Chapter 3 Exercises Fundamental of Business

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Business Essentials, 9e(Ebert/Griffin)

Chapter 3 Entrepreneurship, New Ventures, and Business Ownership

1) The Small Business Administration is the government agency charged with owning smallbusinesses.

Answer: FALSEE!lanation: The Small Business Administration is a government agency that assists smallbusinesses."age #e$: %&'i$$iculty: Easy(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

-) Small businesses !roduce more !atents !er em!loyee than large !atenting $irms.Answer: T#E

E!lanation: Small businesses are an im!ortant source o$ innovation as evidenced by the!roduction o$ !atents."age #e$: %1'i$$iculty: /oderate(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

*) /ost businesses in the nited States are large businesses with more than 0&& em!loyees.Answer: FALSEE!lanation: Almost % !ercent o$ all .S. businesses have no more than -& em!loyees.

"age #e$: %1'i$$iculty: /oderate(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

2) /aor innovations are most li+ely to come $rom large cor!orations.Answer: FALSEE!lanation: /ost maor innovations come $rom small businesses."age #e$: %1'i$$iculty: /oderate(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

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,o!yright 3 -&1* "earson Education4 5nc. "ublishing as "rentice 6all


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0) /anu$acturing is overwhelmingly handled by big business.Answer: T#EE!lanation: Small business manu$acturers account $or less than 0 !ercent o$ the manu$acturingindustry."age #e$: %*

'i$$iculty: EasyAA,SB: 'ynamics o$ the global economy(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

%) "eo!le who assume the ris+ o$ business ownershi! with a !rimary goal o$ growth ande!ansion are called entre!reneurs.Answer: T#EE!lanation: Entre!reneurs are !eo!le who assume the ris+ o$ business ownershi!."age #e$: %2'i$$iculty: Easy(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

7) /ost success$ul entre!reneurs have a strong desire to be their own bosses.Answer: T#EE!lanation: /any entre!reneurs are attracted to small business because o$ o!!ortunities $orinde!endence."age #e$: %2'i$$iculty: Easy(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

) A business !lan demonstrates how an entre!reneur8s business strategy will be im!lemented.Answer: T#EE!lanation: A business !lan documents business strategy and im!lementation !rocedures."age #e$: %0'i$$iculty: Easy(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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9) Franchisees may be obligated to contribute a !ercentage o$ sales to !arent cor!orations.Answer: T#EE!lanation: The obligation to contribute a !ercentage o$ sales is a disadvantage $rom the$ranchisee8s !ers!ective."age #e$: %7

'i$$iculty: /oderate(bective: *.*Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

1&) Loans are the most im!ortant sources o$ money $or new businesses.Answer: FALSEE!lanation: According to the ational Federation o$ 5nde!endent Business4 !ersonal resourcesare the most im!ortant sources o$ money $or new businesses."age #e$: %7'i$$iculty: /oderate

(bective: *.*Learning (utcome: 'iscuss the $unctions o$ di$$erent ty!es o$ $inancial institutions in themonetary systemS+ill: ,once!t

11) Lending institutions are more li+ely to hel! $inance the !urchase o$ an eisting businessrather than the start;u! o$ a business $rom scratch.Answer: T#EE!lanation: This is the case because the ris+s are ty!ically better understood $or an eistingbusiness."age #e$: %7'i$$iculty: /oderateAA,SB: 'ynamics o$ the global economy(bective: *.*Learning (utcome: 'iscuss the $unctions o$ di$$erent ty!es o$ $inancial institutions in themonetary systemS+ill: A!!lication

1-) A grou! o$ small investors who invest money in com!anies in return $or !artial ownershi! is+nown as a small;business develo!ment com!any.Answer: FALSEE!lanation: A grou! o$ small investors who invest money in com!anies in return $or !artialownershi! is called a venture ca!ital com!any.

"age #e$: %'i$$iculty: Easy(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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1*) Small;business investment com!anies


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17) The $ailure rate among small businesses has been increasing in recent years.Answer: FALSEE!lanation: The $ailure rate $or small businesses has been decreasing in recent years."age #e$: %9'i$$iculty: /oderate

(bective: *.2Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

1) eglect is a maor $actor that contributes to small business $ailure.Answer: T#EE!lanation: (ther $actors include managerial incom!etence4 ine!erience4 wea+ controlsystems4 and insu$$icient ca!ital."age #e$: 7&'i$$iculty: /oderate(bective: *.2

Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

19) Low start;u! costs and ta bene$its are advantages o$ sole !ro!rietorshi!s.Answer: T#EE!lanation: Sole !ro!rietorshi!s can vary widely in si=e> a sole !ro!rietorshi! is merelyde$ined as a business owned and o!erated by one !erson."age #e$: 7-'i$$iculty: /oderate(bective: *.0Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

-&) By law4 each general !artner is liable $or all debts incurred in the name o$ the !artnershi!.Answer: T#EE!lanation: Each general !artner can be seen as a sole !ro!rietor in terms o$ taation and there!aying o$ debt."age #e$: 7*'i$$iculty: /oderate(bective: *.0Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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-1) ,or!orations generate sales revenues !ro!ortionate to their number.Answer: FALSEE!lanation: ,or!orations account $or about -& !ercent o$ all .S. businesses but generate about0 !ercent o$ all sales revenues."age #e$: 72

'i$$iculty: /oderateAA,SB: 'ynamics o$ the global economy(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

--) ,or!orations enoy signi$icant ta bene$its when com!ared to sole !ro!rietorshi!s or!artnershi!s.Answer: FALSEE!lanation: The biggest disadvantage o$ regular cor!orations is double taation4 wherein thecom!any !ays income ta on !ro$its and stoc+holders !ay taes on income $rom their

investments in the com!any."age #e$: 7%'i$$iculty: /oderate(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

-*) An S cor!oration has stoc+ that is widely held and available $or sale to the general !ublic.Answer: FALSEE!lanation: An S cor!oration is a hybrid o$ a closely held cor!oration and a !artnershi!. 5t isorgani=ed and o!erates li+e a cor!oration4 but it is treated li+e a !artnershi! $or ta !ur!oses."age #e$: 77'i$$iculty: /oderate(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

-2) The board o$ directors o$ a cor!oration re!orts to the o$$icers o$ the cor!oration.Answer: FALSEE!lanation: The o$$icers o$ the cor!oration re!ort to the board o$ directors> the board o$directors is elected by stoc+holders."age #e$: 77'i$$iculty: /oderate(bective: *.%Learning (utcome: 'iscuss the $actors that in$luence decisions about organi=ational structureS+ill: ,once!t

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-0) The Small Business Administration


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-9) The number o$ minority;owned businesses has decreased in recent years.Answer: FALSEE!lanation: A$rican American;owned businesses have grown at a rate o$ about 2 !ercentduring the most recent $ive;year !eriod $or which data were available4 and 6is!anic;ownedbusinesses have grown at *1 !ercent.

"age #e$: %9'i$$iculty: /oderateAA,SB: /ulticultural and diversity understanding(bective: *.*Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

*&) /any entre!reneurs are $inding new o!!ortunities in $oreign mar+ets.Answer: T#EE!lanation: Foreign mar+ets are o$ten targets $or small businesses."age #e$: %9'i$$iculty: Easy(bective: *.2Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

*1) The 5nternal #evenue Service taes !artners as individuals.Answer: T#EE!lanation: Because !artnershi!s have no legal standing as a distinct entity4 the 5#S taes each!artner as an individual."age #e$: 7*'i$$iculty: /oderate(bective: *.0Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

*-) @eneral !artnershi!s generate a substantial !ercentage o$ total sales revenue in the nitedStates.Answer: FALSEE!lanation: (verall4 .S. !artnershi!s are res!onsible $or sales revenue o$ less than % !ercento$ the total."age #e$: 72'i$$iculty: /oderate(bective: *.0

Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t



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**) The Small Business 'evelo!ment ,enter !rogram consolidates in$ormation $rom variousdisci!lines and institutions $or use by new and eisting businesses.Answer: T#EE!lanation: 5t is one o$ a number o$ SBA !rograms available to aid small businesses."age #e$: %

'i$$iculty: /oderate(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

*2) hich entity is de$ined as inde!endent and has little in$luence on its mar+etA) cor!orationB) oint venture,) small business') !artnershi!E) government agency

Answer: ,E!lanation: ,) A small business is de$ined as inde!endent with marginal in$luence in itsmar+et."age #e$: %&'i$$iculty: Easy(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

*0) Entre!reneurs o$ten have more than one goal $or starting a business and becoming sel$;em!loyed. hich o$ the $ollowing reasons is the LEAST common goal o$ entre!reneursA) to see+ inde!endence and be their own bossB) to earn a com$ortable living $or a !eriod o$ time,) to grow and e!and a current business') to meet community or social obligationsE) to !rovide $or their $inancial needsAnswer: 'E!lanation: ') Some entre!reneurs may start a business with the goal o$ meeting communityor social obligations4 but the other goals are $ar more common."age #e$: %2'i$$iculty: /oderate(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocess

S+ill: ,once!t

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*%) hat is the name o$ the document in which an entre!reneur summari=es his or her businessstrategy $or a !ro!osed new ventureA) success chartB) director8s guideline,) $inancial blue!rint

') business !lanE) balance sheetAnswer: 'E!lanation: ') A business !lan is a summary o$ the business strategy $or the !ro!osed newventure and how that strategy will be im!lemented."age #e$: %0'i$$iculty: Easy(bective: *.*Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

*7) hat is the most signi$icant disadvantage o$ owning a $ranchiseA) start;u! costsB) o!erational guidelines,) di$$iculty obtaining loans') double taationE) com!etitionAnswer: AE!lanation: A) Start;u! costs are considered one o$ the most signi$icant disadvantages o$owning a $ranchise."age #e$: %%'i$$iculty: Easy(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

*) hich o$ the $ollowing is the most signi$icant disadvantage o$ starting a business $romscratchA) having $ew em!loyeesB) inability to $ranchise,) having com!etition') coming u! with new ideasE) the ris+ o$ $ailureAnswer: E

E!lanation: E) There is much greater ris+ involved in starting a new business $rom scratch thanin acCuiring an already;eisting business."age #e$: %7'i$$iculty: EasyAA,SB: 'ynamics o$ the global economy(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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*9) hat is the most im!ortant source o$ money $or new business start;u!sA) ban+sB) the SBA,) !ersonal resources

') government grantsE) venture ca!italAnswer: ,E!lanation: ,) /ost individuals starting a new business have to rely on !ersonal $inances to doso."age #e$: %7'i$$iculty: Easy(bective: *.*Learning (utcome: 'iscuss the $unctions o$ di$$erent ty!es o$ $inancial institutions in themonetary systemS+ill: ,once!t

2&) ho constitutes the membershi! o$ S,(#EA) retired eecutivesB) venture ca!italists,) com!any o$$icers') commercial lendersE) success$ul entre!reneursAnswer: AE!lanation: A) The Service ,or!s o$ #etired Eecutives is made u! o$ retired eecutives whovolunteer to hel! entre!reneurs start new businesses."age #e$: %'i$$iculty: Easy(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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21) hich o$ the $ollowing re!resents the $astest;growing segment o$ minority businessownershi!A) A$rican AmericansB) Asians,) 6is!anics

') "aci$ic 5slandersE) Euro!eansAnswer: AE!lanation: A) The number o$ businesses owned by A$rican Americans increased by 2 !ercentduring the most recent $ive;year !eriod $or which data is available."age #e$: %9'i$$iculty: EasyAA,SB: /ulticultural and diversity understanding(bective: *.2Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

2-) hich o$ the $ollowing ty!es o$ businesses is most common in the nited StatesA) sole !ro!rietorshi!sB) general !artnershi!s,) coo!eratives') cor!orationsE) limited !artnershi!sAnswer: AE!lanation: A) About 7- !ercent o$ all .S. businesses are sole !ro!rietorshi!s."age #e$: 7-'i$$iculty: Easy(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

2*) hat !ercent o$ a business is the least amount that a master !artner will retainA) 1& !ercentB) -0 !ercent,) 0& !ercent') 70 !ercentE) & !ercentAnswer: ,E!lanation: ,) The master !artner retains at least 0& !ercent ownershi! and runs the business4while minority !artners have no management voice."age #e$: 72'i$$iculty: Easy(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

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22) 5n which business sector are coo!eratives still im!ortantA) manu$acturingB) automotive,) !ublic utilities') agriculture

E) health careAnswer: 'E!lanation: ') Although coo!eratives ma+e u! only a minor segment o$ the .S. economy4 therole o$ coo!eratives is im!ortant in agriculture."age #e$: 72'i$$iculty: /oderateAA,SB: 'ynamics o$ the global economy(bective: *.0Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

20) hich $orm o$ business ownershi! generates the most sales in the nited StatesA) sole !ro!rietorshi!B) general !artnershi!,) coo!erative') cor!orationE) limited !artnershi!Answer: 'E!lanation: ') ,or!orations generate u! to 0 !ercent o$ the total sales revenue o$ allbusinesses."age #e$: 70'i$$iculty: /oderate(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

2%) hich ty!e o$ business is legally considered a se!arate entity $rom its owners and is liable$or its own debtsA) sole !ro!rietorshi!B) cor!oration,) limited !artnershi!') coo!erativeE) general !artnershi!Answer: BE!lanation: B) A cor!oration is a business that is legally considered an entity se!arate $rom itsowners and is liable $or its own debts. The liability o$ the owners etends to the limits o$ theirinvestments."age #e$: 70'i$$iculty: Easy(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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27) ho are the owners o$ a cor!orationA) board o$ directorsB) $inancial o$$icers,) stoc+holders') to! managers

E) entre!reneursAnswer: ,E!lanation: ,) Stoc+holders are the owners o$ shares o$ stoc+ in a cor!oration."age #e$: 77'i$$iculty: Easy(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

2) hat are shares in a business that the business sells calledA) bonds

B) !ro$its,) stoc+s') dividendsE) loansAnswer: ,E!lanation: ,) Shares in a cor!oration are called stoc+s."age #e$: 77'i$$iculty: Easy(bective: *.%Learning (utcome: 'escribe the goals and stages o$ $inancial management $or com!aniesS+ill: ,once!t

29) Su!!ose BrightLights (nline ?ideo !urchases another com!any4 Dui+Fli. hat is this aneam!le o$A) mergerB) s!in;o$$,) divestiture') acCuisitionE) colla!seAnswer: 'E!lanation: ') An acCuisition is when one com!any buys another com!any outright."age #e$: 7'i$$iculty: Easy(bective: *.%Learning (utcome: 'escribe the goals and stages o$ $inancial management $or com!aniesS+ill: A!!lication

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0&) The .S. 'e!artment o$ ,ommerce considers a business small i$ it has $ewer than howmany em!loyeesA) 1&B) 0&,) 1&&

') 0&&E) 140&&Answer: 'E!lanation: ') The .S. 'e!artment o$ ,ommerce considers a business small i$ it has $ewerthan 0&& em!loyees."age #e$: %&'i$$iculty: /oderate(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

01) hich o$ the $ollowing industry grou!s is the $astest growing segment o$ small businessenter!riseA) manu$acturingB) wholesaling,) retailing') trans!ortationE) servicesAnswer: EE!lanation: E) Services is the $astest growing segment4 !robably because services reCuire $ewresources."age #e$: %-'i$$iculty: /oderateAA,SB: 'ynamics o$ the global economy(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

0-) hich o$ the $ollowing ty!es o$ venue is $avored by small;business retailersA) su!erstoreB) catalog showroom,) s!ecialty sho!') de!artment storeE) studio wor+roomAnswer: ,E!lanation: ,) sually4 !eo!le who start small retail businesses $avor s!ecialty sho!s that letthem $ocus limited resources on narrow mar+et segments."age #e$: %-'i$$iculty: /oderate(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

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0*) hat does a start;u! com!any need in order to estimate the reCuired si=e o$ a !lant4 store4 oro$$ice4 to decide how much inventory to carry4 and to determine how many em!loyees to hireA) sales $orecastB) ta estimate,) business obective

') stoc+ o!tionsE) $unding sourceAnswer: AE!lanation: A) 5n addition4 a sales $orecast hel!s the entre!reneur demonstrate anunderstanding o$ the current mar+et4 the strengths and wea+nesses o$ eisting $irms4 and themeans by which the new venture will com!ete."age #e$: %0'i$$iculty: /oderate(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

02) hat are s!eci$ic locations o$ #amada4 /c'onald8s4 and Subway eam!les o$A) government entitiesB) university s!onsored businesses,) $ranchises') networ+ing businessesE) coo!erativesAnswer: ,E!lanation: ,) All o$ these businesses re!resent an agreement between a $ranchisee and a$ranchiser. The $ranchisee buys the rights $or a location $rom the $ranchiser4 and runs the businessinde!endently."age #e$: %%'i$$iculty: /oderateAA,SB: 'ynamics o$ the global economy(bective: *.*Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

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00) hich o$ the $ollowing is the most signi$icant disadvantage o$ $ranchisingA) high start;u! costsB) ris+ o$ $ailure,) di$$iculty in obtaining $inancing') lengthy contracts

E) high cost o$ o!erationAnswer: AE!lanation: A) Start;u! $ranchise !rices tend to be highthe start;u! $ee $or a /c'onald8s$ranchise is G204&&&."age #e$: %%'i$$iculty: /oderate(bective: *.*Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

0%) hat is the maor drawbac+ o$ acce!ting venture ca!italA) sharing com!any controlB) having to !ay high interest rates,) limiting e!ansion') $acing a short re!ayment !eriodE) having to write a !ro!osalAnswer: AE!lanation: A) ?enture ca!italists $ocus on turning a !ro$it on their investments. 5n order tobetter ensure that they do4 they ty!ically invest in a business on the condition that they be givensome control over the com!any."age #e$: %'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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07) hich o$ the $ollowing are grou!s o$ small investors see+ing to ma+e !ro$its on com!anieswith ra!id growth !otentialA) community ban+sB) venture ca!ital com!anies,) eCuity managers

') government securities dealersE) stoc+ bro+ersAnswer: BE!lanation: B) /ost venture ca!ital com!anies do not lend money> instead4 they su!!ly ca!italin return $or !artial ownershi! or re!resentation on boards o$ directors."age #e$: %'i$$iculty: /oderate(bective: *.*Learning (utcome: 'iscuss the $unctions o$ di$$erent ty!es o$ $inancial institutions in themonetary systemS+ill: ,once!t

0) hich o$ the $ollowing is $ederally licensed to borrow money $rom the Small BusinessAdministration to invest in or lend to small businessesA) S,(#EB) SB5,s,) SB',') F'5,E) SE,Answer: BE!lanation: B) 5n addition4 small;business investment com!anies are themselves investments$or their shareholders."age #e$: %'i$$iculty: /oderate(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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09) hich o$ the $ollowing hel!s entre!reneurs gain s+ills that are essential $or running abusinessA) ES("B) SB5,s,) SE,

') LL,E) SBAAnswer: EE!lanation: E) The Small Business Administration hel!s entre!reneurs im!rove theirmanagement s+ills."age #e$: %'i$$iculty: /oderate(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

%&) hich o$ the $ollowing is the most signi$icant recent trend in small;business start;u!sA) entre!reneurs who cross over $rom big businessB) increased o!!ortunities $or minorities,) increased o!!ortunities $or women') emergence o$ e;commerceE) global economic downturnAnswer: 'E!lanation: ') Because the 5nternet !rovides $undamentally new ways o$ doing business4entre!reneurs have created and e!anded new businesses $aster than ever be$ore."age #e$: %'i$$iculty: /oderateAA,SB: 'ynamics o$ the global economy(bective: *.2Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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%1) According to SBA estimates4 what !ercent o$ all new businesses can e!ect to survive $or atleast $our yearsA) 12 !ercentB) -2 !ercent,) 22 !ercent

') %2 !ercentE) 2 !ercentAnswer: ,E!lanation: ,) 'uring the 19%&s and 197&s4 less than hal$ o$ all new start;u!s survived morethan 1 months> only one in $ive lasted 1& years. ow4 however4 22 !ercent can e!ect to survive$or at least $our years."age #e$: %9'i$$iculty: /oderate(bective: *.2Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

%-) hich o$ the $ollowing $actors most contributes to small business $ailureA) managerial incom!etence or ine!erienceB) bad !roduct design,) legal !roblems') time s!ent raising ca!italE) !ersonnel issuesAnswer: AE!lanation: A) The $our main reasons $or small business $ailure are managerial incom!etence4neglect4 wea+ control systems4 and insu$$icient ca!ital."age #e$: 7&'i$$iculty: /oderate(bective: *.2Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

%*) A new business should have enough ca!ital to o!erate at least how many months withoutearning a !ro$itA) 1B) -,) 2') %E) 9

Answer: 'E!lanation: ') 5n addition4 some e!erts recommend having enough ca!ital to last one year."age #e$: 7&'i$$iculty: /oderate(bective: *.2Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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%2) hich o$ the $ollowing legal $orms o$ business is owned and usually o!erated by a !ersonwho is res!onsible $or its debtsA) cartelB) cor!oration,) general !artnershi!

') sole !ro!rietorshi!E) limited !artnershi!Answer: 'E!lanation: ') About 7- !ercent o$ all businesses are sole !ro!rietorshi!s> however4 theyaccount $or only about 0 !ercent o$ total business revenues."age #e$: 7-'i$$iculty: Easy(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

%0) hat is a maor drawbac+ o$ sole !ro!rietorshi!sA) limited $undingB) wor+ $leibility,) low start;u! costs') unlimited liabilityE) structured hoursAnswer: 'E!lanation: ') A sole !ro!rietor is res!onsible $or all debts incurred by the business4 whichincreases the ris+ involved in doing business."age #e$: 7-'i$$iculty: /oderate(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

%%) hen can a sole !ro!rietorshi! legally be dissolvedA) sales eceed G1 millionB) the !artners reorgani=e the $irm8s structure,) earnings are less than G0&&4&&&') the owner donates !ro$itsE) the owner diesAnswer: EE!lanation: E) Although the business can be reorgani=ed by a successor4 eecutors or heirs

must otherwise sell its assets."age #e$: 7-'i$$iculty: /oderate(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

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%7) hat resources does a sole !ro!rietorshi! !rimarily de!end onA) the cor!orationB) $oreign investors,) ca!ital mar+ets') those o$ the owner

E) a committed clienteleAnswer: 'E!lanation: ') There$ore4 sole !ro!rietors o$ten $ind it hard to borrow money to start u! ore!and> many ban+ers $ear that they will not be able to recover loans i$ owners become disabledor insolvent."age #e$: 7-'i$$iculty: /oderate(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

%) hat ty!e o$ business has two or more owners who share in the o!eration o$ the $irm and are$inancially res!onsible $or its debtsA) cor!orationB) !artnershi!,) coo!erative') conglomerateE) non!ro$itAnswer: BE!lanation: B) "artners may invest eCual or uneCual sums o$ money and may earn !ro$its thatbear no relation to their investments."age #e$: 7*'i$$iculty: /oderate(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

%9) hat is the most common ty!e o$ !artnershi!A) limited !artnershi!B) cor!orate !artnershi!,) general !artnershi!') sole !artnershi!E) coo!erative !artnershi!Answer: ,

E!lanation: ,) A general !artnershi! is similar to a sole !ro!rietorshi! but is owned by morethan one !erson."age #e$: 7*'i$$iculty: /oderate(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

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7&) ho invests all o$ the $unds needed $or a business but !lays no role in its managementA) silent !artnerB) sole !ro!rietor,) general !artner') !rinci!al

E) directorAnswer: AE!lanation: A) A silent !artner is a !artner who invests all o$ the $unds needed $or a businessand there$ore gets a return on the investment i$ the business earns a !ro$it4 but !lays no role in itsmanagement."age #e$: 7*'i$$iculty: /oderate(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

71) hat is the most im!ortant advantage o$ general !artnershi!sA) the unlimited liability o$ the !artnershi!B) the ability to grow with the addition o$ new talent and money,) the ease o$ im!lementing an e$$ective control system') the increased role o$ luc+E) the need $or minority !artnersAnswer: BE!lanation: B) ew !artners can oin a general !artnershi! at any time by investing their timeand money."age #e$: 7*'i$$iculty: /oderate(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

7-) hat do both sole !ro!rietorshi!s and !artnershi!s lac+A) trustB) legal standing,) continuity') shared visionE) ada!table !rocessesAnswer: ,E!lanation: ,) hen one !artner dies or leaves4 the original !artnershi! dissolves4 even i$ one

or more o$ the other !artners want it to continue."age #e$: 7*'i$$iculty: /oderate(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

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7*) hich o$ the $ollowing is a !artner who actively manages a $irm and has unlimited liability$or its debtsA) limited !artnerB) general !artner,) stoc+holding !artner

') !ublic !artnerE) silent !artnerAnswer: BE!lanation: B) A general !artner is also +nown as an active !artner because he or she !lays anactive role in the management o$ the !artnershi!."age #e$: 72'i$$iculty: /oderate(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

72) hat !ercent o$ all businesses in the nited States are cor!orationsA) 10 !ercentB) -& !ercent,) 0& !ercent') 70 !ercentE) 0 !ercentAnswer: BE!lanation: B) There are about 2.9* million cor!orations in the nited States> this accounts $orabout -& !ercent o$ all .S. businesses."age #e$: 72'i$$iculty: /oderateAA,SB: 'ynamics o$ the global economy(bective: *.%Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

70) hat ty!e o$ com!any has stoc+ that is widely held and available $or sale to the general!ublicA) !rivate cor!orationB) !ublic cor!oration,) general !artnershi!') limited liability cor!orationE) !ro$essional cor!oration

Answer: BE!lanation: B) hen shares are !ublicly issued4 the $irm becomes a !ublicly held stoc+ is widely held and available $or sale to the !ublic."age #e$: 7%'i$$iculty: /oderate(bective: *.%Learning (utcome: 'escribe the goals and stages o$ $inancial management $or com!aniesS+ill: ,once!t

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7%) hat ty!e o$ cor!orations are those com!rised o$ doctors4 lawyers4 or accountants mostli+ely to beA) !rivateB) !ublic

,) subcha!ter S') !ro$essionalE) multinationalAnswer: 'E!lanation: ') hile the cor!orate structure !rotects members $rom unlimited $inancialliability4 they are not immune $rom unlimited liability and are subect to !artnershi! taation."age #e$: 77'i$$iculty: /oderate(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

77) Two businesses4 #io Boo+s and 'evereau 6oldings4 collaborate to create and run a newboo+selling business. hat is this action calledA) cor!orati=ationB) vertical merger,) oint venture') strategic allianceE) institutional investmentAnswer: ,E!lanation: ,) Hoint ventures abound in numerous industries. nli+e in a strategic alliance4each !artner in a oint venture owns a share o$ the new enter!rise."age #e$: 7'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: A!!lication

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7) hich o$ the $ollowing occurs when two $irms combine to create a new com!anyA) acCuisitionB) ta+eover,) venture') divestiture

E) mergerAnswer: EE!lanation: E) A merger occurs when ,om!any A4 $or eam!le4 merges with ,om!any B tocreate ,om!any ,."age #e$: 7'i$$iculty: Easy(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

79) hy is it di$$icult to com!are relative ob growth $or di$$erent;si=ed businesses

A) Sourcing u!;to;date em!loyment $igures is di$$icult.B) /any small businesses e!erience ra!id unre!orted growth.,) S!heres o$ in$luence overla! between the small and big business sectors.') Sta$$ si=e o$ small businesses tends to change $aster than sta$$ si=e o$ big businesses.E) 5t is hard to determine the cuto$$ !oint at which a small business becomes a large business.Answer: EE!lanation: E) #elative ob growth among businesses o$ di$$erent si=es is not easy todetermine. There are di$$erent !arameters governing the si=e o$ a small versus a big business andadditionally there is no !recise !oint where such a di$$erentiation can be clearly identi$ied."age #e$: %1'i$$iculty: 'i$$icultAA,SB: Analytic s+ills(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

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&) hy do attitudes about entre!reneurshi! vary internationallyA) 'ecision ma+ing in big business can overloo+ local customs.B) Attitudes towards ris+;ta+ing in business are culturally determined.,) ,onsumer attitudes are in$luenced by economic cycles.') Foreign;owned com!anies can be unres!onsive to local mar+ets.

E) 5nternational business is creating a global village.Answer: BE!lanation: B) 5n many cultures4 such as the nited States4 the entre!reneurial s!irit is highlyvalued. 6owever4 in some Asian countries4 the entre!reneurial s!irit is o$ten tem!ered by theneed $or consensus."age #e$: %*'i$$iculty: 'i$$icultAA,SB: /ulticultural and diversity understanding(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

1) (livia has $ound a viable business4 a small $urniture store4 she is interested in !urchasing.She has learned that the store is su!!lied by reliable vendors and has a steady stream o$ local andonline buyers. hat should be (livia8s net ste! at this !ointA) Analy=e the $urniture store8s !ast $inancial statements.B) Start negotiating a !urchase !rice with the current owner.,) A!!roach a ban+ing institution about $inancing her !urchase.') ,onsult a mar+eting agency about ways to reach more customers.E) Search $or vendors that can !rovide similar !roducts at lower costs.Answer: AE!lanation: A) hile what (livia has learned about the state o$ the business is !ositive4 it isstill in her best interest to continue to do due diligence and more closely eamine the business."age #e$: %%'i$$iculty: 'i$$icultAA,SB: #e$lective thin+ing s+ills(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: A!!lication

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-) ?iola wants to be a business owner4 and is contem!lating whether to start her own businessor o!en a $ranchise.

hich o$ the $ollowing4 i$ true4 would be a com!elling reason $or ?iola to o!en a $ranchise ratherthan start a new business

A) The $ranchiser reCuires G*4&&& in start;u! costs and a 0 !ercent monthly royalty $ee.B) The $ranchiser tightly controls and monitors the service !rotocol.,) The $ranchisee is res!onsible $or develo!ing all mar+eting materials.') The com!any has only recently become a $ranchise.E) There are several other $ranchises with the same com!any in the area.Answer: AE!lanation: A) The start;u! cost $or most $ranchises is around G0&4&&& and the royalty $ee isusually between % and 1& !ercent. The substantially lower costs o$ G*4&&& and 0 !ercent wouldbe a com!elling reason to ta+e on a $ranchise i$ it also has acce!table growth !otential."age #e$: %%'i$$iculty: 'i$$icult

AA,SB: #e$lective thin+ing s+ills(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,ritical Thin+ing

*) A!!roimately what !ercent o$ all .S. businesses em!loy -& or $ewer !eo!leA) % !ercentB) %% !ercent,) 2% !ercent') -% !ercentE) 1% !ercentAnswer: AE!lanation: A) According to -&&% census data4 0.90 !ercent o$ all businesses em!loy -& or$ewer !eo!le> this illustrates how im!ortant small business is to the .S. economy."age #e$: %&'i$$iculty: 'i$$icult(bective: *.2Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

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2) Each year4 between %&&4&&& and %0&4&&& new businesses are launched in the nited States.A!!roimately how many businesses $ail each yearA) 0&4&&& to 1&&4&&&B) 1&&4&&& to -0&4&&&,) -0&4&&& to 0&&4&&&

') 0&&4&&& to 7&&4&&&E) 7&&4&&& to 1 millionAnswer: 'E!lanation: ') For eam!le4 in -&&94 %-74-&& new $irms started and another 0904%&& closeddown."age #e$: %'i$$iculty: /oderate(bective: *.2Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

0) By what !ercent has the number o$ A$rican American;owned businesses increased over the!ast $ive;year !eriodA) 1 !ercentB) - !ercent,) 2 !ercent') % !ercentE) 7 !ercentAnswer: ,E!lanation: ,) The number o$ businesses owned by A$rican Americans increased by 2 !ercentduring the most recent $ive;year !eriod $or which data are available and now totals - million."age #e$: %9'i$$iculty: /oderateAA,SB: /ulticultural and diversity understanding(bective: *.2Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

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%) hich $igures re$lect the current si=e and the growth in 6is!anic;owned businesses $or thelast $ive yearsA) -.-0 million and *1 !ercentB) -.70 million and 21 !ercent,) *.10 million and 71 !ercent

') *.00 million and 1 !ercentE) 2.-0 million and 0 !ercentAnswer: AE!lanation: A) Figures o$ *1 !ercent totaling about -.-0 million businesses re$lect stronggrowth $or this grou!."age #e$: %9'i$$iculty: 'i$$icultAA,SB: /ulticultural and diversity understanding(bective: *.2Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

7) hat is the main reason why women start new businessesA) need to earn more moneyB) !re$erence $or wor+ing alone,) o!!ortunities $or $amily members') control in organi=ing their timeE) desire to em!loy other womenAnswer: 'E!lanation: ') Some 2% !ercent o$ woman cite being able to gain control over their scheduleas the reason why they are attracted to starting their own businesses."age #e$: %9'i$$iculty: 'i$$icultAA,SB: /ulticultural and diversity understanding(bective: *.2Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

) hat is the most e$$ective way $or an entre!reneur to become a com!etent managerA) wor+ing aloneB) relying on luc+,) getting a college degree') being o!en to o!!ortunitiesE) wor+ing $or a success$ul com!any $irst

Answer: EE!lanation: E) Few success$ul business owners succeed alone or straight out o$ college. /osts!end time in success$ul com!anies or !artner with others to bring e!ertise to a new business."age #e$: 71'i$$iculty: /oderate(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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9) Lucy has organi=ed her cra$t sho! as a sole !ro!rietorshi!. 6er sister has warned Lucy aboutthe legal !rinci!le holding her res!onsible $or !aying o$$ all o$ the debts o$ the business. hat isthe name o$ this !rinci!leA) unlimited liability

B) limited liability,) !rivity') unrestricted debtE) accountabilityAnswer: AE!lanation: A) Sole !ro!rietors $ace unlimited liability4 meaning that they are liable $or !ayingall debts incurred by the business."age #e$: 7-'i$$iculty: 'i$$icult(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economy

S+ill: A!!lication

9&) Shirley is o!ening a $lower sho! and has decided to o!erate as a sole !ro!rietorshi!. hicho$ the $ollowing is (T an advantage Shirley will have in o!erating her businessA) $reedomB) sim!licity o$ o!eration,) limited liability') low start;u! costsE) choice o$ locationAnswer: ,E!lanation: ,) A maor drawbac+ $or sole !ro!rietors is unlimited liability4 whereby a sole!ro!rietor is !ersonally liable $or all debts incurred by the business."age #e$: 7*'i$$iculty: /oderate(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

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91) Ient and "atric+ have decided to start a landsca!ing business. (ne o$ the $irst things thatthey do is sign a document that describes the investments and res!onsibilities o$ the !artners andma+es !rovisions $or the allocation o$ !ro$its and dissolution o$ the business. hat is the nameo$ this documentA) articles o$ incor!oration

B) !artnershi! charter,) !artnershi! agreement') cor!orate charterE) $inancial !ro!osalAnswer: ,E!lanation: ,) The !artnershi! agreement is strictly a !rivate document> no laws reCuire!artners to $ile agreements with any government agency."age #e$: 7*'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.0

Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

9-) Today4 what !ercent o$ all businesses in the nited States are registered as sole !ro!rietorsA) 92 !ercentB) 7- !ercent,) 02 !ercent') - !ercentE) 1& !ercentAnswer: BE!lanation: B) 6owever4 sole !ro!rietors account $or only 0 !ercent o$ total revenues."age #e$: 70'i$$iculty: /oderate(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

9*) hy are lenders most willing to loan to cor!orationsA) ,ontinuity and legal status are assured.B) Lin+s with owners and $ounders are established.,) "ro$essional management teams can be changed.') ,ommitment to e!ansion is readily available.E) Brand and mar+eting strategies can be diversi$ied.Answer: AE!lanation: A) The biggest advantage o$ being a cor!oration is limited liability. Anotheradvantage is continuity4 as a cor!oration can4 in theory4 continue $orever."age #e$: 70'i$$iculty: 'i$$icult(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

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92) American Business /achines is organi=ed as a cor!oration. 5ts income will be taed at thecor!orate level and also on shareholder returns as dividends. hat is this situation +nown asA) dual costsB) double taation,) regulatory costs

') double ownershi!E) $inancial balancingAnswer: BE!lanation: B) The biggest disadvantage o$ incor!oration is double taation. First4 acor!oration !ays income taes on com!any !ro$its> in addition4 stoc+holders then !ay taes onincome returned by their investments in the cor!oration."age #e$: 7%'i$$iculty: /oderate(bective: *.%Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

90) hat is asmall businessAnswer: A small business is an inde!endently owned business that has relatively little in$luenceon its mar+et.E!lanation: A small business is considered to be an inde!endent business which has relativelylittle in$luence on its mar+et."age #e$: %&'i$$iculty: Easy(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

9%) hat is an entrepreneurAnswer: An entre!reneur is a business !erson who acce!ts both the ris+s and the o!!ortunitiesinvolved in creating and o!erating a new business venture.E!lanation: Entre!reneurs are !eo!le who assume the ris+ associated with business ownershi!."age #e$: %-'i$$iculty: Easy(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

97) hat is a mergerAnswer: A merger occurs when two $irms combine to create a new com!any.E!lanation: An eam!le o$ a merger is the recent merging o$ nited Airlines and ,ontinentalto $orm the world8s largest airline."age #e$: 7'i$$iculty: Easy(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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9) hat is a divestitureAnswer: ith a divestiture4 a cor!oration decides to sell !art o$ its eisting business o!erationsto another cor!oration4 $or eam!le to $ocus more s!eci$ically on its core business.E!lanation: 5n a divestiture4 a cor!oration decides to sell !art o$ its eisting business o!erationsto another cor!oration.

"age #e$: 79'i$$iculty: Easy(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

99) hy might an entre!reneur wish to !urchase an eisting business rather than start one $romscratchAnswer: An entre!reneur may wish to !urchase an eisting business because o$ an increasedchance $or success. An eisting business will have established wor+ing relationshi!s withlenders4 su!!liers4 and the community. The trac+ record o$ an eisting business gives !otential

buyers a much clearer !icture o$ what to e!ect than any estimate o$ new business !ros!ects.E!lanation: The advantage o$ buying an eisting business is better chances o$ success4 asbusiness relationshi!s have already been established and !ast records give an indication o$ $uturebusiness !ossibilities."age #e$: %%'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

1&&) hat are the advantages and disadvantages $or a $ranchiseeAnswer: The advantages o$ $ranchising include access to managerial and $inancial hel!4 thebene$its o$ the selling cor!oration8s e!ertise and e!erience4 and reduced chances o$ $ailure. Thedisadvantages o$ $ranchising include signi$icant start;u! costs and continued obligations tocontribute a !ercentage o$ sales to !arent cor!orations.E!lanation: Advantages include access to managerial and $inancial hel!4 and the bene$its o$ theselling cor!oration8s e!ertise and e!erience4 which can su!!ort increased chances o$ success.The disadvantages include signi$icant start;u! costs and ongoing commitments to contribute a!ercentage o$ sales to !arent cor!orations."age #e$: %%'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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1&1) 'escribe three disadvantages o$ o!erating a business as a sole !ro!rietorshi!.Answer: The disadvantages o$ sole !ro!rietorshi!s include unlimited liability4 lac+ o$ continuity4and limited $inancing o!tions. A sole !ro!rietor is totally res!onsible $or all o$ the debts o$ thebusiness and may have to give u! !ersonal assets to re!ay those debts. A sole !ro!rietorshi!lac+s continuity because the business dissolves with the death o$ the owner. Finally4 sole

!ro!rietors have a limited ability to secure $inancing4 relying mostly on their !ersonal resources.E!lanation: The disadvantages o$ sole !ro!rietorshi!s include unlimited liability4 lac+ o$continuity4 and limited $inancing o!tions."age #e$: 7-'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.0Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

1&-) 'iscuss the advantages and disadvantages o$ !artnershi!s.

Answer: Advantages o$ !artnershi!s include their ability to grow with the addition o$ new talentand money4 ease o$ organi=ation4 and inde!endent legal status. 'isadvantages are unlimitedliability4 !otential lac+ o$ continuity4 di$$iculty o$ trans$erring ownershi!4 and little or noguidance $or resolving internal con$licts.E!lanation: Advantages o$ !artnershi!s include their ability to grow with the addition o$ newtalent and money4 ease o$ organi=ation4 and inde!endent legal status. 'isadvantages includeunlimited liability4 !otential lac+ o$ continuity4 di$$iculty o$ trans$erring ownershi!4 and little orno guidance $or resolving internal con$licts."age #e$: 7*'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.0Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

1&*) E!lain limited liability in a cor!oration.Answer: Limited liability is the legal !rinci!le holding investors liable $or a $irm8s debts only tothe limits o$ their !ersonal investment in it.E!lanation: The biggest advantage o$ cor!orations is limited liability: 5nvestor liability islimited to !ersonal investment


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1&2) E!lain a tender o$$er.Answer: A tender o$$er is an o$$er to buy shares made by a !ros!ective buyer directly to acor!oration8s shareholders. A cor!oration can be ta+en over against the will o$ its managersthrough a tender o$$er.E!lanation: A tender o$$er is an o$$er to buy shares made by a !ros!ective buyer directly to a

cor!oration8s shareholders4 who then ma+e individual decisions about whether to sell."age #e$: 70'i$$iculty: /oderate(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

1&0) A cor!oration must be managed on the !rinci!les o$ cor!orate governance. E!lain whatthis is.Answer: ,or!orate governance is the role o$ shareholders4 directors4 and other managers incor!orate decision ma+ing and accountability. This governance is established by a $irm8s bylaws

and usually involves stoc+holders4 the board o$ directors4 and o$$icers.E!lanation: ,or!orate governance is the role o$ shareholders4 directors4 and other managers incor!orate decision ma+ing and accountability."age #e$: 77'i$$iculty: /oderate(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

1&%) E!lain the role o$ a cor!oration8s board o$ directors.Answer: The board o$ directors is res!onsible $or communicating with shareholders and othersta+eholders and $or setting $inancial !olicy on issues such as dividends4 maor s!ending4 andeecutive com!ensation.E!lanation: The board is legally res!onsible and accountable $or cor!orate actions."age #e$: 7'i$$iculty: /oderate(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: A!!lication

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1&7) 6ow is the .S. economy a$$ected by small businessesAnswer: Small businesses a$$ect the .S. economy through ob creation and innovation4 and byma+ing !roducts $or and selling !roducts made by big businesses. Small businesses are anim!ortant source o$ new obs in the nited States. 5nnovations are as li+ely to come $rom smallbusinesses as big businesses. Finally4 most o$ the !roducts made by big businesses are sold to

consumers by small businesses. Big businesses o$ten de!end on small businesses as su!!liers aswell.E!lanation: By creating obs4 $ostering innovation4 and !roviding goods and services4 smallbusinesses have a !ositive e$$ect on the .S. economy."age #e$: %&;%1'i$$iculty: 'i$$icultAA,SB: #e$lective thin+ing s+ills(bective: *.1Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

1&) 'iscuss $our sources o$ $inancing $or starting u! a small business.Answer: Financing $or starting u! a new business may come $rom !ersonal resources4 ban+loans4 venture ca!ital $irms4 or small;business investment com!anies


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11&) 'escribe the three distinct bodies o$ cor!orate governance that are s!eci$ied in acor!oration8s bylaws.Answer: Stoc+holders are the owners o$ a cor!oration who buy shares o$ ownershi!. The boardo$ directors is a grou! o$ !eo!le elected by stoc+holders to oversee the management o$ thecor!oration. ,or!orate o$$icers are to! managers hired by the board to run the cor!oration on a

day;to;day basis.E!lanation: ,or!orate governance covers the roles o$ shareholders4 directors4 and othermanagers in cor!orate decision ma+ing and accountability."age #e$: 77'i$$iculty: 'i$$icult(bective: *.%Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: ,once!t

111) E!lain entre!reneurshi! and describe +ey entre!reneurial characteristics.Answer: Entre!reneurs are !eo!le who assume the ris+ o$ business ownershi!. Entre!reneurshi!is the !rocess o$ see+ing business o!!ortunities under conditions o$ ris+. Some entre!reneurshave a goal o$ inde!endence and $inancial security4 whereas others want to launch a new venturethat can be grown into a large business. /ost success$ul entre!reneurs are resource$ul andconcerned $or customer relations. They have a strong desire to be their own bosses and canhandle ambiguity and sur!rises. Today8s entre!reneur is o$ten an o!en;minded leader who relieson networ+s4 business !lans4 and consensus and is ust as li+ely to be $emale as male. Finally4although success$ul entre!reneurs understand the role o$ ris+4 they do not necessarily regard whatthey do as being ris+y."age #e$: %2'i$$iculty: EasyAA,SB: #e$lective thin+ing s+ills(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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11-) 'escribe the business !lan and the start;u! decisions made by small businesses. 5denti$ysources o$ $inancial aid available to small businesses.Answer: The starting !oint $or virtually every new business is a business !lan4 in which theentre!reneur summari=es business strategy $or the new venture and shows how it will beim!lemented. Entre!reneurs must also decide whether to buy an eisting business4 o!erate a

$ranchise4 or start $rom scratch. Further4 common $unding sources include !ersonal $unds4 $amilyand $riends4 savings4 lenders4 investors4 and government agencies. ?enture ca!ital com!anies aregrou!s o$ small investors see+ing to ma+e a !ro$it on com!anies with ra!id growth !otential./ost o$ these $irms do not lend money but rather invest it4 su!!lying ca!ital in return $or !artialownershi!. Lending institutions are more li+ely to $inance an eisting business than a newbusiness because the ris+s are better understood."age #e$: %0;%%'i$$iculty: EasyAA,SB: #e$lective thin+ing s+ills(bective: *.*Learning (utcome: E!lain the entre!reneurshi! !rocess

S+ill: ,once!t

11*) E!lain sole !ro!rietorshi!s and !artnershi!s. 'iscuss the advantages and disadvantages o$each.Answer: The sole !ro!rietor is owned and usually o!erated by one !erson. There are ta bene$its$or new businesses that are li+ely to su$$er losses in early stages. (ne drawbac+ is unlimitedliability. Another disadvantage is lac+ o$ continuity. Finally4 a sole !ro!rietorshi! de!ends on theresources o$ a single individual. The general !artnershi! is a sole !ro!rietorshi! multi!lied by thenumber o$ !artner;owners. The biggest advantage is its ability to grow by adding new talent andmoney. A !artnershi! is not a legal entity. 5t is ust two or more !eo!le wor+ing together. "artnersare taed as individuals4 and unlimited liability is a drawbac+. "artnershi!s may lac+ continuity4and trans$erring ownershi! may be hard. o !artner may sell out without the consent o$ theothers."age #e$: 7-;7*'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.0Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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112) 'escribe cor!orations. List their advantages and disadvantages.Answer: A cor!oration is a business that is legally considered a se!arate entity $rom its owners.They may sue and be sued> buy4 hold4 and sell !ro!erty> ma+e and sell !roducts> and be tried and!unished $or crimes. An advantage o$ incor!oration is limited liability: 5nvestor liability islimited to !ersonal investments in the $irm. Another advantage is continuity. ,or!orations also

have advantages in raising money. By selling stoc+4 they e!and the number o$ investors andavailable $unds. (ne disadvantage is that a cor!oration can be ta+en over against the managers8will. Also4 start;u! costs are high. ,or!orations are regulated and must meet legal reCuirementsin the states in which they are chartered. A drawbac+ to incor!oration is double taation.'i$$erent +inds o$ cor!orations hel! businesses ta+e advantage o$ incor!oration withoutassuming all o$ the disadvantages."age #e$: 70;7%'i$$iculty: 'i$$icultAA,SB: #e$lective thin+ing s+ills(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocess

S+ill: ,once!t

110) E!lain the basic issues involved in managing a cor!oration.Answer: ,or!orations sell shares4 called stoc+4 to investors who then become stoc+holders andthe real owners. "ro$its are distributed among stoc+holders in the $orm o$ dividends4 andmanagers serve at their discretion. The governing body o$ a cor!oration is its board o$ directors./ost board members do not !artici!ate in day;to;day management but rather hire a team o$managers. This team4 called o$$icers4 is usually headed by a chie$ eecutive o$$icer4 or ,E(4 whois res!onsible $or overall !er$ormance."age #e$: 77;7'i$$iculty: 'i$$icultAA,SB: #e$lective thin+ing s+ills(bective: *.%Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,once!t

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The /iller brothers


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119) Assuming the $arm is organi=ed as a general !artnershi!4 what are the disadvantagesAnswer: The disadvantages o$ a general !artnershi! include unlimited liability in that the!artners are !ersonally liable $or all debts incurred by the business4 and a lac+ o$ continuity inthat the business legally dissolves when a !artner leaves or dies."age #e$: 7*

'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.%Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

1-&) Assuming the $arm is organi=ed as a !rivate cor!oration4 what are the advantagesAnswer: The advantages o$ a !rivate cor!oration include limited liability in that owner liabilityis limited to !ersonal investments in the business4 and continuity that allows that the legal li$e o$the business is inde!endent o$ owners."age #e$: 70

'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.%Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

1-1) Assuming the $arm is organi=ed as a !rivate cor!oration4 what are the disadvantagesAnswer: The disadvantages o$ a !rivate cor!oration include signi$icant start;u! costs and doubletaation4 in which !ro$its are taed at cor!orate and individual levels."age #e$: 70;7%'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.%Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

1--) Assuming the $arm is organi=ed as an S cor!oration4 what are the advantagesAnswer: The advantages o$ an S cor!oration include limited liability4 in that the owner liabilityis limited to !ersonal investment in the business4 and continuity."age #e$: 77'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.%Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

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1-*) Assuming the $arm is organi=ed as an S cor!oration4 what are the disadvantagesAnswer: The disadvantages o$ an S cor!oration include signi$icant start;u! costs and stringentlegal reCuirements."age #e$: 77'i$$iculty: /oderate

AA,SB: #e$lective thin+ing s+ills(bective: *.%Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

1-2) Assuming the $arm is organi=ed as a limited liability cor!oration4 what are the advantagesAnswer: The advantages o$ a limited liability cor!oration include limited liability4 in that ownerliability is limited to !ersonal investment in the business4 and continuity."age #e$: 77'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.%Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

1-0) Assuming the $arm is organi=ed as a limited liability cor!oration4 what are thedisadvantagesAnswer: The disadvantages o$ a limited liability cor!oration include signi$icant start;u! costsand additional regulation."age #e$: 77'i$$iculty: /oderateAA,SB: #e$lective thin+ing s+ills(bective: *.%S+ill: A!!lication

1-%) The /iller brothers are not sure how to organi=e their business. hat are their o!tions interms o$ legal $ormAnswer: The three general $orms o$ business ownershi! are sole !ro!rietorshi!4 !artnershi!4 andcor!oration. (bviously4 the business is unli+ely to be organi=ed as a sole !ro!rietorshi!4 as therecan be only one owner. Since the brothers have indicated that they do not wish to bring in outsideowners4 they may wish to consider organi=ing as a general !artnershi!. Finally4 the brothers maywish to investigate $orms o$ cor!orate ownershi!4 including the !rivate cor!oration4 Scor!oration4 or limited liability cor!oration. The !ublic cor!oration $orm is not a!!ro!riate4 as itwould allow others to buy an interest in the $arm.

"age #e$: 72'i$$iculty: 'i$$icultAA,SB: Analytic s+ills(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

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1-7) hich $orm o$ business ownershi! would you recommend $or the /iller brothers hyAnswer: Answers will vary and should be based on the advantages and disadvantages identi$iedin answers to !revious Cuestions related to the /iller brothers8 scenario."age #e$: 77'i$$iculty: 'i$$icult

AA,SB: Analytic s+ills(bective: *.0Learning (utcome: 'escribe the role o$ small businesses in the economyS+ill: A!!lication

An entre!reneur4 ,hristina #ossini4 is !lanning to o!en a small chain o$ 2 to % !i==a stores underthe brand name #edenda "i==a. The name comes $rom combining the $irst names o$ theentre!reneur8s grand!arents. ,hristina wants to have a com!etitive advantage by o$$eringinnovative and distinct s!ecialty !i==as and by o$$ering the $reshest ingredients. 6owever4 she isconcerned that without !ro!er !lanning4 her venture will not be success$ul.

1-) ,hristina is trying to identi$y !otential !roblems in order to avoid them or at least be better!ositioned to react i$ they cannot be avoided. 5n doing so4 ,hristina should account $or all o$ the$ollowing !ossibilities EJ,E"T:A) the !ossibility that years in the $uture scientists may give a new communicable disease aname that sounds similar to #edendaB) the !ossibility that a signi$icant number o$ her !otential customers could be allergic to one ormore o$ her ingredients,) the !ossibility that seasonal variations in the availability o$ ingredients could a$$ect the !riceo$ those ingredients') the !ossibility that advertising $resh ingredients may !revent #edenda "i==a $rom usingless;e!ensive ingredientsE) the !ossibility that many customers are reluctant to try new !i==a reci!esAnswer: AE!lanation: A) 5denti$ying things that could go wrong is an im!ortant !art o$ !lanning4 but it isunrealistic to try to account $or every !ossibility. The event in ,hoice A would be devastating i$it ha!!ened4 but how could it be avoided There8s no good way to tell whether this name


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1-9) Answers to which o$ the $ollowing Cuestions would be LEAST relevant to determiningwhether ,hristina has located a good o!!ortunity in starting #edenda "i==aA) Are there other !i==a restaurants in the immediate vicinity o$ the !lanned locationB) 5s the business o$ other !i==a restaurants in the city growing,) 'oes the !lanned location o$ the restaurant have com!etitive rent

') ill #edenda "i==a o$$er uniCue ingredients in its $ood o$$eringsE) ould ,hristina bring uniCue talents and ideas to a restaurant businessAnswer: ,E!lanation: ,) The rent o$ the !lanned location is not o$ direct relevance to how good theo!!ortunity is4 because the success o$ the restaurant is inde!endent o$ how good the rent is: eveni$ the rent is com!etitive4 that would not be su$$icient $or the success o$ the restaurant. (n theother hand4 the Cuestions o$ whether there is su$$icient demand $or !i==a restaurants and not toomuch su!!ly o$ them are directly relevant to the Cuestion o$ whether there is a good o!!ortunity$or a !i==a restaurant4 as is the Cuestion o$ whether ,hristina will bring uniCue things to a !i==arestaurant that would enhance its chances o$ success."age #e$: %0

'i$$iculty: 'i$$icult(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,ritical Thin+ing

1*&) hich o$ the $ollowing4 i$ true4 would strengthen the case that ,hristina has a goodo!!ortunity in o!ening a new !i==a restaurantA) There are many eisting !i==a restaurants in ,hristina8s city.B) The !i==a business in ,hristina8s city has remained largely unchanged $or many years.,) #estaurant consumers in ,hristina8s city mostly $reCuent /eican restaurants.') "i==a restaurants reCuire several e!erienced em!loyees to be success$ul.E) "i==a restaurants can be $ound in almost any town in the nited States.Answer: BE!lanation: B) 5$ the !i==a business has remained largely unchanged $or a !eriod o$ time4 thisre!resents an o!!ortunity $or ,hristina to bring something di$$erent to the local industry andthereby attract customers because o$ the newness involved. ,hoice A would indicate thatconsumer needs are already met by other establishments4 and ,hoice , im!lies that demand $or!i==a restaurants is low in ,hristina8s city4 indicating little o!!ortunity. ,hoices ' and E do notstrengthen the case o$ a !i==a restaurant being a good o!!ortunity $or ,hristina."age #e$: %0'i$$iculty: /oderate(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,ritical Thin+ing

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1*1) hich o$ the $ollowing4 i$ true4 would (T strengthen the case that ,hristina has !ersonalcharacteristics necessary $or her new business to succeedA) She is willing to ta+e ris+s.B) She is motivated.,) She wor+s well with others.

') She is a big !icture thin+er.E) She $ollows directions care$ully.Answer: EE!lanation: E) Following directions care$ully may be a use$ul general characteristic $or awor+er4 but it is o$ no !articular hel! in being an entre!reneur. #ather4 good leadershi!characteristics and being able to wor+ well with a variety o$ !eo!le who will be involved in thebusiness contribute to being a success$ul entre!reneur. A good entre!reneur must be willing tota+e ris+s4 or there will be no chance to start a business4 which is inherently ris+y. 5t ta+esmotivation to see a new business through to success4 and it ta+es big;!icture thin+ing to +ee!all the $actors in mind that are necessary $or a business8s success."age #e$: %0

'i$$iculty: /oderate(bective: *.1Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,ritical Thin+ing

1*-) hich o$ the $ollowing BEST e!lains why $leibility is an im!ortant Cuality that ,hristinaneeds $or successA) 5t ta+es a certain amount o$ money to start a business.B) 5t o$ten hel!s to have a business !artner in a new business.,) Starting a new business reCuires a great deal o$ !lanning.') Starting and running a new business involves many un!redictable $actors.E) An entre!reneur must be etremely com!etent in business s+ills.Answer: 'E!lanation: ') Starting a new business reCuires !lanning4 but also the ability to adust to theinevitable eventualities in which things do not go according to !lan and im!rovise so that goalscan still be reached. Fleibility does not directly relate to acCuiring start;u! money4 or to havinga business !artner or business s+ills."age #e$: %2;%0'i$$iculty: 'i$$icult(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,ritical Thin+ing

2%



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Short and Shearer are two $riends who want to begin an entre!reneurshi! as business !artners.They need to decide whether to start u! a new business or to buy an eisting business. To do this4Short and Shearer need to weigh the !ros and cons o$ each in order to see what the best strategy$or them would be.

1**) hich o$ the $ollowing4 i$ true4 would strengthen the case $or Short and Shearer buying aneisting businessA) Short and Shearer have a lot o$ ideas as to the +ind o$ business they would li+e to own.B) An eisting business would have an eisting customer base that Short and Shearer wouldinherit.,) An eisting business $or sale might have di$$iculties that Short and Shearer would inherit.') Short and Shearer greatly value inde!endence.E) Eisting small businesses are usually carrying debts.Answer: BE!lanation: B) 6aving an eisting customer base would ma+e doing business easier4 becausethey could count on a relatively reliable source o$ revenue right away. 5$ an eisting small

business has debts or other di$$iculties that Short and Shearer would inherit4 this would wea+enthe case $or buying it. 5$ Short and Shearer value inde!endence4 this means they should beentre!reneurs4 but it would not strengthen the case $or their buying an eisting business overstarting their own. 5$ they have a lot o$ business ideas4 this does not strengthen the case $orbuying an eisting business4 although it would strengthen the case $or them starting a newbusiness o$ their own."age #e$: %%'i$$iculty: /oderate(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,ritical Thin+ing

1*2) hich o$ the $ollowing4 i$ true4 would wea+en the case $or Short and Shearer buying aneisting businessA) Short and Shearer could more easily obtain $inancing $or the !urchase.B) Buying an eisting business involves $ewer legal hurdles than starting a new one.,) Franchises have more !otential $or success than single;$acility businesses.') Short and Shearer have limited $unds to start with.E) Eisting businesses cost less to !urchase than new ones.Answer: 'E!lanation: ') 5$ Short and Shearer have limited $unds4 they would !robably not be in a good!osition to !ay the $ull !urchase !rice $or an eisting business4 which tends to have a lot o$eisting value. 5$ it costs less4 however4 or they could easily obtain $inancing4 or it involves $ewerlegal hurdles4 these would strengthen the case $or buying an eisting business. 5t is not givenwhether Short and Shearer are loo+ing at buying a $ranchise or a single;$acility business4 so i$ a$ranchise is !re$erable4 this does not wea+en the case $or their buying an eisting business."age #e$: %%'i$$iculty: /oderate(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,ritical Thin+ing

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1*0) hich o$ the $ollowing4 i$ true4 would strengthen the case $or Short and Shearer8s starting anew business o$ their ownA) Starting a new business would !ut a lot o$ demands on their time.B) Starting a new business involves more ris+ than !urchasing an eisting one.,) Starting a new business would give them a lot o$ $reedom and inde!endence.

') Starting a new business would mean hiring many new em!loyees right away.E) Starting a new business involves a lot o$ stress $or the !ro!rietors.Answer: ,E!lanation: ,) 5$ Short and Shearer are entre!reneurs4 this ma+es it highly li+ely that theyvalue $reedom and inde!endence4 in which case this would strengthen the case $or starting a newbusiness o$ their own. #is+4 stress4 demands on their time4 and having to hire several newem!loyees are all wea+nesses to the case being made."age #e$: %%'i$$iculty: /oderate(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocess

S+ill: ,ritical Thin+ing

1*%) hich o$ the $ollowing4 i$ true4 would wea+en the case $or Short and Shearer8s starting anew businessA) Starting a new business allows an entre!reneur to determine their own wor+ing hours.B) Starting a new business allows an entre!reneur to establish their own clientele.,) Starting a new business allows an entre!reneur to use their own ideas.') Starting a new business gives a !otential $or a $eeling o$ great accom!lishment.E) Starting a new business involves using an untested business model.Answer: EE!lanation: E) An untested business model involves ris+ to the entre!reneur4 since it increasesthe chances that the business might $ail. 'etermining one8s own wor+ing hours and clientele4using one8s own ideas4 and having the !otential $or giving a sense o$ accom!lishment would allstrengthen the case $or starting a new business."age #e$: %%'i$$iculty: /oderate(bective: *.-Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,ritical Thin+ing

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1*7) 5n order to hel! ensure success $or their new business4 which o$ the $ollowing Cuestionswould be LEAST hel!$ul $or Short and Shearer to !eriodically as+ themselvesA) 6ow well does our $irm8s o!eration align with the business !lanB) 6ow many em!loyees do we have,) 6ow are we handling our $inances

') 6ow are our em!loyees !er$ormingE) 6ow much debt can we a$$ord to carryAnswer: BE!lanation: B) umber o$ em!loyees in itsel$ is not an indicator o$ a business8s health. Thebusiness could be doing very well with $ew em!loyees4 or $loundering with many em!loyees


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1*9) hich o$ the $ollowing4 i$ true4 would wea+en the case $or ina running the business as asole !ro!rietorshi!A) ina has a degree in accounting.B) ina8s !arents also ran a dry;cleaning business.,) ina had the initial idea to start the new business.

') Sam is anious to ta+e on a lead role in the business.E) Sam does not have any !revious dry;cleaning e!erience.Answer: 'E!lanation: ') 5$ Sam wants to ta+e on a lead role in the new business4 then he will be willingto ta+e on the res!onsibility o$ being one o$ the owners o$ the business4 in which case inashould not be sole !ro!rietor. ,hoice A: 5$ ina has a degree in accounting4 this might come inuse$ul in business ownershi!4 so it does not wea+en the case $or sole !ro!rietorshi!. 5$ ina8s!arents ran a dry;cleaning business


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121) hich o$ the $ollowing4 i$ true4 would wea+en the case $or Sam and ina owning thebusiness in a !artnershi!A) Sam and ina have di$$erent !ersonalities.B) Sam and ina have +nown each other $or many years.,) Sam and ina have con$licting ideas about what would ma+e a dry;cleaning business

succeed.') ina is e!erienced in $inance but not in eCui!ment re!air.E) Sam is e!erienced in dry;cleaning but not s+illed as an administrator.Answer: ,E!lanation: ,) "artners should be on the same !age in terms o$ their basic e!ectations on howto establish and grow the business. 5$ Sam and ina disagree on $undamental elements o$ thedry;cleaning business4 they8d be better o$$ starting their own sole !ro!rietorshi!s. The case $oroint ownershi! between them would not be wea+ened by the other choices4 which arecom!atible with a !artnershi! arrangement."age #e$: 72'i$$iculty: /oderate

(bective: *.0Learning (utcome: E!lain the entre!reneurshi! !rocessS+ill: ,ritical Thin+ing

Three $riends want to start a warehousing and distribution business in a maor city. They +nowthat they each want to be co;owners o$ the new business4 with a sta+e in its !ro$its. The newbusiness will there$ore be a cor!oration4 but they need to determine which +ind o$ cor!oration itshould be so that it will best $it their interests in the business.

12-) hich o$ the $ollowing4 i$ true about the owners8 !lan $or the new business4 wouldstrengthen the case that it should be registered as an S cor!orationA) They want their shareholders to be !ersonally liable $or the cor!oration8s debts.B) They want to have an unlimited number o$ shareholders.,) They do not want the com!any to have to !ay a cor!orate income ta.') They do not want to have to meet any start;u! reCuirements.E) They don8t want to have a board o$ directors.Answer: ,E!lanation: ,) An S cor!oration does not have to !ay cor!orate income taes4 so this would $itthe owners8 !lans. The shareholders o$ an S cor!oration are not !ersonally liable $or thecom!any8s debts


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12*) hich o$ the $ollowing4 i$ true about the owners8 !lan $or the new business4 would wea+enthe case that it should be registered as an S cor!orationA) They want the com!any to be able to change its !rocedures over time.B) They want the com!any to be able to change its board membershi! i$ needed.,) They want the com!any to grow as Cuic+ly as they can grow it.

') They want the com!any to be able to issue multi!le classes o$ stoc+.E) They want to !ay income taes via the individual ta returns o$ the shareholders.Answer: 'E!lanation: ') An S cor!oration is allowed to issue only one class o$ stoc+. 5t is $ree4 however4to change its !rocedures


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120) hich o$ the $ollowing4 i$ true about the owners8 !lan $or the new business4 would wea+enthe case that it should be registered as an LL,A) They want the com!any to maintain its current membershi!.B) They do not want to be liable $or the com!any8s debts.,) They want the com!any8s $unding to come $rom shareholders.

') They want to set the management details in advance.E) They want the com!any to be registered both $ederally and with the state.Answer: ,E!lanation: ,) An LL, will not have shareholders4 because it cannot issue stoc+. An LL, canset its membershi! details in an o!erating agreement

Chapter 3 Exercises Fundamental of Business

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Transcript of Chapter 3 Exercises Fundamental of Business