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Exam 5: How to Form a Business

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Question 181

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Halle wants to start a business.She has two goals.First,given her limited personal wealth and eagerness to get started,she wants to get her business up and running with the least possible hassle and expense.Second,she wants to minimize her personal risk in the event that her company experiences difficulties.If Halle chooses a sole proprietorship,she would:

A) Achieve both goals since this form of ownership is both the easiest to form and the least risky.
B) Meet her first goal since sole proprietorships are easy and inexpensive to form.However,she would expose herself to personal risk because owners of sole proprietorships have unlimited liability.
C) Not achieve either goal since proprietorships are both costly to set up and subject to unlimited liability.
D) Achieve her second goal,since the owners of sole proprietorships are legally protected from losing more than the amount they invest in their company.However,she would find that the start-up costs would be higher than if she had incorporated her business.

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

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Question 182

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A limited liability company is similar to an S corporation,but without the special eligibility requirements.

A) True
B) False

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Question 183

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The __________ is the most common form of business ownership.

A(n) ___________________ is a state-chartered legal entity with authority to act and to have liability separate from its owners.

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. -Although Lew Banfilter,now a young attorney is impressed with AutoMotion and believes it could be a place to invest money,he informed Jenna that his professional position at a law firm prevents him from taking an active role in the business.He is also concerned about accepting more risk since he has a young family.He mentioned a preference for unlimited liability.If Lew joined Jenna and Al,the three might consider forming a(n) :

A limited partnership consists of one or more general partners and one or more limited partners.

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

Maria is already a successful franchisee with Nite Lite,a chain of "no frills" motels that provide clean rooms and good service at affordable rates.The motel she currently operates is located in Texas,but she is considering an opportunity to open another Nite Lite motel in Canada.Although her costs of operating in a foreign nation may be higher,she has the benefit of an expanding market and less competition.

Franchisors sometimes pay reverse royalties to franchisees if it is evident that the franchisor's Internet sales have negatively impacted the profits of traditional bricks and mortar franchisee businesses.

A major advantage of sole proprietorships is that an owner has limited liability for the debts of his or her business.