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Exam 5: How to Form a Business

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Question 91

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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.

A) True
B) False

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Question 92

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A comparison of the three major forms of business ownership shows that sole proprietorships are usually the most difficult type of business to establish.

A) True
B) False

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Question 93

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Huang has agreed to become a partner in his cousin's waste management business. Since he provided 30 percent of the money to start the company and built an air-conditioned garage, he is entitled to 30 percent of any profits the company earns during its first year of operation.

Delaware and Nevada are popular states in which to seek incorporation because these states' business-oriented laws make the process easier than it is in other states.

A well-known franchised food chain was brought to its knees when several customers got sick from tainted beef. Although the food chain recovered due to its quick and consistent action, several franchisees sued the parent company for loss of sales. The franchisees experienced the coattail effects of the bad publicity this event received.

Matthew is leading a group of stockholders who want to take the Cash Cow Corporation private. If Matthew's group succeeds, Cash Cow's stock will no longer be available to investors on the open market.

A ________ is the share of profits or percentage of sales a franchisee pays to a franchisor.

Qiang is ready to become a franchise owner and open one of the 50 Southwest Diners, a very successful fast food chain specializing in dishes from the American Southwest. Which of the following problems is Qiang most likely to encounter if she agrees to become a franchisee?

To qualify as an S corporation, a company must

A recent study showed that partnerships are more likely to fail than sole proprietorships.

Motor Masters is a conventional corporation with 516 stockholders. A number of the stockholders are citizens of Canada and others are citizens of Mexico, though most are American. Due to its size and diversity in ownership, you would recommend that Motor Masters change to an S corporation.

Mini-Case Genna Raiter's passion has always been cars, cars, cars! As a teen, she would spend hours with her dad fixing the family car, and he taught her how to change the oil and make minor repairs. While still in high school, Genna got a job at a local garage. After high school graduation, she completed the auto mechanics degree at a local community college and quickly decided she wanted to be her own boss. She quit her job at her first garage, borrowed some money from her dad, and created her own repair shop, the Car Keepers Garage. Genna's hard work gradually attracted a loyal clientele of satisfied customers. Her success has her thinking about expanding and opening garages in two other locations, but she lacks the financial resources needed for development. Furthermore, the success of her business is forcing Genna to spend more time managing the business and less time doing the actual technical work she still enjoys. She wants to find business partners who can help her with management and provide additional financial resources. She has approached a couple of friends she met in high school: Al Ternator and Lou Banfilter, to see if they would like to join the business. -Right now, Car Keepers Garage is operated as a

One reason that a firm may choose to merge or acquire another company would be to diversify products or services.

Amelia has a lot of business knowledge and is confident in her abilities to open a successful store. She recently opened a bakery as a sole proprietor. She is expecting a high level of profits and is looking forward to

A ________ is a form of business that is owned, and usually managed, by one person.

After a fruitful first five years, Serenity Stables, LLC (a retirement ranch for racehorses), thinks it may be able to attract donations from animal advocate groups and even the federal government if it becomes a nonprofit corporation. As its business advisor, you explain that as a nonprofit corporation, the owner(s) may earn a salary but the business should not seek after-tax profits.

In order to protect all parties and minimize misunderstandings among partners, all terms of the partnership should be spelled out in writing.

One drawback of franchises is that they have a higher failure rate than other types of business ventures.

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

An S corporation has fewer ownership rules than a limited liability company.