Business in Action, 6e (Bovee/Thill)

Chapter 5 Forms of Ownership

1) Owner has limited personal liability for the business's financial
obligations in sole proprietorships.
2) Establishing a corporation is more complicated and expensive
compared to establishing a sole proprietorship.
3) The federal government recognizes a sole proprietorship as an
independent taxable entity.
4) Unlimited liability is a legal condition under which any damages or
debts incurred by a business are the owner's personal responsibility.
5) A partnership is a company that is owned by two or more people but
is not a corporation.
6) All partners have joint authority to make decisions for the firm in a
general partnership.
7) A master limited partnership is not allowed to raise money by selling
units of ownership to the general public.
8) Partners are responsible for each other's action in a limited liability
partnership.
9) Partnerships are subject to double taxation of income.
10) All owners in a general partnership and the general partners in a
limited partnership face the same unlimited liability as sole proprietors.
11) A corporation is a legal entity distinct from the persons running the
corporation.
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12) The stock of a private corporation is made available for purchase by

the public.
13) Liquidity is a measure of how easily and quickly an asset can be
converted into cash.
14) A corporation itself has limited liability on its transactions.
15) Government agencies require publicly traded companies to publish
extensive and detailed financial reports.
16) An S corporation has the federal taxation advantages of a
partnership.
17) The number of shareholders is limited to fifty in a limited liability
company.
18) A benefit corporation must pursue a stated non-financial goal.
19) Board of directors has the responsibility for the overall direction of
the company and the selection of top executives.
20) Corporate officers of an organization are elected directly by the
shareholders of a corporation.
21) Proxy is a document that authorizes another person to vote on behalf
of a shareholder in a corporation.
22) The chief operating officer is the highest-ranking officer of a
corporation.
23) One company buys a controlling interest in the voting stock of
another company in a merger.
24) A horizontal merger occurs when different companies at the same
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stage or level merge.

25) A joint venture does not result in a separate legal entity.
26) A sole proprietorship ________.
A) is taxed as a separate corporation
B) requires immense paperwork
C) does not have a legal status
D) is owned by only one person
E) gives reduced control to the owner
27) Robert owns three restaurants in Atlanta. He pays taxes for the
income from the restaurants as his personal income. Robert's business is
an example of a ________.
A) personal partnership
B) sole proprietorship
C) joint venture
D) small corporation
E) limited liability firm
28) Profits of sole proprietorships ________.
A) reach shareholders through intermediaries
B) flow directly to the owners
C) are considered fixed assets
D) are taxed at corporate rates
E) are subject to double taxation
29) Which of the following statements is true of the liability of investors
in a corporation?
A) Majority investors are personally liable, whereas minority investors
are not personally liable.
B) Investors have personal liability for the business transactions in
corporations.
C) Investor's liability is limited to the amount invested in the
corporation.
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D) Investors are personally liable for transactions, whereas their

property is not liable.
E) Investors' property is liable for the business transactions but investors
are not personally liable.
30) Which of the following business structures is the most complicated
and expensive?
A) unlimited partnership
B) corporation
C) general partnership
D) sole proprietorship
E) limited partnership
31) Edwin runs an antique retail shop that is registered as a sole
proprietorship. The liability exposure of Edwin's business ________.
A) is limited to the amount he has invested on fixed assets
B) refers to the amount invested on variable assets
C) is more if the size of transactions is limited
D) refers to the total fixed investments made by him
E) is unlimited for the business's personal obligations
32) Which of the following is a key difference between a corporation
and a sole proprietorship?
A) Establishing a corporation is easier compared to establishing a
proprietorship.
B) Unlike a corporation, a proprietorship is subject to double taxation.
C) Regulatory requirements are less severe for corporations than sole
proprietorships.
D) Unlike a sole proprietorship, a corporation is subject to limited
liability.
E) Establishing a sole proprietorship has complex legal requirements
unlike a corporation.
33) Which of the following is a key advantage of incorporating a
business as a sole proprietorship?
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A) Owners receive tax exemptions when a business is a sole

proprietorship.
B) It helps proprietors file taxes separately from their personal income.
C) It is easy to establish and requires less paperwork than other
structures.
D) Owner's risk is limited to the extent he/she has invested in the
business.
E) Risk associated with sole proprietorship is less compared to other
structures.
34) In a sole proprietorship, the owner ________.
A) obtains limited liability protection on the business's actions
B) is taxed more than once for the income generated
C) and the business are legally inseparable
D) has lesser responsibility compared to other forms
E) does not have personal liability for the transactions of the business
35) A ________ is an unincorporated company owned by two or more
people.
A) limited company
B) partnership
C) corporation
D) S corporation
E) proprietorship
36) In a general partnership, ________.
A) all partners have joint authority to make decisions
B) all partners have limited liability
C) the number of partners is limited to five
D) units of ownership are sold to the general public
E) risk is limited to the amount invested in a partnership
37) A ________ is allowed to raise money by selling units of ownership
to the general public in the same way corporations sell shares of stock to
the public.
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A) master limited partnership

B) general partnership
C) sole proprietorship
D) unlimited proprietorship
E) limited liability partnership
38) A ________ is a partnership in which each partner has unrestricted
accountability only for his or her own actions and at least some degree
of responsibility for the partnership as a whole.
A) master limited partnership
B) general partnership
C) sole proprietorship
D) combined proprietorship
E) limited liability partnership
39) Which of the following is a key difference between a master limited
partnership (MLP) and other forms of partnerships?
A) A MLP allows partnerships to sell units of ownership to the general
public.
B) Other partnerships should have more members than an MLP.
C) Other partnerships have double-taxation disadvantage unlike an MLP.
D) A MLP allows the partners to have limited liability on their
investments.
E) A MLP is characterized by double taxation unlike the other forms of
partnerships.
40) A major advantage of partnerships is that they ________.
A) do not require owners to take personal responsibility for their actions
B) provide limited liability protection to partners
C) have a straightforward income tax structure
D) are less vulnerable to conflicts between investors
E) allow investors to handle issues such as succession and termination
better
41) A potentially significant disadvantage of a partnership is that
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________.
A) it involves double taxation of the income generated
B) income tax is not straightforward and is complex
C) it has more chances for disagreement and conflict
D) it does not present opportunities to share costs
E) the amount of money generated in a partnership is low
42) Which of the following is a valid observation of corporations?
A) A corporation cannot own property of its own.
B) All corporations should sell its stock to the public.
C) The owners of a corporation are called directors.
D) A corporation is distinct from the people running it.
E) A corporation must be owned by less than fifty people.
43) Which of the following is a key difference between private
corporations and public corporations?
A) Private corporations are legally a group of people, whereas public
corporations are distinct from any individual persons.
B) Private corporations cannot own property, whereas public
corporations can own property.
C) Public corporations cannot own property, whereas private
corporations can own property.
D) Private corporations do not have the power to run business of its
own, whereas public corporations can run a business of its own.
E) Private corporations are owned by a few people, whereas public
corporations can be owned by anyone who has the means to buy stake.
44) Which of the following is a key advantage that corporations have
over sole proprietorships and partnerships?
A) Management is less likely to lose control of operations in
corporations than proprietorships and partnerships.
B) Reporting requirements of corporations are simpler than sole
proprietorships and partnerships.
C) Forming corporations involves less cost over sole proprietorships and
partnerships.
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D) Investments in corporations have more liquidity than partnerships

and sole proprietorships.
E) Corporations have a less complex structure compared to sole
proprietorships and partnerships.
45) A disadvantage of the corporate structure is that it ________.
A) limits the business's ability to raise capital
B) limits the liquidity that businesses have
C) increases the risk of conducting business
D) involves strict reporting requirements
E) imposes unlimited liability on the owners
46) S corporation is a type of corporation that ________.
A) combines limited liability of a corporation with the federal taxation
advantages of a partnership
B) does not have such advantages as limited liability of investments
C) does not split the ownership into smaller units
D) files income tax returns in a country other than the country of
operation
E) combines limited ownership of a proprietorship with the capitalraising options of a corporation
47) A group of college graduates starts a business. They want to give
their business a structure such that their risk is limited to the amount
they have invested in the business. They also want to avoid double
taxation of the income that they generate from the business. Which of
the following structures is most suitable to satisfy these wants?
A) sole proprietorship
B) corporation
C) direct partnership
D) S corporation
E) general partnership
48) A(n) ________ has most of the attributes of a regular corporation but
adds the legal requirement that the company must also pursue a stated
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non-financial goal.
A) limited liability corporation
B) general partnership
C) S corporation
D) sole proprietorship
E) benefit corporation
49) RSS Bank is registered as a corporation in Maryland. Apart from its
financial objectives, the company has also formed a legal requirement to
work for the welfare of the elderly citizens in the state. The bank is
obligated to work for the cause even if there is a change in ownership.
Based on this information, it can be concluded that RSS bank is a(n)
________.
A) public corporation
B) benefit corporation
C) unlimited company
D) S corporation
E) not-for-profit company
50) A public corporation refers to a corporation ________.
A) that is allowed to sell stock only to a limited number of investors
B) whose stock is sold to general people
C) that is owned solely by the federal government
D) that is owned solely by state/federal government
E) whose stock is not traded in stock exchanges or other markets
51) A corporation primarily or wholly owned by another company is
known as a(n) ________.
A) domestic company
B) alien company
C) subsidiary
D) parent company
E) holding company
52) Pacific Electronics is a Swiss corporation doing business in the U.S.
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It was incorporated in Switzerland, in the year 1997. The company sells

products such as electronic measuring devices, microprocessors, and
microcontrollers. Pacific Electronics is called a(n) ________.
A) alien corporation
B) foreign corporation
C) domestic corporation
D) external company
E) unlimited company
53) A company that is incorporated in one state (frequently the state of
Delaware, where incorporation laws are more lenient) but that does
business in several other states where it is registered is called a(n)
________.
A) foreign corporation
B) domestic corporation
C) global corporation
D) alien corporation
E) international corporation
54) RK Associates is a firm incorporated in the state of Delaware. The
company has operations in thirteen states. However, the company does
not have any facilities in countries other than the United States. RK
Associates is a(n) ________.
A) international company
B) local corporation
C) domestic company
D) alien corporation
E) foreign corporation
55) In the United States, a corporation is called a domestic corporation if
it ________.
A) does business only in the state where it is chartered
B) files income taxes with the U.S. government
C) does business only within the United States
D) has more than 5 subsidiaries in the United States
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E) has incorporated its business in any of the U.S. states

56) The board of directors are ________.
A) the highest-ranked managers of a corporation
B) elected by corporate officers
C) representatives of the shareholders
D) the top executives running a corporation
E) elected by the employees of an organization
57) Which of the following is a document that authorizes another person
to vote on behalf of a shareholder in a corporation?
A) agency agreement
B) proxy
C) draft
D) affidavit
E) share certificate
58) Robex Retail is a retail chain that has more than 390 stores in the
United States. The directors of the company decide to launch operations
in Italy to increase the company's market reach. Many of the
shareholders think that this decision is not appropriate in light of the
economic slowdown in Europe. A group of shareholders unite to
pressurize the board of directors to change their decision. This is an
example of ________.
A) shareholder protection
B) shareholder activism
C) hostile takeover
D) corporate governance
E) shareholder resolution
59) Corporate officers are the ________.
A) people who elect directors of a company
B) official representatives of shareholders
C) top executives who run a corporation
D) middle level managers of a corporation
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E) lower level employees of an organization

60) Who is the highest-ranked officer of a corporation?
A) chief information officer
B) chief financial officer
C) chief operating officer
D) chief executive officer
E) chief technology officer
61) Corporate officers of a company ________.
A) are hired by the board of directors of a company
B) have voting rights in directorial meetings
C) are hired by the chief executives of a firm
D) have voting rights on shareholding issues
E) are elected by the shareholders of the company
62) In a(n) ________, two companies join to form a single entity either
by pooling their resources or by one company purchasing the assets of
the other.
A) limited partnership
B) acquisition
C) merger
D) joint venture
E) strategic alliance
63) In a(n) ________, two companies create a new, third entity that then
purchases the two original companies.
A) limited partnership
B) consolidation
C) acquisition
D) joint venture
E) strategic alliance
64) In a(n) ________, one company simply buys a controlling interest in
the voting stock of another company.
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A) limited partnership
B) consolidation
C) acquisition
D) joint venture
E) strategic alliance
65) RDS Bank has been making losses for many years now. The
company's management wants to continue with the same style of
operations, whereas many shareholders demand a change in
management. A majority of shareholders unite and vote against the
management's wish to sell the company to a larger counterpart subject to
pressures from an external buyer. This is an example of a(n) ________.
A) forced joint venture
B) hostile takeover
C) strategic alliance
D) majority merger
E) operational alliance
66) A ________ occurs when someone purchases a company's publiclytraded stock primarily by using borrowed funds, sometimes using the
target company's assets as collateral for these loans.
A) leveraged buyout
B) hostile takeover
C) forced joint venture
D) consolidation
E) strategic alliance
67) A vertical merger occurs when ________.
A) a merger expands the geographic range of markets that it can serve
B) different stages or levels of the same industry unite
C) different companies at the same stage or level unite
D) a merger expands the mix of goods and services available for sale
E) two companies from unrelated industries unite to become a single
company
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68) An electronic appliance marketing company merges with one of its

suppliers to form a larger company. This is an example of a ________
merger.
A) market-extension
B) product differentiation
C) conglomerate
D) vertical
E) product-extension
69) A product-extension merger occurs when ________.
A) two companies from unrelated industries unite to become a single
company
B) different stages or levels of the same industry unite
C) different companies merge to increase global reach
D) a merger expands the mix of goods and services available for sale
E) a merger expands the geographic range of markets that it can serve
70) A ________ merger occurs when different companies at the same
stage or level merge.
A) standardized
B) horizontal
C) conglomerate
D) vertical
E) operational
71) Eurotec, a manufacturer of security systems in Italy, merges with a
company in China to expand its reach. This is an example of a ________
merger.
A) product-extension
B) vertical
C) conglomerate
D) retail
E) market-extension
72) A ________ merger occurs when companies in unrelated industries
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join to form a single entity.

A) product-extension
B) vertical
C) conglomerate
D) retail
E) market-extension
73) Froxer Electronics is an electronic appliance manufacturer. The
company merges with a food manufacturer to form a larger company.
This is an example of a ________ merger.
A) product-extension
B) vertical
C) retail
D) market-extension
E) conglomerate
74) Which of the following is a key disadvantage of mergers and
acquisitions?
A) They limit the market reach of the companies involved.
B) They reduce the chances of cross-selling products.
C) They reduce the bargaining power of the companies.
D) They might present issues related to cultural harmony.
E) They limit the geographic range of the companies involved.
75) In a ________, the raider launches a public relations battle for
shareholder votes, hoping to enlist enough votes to oust the board and
management.
A) poison pill tactic
B) proxy fight
C) tender offer
D) direct offer
E) white knight tactic
76) With a ________, a targeted company invokes some move that
makes it less valuable to the potential raider, with the hope of
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discouraging the takeover.

A) white knight tactic
B) tender offer
C) proxy fight
D) direct offer
E) poison pill defense
77) Integral Solutions is a firm that offers open source enterprise
software services to small and medium companies. The company had a
public issue two years ago and the company has shown significant
growth in the current financial year. A major rival is silently amassing
the company's shares to acquire majority stake in the company. In order
to prevent this, the company issues shares to current shareholders at
prices below the market value. This tactic used by Integral Solutions to
prevent a takeover is an example of a ________.
A) poison pill defense
B) proxy fight
C) direct offer
D) tender offer
E) white knight tactic
78) With the ________, a third company is invited to acquire a company
that is in danger of being swallowed up in a hostile takeover.
A) poison pill defense
B) proxy fight
C) direct offer
D) tender offer
E) white knight tactic
79) Albama Associates is a consulting firm owned by a few
entrepreneurs. Rogo Consulting, a large consulting firm, tries to buy
shares from some of the shareholders of Albama to obtain control of the
company without making a formal acquisition proposal with the
management. Albama's management invites a third party to acquire the
company to prevent a hostile takeover by Rogo Consulting. This
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approach used by Albama to prevent hostile takeover is an example of a

________.
A) white knight tactic
B) counteroffer
C) proxy fight
D) direct offer
E) poison pill defense
80) Which of the following is an action that allows the companies to
collaborate without formally combining?
A) strategic alliance
B) joint venture
C) merger
D) acquisition
E) amalgamation
81) Strategic alliances are ________.
A) internal agreements formed between the subsidiaries of a company
B) not helpful when a company has to gain credibility in a new field
C) a means of permanently integrating two companies in a business
D) an alternative to mergers and acquisitions with less risk and work
E) not helpful when a company's aim is expanding its market presence
82) Carton Life is an insurance firm. The firm wants to enter an Asian
country that recently removed protectionist barriers in the insurance
industry. The company wants to enter the country with the help of a local
firm. However, the company does not want to permanently integrate
with another firm. Which of the following arrangements is most suited
for this company?
A) amalgamation
B) acquisition
C) merger
D) joint venture
E) strategic alliance
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83) Which of the following statements is true of strategic alliances?

A) Establishing strategic alliances have more legal requirements than
mergers and acquisitions.
B) Strategic alliances attract more work than other forms of business.
C) Strategic alliances are not an effective way to collaborate.
D) Establishing strategic alliances involves more risks than other forms.
E) Strategic alliances don't create a unified entity with a single
management structure.
84) Joint ventures ________.
A) let companies create tightly integrated operations
B) are less risky compared to strategic alliances
C) are riskier to a firm than formal mergers
D) disrupt the original companies and their business
E) would not help companies gain credibility in new fields
85) A company decides to establish a relationship with a local company
in order to better its business in a foreign country. The company must
choose joint ventures ahead of mergers and acquisitions if it wants to
________.
A) establish a company that is totally different
B) create a single management structure
C) create a unified business structure
D) establish a well-structured arrangement
E) avoid disrupting the original companies too much
86) Compare and contrast sole proprietorships and general partnerships.
87) Explain the advantages of operating as a sole proprietorship.
88) Compare and contrast a general partnership and a limited
partnership.
89) Compare and contrast a master limited partnership and a limited
liability partnership.
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90) A group of friends is planning to start a business. Should they form a

formal contract to
91) Compare and contrast private corporations and public corporations.
92) You work for a European company that is planning to launch
business in the United States.
93) Explain the major disadvantages of incorporating a business as a
corporation.
94) Compare and contrast a limited liability company and a benefit
corporation.
95) Select an organization of your choice. Construct a model that shows
the corporate
96) What is shareholder activism?
97) Explain the role of corporate officers in corporate governance.
98) Compare and contrast mergers and acquisitions.
99) Compare the three common types of mergers.
100) Distinguish between strategic alliances and joint ventures.

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