Gibson, Business Law, 11th Edition

Chapter 14: Choosing a Business Entity

LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

Multiple choice: Choose the one alternative that best completes the statement or answers the question.

1. In choosing a business entity which of the following is not a factor in making the decision?
2. Tax implications
3. Limiting potential liability
4. Government approval
5. Opportunity to raise capital

Difficulty: Basic

Topic: What factors should you consider in choosing a business entity

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

1. In which of the following business entities would the creditors be able to recover moneys owed to them by the business from the proprietors of the business?
2. The trading trust where a company is used to conduct the business
3. The limited liability company
4. The sole trader
5. None of the above

Difficulty: Basic

Topic: What factors should you consider in choosing a business entity

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

1. Which of the following statements about a sole trader is true?
2. A sole trader with employees must change to a different business structure.
3. Every sole trader must register their business name.
4. There are no special requirements to start operating a business if the sole trader uses their own name.
5. The sole trader must generally consult with customers, creditors and employees in deciding what the business will and will not do.

Difficulty: Basic

Topic: Who is a sole trader

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

1. Which of the following statements about a sole trader is not true?
2. All profits made by the business belong to the business and form part of the business’ own income.
3. Because there are no special statutory disclosure requirements, secrecy can be maintained by the sole trader.
4. There are no special requirements to start operating a business if the sole trader uses their own name.
5. The sole trader generally has complete control over what the business will and will not do.

Difficulty: Basic

Topic: Who is a sole trader

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

1. Which of the following statements about a partnership is true?
2. Partnerships, like sole traders, are not regulated by statute.
3. Due to ongoing disclosure requirements, secrecy is generally difficult to maintain.
4. Partners have a heavier tax burden than a sole trader.
5. Liability of partners for partnership debts is unlimited and personal.

Difficulty: Basic

Topic: What is a partnership

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

1. Which of the following statements about a partnership is not true?
2. Partners must keep their capital separate for tax purposes.
3. It can be difficult to sell a share in a partnership.
4. Partners are unable to contract with the firm.
5. Partnerships can be cheap and quick to establish.

Difficulty: Basic

Topic: What is a partnership

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

1. A corporation is an entity separate from its:
2. members and shareholders but not its directors.
3. members but not its shareholders or directors.
4. members, shareholders and directors.
5. shareholders but not its members or directors.

Difficulty: Moderate

Topic: What is a company

Standard/Graduate Attribute AACSB: Analytical thinking

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

1. Which of the following statements about a corporation is not true?
2. A corporation can sue and be sued.
3. A corporation has perpetual succession.
4. There are onerous administrative and reporting requirements.
5. Share transfer requirements are complex.

Difficulty: Basic

Topic: What is a company

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

True/False: Identify whether the statement is True or False.

1. A partnership is the relationship that exists between persons carrying on a business in common with a view to profit.
2. True
3. False

Difficulty: Basic

Topic: What is a partnership

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

1. Although a company is a distinct legal entity, it is not separate from its shareholders.
2. True
3. False

Difficulty: Basic

Topic: What is a company

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

1. The shareholders of a company with share capital are its members.
2. True
3. False

Difficulty: Basic

Topic: What is a company

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

Essay: Write your answer in the space provided or on a separate sheet of paper.

1. Define a sole trader and discuss its advantages and disadvantages.

Difficulty: Basic

Topic: Who is a sole trader

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

• In Australia, there are thousands of sole traders in every state who frequently assume the triple responsibilities of owner, manager and risk-taker—small-shop owners, builders, plumbers, electricians, tilers, lawn-mowing operators, doctors, dentists and solicitors, to mention a few. These are individual proprietorships and they vary from businesses where the owner does all the work to those in which many people are employed.
• Anyone capable of entering into a contract can operate a business as a sole trader, subject to any statutory requirements that may be laid down by the relevant authorities for the given type of business.
• There are both advantages and disadvantages of trading as a sole trader. One advantage is that the sole trader can keep all of the profits earned and a disadvantage is unlimited liability.

1. Explain how and why a sole trader might adopt a discretionary trust as their business structure.

Difficulty: Complex

Topic: Who is a sole trader

Standard/Graduate Attribute AACSB: Reflective thinking

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

1. What are the factors which must be taken into account when deciding on a suitable business entity?

Difficulty: Moderate

Topic: What factors should you consider in choosing a business entity

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.1 Explain the characteristics, advantages and disadvantages of a sole trader, a partnership and a company

• The duration of your business
• The expenses or capital required
• The formation of your business
• The tax expenses
• Property owned
• Access to further capital
• Lending requirements
• Professional ethics
• Legal restrictions
• Desirability of limited liability

LO 14.2 Discuss the purpose of a trust and trustee and describe the different types of trusts

Multiple choice: Choose the one alternative that best completes the statement or answers the question.

1. Which of the following statements about a trust is true?
2. A trust is administered and controlled by a trustee.
3. The trust is the most complex of business structures.
4. A trust is a creation of equity.
5. All of the above

Difficulty: Basic

Topic: What is a trust and who is a trustee

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. Which of the following is not a requirement for the creation of a trust?
2. A trustee
3. A beneficiary
4. A trust deed
5. Trust property

Difficulty: Moderate

Topic: What is a trust and who is a trustee

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. Which of the following is not an advantage of a trading trust?
2. Protection of privacy
3. Opportunity for wealth transfer between generations
4. Protection of assets against creditors
5. Personal control over trust activities

Difficulty: Moderate

Topic: Types of trusts

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. Which are the three certainties that are necessary for the creation of an express trust?
2. Intention to create a trust, agreement and consideration.
3. Intention to create a trust, plus certainty of the identity of the property and beneficiaries.
4. Intention to create a trust, consent of the beneficiaries and agreement of the trustee.
5. Consideration, knowledge on the part of the beneficiaries and certainty of duration.

Difficulty: Complex

Topic: Types of trusts

Standard/Graduate Attribute AACSB: Analytical thinking

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. Which of the following statements about a trading trust is not true?
2. Business information can remain private.
3. Assets can be protected from creditors.
4. Simple and cheap to establish.
5. Control of business assets can be maintained.

Difficulty: Moderate

Topic: Types of trusts

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. Which of the following describes a trust in which the trustee has the power to choose beneficiaries along with the amount of proceeds they are to be paid?
2. Fixed trust
3. Trading trust
4. Discretionary trust
5. Constructive trust

Difficulty: Moderate

Topic: Types of trusts

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. An identified beneficiary with an equal share is said to belong to a(n):
2. implied trust.
3. specific trust.
4. fixed trust.
5. resulting trust.

Difficulty: Moderate

Topic: Types of trusts

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. Which of the following statements about a unit trust is not true?
2. There is a fixed entitlement to income.
3. Unit holders are protected by limited liability.
4. There is a fixed capital entitlement.
5. Units are transferrable.

Difficulty: Moderate

Topic: Types of trusts

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. Which of the following is an accurate description of an implied trust?
2. The trustee has the power to choose the beneficiaries and the amounts to be paid to them.
3. The parties clearly intended to create a trust, but did not express that intention.
4. Each beneficiary is identified in the trust deed and has an equal share in the trust.
5. A person has become the legal owner of property as the result of a breach of fiduciary duty.

Difficulty: Moderate

Topic: Types of trusts

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. Which of the following is an accurate description of a constructive implied trust?
2. The trustee has the power to choose the beneficiaries and the amounts to be paid to them.
3. The parties clearly intended to create a trust, but did not express that intention.
4. Each beneficiary is identified in the trust deed and has an equal share in the trust.
5. A person has become the legal owner of property as the result of a breach of fiduciary duty.

Difficulty: Complex

Topic: Types of trusts

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. Which of the following is not one of the duties of a trustee?
2. Preserve the trust property
3. Indemnify the beneficiaries for any losses
4. Act in accordance with the trust
5. Avoid conflict of interest and personal benefit

Difficulty: Moderate

Topic: Appointment of trustees

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. Which of the following statements about a trustee is not true?
2. The liability of a trustee is unlimited unless a company is appointed to operate the business of the trust.
3. Any person capable of holding the title to property is capable of being a trustee.
4. The trustee is responsible for all losses on trust investments.
5. The trustee is entitled to full indemnity out of the trust property for their expenses and costs.

Difficulty: Complex

Topic: Appointment of trustees

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

True/False: Identify whether the statement is True or False.

1. A trustee is a person who benefits under the trust.
2. True
3. False

Difficulty: Basic

Topic: Appointment of trustees

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. Under an express trust, the beneficiary is able to exercise discretion as to who should benefit and how much they should get.
2. True
3. False

Difficulty: Basic

Topic: Types of trusts

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

Essay: Write your answer in the space provided or on a separate sheet of paper.

1. Discuss the trust concept.

Difficulty: Basic

Topic: Types of trusts

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

1. Explain the purpose of a trust instrument.

Difficulty: Basic

Topic: Powers of a trustee

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.2 Discuss the purpose of a trust and trustee and

describe different types of trusts.

LO 14.3 Identify the essential characteristics of a franchise and discuss the application of consumer protection law to its operation

Multiple choice: Choose the one alternative that best completes the statement or answers the question.

1. Which of the following statements about a franchise is not true?
2. The franchisee retains the goodwill of the business on expiry of the agreement.
3. The franchisor provides training and support to the franchisee.
4. The franchisor has significant control over the franchised business.
5. A franchisee is self-employed.

Difficulty: Moderate

Topic: What are franchises

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.3 Identify the essential characteristics of a franchise

and discuss the application of consumer protection law to its operation.

1. Which of the following is an advantage of a franchise for the franchisor?
2. Virtually instant reputation and goodwill
3. Benefiting from the marketing efforts of the other party
4. Benefiting from the financial expertise of the other party
5. Rapid expansion

Difficulty: Moderate

Topic: What are franchises

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.3 Identify the essential characteristics of a franchise

and discuss the application of consumer protection law to its operation.

1. Which of the following is an advantage of a franchise for the franchisee?
2. Rapid expansion
3. Virtually instant reputation and goodwill
4. Total control over the business
5. Fewer staff problems

Difficulty: Moderate

Topic: What are franchises

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.3 Identify the essential characteristics of a franchise

and discuss the application of consumer protection law to its operation.

True/False: Identify whether the statement is True or False.

1. A franchise is a specialised business entity.
2. True
3. False

Difficulty: Basic

Topic: What are franchises

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.3 Identify the essential characteristics of a franchise

and discuss the application of consumer protection law to its operation.

1. Franchises are regulated by the common law of contract.
2. True
3. False

Difficulty: Complex

Topic: What are franchises

Standard/Graduate Attribute AACSB: Analytical thinking

Learning Outcome: LO 14.3 Identify the essential characteristics of a franchise

and discuss the application of consumer protection law to its operation.

1. Franchises are regulated by the Competition and Consumer Act 2010 (Cth).
2. True
3. False

Difficulty: Complex

Topic: Possible conflicts with the Competition and Consumer Act 2010 (Cth)

Standard/Graduate Attribute AACSB: Analytical thinking

Learning Outcome: LO 14.3 Identify the essential characteristics of a franchise

and discuss the application of consumer protection law to its operation.

1. The Franchising Code of Conduct regulates franchise agreements.
2. True
3. False

Difficulty: Complex

Topic: Possible conflicts with the Competition and Consumer Act 2010 (Cth)

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.3 Identify the essential characteristics of a franchise

and discuss the application of consumer protection law to its operation.

1. A franchisee has a 14-day cooling-off period to terminate the agreement with the franchisor.
2. True
3. False

Difficulty: Moderate

Topic: Franchising code of conduct

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.3 Identify the essential characteristics of a franchise

and discuss the application of consumer protection law to its operation.

Essay: Write your answer in the space provided or on a separate sheet of paper.

1. Given the disadvantages associated with franchises, why do you think many people still choose this pathway?

Difficulty: Complex

Topic: What are franchises

Standard/Graduate Attribute AACSB: Reflective thinking

Learning Outcome: LO 14.3 Identify the essential characteristics of a franchise

and discuss the application of consumer protection law to its operation.

LO 14.4 Explain the process and purpose of registering a business name and the protection given by doing so

Multiple choice: Choose the one alternative that best completes the statement or answers the question.

1. Which of the following statements about business names is not true?
2. Registration grants monopoly rights but not proprietary rights.
3. A business name must be registered in every state the business trades in.
4. Registration provides a registry so that business owners can be identified.
5. Registration is not necessary if the entity is a registered company trading in the company name.

Difficulty: Basic

Topic: Why have a business name

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.4 Explain the processand purpose of

registering a business name and the protection given by doing so.

1. Which of the following is not a means of protection of a registered business name?
2. Passing off
3. The Business Names Registration Act 2011 (Cth)
4. Trade mark law
5. The Competition and Consumer Act 2010 (Cth)

Difficulty: Basic

Topic: Protection of business names

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.4 Explain the processand purpose of

registering a business name and the protection given by doing so.

True/False: Identify whether the statement is True or False.

1. The purpose of business name registration is to prevent consumers being confused.
2. True
3. False

Difficulty: Complex

Topic: Purposes of registration

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.4 Explain the processand purpose of

registering a business name and the protection given by doing so.

1. Trading under an unregistered business name is an offence under the Business Names Registration Act 2011 (Cth).
2. True
3. False

Difficulty: Moderate

Topic: Why have a business name

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.4 Explain the processand purpose of

registering a business name and the protection given by doing so.

Essay: Write your answer in the space provided or on a separate sheet of paper.

1. What does an Internet Domain Name refer to?

Difficulty: Basic

Topic: Registration of a business name on the internet

Standard/Graduate Attribute AACSB: Application of knowledge

Learning Outcome: LO 14.4 Explain the processand purpose of

registering a business name and the protection given by doing so.

1. What is the purpose of registering a business name?

Difficulty: Basic

Topic: Business names

Standard/Graduate Attribute AACSB: Analytical thinking

Learning Outcome: LO 14.4 Explain the processand purpose of

registering a business name and the protection given by doing so.

There are a number of purposes for seeking registration of a business name and they include:

• Registration gives monopoly rights to the registered use of the name, but it does not give any proprietary right.

• Registration is in the interest of the public as it compels persons who are not trading under their own names to provide a means of being able to identify the business and their place of business.

• It also prevents the public from being confused or misled by people registering names that are identical or similar to established business names.

• To provide a public registry where information concerning the registered business name is readily available to any interested person or parties.

1. Visit your State or Territory’s business affairs site and prepare a step-by-step guide to registering a business name.

Difficulty: Complex

Topic: Business names

Standard/Graduate Attribute AACSB: Reflective thinking

Learning Outcome: LO 14.4 Explain the processand purpose of

registering a business name and the protection given by doing so.