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Exam 5: How to Form a Business

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Question 21

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Mel, Tim, and Bill agreed to partner in a small rehab business. Initially, they were enthusiastic contributors until their first project took more work than Mel initially estimated; Tim wanted morning meetings and long lunch hours; and Bill decided to go on vacation even though the project was not complete and ready to sell. As Figure 5.2 indicates,

A) it's smart to begin the partnership with honest communication of what each partner expects to give and get from the partnership.
B) it's smart to organize the business as a limited liability company to reduce the financial risks that put pressure on members of the partnership.
C) it's smart to designate one of the partners as the primary partner with final authority to call all the shots.
D) it's smart to enter into partnerships with people who have similar educational and cultural backgrounds and similar personalities.

E) A) and C)
F) None of the above

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Question 22

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In a limited liability partnership, each partner's risk of losing personal assets is:

A) unlimited.
B) limited to losses that result from his/her own acts and omissions and the acts and omissions of those who work under his/her supervision.
C) determined entirely by the maximum loss provision established by the articles of co-partnership.
D) nonexistent.

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

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Question 23

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A cooperative consists of people with similar needs who pool their resources for mutual gain.

In a leveraged buyout, the managers of a firm, its employees, or other investors:

Tech Solutions, Inc., a manufacturer of laptops, is considering a merger with Outtel, a leading producer of microprocessors and other computer chips. Tech Solutions believes such a merger would give them a guaranteed source of needed components, and enable them to have better control over quality. If this merger occurs, it would be an example of a horizontal merger.

Sergio has agreed to become a partner in his brother's horse-breeding business. Since he provided 30 percent of the money to start the firm and built an air-conditioned barn, he is entitled to 30 percent of any profits the firm earns during its first year of operation.

Some __________ ask members/customers to work at the organization for a number of hours a month as part of their duties.

A(n) _________ occurs when one company buys the property and obligations of another company.

If a corporation has after-tax profits of $360,000, and elects to distribute this amount in the form of dividends to its stockholders, these distributions are free and clear of taxes because the corporation paid taxes on this amount prior to distribution.

Like stockholders of a C corporation, owners of a limited liability company (LLC) are free to sell their ownership without the approval of other members.

A disadvantage of corporations is that their charters are only valid for 99 years, so corporations are less permanent than other types of businesses.

Franchisees must follow more rules, regulations, and procedures than if they operated independently owned businesses.

If firms wish to gain market share in their current market, they would consider a conglomerate merger.

Double taxation is experienced by corporations that pay dividends. Which of the following scenarios is an accurate example of double taxation?

A multinational corporation is a firm that operates in several countries.

Several years ago, Regis Corporation, a very large hair styling salon company, purchased 60 "Your Father's Mustache" salons. Although this was initially an acquisition, the merging of these two businesses was a(n) ____________. Regis went on to purchase several hair care product companies. Joining forces with hair care product companies would represent a _____________.

A few years back, your three U.S. born friends that live in the State of Wyoming inherited a dude ranch that they plan to turn into a retirement haven for race horses. Peaceful Pastures wants to open its doors by spring of 2018. After attending several small business seminars, the three friends are certain they need limited liability. The high-risk, labor-intensive business will require a sizeable investment including an air-conditioned barn, several fenced-in pastures and loads of animal feed. You recently heard that one form of business ownership requires owners to pay self-employment taxes on the entire amount of earnings. You are fairly certain this is one tax liability your friends would like to avoid. You recommend:

Compared to the C corporation, the limited liability company is an attractive form of business ownership because:

Mini-Case For as long as she could remember, Jenna Raiter's passion was cars. As a teenager, she spent hours with her dad tinkering with the family car, learning to change the oil and making minor repairs. She got a job at a local garage while still in high school. A few years after graduating from high school and completing the auto mechanics degree at a local community college, Jenna decided she wanted to be her own boss. She quit her job, borrowed some money from her dad, and began her own repair shop, the AutoMotion Garage. Jenna's hard work gradually attracted a loyal clientele of satisfied customers. Her success has her thinking about opening garages in two other locations, but she lacks the financial resources needed for expansion. Furthermore, the success of her business is forcing Jenna 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 Lew Banfilter, to see if they would like to join the business. -When Jenna confided in Lew and Al that she too was concerned about adding additional risk, Lew suggested that they explore the possibility of one of the newest forms of business ownership, a(n) ____________, which has very flexible ownership rules and would give them more choices in how the company's earnings are taxed while still protecting all owners from high levels of risk.

The limited liability provided to limited partners means that they are not responsible for the debts of the business beyond: