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Exam 5: How to Form a Business

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Question 141

Multiple Choice

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The income generated by S corporations

A) passes through to its owners, and each is taxed individually for this income.
B) is provided to nonprofit organizations, so it is considered a tax-free source of funds.
C) is taxed separately from its owners.
D) must be reinvested in the business. Owners should not expect dividends.

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

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Question 142

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An alien corporation does business abroad but is chartered in the U.S.

A) True
B) False

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Question 143

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A disadvantage of corporations is that they generally require extensive paperwork.

How does a limited liability company (LLC) compare to an S corporation? What are the major advantages and disadvantages of an LLC?

A domestic corporation does business in the state in which it's chartered.

Sole proprietors sometimes have trouble competing with large firms for expert talent. Large firms can usually pay better and offer fringe benefits that are unaffordable to the sole proprietor.

Describe and differentiate between the three types of corporate mergers. Give an example of each type.

When a sole proprietor dies

A closed corporation is one whose stock is held by a few people and is not available to the general public.

A ________ is two firms combining to form one company.

One reason many companies do not organize themselves as an S corporation is that this form of business

The ________ is usually the easiest form of business to start and end.

Franchisors sometimes pay reverse royalties to franchisees if it is evident that the franchisor's Internet sales have negatively impacted the profits of traditional bricks-and-mortar franchisee businesses.

Compared to a sole proprietorship, which of the following is considered an advantage of a general partnership?

Lucy is preparing to invest in a new online franchise, Notable Moments. The franchisor provides the exclusive software and training for designing invitations and cards for special occasions such as weddings, graduations, and birth announcements. In return, the franchisee is required to pay a monthly fee to the franchisor. Lucy will use the Notable Moments software to create her own special designs that she will ultimately feature on her website. Order turnaround time must be fast. She can only take on as many clients as she can make good on delivery. An advantage of Lucy's online franchise is that she

Which of the following is an advantage of a partnership?

Carter is a stockholder in ExtremeTrax, Inc., a C corporation that designs and manufactures amusement park roller coasters. The company recently lost a major court decision and is being forced into bankruptcy. In fact, the damages being awarded are so large that, even if all company assets are sold and the proceeds are used to pay its debts, ExtremeTrax is likely to still owe money to its creditors. If ExtremeTrax goes bankrupt, Carter and the other stockholders will

One reason limited liability companies have become so popular is that they

The sole proprietorship form of ownership tends to be attractive to people who want to invest in a company without taking an active role in management.

Angelica and Celeste invested all their savings in a small pizzeria they opened outside the University of Missouri. They operated the business as a general partnership. After 11 months, the business went broke and Angelica and Celeste were left with outstanding bills of $43,650, which was more than their initial investment in the company. Angelica and Celeste can