Chapter 6: Setting up the Company

True/False

1. Unfortunately, with the way the laws are written, the sole owner does not have the right to make all the decisions for the business.
2. One of the most attractive features of sole proprietorships is how fast and simple it is to begin operations.
3. In choosing a form of ownership, entrepreneurs must remember that there is no single “best” form.
4. The greatest advantage of a sole proprietorship is unlimited personal liability.
5. When a corporation is founded, it does not have to accept the regulations and restrictions of the state in which it is incorporated and of each state in which it does business.
6. When a corporation is established, its equity is divided among a number of shares of stock that are issued to the investors in proportion to their investment in the corporation.
7. The CEO selects the board and the CEO has the power to remove board members.
8. The ownership of a corporation lies in the stockholders and is evidenced by stock certificates issued to the shareholder.
9. The total number of issued shares outstanding in a company is most often shown in the annual report.
10. A disadvantage of a limited liability company is that the owners do not assume liabilities for debt.
11. An advantage of becoming an S corporation is that the business does not need to pay corporate income tax.
12. A disadvantage of an S corporation is unlimited personal liability, very similar to the liability in a sole proprietorship.
13. When choosing an attorney, an entrepreneur should select one who is able to assist in formatting the business, filing necessary documents with governmental authorities, and preparing employment contracts.
14. Before launching a business, an entrepreneur should register the company with local taxing authorities.

Short Answer / Fill in the Blank

1. A(n) ________ is a form of business in which a single owner does business himself or herself and requires only a business license to open.
2. _________ value is an archaic concept of monetary value that is still applied to each share of stock.
3. Annual state _________ are usually based on the number of shares of authorized stock and on whether the stock has a par value.
4. ____________ are the stock that a company sold to investors to generate capital.
5. The _____________ is a corporation that elects under federal and state tax laws to be taxed like a partnership.
6. A(n) _________ is usually defined as an association of two or more people carrying on as co-owners of a business for profit.
7. A(n) ________ partnership must have at least one general partner so at least one person or entity’s personal assets must be at stake.
8. A(n) ________ is a blend of some of the best characteristics of corporations, partnerships, and sole proprietorships.
9. A limited liability company is formed by filing a(n) _______________ form with a secretary of state and signing an LLO Operating Agreement.

Multiple Choice

1. All of the following are advantages of a sole proprietorship except:
   1. Profit Incentive
   2. Easy to Discontinue
   3. Total Decision-Making Authority
   4. Unlimited Personal Liability
2. All of the following are disadvantages of sole proprietorship except:
   1. Limited Skills
   2. Limited Access to Capital
   3. No Special Legal Restrictions
   4. Lack of Continuity for the Business
3. Which of the following is the greatest disadvantage of sole proprietorship?
   1. Limited Skills
   2. Unlimited Personal Liability
   3. Limited Access to Capital
   4. Lack of Continuity for the Business
4. A _______ is a separate legal entity apart from its owners and may engage in business, issue contracts, sue and be sued, and pay taxes.
   1. stockholder
   2. corporation
   3. sole proprietorship
   4. partnership
5. A “C” corporation need not have:
   1. stockholders
   2. a board of directors
   3. external investors.
   4. officers.
6. Who has the ultimate power and control of every corporation?
   1. Officers
   2. Board of directors
   3. Stockholders
   4. Sole proprietors
7. Who establishes the general policies of the company, and to a greater or lesser extent depending on the particular corporation, can become involves in various details of the operating procedures?
   1. Employees
   2. Board of directors
   3. Stockholders
   4. Government
8. The functions of each officer are defined by:
   1. Board of directors
   2. Stockholders
   3. Officers themselves
   4. Government
9. Who is in charge of day-to-day operations under the directives of the board of directors?
   1. Stockholders
   2. The President
   3. An Attorney
   4. Employees
10. If you are not a resident of Delaware, you must have an agent who is in the state empowered to accept service in the event the corporation is sued. What is the next step after selecting a local agent?
    1. Select the corporate name
    2. Prepare the Certificate of Incorporation
    3. Hire employees
    4. Get a building
11. Which type of stock is the most common/usual?
    1. Preferred Stock
    2. Par Value
    3. No-Par-Value Stock
    4. Private Stock
12. All of the following are advantages of a C-corporation except:
    1. Limited Liability of the Stockholders
    2. Ability to Attract Capital
    3. Skills, Expertise, Knowledge
    4. Directors held Accountable
13. All of the following are disadvantage of a C-corporation except:
    1. Double Taxation
    2. Cost and Time Involved in the Incorporation Process
    3. Transferable Ownership
    4. High Administration Compliance Costs
14. To become an S-corporation, all of the following must occur except:
    1. Only two classes of stock are allowed.
    2. Shareholders cannot be nonresident aliens.
    3. The company must be a domestic company.
    4. Only individuals and certain trusts may own stock.
15. What is the maximum number of shareholders there can be in an S-corporation?
    1. 200
    2. 150
    3. 100
    4. 80
16. All of the following are disadvantages of S-corporations except:
    1. Investors cannot receive preferred shares.
    2. Qualification requirements necessitate administrative and cost burdens.
    3. Not eligible for qualified employee stock options.
    4. Owners pay all taxes.
17. What type of partnership has unlimited liability?
    1. Limited
    2. General
    3. Complementary
    4. Personal
18. All of the following are advantages of a partnership except:
    1. Division of Profits
    2. Larger Pool of Capital
    3. Capital Accumulation
    4. Easy to Establish
19. All of the following are disadvantages of a partnership except:
    1. Potential for Personality and Authority Conflicts
    2. Unlimited Liability
    3. Restrictions of Elimination for the General Partnership
    4. Division of Profits
20. All of the following are advantages of a limited liability company except:
    1. They may offer different classes of membership.
    2. There are no restrictions on the number and types of owners.
    3. Owners do not assume liabilities for debt.
    4. Transferring ownership is restricted.
21. In the first 30 days, a suggested business start-up checklist includes all but which one of the following?
    1. Do a name search in location state to determine if the name is available on Clerks Commission web site.
    2. Select an accountant
    3. Obtain an Employer Identification Number (EIS) from IRS
    4. Pay corporate franchise tax or annual state fees
22. In the first 30 days of your new company you should:
    1. Register your Internet domain name.
    2. Select a lawyer.
    3. File your first tax return.
    4. Join the local entrepreneurs’ network.
23. When should you contact suppliers?
    1. First 30 days
    2. Sixty days
    3. Between 3-6 months after opening
    4. At the end of the year
24. When should you establish a relationship with a bank in order to acquire a line of credit in the near term?
    1. First 30 days
    2. Sixty days
    3. Between 30-60 days
    4. At the end of the year
25. Which of the following insurance coverages should be considered, although not required, as soon as you start you company?
    1. Fire
    2. Employee health and life
    3. Business interruption
    4. All the above
26. Which of the rows in the following table is the correct combination of characteristics for C-Corps; S-Corps LLCs; and Partnerships?

1. A skillful and capable entrepreneur who appreciates independence and control of operations would likely select which of the following forms of doing business?
   1. S-Corp and LLC.
   2. Partnership with up to 10 partners.
   3. C-Corporation.
   4. Sole proprietorship.
2. Which of the following business could consider S-Corporation status?
   1. A highly profitable personal service company with 125 shareholders.
   2. A business with less than 5 stockholders which expects to distribute profits at the end of the year.
   3. A business which has no more than two non-resident aliens as owners.
   4. A service business with 10 shareholders located in NYC.