Chapter 5 study questions

Which statement about sole proprietorships is true?

• Sole proprietorships can be owned by more than one person.

• Sole proprietorships are the most common form of business organization in the United

  States.

• Sole proprietorships generate about 40 percent of all sales in the United States.

• Sole proprietorships do not have to pay employment taxes.

Answer explanation

The correct answer is that sole proprietorships are the most common form of business organization in the United States. This is because they are easy to establish and manage, with one person having complete control over the business decisions. The other options are incorrect as sole proprietorships are owned by one person, they do not generate about 40 percent of all sales in the United States, and they are subject to employment taxes.

Why is it easy to start a sole proprietorship?

• Sole proprietors do not need to file a lot of paperwork to start a business.

• Sole proprietors do not have any legal obligations.

• Sole proprietors are not subject to zoning laws.

• Sole proprietors do not need to follow any government regulations.

Answer explanation

The correct answer is that sole proprietors do not need to file a lot of paperwork to start a business. This is because a sole proprietorship is the simplest business structure, which does not require formal registration with the state. Unlike other business structures, it involves less bureaucracy and legal formalities, making it easier to start.

Which is a disadvantage of sole proprietorships?

• full control

• few regulations

• easy to start and end

• limited access to resources

Answer explanation

The disadvantage of sole proprietorships is the 'limited access to resources'. Unlike corporations or partnerships, sole proprietors often struggle to raise funds as they cannot sell stocks and may find it hard to attract investors. This limits their access to resources, which can hinder growth and expansion.

Which of these is an advantage that general partners alone enjoy in a limited partnership?

• control of business operations

• limited liability

• share of investment

• share of profits

Answer explanation

In a limited partnership, general partners have the advantage of controlling business operations. This is because they are actively involved in the day-to-day management of the business. The other options such as limited liability, share of investment, and share of profits are not exclusive to general partners.

What is an advantage that the general partners who own a partnership have that the owner of a sole proprietorship may not have?

• no need to follow government regulations

• better access to capital

• ease of start-up

• no need to hire employees

Answer explanation

The advantage that general partners in a partnership have over a sole proprietorship is better access to capital. This is because a partnership involves multiple people, each contributing to the business's capital. This allows for more funds to be gathered and used for business growth and development, compared to a sole proprietorship where only one person is responsible for providing all the capital.

Suppose a business is owned by two partners. What skill does each partner need that a sole proprietor would not necessarily need?

• decision-making ability

• management expertise

• ability to collaborate with an equal

• advertising expertise

Answer explanation

The question asks about a skill that is unique to a partnership business model, not required for a sole proprietorship. The correct answer is 'ability to collaborate with an equal'. This is because, in a partnership, decisions are made collectively, requiring collaboration. While decision-making, management, and advertising skills are important for any business model, the need to collaborate equally is specific to partnerships.

What is an advantage of being a franchisee?

• brand recognition

• control over products sold to customers

• franchising fees

• royalty payments

Answer explanation

The advantage of being a franchisee is 'brand recognition'. This means that the franchisee benefits from the established reputation and customer base of the franchisor's brand. This is a significant advantage over starting a business from scratch, where the owner would have to build brand recognition from the ground up.

A publicly held corporation has

• no legal identity beyond that of its owners.

• many shareholders who can buy or sell its stock.

• a few stockholders who are often family members.

• stockholders who rarely trade their shares of stock.

Answer explanation

A publicly held corporation is characterized by having many shareholders who can buy or sell its stock. This is the defining feature of such corporations, distinguishing them from private corporations where the stock is held by a few individuals, often family members, and is not freely traded. Therefore, the correct answer is that a publicly held corporation has many shareholders who can buy or sell its stock.

How do corporations raise capital?

• by transferring funds from the owners to the investors

• through grants from the board of directors

• by taking out loans against the owners’ assets

• by selling stocks and bonds

Answer explanation

Corporations raise capital primarily through the sale of stocks and bonds. Stocks represent ownership in the corporation, while bonds are a form of debt that the corporation promises to repay at a certain date. The other options, such as transferring funds from owners to investors or taking out loans against the owners' assets, are not typical ways corporations raise capital.

In order to do business, what is one regulation that corporations have to follow?

• They have to form limited liability corporations.

• They have to have an advisory board that makes financial decisions.

• They have to sell stocks and bonds on the stock exchange.

• They have to file quarterly and annual reports with the SEC.

Answer explanation

The correct answer is that corporations have to file quarterly and annual reports with the SEC. This is a requirement for all publicly traded companies in the United States. The Securities and Exchange Commission (SEC) uses these reports to monitor the company's financial health and ensure transparency for investors. The other options, while they may be true for some corporations, are not universally required regulations.