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Chapter 4 Entrepreneurship, Small Business, and New Venture Creation MULTIPLE CHOICE QUESTIONS. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following is correct with regard to the opening case entitled “Parasuco Jeans"? A) The company is a new start-up B) The founder of the Parasuco worked for a big company for many years, but then decided to start the new firm C) The company has been successful in spite of the fact that celebrities don't wear its products D) The jeans are not as popular in Canada as they are in other countries even though the company is Canadian E) Unlike other clothing manufacturers, Parasuco does not use provocative advertisements to promote its products Answer: D 2) In 2009, the number of self-employed Canadians increased by A) 90,000 B) 115,000 C) 350,000 D) 650,000 E) 844,000 Answer: B 3) Approximately how many new businesses are started each day in Canada? A) 25 B) 100 C) 250 D) 380 E) 500 Answer: D 4) Which of the following is not one of the measures normally used to define a small business? A) The size of the investment B) The type of ownership structure C) The company's sales revenue D) The number of items sold E) The number of people the business employs Answer: D 5) Individuals who both recognize and seize opportunities are referred to as A) speculators. B) franchisees. C) entrepreneurs. D) intrapreneurs. E) independents. Answer: C 6) A new firm is A) one that has been in business for 5 years or less. B) one that as not yet opened for business. C) one with less than 10 years experience. D) one that has become operational within the previous 12 months. E) one that opened its doors within the past 6 months. Answer: D 7) Nascent entrepreneurs are A) people who have recently sold their business. B) people who actually have started a business. C) people who are trying to start a business. D) people who have been in business over 10 years. E) people who are in their first year of business. Answer: C 8) A small business is an owner managed business with less than ________ employees. A) 25 B) 50 C) 10 D) 500 E) 100 Answer: E 9) According to Industry Canada there are about ________ people who are “self employed” and about _________ “business establishments.” A) 1.2 million; 1.2 million B) 5 million; 500,000 C) 2.6 million; 2.3 million D) 725,000; 500,000 E) 225,000; 225,000 Answer: C 10) In the Business Register, a goods-producing business is considered small if it has fewer than ________ employees, and a service-producing business is considered small if it has fewer than _______ employees. A) 1,000;500 B) 500;1,000 C) 100;50 D) 500;250 E) 250;500 Answer: C 11) In the 2010 Heritage Foundation index of economic freedom, what were the top three countries? A) Australia, Japan, and Somalia B) the United States, Canada, and Japan C) Canada, Ireland, and Greece D) Hong Kong, Singapore, and Australia E) China, Japan, and South Vietnam Answer: D 12) At Hewlett-Packard there is a division called the New Business Group which listens to “sales pitches” about possible new products. This is an example of ________. A) microenterprise B) entrepreneurship C) intrapreneurship D) profit centres E) new venture analysis Answer: C 13) The Swiffer product line from Procter & Gamble was the result of __________ in a large firm. A) product refinement B) intrapreneurship C) entrepreneurship D) starting a business from scratch E) marketing research Answer: B 14) The part of the economy that is made up of companies and organizations not owned or controlled by the government is called A) crown corporations. B) split sector. C) legislated corporations. D) public sector. E) the private sector. Answer: E 15) According to Industry Canada, small businesses account for over two thirds of employment in all of the following except A) other services. B) construction. C) accommodation and food. D) manufacturing. E) non-institutional health care. Answer: D 16) What percentage of businesses in Canada have less than 100 employees? A) 98 B) 58 C) 88 D) 78 E) 28 Answer: A 17) Which of the following is correct with regard to the box entitled “Small Businesses Go Green”? A) There are few government resources available to small business owners who want to “go green” B) The project called greenTbiz polices bad environmental behaviour by small businesses C) Shannon Boase founded Earth cycle to make packaging from palm fibre that was formerly thrown away D) One of the problems facing small businesses who want to “go green” is that there are very few inexpensive initiatives they can take E) None of these statements are correct Answer: C 18) Which of the following is true? A) Women account for about 25 percent of new businesses that are formed B) Women fail less frequently in small business than men do C) Men run about 90 percent of all small businesses D) Women lead 60 percent of small businesses that export goods and services E) Women make more money running small businesses than men do Answer: B 19) In 2007, small business created _______ jobs, and this represented ______ percent of all jobs that were created. A) 80,000; 90 B) 70,000; 80 C) 100,000; 20 D) 100,000; 40 E) 200,000; 70 Answer: D 20) According to a recent Statistics Canada report, there are approximately ________ women entrepreneurs in Canada. A) 18,000 B) 1 million C) 877,000 D) 54,000 E) 1.5 million Answer: C 21) What percentage of business establishments are located in Ontario and Quebec? A) 20 B) 89 C) 32 D) 57 E) 76 Answer: D 22) According to Industry Canada, small businesses account for over two thirds of employment in which of the following industries? A) Non-institutional health care, other services, manufacturing, and construction B) Other services, manufacturing, construction, and accommodation and food C) Accommodation and food, non-institutional health care, other services, and manufacturing D) Construction, non-institutional health care, other services, and accommodation and food E) Manufacturing, non-institutional health care, other services, and construction Answer: D 23) Which is the most common source of ideas for a new venture? A) Brainstorming B) Family C) Work experiences D) Children E) Magazines Answer: C 24) Which one of these questions is not one an entrepreneur would ask in the process of screening ideas? A) Is the idea marketable? B) Does this have a high entrance cost? C) Does this create or add value for the customer? D) Does it provide a sustainable competitive advantage? E) Is it financially viable? Answer: B 25) What is a financial forecast? A) A listing of total revenues for the first year of operations. B) An estimate of the revenues for a business less the exit costs. C) A two to three year projection of a venture's future financial position and performance. D) An estimate of how many units will be purchased by a customer group. E) It is the same as a business plan. Answer: C 26) A financial forecast includes all of these items except A) a cash budget. B) an estimate of start up costs. C) an income statement. D) a listing of potential customers. E) a balance sheet. Answer: D 27) A ________ typically includes a company description, product description, marketing analysis and plan, operating plan, financial plan and other supporting information. A) bank loan application B) business plan C) tax application D) partnership agreement E) grant application Answer: B 28) Bootstrapping means A) doing more with less. B) selling shares. C) designing new products. D) preparing a business plan. E) creating new ideas. Answer: A 29) The ________ fit involves determining if the resources needed to capitalize on the opportunity can be acquired. A) resource-entrepreneur B) personal-entrepreneur C) entrepreneur-opportunity D) opportunity-resource E) entrepreneur-resource Answer: D 30) Which one of the following statements is true? A) Love money is a form of debt financing B) Suppliers typically provide long term financing C) Debt financing refers to money invested by the owner in the company D) Borrowing money reduces the potential for higher returns when a business is performing well E) Banks are typically risk averse Answer: E 31) Sam has always been interested in starting his own business, but as a recent graduate, is not certain where he can get ideas. Which of the following is a good reliable source for information needed to make the decision to start a new business? A) Experience in industry before starting a new business B) Parents C) Teachers D) Bankers E) Business analysts Answer: A 32) Bootstrapping involves all of these actions except A) acquiring resources such as people and equipment. B) doing more with less. C) purchasing as many resources as possible. D) using other people's resource. E) borrowing materials. Answer: C 33) Assets that a borrower uses to secure a loan or other credit are referred to as A) financed assets. B) tangible assets. C) fixed assets. D) collateral. E) assignments. Answer: D 34) One popular source of equity capital is informal capital from private investors who are known as A) private loans. B) traditional lenders. C) pseudo loans. D) off-the-books financing. E) angels. Answer: E 35) Venture capitalists A) require collateral for all transactions. B) are risk averse lenders. C) invest funds from professionally managed pools of investor money. D) offer loans with a maximum 90-day payback period. E) are individuals in the U.S. who are willing to loan money to Canadians who want to start a business. Answer: C 36) The document that identifies a detailed outline of the proposed business and market, the owner's background, and other sources of funds is called a _________. A) business plan B) business loan C) business strategy D) franchise E) a capital launch Answer: A 37) Erin feels that she has a wonderful opportunity of creating a new apple beverage she saw in Europe by using surplus apples grown near Georgian Bay in Ontario. At this point, which question must she answer in evaluating this opportunity? A) What interest rate will be charged for financing the purchase of capital equipment? B) What depreciation procedures will be used? C) What kind of computers should I purchase? D) Where will my business be located? E) Are there enough customers willing to buy this? Answer: E 38) Robert wants to start a new business. At this point, he needs to ask himself all of the following questions except A) What is my competitive advantage? B) How much will the customer buy? C) What legal form should the business take? D) What value is created or added to for the customer? E) What is the marketability of this idea? Answer: C 39) There are certain important questions to ask in order to identify a genuine business opportunity. Which of the questions below is not one of those recommended questions? A) What is our estimated demand? B) Will we have a short-term competitive advantage? C) Will our sales lead to profits? D) Does this product/service solve a problem or meet a significant need? E) Who are our customers? Answer: B 40) Franchising is a contract between a(n) __________ and a(n) __________ that stipulates how __________ or __________ will be sold. A) buyer; seller; a product; a service B) retailer; outlet owner; food; a service C) manufacturer; dealer; a product; a service D) manufacturer; seller; a service; a product E) outlet owner; dealer; food; a service Answer: C 41) Karen is trying to assess whether she can start her own small business. But, as with many small businesses, money is a problem. She asks for your help. You indicate that the most likely source of money for starting up a small business is A) family investment. B) lottery winnings. C) banks. D) credit unions. E) personal savings. Answer: E 42) Which source of capital is identified as a group of small investors who are willing to invest money into the new firm in exchange for an ownership share? A) Venture capital firm B) Foreign investors C) Stockbroker syndicate D) Silent domestic partner E) Banks Answer: A 43) Sources of assistance for small business include all of the following except A) banks. B) venture capitalists. C) government agencies. D) consultants. E) politicians. Answer: E 44) Trade credit is A) the selling of bonds or debentures. B) reinvested in the enterprise. C) paid to the owners in the form of dividends. D) derived from funds generated from the operation of the business. E) delayed payment terms offered by suppliers. Answer: E 45) An example of a debt source of funds is ________ and an example of an equity source of funds is ________. A) family and friends; venture capitalists B) private lenders; family and friends C) private lenders; trade credit D) venture capitalists; private lenders E) family and friends; private lenders Answer: B 46) ________ is an example of a debt source and ________ is an example of an equity source. A) Family and friends; governments B) Venture capitalists; entrepreneur's personal funds C) Trade credit; selling shares to the public D) Trade credit; private lenders E) Venture capitalists; governments Answer: C 47) In order to obtain debt financing an entrepreneur typically must have at least ________ equity investment in the business. A) 35% B) 50% C) 20% D) 40% E) 60% Answer: C 48) ________ financing refers to the amount of money that is borrowed and ________ financing refers to money invested in exchange for an ownership interest. A) Debt; equity B) Treasury; equity C) Collateral; equity D) Equity; debt E) Treasury; debt Answer: A 49) Which one of the following is not one of the main new venture entry strategies? A) Franchise B) Introduce a product or service that competes directly with current offerings but has a new twist C) Test a new marketplace D) Introduce a totally new product or service E) All of these are new entry strategies. Answer: C 50) Finance companies lend to ________ risk ventures and typically charge ________ interest rates. A) medium, low B) low, low C) low, high D) medium, medium E) high, high Answer: E 51) A business is normally at its riskiest point during the ________ phase. A) preliminary B) growth C) start-up D) maturity E) conception Answer: C 52) Which of the following is correct with regard to business planning? A) A business plan is a good thing to have, but it is generally not a requirement for securing resources for the proposed new venture B) If market conditions are changing rapidly, the benefits gained from extensive research and planning will diminish quickly C) If the product is highly innovative, research is particularly important D) Planning should be completed before action is taken E) All things considered it is probably best to plan to start as a franchise Answer: B 53) A financial forecast includes all of the following items except A) an estimate of start up costs. B) a balance sheet. C) a listing of potential customers. D) an income statement. E) a cash budget. Answer: C 54) All of the following are common sources of equity for new ventures except A) banks. B) personal savings. C) love money. D) private investors. E) venture capitalists. Answer: A 55) The two most common sources of debt financing for new ventures are A) banks and love money. B) venture capitalists and personal savings. C) private investors and venture capitalists. D) love money and suppliers. E) financial institutions and suppliers. Answer: E 56) All of the following are questions to ask in order to identify a genuine business opportunity except A) will our sales lead to profits? B) does this product/service solve a problem or meet a significant need? C) who are our customers? D) what is our estimated demand? E) what government loan assistance is available? Answer: E 57) Which of the following is correct with regard to collateral? A) It refers to business (but not personal) assets that a borrower uses to secure a loan or other credit B) Tangible assets like buildings as well as intangible assets like goodwill C) Collateral can be seized by the lender if the loan is not repaid according to specified terms D) It refers to personal (but not business) assets that a borrower uses to secure a loan or other credit E) Banks are most impressed with debt investment Answer: C 58) Which one of the following is not one of the main new venture entry strategies? A) Develop entirely new products or services B) Introduce a product or service that competes directly with current offerings but has a new twist C) Franchise D) Start a family business E) All of these are new entry strategies Answer: D 59) Which of the following is not a source of debt financing for small businesses? A) commercial banks B) love money C) trust companies D) cooperatives E) finance companies Answer: B 60) Which of the following statements is true? A) Love money is a form of debt financing B) Borrowing money reduces the potential for higher returns when a business is performing well C) Debt financing refers to money invested by the owner in the company D) Banks are typically risk averse E) Suppliers typically provide long term financing Answer: D 61) __________ is an example of a debt source and __________ is an example of an equity source. A) Trade credit; personal savings B) Venture capitalists; entrepreneur's personal funds C) private investors; private lenders D) personal savings; governments E) love money; governments Answer: A 62) Entrepreneurs generate many ideas, so ________ them is a key part of the entrepreneurial idea process. A) franchising B) dead-ending C) sketching D) screening E) selling Answer: D 63) What are the three key elements in the entrepreneurial process? A) The entrepreneur, the opportunity, and the marketing plan B) The marketing plan, the production plan, and the finance plan C) The product (or service) plan, the entrepreneur, and luck D) The entrepreneur, the opportunity, and the resources E) The financing plan, the product (or service) plan, and luck Answer: D 64) Which of the following statements is correct with regard to the boxed insert entitled "New Age Entrepreneurs: The Rise of Twitter"? A) Social media sites have turned out to be not very effective promotion tools for entrepreneurs B) Twitter is so popular because it allows people to exchange ideas in depth C) Twitter 101 for Businesses reports on businesses that are behaving unethically toward consumers D) Studies show that popularity on Twitter translates into profitability E) YouTube video demonstrations provide insight on how to maximize twitter for small business applications Answer: D 65) Judy is a graduate from a denturist program. Normally, graduates start up their own business, much like dentists and doctors. She has the choice of starting on her own or buying an existing practice. What is an advantage for her of starting a new business from scratch? A) No suffering from prior owner's errors B) Odds are better to succeed C) Relationship with suppliers already established D) Needs and desires of customers known E) The risks are lower than if she were to buy an existing practice Answer: A 66) Harold's father owns a plumbing business, which Harold will likely take over. However, Harold needs to know the problems that beset family businesses. Which of the following is not a problem in a family business? A) Untrained and uneducated family members as personnel B) Failure to respond to changing market conditions C) Choosing an appropriate successor D) Consistent under-financing E) Disagreement among family members about the future of the business Answer: D 67) Jody is a young graduate from a business program. She can either help out in the family business or work with another organization. Which of the following is not a typical advantage associated with a family business? A) Highly trained individuals B) Valuable community relationships C) Personal sacrifices leading to financial advantage D) High employee loyalty E) Unified family management Answer: A 68) Ted is about to take over a family business. Among the issues of which he should be aware include all of the following except A) assuring economic security for the retiring leader and spouse. B) training the successor. C) benefits for the successor. D) timing the succession. E) successor selection. Answer: C 69) Margaret has an opportunity to buy an existing business. Among the issues of which she should be aware include all of the following except A) the location of the business. B) legal form of the business. C) difficulty in determining an appropriate price for the business. D) incomplete knowledge of the state of the business. E) the reputation of the business. Answer: B 70) The advantages of becoming a small businessperson by buying an existing business include all of the following except A) established customer base. B) established working relationships with vendors. C) freedom to structure the business the way you want to. D) reputation in the community. E) odds of success are better. Answer: C 71) About one-third of all new businesses owners A) buy an existing business. B) start from scratch. C) buy out the other partner. D) win the business in a draw. E) inherit the business. Answer: A 72) Which term identifies the arrangement in which a buyer purchases the right to sell the good or service of the seller? A) Exporter B) Right marketer C) Franchise D) Importer E) License Answer: C 73) A franchisor enjoys all of the following benefits except A) rapid growth. B) freed from all details of local operations. C) advertising money is spent more efficiently. D) lower prices. E) motivated franchisees. Answer: D 74) To start up a new business by operating under a license issued by a parent company to local entrepreneurs who own and manage them is known as A) a small business. B) a macro enterprise. C) an enterprise. D) a microenterprise. E) a franchise. Answer: E 75) Roger has made a list of what he considers to be advantages of buying a franchise. You tell him that one item on his list is not an advantage. Which one is it? A) Improved chances of success B) Access to big business management skills C) Don't have to build a business step by step D) Incentives of owning your own business E) Low start-up costs Answer: E 76) Hector wants to buy a franchise. He has developed a list of advantages and disadvantages. Which one does not apply? A) The start-up costs B) A franchise arrangement combines the incentive of owning a business with the advantage of access to big business management skills C) Franchises have a greater success rate than starting businesses from scratch D) Usually involves contributing a percentage of the sales to the parent company E) It is virtually impossible to lose money owning a well-known franchise Answer: E 77) Which of the following is not likely to be provided by the seller of a franchise? A) Financing help B) Guarantee of success C) Marketing strategy D) Training for employees and managers E) Management advice Answer: B 78) Ken wants to start a business, but because he is not certain about his success of starting one from scratch he is thinking about a franchise. Which of the following is not an advantage of franchising? A) Access to training programs B) Failure rates are lower than starting a business from scratch C) Expert advice D) Recognition E) These are all advantages of franchising Answer: E 79) Mary’s father owns an electrical supply business, which Mary will likely manage within a few years, so she needs to know about the typical problems that can arise in family businesses. Which of the following is not a problem she is likely to face? A) Consistent under-financing B) Choosing an appropriate successor C) Failure to respond to changing market conditions D) Disagreement among family members about the future of the business E) Untrained and uneducated family members as personnel Answer: A 80) Jamie is a recent community college graduate. She can either go to work in the family business or work with another organization. Which of the following is not a typical advantage associated with a family business? A) Valuable community relationships B) Unified family management C) Personal sacrifices leading to financial advantage D) High employee loyalty E) Highly trained individuals Answer: E 81) Margaret has an opportunity to buy an existing business. Among the issues of which she should be aware include all of the following except A) the reputation of the business. B) the location of the business. C) legal form of the business. D) difficulty in determining an appropriate price for the business. E) incomplete knowledge of the state of the business. Answer: C 82) Franchising is a contract between a(n) __________ and a(n) __________ that stipulates how __________ or __________ will be sold. A) manufacturer; dealer; a product; a service B) retailer; outlet owner; food; a service C) buyer; seller; a product; a service D) outlet owner; dealer; food; a service E) manufacturer; seller; a service; a product Answer: C 83) Which of the following is not likely to be provided by the seller of a franchise? A) Training for employees and managers B) Management advice C) Guarantee of success D) Financing help E) Marketing strategy Answer: C 84) Which of the following is considered to be an advantage to both the franchisee and the franchisor? A) Guaranteed success B) Economies of scale in buying C) Promotion savings D) Recognition E) Management assistance Answer: D 85) The benefits of franchising the franchisor enjoys include all of the following except A) more revenue. B) more financing. C) more involvement in the details of local operations. D) advertising money is spent more efficiently. E) rapid growth. Answer: C 86) In a franchise agreement, the __________ is purchasing the right to sell the products of the __________. A) franchisee; franchisor B) franchisor; parent company C) franchisor; franchisee D) pigeon; shyster E) sub leaser; leaser Answer: A 87) Molly believes that success is almost guaranteed when one buys a franchise. You point out that she should consider the costs such as A) emergency needs. B) operational expenses. C) the franchise sales price. D) training expenses. E) all of these. Answer: E 88) Which of the following is not one of the disadvantages of owning a franchise? A) High failure rates B) Sacrifice of independence C) Difficult to terminate D) On-going payments to the parent company E) High start-up costs Answer: A 89) Which of the following is an advantage for the franchisee? A) Freed from detail of local operations B) Recognition C) Rapid growth for the franchise D) Low entry cost E) Guaranteed success Answer: B 90) Lester is hoping that by buying a franchise he will get a lot of assistance from the company providing the franchise. Which of the following would not be a benefit to Lester should he decide to buy a franchise? A) Recognition B) Guaranteed success C) Management assistance D) Standardized appearance of the franchise E) Economies of scale in buying Answer: B 91) The features of a sole proprietorship include all the following except A) a lot of government paperwork B) simple to form. C) easy to dissolve. D) limited resources. E) unlimited liabilities. Answer: A 92) Which of the following is not typical for a sole proprietorship? A) Limited liability B) Losing money at start-up C) Lack of continuity D) Easy to dissolve E) Hard to borrow money Answer: A 93) Sam Clark has a custom cheese cake business that he owns and operates out of his home. Sam's ownership structure likely is A) a franchise. B) a limited partnership. C) a partnership. D) a corporation. E) a sole proprietorship. Answer: E 94) Tax laws permit __________ to treat the sales revenues and operating expenses of the business as part of their personal finances. A) sole proprietorships B) joint ventures C) privately-held corporations D) either publicly-held or privately-traded corporations E) publicly-held corporations Answer: A 95) Low start up costs, simplicity in formation, and freedom are advantages in establishing a A) corporation. B) sole proprietorship. C) partnership. D) joint venture. E) cooperative. Answer: B 96) A major disadvantage of the sole proprietorship is the A) ability to grow by adding talent. B) high start-up costs. C) unlimited liability. D) lack of freedom in making business decisions. E) difficulty in beginning business activities. Answer: C 97) Gilbert is considering setting up a business. He likes some of the advantages of sole proprietorships, but is concerned about some of the disadvantages. He should consider all of the following except A) unlimited liability. B) difficulty of passing the business on to his heirs. C) limited managerial and financial resources. D) difficulty of liquidation. E) difficulty in getting bank loans. Answer: D 98) A general partnership has advantages which are similar to a sole proprietorship, such as A) easy to transfer ownership. B) limiting owner's liability. C) being simple to organize. D) providing for continuity. E) being dependent upon resources of an individual. Answer: C 99) A limited partnership attempts to A) avoid the problem of unlimited liability for the owners. B) limit the number of partners who may purchase a share of ownership. C) provide for continuity of operation upon the departure of one of the partners. D) limit the number of partners who may vote at board meetings. E) limit the geographical area of operation for a business firm. Answer: A 100) Partnerships are generally more advantageous than sole proprietorships because A) the talents of the partners can be pooled. B) some businesses can only be formed as partnerships. C) there are many types of partnerships. D) partners are jointly and severally liable. E) many people can be the president of the company. Answer: A 101) Which of the following statements about partnerships is false? A) A partner cannot sell their interest without the other partners' consent B) The partnership terminates upon the death of a partner C) A partner cannot retire without the other partners' consent D) General partnerships are limited to ten partners E) It is easier to borrow money than a sole proprietorship Answer: D 102) If sole proprietor Tom decided to merge his business with that of another sole proprietor Cindy, a ________ would result. A) partnership B) T-4A special corporation C) publicly-traded corporation D) dual proprietorship E) co-operative Answer: A 103) Low start up costs and simplicity of operations are among the main advantages of ________. A) a sole proprietorship B) selling shares C) incorporating D) a co-operative E) none of these Answer: A 104) The features of a sole proprietorship include all the following except A) unlimited liabilities. B) limited resources. C) a lot of government paperwork. D) simple to form. E) easy to dissolve. Answer: C 105) Many professional organizations such as legal and accounting are formed as A) joint ventures. B) partnerships. C) public corporations. D) private corporations. E) sole proprietorships. Answer: B 106) Which of the following is not true of partnerships? Partnerships A) can grow by adding talent and money. B) are simple to organize. C) sometimes consists of only one partner. D) are often an extension of a business that began as a sole proprietorship. E) have few legal requirements. Answer: C 107) The size of a partnership is A) limited to a maximum of $100 million in annual sales. B) unlimited. C) limited to a maximum of 100 partners. D) limited to a maximum of 1000 employees. E) limited to a maximum of $10 million in annual sales. Answer: B 108) Jeanne is not an active participant in Highline Food Company, but she has contributed a significant amount of capital as a partner to the business. Jeanne is known as a(n) ________ partner. A) managing B) general C) limited D) dormant E) secret Answer: C 109) There are two basic types of partners: ________ and _________. A) dormant; active B) key; secondary C) secret; open D) general; limited E) primary; secondary Answer: D 110) Your grandmother wishes to invest in your partnership, but she does not want to have unlimited liability. She should be a _________ partner. A) silent partner B) secret partner C) limited partner D) dormant partner E) general partner Answer: C 111) Paul invests $50 000 in a partnership with his sister to operate a computer sales outlet. Paul is not involved in the operation of the store and has limited liability through the written partnership agreement. What kind of partner is Paul? A) Secret B) Ostensible C) Limited D) Dormant E) General Answer: C 112) Two architects are considering forming a partnership. Both want a partnership agreement. All of the following should be part of their agreement except A) the formal reporting relationship between the two partners. B) the amount of the individual investment. C) how the company will be dissolved. D) how the profits will be shared. E) how new employees will be hired. Answer: E 113) ___________ partners don’t participate actively in the business, while __________ partners do. A) Secret; ostensible B) Limited; general C) General; secret D) Secret; dormant E) Private; ostensible Answer: B 114) Ann and David want to form a partnership. They should consider all of the following except A) possibility of disagreement. B) unlimited liability. C) ease of setting up a partnership. D) the combined talents of both partners. E) ease in transferring ownership. Answer: E 115) Disadvantages of the general partnership form of business organization include A) limited liability. B) ability to provide dividends to shareholders. C) lack of continuity. D) simplicity of establishment. E) difficult to organize. Answer: C 116) In a partnership A) partners are not liable for debts of other partners if there is no partnership agreement. B) each partner pays only his or her share of the liability even if one partner runs out of money before that partner's share is paid. C) a partner is not responsible for debts if another partner created the liability through some action that violated the partnership agreement. D) each partner is responsible for the debts even if the debt was the result of the actions of only one partner. E) each partner is responsible only for the debts he or she incurred. Answer: D 117) Disadvantages of the general partnership form of business organization include A) limited liability. B) simplicity of establishment. C) lack of continuity. D) difficult to organize. E) ability to provide dividends to shareholders. Answer: C 118) Computers-B-Us is a new company. Its owners all have no personal liability for any debts of the company. All five of its owners invested the same amount and will share equally in the profits. The structure of Computers-B-Us is most likely a A) private corporation. B) co-operative. C) limited partnership. D) general partnership. E) sole proprietorship. Answer: A 119) The two most widely used methods to form a corporation include A) traditional or contemporary incorporation. B) limited or unlimited incorporation. C) private or public incorporation. D) inside or outside incorporation. E) federal or provincial incorporation. Answer: E 120) Bill is starting up a new business. In order to raise the capital needed for the business Bill has sold shares of his company to a few close relatives. This type of structure is known as a A) sole proprietorship. B) private corporation. C) macro enterprise. D) public enterprise. E) public corporation. Answer: B 121) An organization designed to avoid paying corporate tax by distributing all or most of their earnings to their shareholders is A) an income trust. B) a shareholders co-operative. C) a public company. D) a limited partnership. E) a private corporation. Answer: A 122) An outside director is A) a person who is not an employee of the company. B) a person from the employee group outside the upper level ranks. C) a person selected by the CEO. D) a person who is a high ranking company official. E) a person from the audit committee. Answer: A 124) A public corporation is A) one whose stock is held by only a few people and the shares are not generally available for sale. B) one whose stock is available for sale to the general public. C) owned by all taxpayers in a country. D) owned by the government, hence "public." E) chartered by the federal government. Answer: B 125) What is the difference between a public and private corporation? A) Public corporations issue shares whereas private corporations do not B) Public corporations are owned by a government whereas private corporations are owned by private individuals C) Public corporations are always large whereas private corporations are not allowed by law to be large D) Public corporations have articles of incorporation whereas private corporations do not E) Public corporations issue shares that are widely held whereas private corporations issue shares that are held by only a few people Answer: E 126) Start up costs and complexities are among the main disadvantages of ________. A) starting up a partnership B) incorporating C) starting up a sole proprietorship D) selling shares E) none of these Answer: B 127) A public corporation is A) one that must do business with the general public. B) chartered by the federal government. C) one whose stock is available for sale to the general public. D) one that cannot keep secrets from its competitors. E) one whose shares are for sale at public auctions. Answer: C 128) ________ is the governing body of a corporation. A) The board of directors B) The majority shareholders committee C) The audit committee D) The CEO E) A shareholders board Answer: A 129) Liz has decided to issue shares of her company to the public in order to raise some capital to build a new factory. Liz is launching a(n) A) initial public offering. B) an extended corporation. C) blended corporation. D) private corporation. E) income tax trust. Answer: A 130) If Doug voted by proxy this means A) he cast his vote as a regular shareholder in a company. B) he withheld his vote. C) he waived his opportunity to vote. D) his vote was cast by someone who was able to attend the shareholder's meeting. E) he cast a private vote. Answer: D 131) ________ is defined as "an artificial being, invisible, intangible and existing only in contemplation of the law." A) A corporation B) A co-operative C) A partnership D) A business owner E) A sole proprietorship Answer: A 132) A share of ownership in a corporation is referred to as A) a partnership. B) stock. C) a principle. D) a directorship. E) debt. Answer: B 133) A ________ is an incorporated form of business that is organized, owned and democratically controlled by the people who use its products and services. A) partnership B) proprietorship C) co-operative D) corporation E) preferred share Answer: C 134) Shareholders are ________ of a company and profits are distributed among shareholders in the form of ________. A) owners; proxies B) owners; cheques C) managers; proxies D) owners; dividends E) managers; profit sharing Answer: D 135) Due to his hard work and notable contributions as an employee of KB Electronics, Nori has just been elected to the board of directors of the company. He will now be expected to fulfill his obligations as both an employee and director. Nori is a(n) A) outside director. B) special representative. C) regular seat holder. D) inside director. E) corporate official. Answer: D 136) Suzy is considering incorporating her financial consulting business. Of the items listed below which one would not be a problem if she incorporates? A) Heavy regulation B) Double taxation C) Complex legal requirements D) Unlimited liability E) High costs of incorporation Answer: D 137) In the double taxation endured by some businesses, _________ is the first taxation and ___________ is the second taxation. A) tax on corporate profits; value-added tax B) tax on dividends; tax on corporate profits C) tax on corporate profits; tax on dividends D) property tax; income tax E) social security tax; income tax Answer: C 138) Advantages of the public corporation as a form of business organization do not include A) limited liability. B) continuity. C) the guarantee of fixed dividends. D) relatively easy to raise money. E) professional management. Answer: C 139) Jonathan is upset that he is a victim of double taxation. What form of business is he involved in? A) Unlimited liability B) Partnership C) Corporation D) Big business venture E) Small corporate venture Answer: C 140) The person responsible for the firm's overall performance is A) the directors. B) the CEO. C) the COO. D) the CFO. E) all employees. Answer: B 141) Most new corporations start out as ________ corporations and then move to ________ corporations as they grow. A) unlimited; limited B) limited; unlimited C) general, active D) public; private E) private; public Answer: E 142) Gloria wants to turn her sole proprietorship into a business corporation. Among the things that she must consider are A) sole proprietorships must be made into partnerships before they can be made into corporations. B) there is a threat of a hostile takeover if she has a private corporation. C) double taxation that occurs with corporations. D) the cost of dissolving her sole proprietorship will be high. E) she has to decide whether or not she will issue shares when the company becomes a corporation. Answer: C 143) Which of the following is the main disadvantage of a co-operative? A) High prices B) Each member only gets one vote C) High tax rates D) Low surplus distribution rates E) Difficult to attract equity investment Answer: E 144) The purpose of a cooperative is A) as a benevolent association designed to help out its members in times of need. B) as an association only for farmers. C) to benefit its owners in the form of reduced prices and/or distribution of surplus at year end. D) to remain small so that they can help all their members on an individual basis. E) to buy fertilizer at reduced prices because of volume buying on the part of its members. Answer: C 145) Voting rights in a cooperative are A) not restricted just to members. B) required before one can buy anything from a cooperative. C) the same as those found in a corporation, that is, the more one owns or contributes the more votes one has. D) there are no votes taken in the running of a cooperative. E) one vote per member regardless of the amount owned or contributed. Answer: E 146) A new business typically adopts one of four main organizational forms. They are A) franchise, sole proprietorship, partnership or corporation. B) franchise, partnership, corporation or co-operative. C) sole proprietorship, franchise, corporation or co-operative. D) sole proprietorship, partnership, corporation or co-operative. E) debt, equity, venture capital or gifted. Answer: D 147) Which of the following is not one of the general factors that contribute to small business failure? A) Managerial incompetence or inexperience B) Neglect C) Bad luck D) Weak control systems E) Insufficient capital Answer: C 148) Which of the following is a contributing factor to the success of a small business? A) Hard work, drive, and dedication B) Overcapitalization C) Strong control systems D) Creativity E) Insufficient capital Answer: A 149) Which of the following is not a success factor for a small business? A) Hard work and drive B) Owner has a business degree C) Luck D) Market demand for the product E) Managerial competence Answer: B 150) All of the following are reasons for success of small businesses except A) market demand for the product. B) money. C) luck. D) managerial competence. E) hard work. Answer: B 151) All of the following are reasons for failure of small businesses except A) poor management skills. B) disasters like fires or weather. C) inadequate marketing capabilities. D) inadequate financial capabilities. E) luck. Answer: E 152) Which is the most common reason for the failure of small business? A) Poor marketing B) Managerial incompetence C) Loss of interest in the business D) Fraud E) Poor production capabilities Answer: B 153) A study by CIBC world markets found that small businesses with above average growth were run by A) owners that had a high level of internet connectivity. B) owners with more formal education. C) owners that used professional advisors. D) owners that adopted a corporate ownership structure. E) all of these were found in the study. Answer: E TRUE/FALSE QUESTIONS. Write 'T' if the statement is true and 'F' if the statement is false. 154) A service-producing business is considered small if it has fewer than 50 employees. Answer: True 155) Entrepreneurship is defined as an individual's willingness to take advantage of business opportunities and to assume the risks of establishing and operating a business. Answer: True 156) A small business is an owner-managed business with less than 100 employees. Answer: True 157) Small businesses often provide an environment to use personal attributes such as creativity. Answer: True 158) The dividing line between a big business and a small business is clear. Answer: False 159) A new venture is a recently formed commercial organization that provides goods, but not services for sale. Answer: False 160) Entrepreneurship is defined as an individual's attempt to start a small business while at the same time reducing personal risks to a minimum. Answer: False 161) Entrepreneurship is restricted to small firms. Answer: False 162) The majority of businesses in Canada have no employees (just the owner). Answer: True 163) Nascent entrepreneurs are people who have tried to start a business but have not succeeded in doing so. Answer: False 164) In the 2010 Heritage Foundation index of economic freedom, Canada ranked third. Answer: False 165) People who exhibit entrepreneurial characteristics within the context of an existing company are known as intrapreneurs. Answer: True 166) About 75 percent of all businesses in Canada are small. Answer: False 167) Manufacturing businesses are the largest and fastest growing segment of small business enterprise. Answer: False 168) Over the past two decades the growth in the number of male entrepreneurs has exceeded that of female entrepreneurs. Answer: False 169) In 2007, small business created 100,000 jobs in Canada. Answer: True 170) Women lead only a very small percentage of small and medium sized firms that export goods and services. Answer: True 171) Less than 20 percent of self-employed women earn more than $30,000 per year. Answer: True 172) People are "born" to be entrepreneurs. Answer: False 173) Most new ventures are not the result of a deliberate search for a viable business idea. Answer: True 174) Entrepreneurial characteristics are not widely distributed in the population. Answer: False 175) Most new venture ideas come from peoples’ hobbies. Answer: False 176) An idea with high business exit costs is good, because it will motivate the entrepreneur to work hard to achieve success. Answer: False 177) If market conditions are rapidly changing, the benefits gained from research diminish quickly. Answer: True 178) The longer markets are in a state of flux, the greater the likelihood of being able to sustain a competitive advantage. Answer: True 179) A sales forecast is the foundation for determining the financial viability of a venture and the resources needed to start it. Answer: True 180) Planning does not have to be complete before action is taken. Answer: True 181) Trade credit is a form of barter between supplier and retailer. Answer: False 182) Equity refers to the money, or capital, invested in the enterprise by individuals in return for an ownership interest. Answer: True 183) There are two main types of financing: debt and equity. Answer: True 184) A business is at its riskiest point during the start up phase. Answer: True 185) One source of debt financing is through private investors also known as angels. Answer: False 186) The most common source of equity financing for small businesses is a bank loan. Answer: False 187) Equity refers to the money, or capital that is loaned to the firm. Answer: False 188) Suppliers who provide goods such as inventory are providing trade credit. Answer: True 189) Survival rates for new ventures are greatly improved by getting involved with an incubator. Answer: True 190) Small founding teams tend to work better than large ones. Answer: True 191) The franchise agreement usually requires that the franchisee pay a fee to the franchisor, but sometimes it is the other way around. Answer: False 192) In a franchising agreement the franchisor is the person who is buying the franchise. Answer: False 193) Part of the franchise agreement usually requires that the franchisor pay a fee to the franchisee. Answer: False 194) A very significant advantage of a franchise as a way of running a small business is that the chances of success are enhanced. Answer: True 195) A disadvantage of a franchise is the initial franchise fee. Answer: True 196) The risks of starting a business from scratch are greater than the risks of buying an existing firm. Answer: True 197) About one-half of all new businesses that were started in the past decade were bought from someone else. Answer: False 198) Two of the major problems in family businesses are choosing and training successors, and determining the direction of the firm. Answer: True 199) A sole proprietorship is easy to form. Answer: True 200) An advantage of the sole proprietorship form of business is its unlimited liability. Answer: False 201) One important business decision is that involving the legal form of organization for the firm. Answer: True 202) A sole proprietorship is a business owned and operated by one person. Answer: True 203) Sole proprietors can generally treat business revenues and operating expenses as part of their personal finances. Answer: True 204) If a sole proprietorship business fails to generate enough cash, bills must be paid out of the owner's pocket. Answer: True 205) Partnerships are often an extension of a business that began as a sole proprietorship. Answer: True 206) A private corporation is a business whose stock is held by a small group of related individuals and is available for sale to the general public. Answer: False 207) In order to raise money, existing corporations can sell shares in an initial public offering (IPO). Answer: False 208) An income trust structure allows converted corporations to avoid paying tax if they distribute all or most of their earnings. Answer: True 209) Inside directors are board members who both serve on the board of directors and are company employees. Answer: True 210) IPO’s are particularly attractive to companies during stock market declines because investors can buy the shares of stock for a low price. Answer: False 211) A business that features limited liability, continuity, and easier access to money is a limited partnership. Answer: False 212) The greatest potential drawback of the corporate form of organization is double taxation. Answer: False 213) A co-operative is an incorporated form of business. Answer: True 214) Although shareholders pay income taxes on the dividends they receive from the corporation, the dividends are tax deductible for corporations. Answer: False 215) Some of the causes of small business failure include poor management skills, inadequate marketing capabilities and inadequate financial capabilities. Answer: True 216) Luck is a significant factor in the success of some small businesses. Answer: True 217) One of the fundamental reasons for small business failure is bad luck. Answer: False 218) A study conducted by CIBC found that small businesses with above-average growth rates were run by owners with more formal education. Answer: True 219) Of every 100 small businesses that begin operation, 96 will still be operating after one year. Answer: True SHORT ANSWER QUESTIONS. Write the word or phrase that best completes each statement or answers the question. 220) How is a small business defined for purpose of the text? Answer: ∙an independently owned and managed business with less than 100 employees 221) What is an intraprenuer? Answer: ∙a person who creates something new within an existing large firm or organization. 222) Define a new venture. Answer: • a recently formed new commercial organization • one that provides goods and or services for sale 223) What are the three key entrepreneurial process elements? Answer: • the entrepreneur • the opportunity • the resource and how all three interact 224) What factors in the broader environment influence the entrepreneurial process? Answer: • social factors • economic factors • political factors • technological factors 225) Should government be involved in giving assistance to small businesses? Answer: Answers will vary. An example of a “Yes” answer is: • due to the tremendous impact of small business on the Canadian economy • significant contributor to development of new products • small businesses are net creators of new jobs • ensures competition • assistance is needed to help overcome the difficulties of starting Yes, government involvement can be crucial through grants, loans, and regulatory support, fostering economic growth and stability. 226) Where do the majority of entrepreneurial ideas come from? Answer: • from everyday events relating to work or life with work experience begin the most common source 227) What are the two most important questions to ask when evaluating an idea for market and financial viability? Answer: • Are there enough customers willing to buy the product or service? • Will sales lead to profits? 228) What is a sales forecast? Answer: ∙this is an estimate of how much of a service/product will be purchased during a specific period of time 229) Where do the majority of entrepreneurial ideas come from? Answer: ∙from everyday events relating to work or life with work experience begin the most common source 230) How has the Internet affected small-business start-ups in recent years? Answer: Because the internet provides fundamentally new ways of doing business, entrepreneurs have created and expanded new businesses faster and easier than ever before. The internet also helps entrepreneurs to gather information, write a business plan, and access government grants. 231) What are the three basic strategies for becoming a business owner? Answer: starting a new business from scratch, buying an existing business, or buying a franchise. 232) How does franchising work? Answer: ∙a legal agreement to supply a product/service that stipulates how a product/service will be supplied and marketed in exchange for a specified franchise fee 233) What is a general partnership? Answer: A general partnership is one in which all partners are jointly liable for he obligations of the business. There is no legal limit to the number of parties who may form a general partnership. Partners may invest equal or unequal sums of money and may earn profits that bear no relation to their investments. 234) Discuss the two most widely used methods to form a corporation. What are the stipulations to becoming federally incorporated? Answer: • federal incorporation under the Canada Business Corporations Act • provincial incorporation under any of the provincial corporations acts • except for banks and certain insurance and loan companies, any company can be federally incorporated under the Canada Business Corporations Act 235) Describe the role and responsibilities of the Board of Directors. Answer: • a board of directors who oversee the corporation's operation • select the president and other officers to run the day to day operations • set dividend policy • set policies on major spending and executive salaries and benefits 236) What does it mean to say that shareholders in a corporation have limited liability? Answer: • shareholders can only lose their initial investment 237) What is a private corporation? Answer: A private corporation is one in which the shares of stock are held by only a few people and are not available for sale to the public. 238) What is a cooperative? Answer: A cooperative is an incorporated form of business that is organized, owned, and democratically controlled by the people who use its products and services. Cooperatives are formed to benefit owners in the form of reduced prices or the distribution of surpluses at year-end. 239) Explain the concept of double taxation as it relates to a corporation. Answer: Double taxation begins when a corporation pays taxes on company profits. Profits returned to stockholders in the form of dividends are also taxed as personal income. 240) Discuss the four major factors that contribute to small business failure. Answer: • managerial incompetence • neglect • weak control systems • insufficient capital ESSAY QUESTIONS. Write your answer in the space provided or on a separate sheet of paper. 241) What are some of the difficulties that are involved in defining what a small business is? Answer: Various measures might be used, including the number of people the business employs, the company’s sales revenue, the size of the investment required, or the type of ownership structure the business has. The government relies on two different sources for information about small business, and the relationship between these two sources is often not clear. For example, Industry Canada reports that ther are 2.2 million business establishments in Canada and about 2.5 million people who are self-employed, but there is no way of knowing how much overlap there is between these two categories. In order to simplify things, a small business is defined as one which is owner-managed and which has less than 100 employees. 242) Describe some key characteristics of small business in Canada. Answer: Small businesses constitute about 98 percent of all businesses in Canada; about half of all employed Canadians work in a small business; small businesses are the main source of job creation; small businesses are also responsible for the vast majority of new product ideas 243) Why might an entrepreneur wish to purchase an existing business rather than starting one from scratch? Answer: An entrepreneur may wish to purchase an existing business because of an increased chance for success. An existing business will have established working relationships with lenders, suppliers, and the community. The track record of an existing business gives potential buyers a much clearer picture of what to expect than any estimate of a new business' prospects. 244) Describe the criteria used to screen an entrepreneur's idea. Answer: • ∙does this idea for a product or services create or add value for the customers? • does this idea provide a sustainable competitive advantage? • Is this idea marketable? • Is it financially viable? • What about the exit costs? 245) Why is it important to have a business plan? Answer: • ∙to help organize and act as a road map through the various stages of development • requires the entrepreneur to document and explain why this is an opportunity • to indicate as many variables as possible for possible weaknesses or strengths in each of the functional areas: marketing, finance and operations • to show conceptually the owner/operator how the business should come together and whether he/she will need help 246) What are the major parts of a good business plan? Answer: • company description • product or service description • marketing analysis and plan • operating plan • management plan • financial plan • supporting details 247) Describe the business plan and the start-up decisions made by small businesses. Answer: The starting point for virtually every new business is a business plan, in which the entrepreneur summarizes business strategy for the new venture and shows how it will be implemented. Entrepreneurs must also decide whether to buy an existing business, operate a franchise, or start from scratch. Further, common funding source include personal funds, family and friends, savings, lenders, investors, and government agencies. Venture capital companies are groups of small investors seeking to make a profit on companies with rapid growth potential. Angels are private investors who make money available to new ventures in return for a share of the business. Most of these firms and individuals do not lend money but rather invest it, supplying capital in return for partial ownership. Lending institutions are more likely to finance an existing business than a new business because the risks are better understood. 248) Describe the difference between debt and equity financing. Answer: • debt financing involves borrowing funds • with debt financing the borrower is required to repay the amount of the loan plus interest charges • equity financing refers to money invested in a business in exchange for ownership interest • equity investors then are interested in profits and how they will be distributed • with equity financing there is not a locked in financing charge 249) Having decided to start a new business, where would you look for the money needed to start the business? Answer: • ∙personal resources • lending institutions • friends or relatives • investors • government 250) Describe private investors (angels) and venture capitalists. Answer: ∙Angels — a popular method of equity financing, typically financially well off and often a successful entrepreneur, looking to recycle their wealth through new business investment ∙Venture Capitalist — a popular source of equity financing, professionally managed pools of investors money, often deal in higher risk ventures with high growth opportunities 251) Describe the two most common sources of debt financing. Answer: • financial institutions such as commercial banks, trust companies, co-operatives, finance companies, equipment companies, credit unions and government agencies. • suppliers who provide goods or services to the entrepreneur with an agreement to bill them later 252) Why would someone want to buy an existing business rather than start it from scratch? Answer: • better chance of success • established working relationships • past track record 253) Discuss the advantages and disadvantages of buying a franchise to start a new business. Answer: • ∙advantages • not build step by step • increased chances of success • help from experienced management • training for employees • advertising • disadvantages • start-up costs are high • on-going payments • lack of independence 254) Why is there such a difference between the failure rates of small businesses in general and franchising operations in particular? Answer: • Franchises fail less because the owner/operator is supplied with: • a proven product/service • proven marketing • financing strategy • established name • proven operations guide 255) Identify the four major forms of legal organization for business firms. List two advantages and disadvantages of each. Answer: • sole proprietorship - freedom, low start-up costs, unlimited liability, difficulty raising money • partnership - greater talent pool, ease of formation, unlimited liability, lack of continuity • corporation - limited liability, continuity, high start-up costs, double taxation • cooperative - reduced prices, share of surpluses, one vote per member, wealthy members have no voting control 256) Describe three advantages and three disadvantages of operating a business as a sole proprietorship. Answer: The advantages of sole proprietorships include freedom, ease of formation, and tax benefits. A sole proprietor is free to operate his or her business as he or she desires. There are few legal requirements for startup, and low startup costs. Losses from a sole proprietorship can offset income from personal sources, providing tax benefits. The disadvantages of sole proprietorships include unlimited liability, lack of continuity, and limited financing options. A sole proprietor is totally responsible for all of the debts of the business and may have to give up personal assets to repay those debts. A sole proprietorship lacks continuity because the business dissolves with the death of the owner. Finally, sole proprietors have a limited ability to secure financing, relying mostly on their personal resources. 257) Explain sole proprietorships and partnerships. Discuss the advantages and disadvantages of each. Answer: The sole proprietor is owned and usually operated by one person. There are tax benefits for new businesses that are likely to suffer losses in early stages. One drawback is unlimited liability. Another disadvantage is lack of continuity. Finally, a sole proprietorship depends on the resources of a single individual. The general partnership is a sole proprietorship multiplied by the number of partner-owners. The biggest advantage is its ability to grow by adding new talent and money. A partnership is not a legal entity. It is just two or more people working together. Partners are taxed as individuals, and unlimited liability is a drawback. Partnerships may lack continuity, and transferring ownership may be hard. No partner may sell out without the consent of the others. 258) Why is unlimited liability a significant disadvantage to both the sole proprietorship and general partnership forms of organization? Answer: • sole proprietors are in a high risk situation as they are solely reliable for all debts of the firm • those involved in a general partnership are also reliable for all debts of the firm, even if they are not responsible for causing those debts or had no knowledge of them being made • personal possessions, with some limitations in both sole proprietorships and partnerships may have to be sold to satisfy the debts of the business 259) What are the advantages and disadvantages of the corporate form of organization? Answer: A corporation is a business that is legally considered a separate entity from its owners. They may sue and be sued; buy, hold, and sell property; make and sell products; and be tried and punished for crimes. An advantage of incorporation is limited liability, which means that investor liability is limited to personal investments in the firm. Another advantage is continuity. Corporations also have advantages in raising money. By selling stock, they expand the number of investors and available funds. One disadvantage is that a corporation can be taken over against the managers' will. Also, start-up costs are high. Corporations are regulated and must meet legal requirements in the states in which they are chartered. A drawback to incorporation is double taxation. Different kinds of corporations help businesses take advantage of incorporation without assuming all of the disadvantages. 260) Explain the basic issues involved in managing a corporation. Answer: Corporations sell shares, called stock, to investors who then become stockholders and the real owners. Profits are distributed among stockholders in the form of dividends, and managers serve at their discretion. The governing body of a corporation is its board of directors. Most board members do not participate in day-to-day management but rather hire a team of managers. This team, called officers, is usually headed by a chief executive officer, or CEO, who is responsible for overall performance. 261) Explain why double taxation is considered to be a disadvantage to a corporate form of organization. Explain how double taxation occurs. Answer: • a corporation must pay income taxes on its profits, and then shareholders must pay income taxes on their dividends received • from the shareholder's point of view, this procedure amounts to double taxation of the corporation's profits • the profits of sole proprietorships and partnerships are only taxed once since profits are treated as the owner's personal income 262) Describe the role and responsibilities of the Board of Directors. Answer: • a board of directors who oversee the corporation's operation • select the president and other officers to run the day to day operations • set dividend policy • set policies on major spending and executive salaries and benefits 263) Discuss the two most widely used methods to form a corporation. What are the stipulations to becoming federally incorporated? Answer: • federal incorporation under the Canada Business Corporations Act • provincial incorporation under any of the provincial corporations acts • except for banks and certain insurance and loan companies any company can be federally incorporated under the Canada Business Corporations Act 264) What does it mean to say that shareholders in a corporation have limited liability? Answer: ∙shareholders can only lose their initial investment 265) Why do so many small businesses fail? Answer: • predominant reason is lack of managerial • neglect - overwhelmed by time commitment • weak control system - lack effective control systems to keep a business on track • insufficient capital - overly optimistic about how soon they will earn profits 266) Discuss the four major factors that impact small business success. Answer: • hard work, drive, and dedication • market demand for the product or service • managerial competence • luck Test Bank for Business Essentials Ronald J. Ebert, Ricky W. Griffin, Frederick A. Starke, George Dracopoulos 9780132479769, 9780134384733

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