Chapter 6 - Legal Business Structures

Question 1

The three basic types of business organizations are:

Answer 1

• Partnership
• Sole proprietorship
• Corporation

Question 2

Which of the following is not a characteristic of a sole proprietorship?

a) It is the oldest and simplest form of business organization.
b) The owner employs him or herself in the business.
c) The owner’s liability for business loss or debt is unlimited.
d) Business income is taxed at the owner’s personal rate

Answer 2

b) The owner employs him or herself in the business.

Question 3

Which of the following statements is/are true of a partnership?

a) A partnership is essentially a corporation with more than one owner.
b) A partnership must have a written agreement between the partners.
c) A corporation cannot be included as a member of a partnership.
d) The liability of each partner for the debts of the partnership is unlimited.
e) All of the above.

Answer 3

d) The liability of each partner for the debts of the partnership is unlimited.

Question 4

Under what business structure(s) can business owners’ personal assets be seized to fulfill obligations of the company?

a) A limited partnership.
b) A partnership.
c) A corporation.
d) A sole proprietorship.
e) b and d above.

Answer 4

e) b and d above.

Question 5

Which of the following statements is/are true about the securities of a corporation?

a) Preferred shareholders generally only have contingent voting rights.
b) Interest on bonds must be paid whether or not a corporation has earned a profit in that year.
c) Bond holders have a direct voice in the management of a corporation during the normal operation of the business.
d) a and b above.

Answer 5

d) a and b above.

Question 6

List four advantages of corporations over the other legal business structures discussed.

Answer 6

• A corporation is a separate legal entity from the owners.
• The owners can limit their liability.
• A corporation has perpetual succession.
• A corporation owns its own property.

Question 7

List four advantages of Sole Proprietorship/Partnership over the other legal business structures discussed.

Answer 7

• Easy & inexpensive to set up
• Owners have direct control
• Simple organization
• Losses are deducted from owners taxable income