LOS b: Compare and contrast the major business forms and describe the conflicts of interest associated with each.

Q1. Which of the following statements about major business forms is least accurate?

A)   A key benefit of the corporate form of business is the ease in transferring ownership.

B)   In a partnership, there is no legal distinction between the business and its owners.

C)   The potential legal liability for the owner of a sole proprietorship is limited to the market value of the business.

Q2. Mitchell Cash of Yost and Karl Consulting is comparing and contrasting sole proprietorships, partnerships, and corporations for a new client that is looking to start a business. Cash makes the following statements to the client:

Statement 1:    Sole proprietorships have potentially unlimited liability, but the liability for a corporate owner is limited to the amount of their investment.

Statement 2:    Sole proprietorships and partnerships have fewer corporate governance risks than corporations.

Statement 3:    In most cases, there is no legal distinction between the owner and the business within a sole-proprietor structure.

Regarding Cash’s statements:

A)   all three statements are correct.

B)   Statements 1 and 3 are correct, but Statement 2 is incorrect.

C)   Statements 2 and 3 are incorrect, but Statement 1 is correct.

Q3. Which of the following statements regarding advantages to the corporate form of business organization compared to other business forms is FALSE?

A)   A corporation’s ability to raise capital is virtually unlimited.

B)   Corporations are easily formed with few legal requirements.

C)   It is unnecessary for an owner of a corporation to have knowledge or expertise in the industry in which a business operates.

Q4. Which form of business is most likely to have conflicts of interest between managers and owners?

A)   Corporation.

B)   Sole-proprietorship.

C)   Partnership.

Q5. Michael Tormey and Amy Arnett are the founding partners of McMillan Corporate Services. Founding the business was relatively straightforward and over the last 20 years, the expertise provided by Tormey and Arnett have been key to making McMillan a success. Every Friday afternoon, Tormey and Arnett meet to discuss the status of the business, and have decided to devote this week’s meeting to strategic alternatives. Tormey believes that while the partnership structure has served McMillan well during its history, it may be time to reform the business into a corporate structure. Arnett, however, is not so sure. Which of the following arguments would be most effective to convince Arnett that a corporate structure would be beneficial for McMillan? The corporate structure would:

A)   allow for easier transition of ownership, reduce legal requirements associated with running the business, and create a legal separation between the owners and the business.

B)   provide more opportunities for raising capital, allow for easier transition of ownership, and reduce the liability that they as owners would incur.

C)   create a legal separation between the owners and the business, allow for fewer conflicts of interest, and reduce the liability that they as owners would incur.

LOS b: Compare and contrast the major business forms and describe the conflicts of interest associated with each. fficeffice" />

Q1. Which of the following statements about major business forms is least accurate?

A)   A key benefit of the corporate form of business is the ease in transferring ownership.

B)   In a partnership, there is no legal distinction between the business and its owners.

C)   The potential legal liability for the owner of a sole proprietorship is limited to the market value of the business.

Correct answer is C)

In a sole proprietorship, there is no legal distinction between the business and its owner. In the event of losses or bankruptcy, creditors could theoretically go after the owner’s personal assets, resulting in unlimited liability.

Q2. Mitchell Cash of Yost and Karl Consulting is comparing and contrasting sole proprietorships, partnerships, and corporations for a new client that is looking to start a business. Cash makes the following statements to the client:

Statement 1:    Sole proprietorships have potentially unlimited liability, but the liability for a corporate owner is limited to the amount of their investment.

Statement 2:    Sole proprietorships and partnerships have fewer corporate governance risks than corporations.

Statement 3:    In most cases, there is no legal distinction between the owner and the business within a sole-proprietor structure.

Regarding Cash’s statements:

A)   all three statements are correct.

B)   Statements 1 and 3 are correct, but Statement 2 is incorrect.

C)   Statements 2 and 3 are incorrect, but Statement 1 is correct.

Correct answer is A)

Cash is correct with respect to all three statements.

Q3. Which of the following statements regarding advantages to the corporate form of business organization compared to other business forms is FALSE?

A)   A corporation’s ability to raise capital is virtually unlimited.

B)   Corporations are easily formed with few legal requirements.

C)   It is unnecessary for an owner of a corporation to have knowledge or expertise in the industry in which a business operates.

Correct answer is B)         

Advantages to the corporate form of business include the ease of raising capital, the ease of the transferability of stock ownership, and the lack of expertise needed by owners of a corporation since managers control the business’ assets. A disadvantage of corporations is the fact that since corporations have many non-manager owners, they are subject to a great deal of legal requirements and regulations.

Q4. Which form of business is most likely to have conflicts of interest between managers and owners?

A)   Corporation.

B)   Sole-proprietorship.

C)   Partnership.

Correct answer is A)

Corporations are typically owned by shareholders who play no role in day-to-day management decisions. Instead, managers are hired to control and deploy the assets of the company, and supposedly do so in the shareholders’ best interest. This separation between ownership and management creates the potential for conflicts of interest. Note that in the case of partnerships and sole proprietorships, the owners and managers are one in the same.

Q5. Michael Tormey and Amy Arnett are the founding partners of McMillan Corporate Services. Founding the business was relatively straightforward and over the last 20 years, the expertise provided by Tormey and Arnett have been key to making McMillan a success. Every Friday afternoon, Tormey and Arnett meet to discuss the status of the business, and have decided to devote this week’s meeting to strategic alternatives. Tormey believes that while the partnership structure has served McMillan well during its history, it may be time to reform the business into a corporate structure. Arnett, however, is not so sure. Which of the following arguments would be most effective to convince Arnett that a corporate structure would be beneficial for McMillan? The corporate structure would:

A)   allow for easier transition of ownership, reduce legal requirements associated with running the business, and create a legal separation between the owners and the business.

B)   provide more opportunities for raising capital, allow for easier transition of ownership, and reduce the liability that they as owners would incur.

C)   create a legal separation between the owners and the business, allow for fewer conflicts of interest, and reduce the liability that they as owners would incur.

Correct answer is B)

A partnership allows two or more people to start a business with few legal requirements. Disadvantages of the partnership structure include a limited ability to raise capital, unlimited liability for owners, and non-transferability of ownership. A corporation is a distinct legal entity that has rights similar to a person. Compared to a partnership, a corporation has a nearly unlimited ability to raise capital, ownership is easily transferable, and the legal separation between the business and its owners limits the liability of the business owners. Disadvantages to the corporate form include increase legal and regulatory requirements and increased conflicts of interest as a result of the separation between owners and managers of the business.