Chapter 11 - Corporations and their Financial Statements

Question 1

What are the significant differences between a sole proprietorship and a partnership?

Answer 1

A sole proprietorship one person runs the business and is taxed on earnings at her personal income tax rate.
In a partnership, two or more persons run the business and each is personally liable for all debts.

Question 2

What is a corporation?

Answer 2

A corporation is a distinct legal entity separate from the people who own its shares. It pays taxes and can sue or be sued in a court of law.

Question 3

Can you list and explain six advantages to incorporation?

Answer 3

• limited shareholder liability
• continued existence even after death
• transfer of ownership
• ability to finance
• growth
• professional management

Question 4

Can you list and explain four disadvantages to incorporation?

Answer 4

• inflexibility
• taxation
• expense
• capital withdrawal

Question 5

Can you compare the fundamental differences between a private and a public corporation?

Answer 5

public corporations are companies whose shares are listed on a stock exchange or traded over the counter.
Private corporations have charters that restrict the right of shareholders to transfer shares, limit the number of shareholders to no more than 50 and prohibit members from inviting the public to subscribe for their securities.

Question 6

What provisions would a corporation’s by-laws deal with?

Answer 6

• shareholders and directors meetings
• qualification, election and removal of directors
• appointment, duties and remuneration of officers
• declaration and payment of dividends
• date of fiscal year end
• signing authority for documents