Directions: Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. Each question is worth five points apiece for a total of 25 points for this homework assignment.
1. One drawback of switching from a partnership to the corporate form of organization is the following:
a. It subjects the firm to additional regulations.
b. It cannot affect the amount of the firm's operating income that goes to taxes.
c. It makes it more difficult for the firm to raise additional capital.
d. It makes the firm's investors subject to greater potential personal liabilities.
e. It makes it more difficult for the firm's investors to transfer their ownership interests.
2. Which of the following statements is CORRECT?
a. The main method of transferring ownership interest in a corporation is by means of a hostile takeover.
b. Two key advantages of the corporate form over other forms of business organization are
unlimited liability and limited life.
c. A corporation is a legal entity that is generally created by a state; its life and existence is separate from the lives of its individual owners and managers.
d. Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.
e. Although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect the firm's managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor
economic conditions.
3. Which of the following statements is CORRECT?
a. In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
b. Attracting large amounts of capital is more difficult for partnerships than for corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.
c. A slow-growth company, with little need for new capital, would be more likely to organize
as a corporation than would a faster growing company.
d. The limited partners in a limited partnership have voting control, while the general partner has operating control over the business. Also, the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy.
e. A major disadvantage of all partnerships compared to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.
4. Which of the following statements is CORRECT?
a. Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned.
b. In a regular partnership, liability for the firm's debts is limited to the amount a particular partner has invested in the business.
c. A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.
d. Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership.
e. A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation.
5. Which of the following statements is CORRECT?
a. Most businesses (by number and total dollar sales) are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships.
b. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.
c. Most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment, due to legal considerations related to ownership transfers and limited liability.
d. Large corporations are taxed more favorably than sole proprietorships.
e. Corporate stockholders are exposed to unlimited liability.