Study Guide Ch 1 - 4

Study Guide Ch 1 - 4 - 1 The form of organization for a...

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1. The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners. B. False 2. The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not. B. False 3. Which of the following statements is CORRECT? A) One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt. B) Sole proprietorships are subject to more regulations than corporations. C) In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner. D) Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones. E) Corporations of all types are subject to the corporate income tax. 4. Which of the following statements is CORRECT? A) One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. B) It is generally easier to transfer one’s ownership interest in a partnership than in a corporation. C) One of the advantages of the corporate form of organization is that it avoids double taxation. D) One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., “one person, one vote.” E) Corporations of all types are subject to the corporate income tax. 5. One drawback of switching from a partnership to the corporate form of organization is the following: A) It subjects the firm to additional regulations. B) It cannot affect the amount of the firm's operating income that goes to taxes. C) It makes it more difficult for the firm to raise additional capital. D) It makes the firm’s investors subject to greater potential personal liabilities. E) It makes it more difficult for the firm’s investors to transfer their ownership interests. 6. Which of the following statements is CORRECT? A) A hostile takeover is the main method of transferring ownership interest in a corporation.
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B) Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. C) A corporation is a legal entity that is generally created by a state, and it has a life and existence that is separate from the lives of its individual owners and managers. D) Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization. E) Although its stockholders are insulated by limited legal liability, the legal status of the corporation does not protect the firm’s managers in the same way, i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions. 7. Which of the following statements is NOT CORRECT?
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Study Guide Ch 1 - 4 - 1 The form of organization for a...

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