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Exam 5: How to Form a Business

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Question 161

Multiple Choice

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Compared to partnerships and sole proprietorships, a major advantage of the C (conventional) corporation as a form of business ownership is that it:

A) Has the ability to raise more money.
B) Is easier and less expensive to form.
C) Qualifies for simplified tax treatment.
D) Creates unlimited liability for its owners.

E) B) and D)
F) A) and B)

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Question 162

Multiple Choice

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Trans Globe Airlines is in talks with Royal Blue Airlines, a financially troubled rival. The firms believe the merger will create a stronger company that can offer travelers more flights to a wider variety of destinations. This proposed merger is an example of a:

A) Conglomerate merger.
B) Leveraged buyout.
C) Horizontal merger.
D) Joint venture.

E) A) and B)
F) A) and C)

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Question 163

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Although it is a small company, Zorn Enterprises owns a large number of inexpensive rental housing units in Texas and Louisiana. Currently, the company is a chartered C-corporation, but the owners are interested in switching to an S corporation. After consulting a lawyer, they learned that Zorn Enterprises does not qualify to be designated as an S corporation. Which of the following characteristics of Zorn Enterprises would prevent it from becoming an S corporation?

A merger between two businesses in different stages of related businesses is known as a vertical merger.

A few years back, your friends who are horse fanatics inherited several acres of land that they turned into a retirement haven for race horses. Peaceful Pastures was recently incorporated as a limited liability company. The members are re-evaluating this form of ownership. Unlike an S-corporation, they now pay self-employment taxes on all company profits - not just on the salaries they pay themselves.

In a sole proprietorship, the profits earned by the business are:

Franchising in global markets has demonstrated that high operating costs are counterbalanced by high profit opportunities.

Corporations are easy to start and easy to terminate.

Finley is a limited partner in Gettout & Associates. Heywood U. Gettout, one of the general partners in the company, must temporarily leave the company to attend to some personal matters. Heywood has asked Finley to perform his managerial duties while he is gone. As a limited partner, Finley:

Alex's uncle recently passed away and left him an American Dream Real Estate franchise business. Alex is not a licensed agent or broker, nor does he know anything about the real estate business. He plans to sell his American Dream franchise to his friend, Derek who recently got his real estate license. One of the advantages of owning a franchise is that you can decide to sell-out to anyone you believe is suitable for the business.

A major objective of a leveraged buyout is to enable investors to gain control of a company by issuing new shares of ownership, thus minimizing the use of debt.

To qualify as an S corporation, a company must:

The "coattail effect" refers to the burden of corporate rules and regulations on franchisees.

The fairest way to handle profits in any partnership arrangement is to divide things evenly. If there are two owners in the business, each gets 50%. If there are three owners (even if one is a limited partner), each gets 33.333% of any accumulated profits.

A distinguishing feature of a cooperative is that it:

Leanne, a franchisee runs a chain of small restaurants with a well-known name. Due to her hard work and people skills, her locations are doing quite well. She has noticed that several other franchisees in the same franchise system have let their restaurants deteriorate, especially in terms of lack of upgrades. Leanne should be concerned about this trend, since it eventually could affect her own business.

The limited liability provided to limited partners means that they are not responsible for the debts of the business beyond:

The owners of a limited liability company (LLC) must pay self-employment taxes on any profits they earn, even if they did not obtain a salary from the company.

A partner (owner) who invests money in a business, does not take an active role in managing the operation, and is only subject to losing the funds he/she invested.

All partners in a general partnership have limited liability for the debts of their firm.