

Difficulty: Difficult

Short Answer

1. Discuss the differences between sole proprietorships and LLCs.

Difficulty: Easy

1. Describe a business that you might want to start and discuss the appropriate business structure for your business.

For example, a student could express an interest in developing a technology product that is new to the market. In this case, if the growth potential is realized and the need for capital great, the student might suggest a corporation business structure. If, instead, the student was interested in starting an organic pet food business, perhaps the LLC or sole proprietorship business structure might be the best choice.

Difficulty: Moderate

1. Discuss how a business may be for-profit but act in a way that makes it appear that it is not-for-profit. Give an example of a company that exhibits this type of behavior.

One example of a company that furthers a social cause is Ben & Jerry’s. They fund and promote the family-farming industry and promote hormone-free dairy products. Additionally, they encourage their employees to give back to their communities and be socially responsible.

Difficulty: Difficult

1. Discuss how a company such as a corporation or an LLC that had limited liability protection for their owners might lose the privilege of limited liability.

Difficulty: Difficult

1. Discuss some of the ways a corporation has the same legal rights as an individual.

Difficulty: Easy

1. What is meant by tripartite corporate structure?

Difficulty: Easy

1. What is double taxation?

Difficulty: Easy

1. Discuss some advantages and disadvantages of partnerships.

Difficulty: Moderate

1. When might a joint venture be appropriate instead of forming a partnership?

Difficulty: Moderate

1. Explain how an LLC is hybrid business structure.

Difficulty: Easy

1. Discuss capital acquisition options for the entrepreneur and how that can vary based on the selected business structure for the organization.

Difficulty: Moderate

1. You have decided to open an organic pet food store. You will make all the products in house and will have a small retail space to sell your products. You will also have a website where your products will be sold. Finally, you expect to do some traveling to various dog shows to sell and market your product. Discuss how you will use the concept of enterprise risk management in this organization.

Difficulty: Difficult

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