2 - Entity Selection, Formation, and Governance

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Tips for Success:

· Read the question first, before reading the scenario.

· Read the question again and answer the question in your mind before looking at the answer choices.

· Read every answer choice option carefully. Eliminate implausible answers.

· Choose the BEST answer. You may not think any of the answer options are 100% spot on.

· Pay attention to absolutes like always, never, not, clearly, etc. Any counterexample that applies to the question would make it incorrect.

· Be alert for the use of double negatives within a question. Such questions should be read carefully to ensure you fully understand what is being asked.

· Go with your first instinct on the answer based on the knowledge you gained from reading the text.

Points:

120

Started on Jan 15 at 07:25

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1. Bookmark question for later

Lily wants to build a business. She has very little capital. She does, however, have a partner with which she could run a business. Lily wants to be able to avoid being held personally liable for any problems the business has. Which of the following would lead Lily to choose a sole proprietorship organization for her business?

· Little capital

· None of the above

· Avoidance of personal liability

· Possession of a partner

2. Bookmark question for later

What is the appropriate description for a distributorship?

· A franchisee makes or sells a franchisor’s product.

· A franchisee produces and sells a franchisor’s product using the franchisor’s name.

· A franchisee sells a franchisor’s product in a specific geographic area.

3. Bookmark question for later

Hal organized his business in Canada. Most of his customers are in Montana. In Montana, Hal’s business would be considered a(n) __________ corporation.

· Subchapter S

· Closely-held

· Alien

· Professional

· Domestic

4. Bookmark question for later

Mario and Johnny want to start a business. They have very little capital. They are new partners and largely unfamiliar with each other’s management practices. They are happy, however, to be organizing a business together in order to avoid full liability for the business. Which detail(s) of this situation would be the largest contributor toward Mario and Johnny's decision to organize a general partnership?

· Avoiding full liability

· Sharing profits

· Little capital

· Unfamiliar with each other’s management practices

5. Bookmark question for later

J-Chron's board of directors periodically meets with the CFO of the company. The CFO reports on the financial status of a company project, after which the board inquires about the project's compliance with legally-required accountings principles. It asks no other questions about the project. Which of the following is true?

· The board is not meeting any basic vigilance requirements.

· The board is meeting legally-required vigilance standards, but not necessarily those which would

protect shareholders' interest.

· The board is not legally required to meet vigilance requirements.

· The board is meeting all of its vigilance requirements.

6. Bookmark question for later

What is the correct order of events for the formation of a corporation?

· Novations are executed; Articles of incorporation are filed; Incorporators select a name for the corporation;

· Business selects a state of incorporation

· Business selects a state of incorporation; Incorporators select a name for the corporation;

· Articles of incorporation are filed; Novations are executed

· Incorporators select a name for the corporation; Articles of incorporation are filed; Business selects a

· state of incorporation; Novations are executed

· Business selects a state of incorporation; Novations are executed; Incorporators select a name for the corporation;

· Articles of incorporation are filed

7. Bookmark question for later

Loptech, a technology firm, wants to issue bonds for investment purposes. Loptech has one of the best credit ratings in the industry. Market rates for debt instruments average at .5% interest. Based on its credit rating, Loptech would likely sell bonds that pay _____.

· Indeterminable with current information

· 0.75%

· 0.25%

· 0.5%

8. Bookmark question for later

Noodleoo, a struggling restaurant chain, wants to enact a franchise agreement with Stephen to sell its product through a chain-style franchise. Stephen agrees and opens the store, and 6 months later Noodleoo goes bankrupt. Which is most likely true of this situation?

· If Noodleoo was transparent with its financial data, it owes no recompense to Stephen.

· If Noodleoo was not transparent with its financial data, Stephen has no recourse.

· More than one response is correct.

· If Noodleoo was not transparent with its financial data, it has broken the franchise rule.

9. Bookmark question for later

What is the appropriate description for a chain-style franchise?

· A franchisee produces and sells a franchisor’s product using the franchisor’s name.

· A franchisee makes or sells a franchisor’s product.

· A franchisee sells a franchisor’s product in a specific geographic area.

10. Bookmark question for later

What role best fits the following situation?

Manny wants to be involved in a business but is not sure which type of business to join or create. He has capital to invest. He has a good network of potential investors and partners. He has no experience in management.

· Neither a limited or general partner would be a good choice.

· General partner in a limited partnership.

· Limited partner in a limited partnership.

11. Bookmark question for later

Tucker works for a retail distribution company that was recently started. Tucker has invested a lot of his earnings into shares of the company. When quarterly earnings are posted, Tucker receives a check for 8% of the quarterly profit of the company. Tucker belongs to a __________ corporation.

· Domestic

· Closely-held

· Subchapter S

· Alien

· Professional

12. Bookmark question for later

Abigail is a manager at her company. The company just launched an initiative to improve its corporate citizenship practices. Abilgail is responsible for all but which of the following areas?

· Safeguarding shareholders' interests

· Vigilance of the board of directors

· Integrity and ethical behavior

· Disclosure and transparency

13. Bookmark question for later

Rita wants to be involved in business. She has a fair amount of money to invest, but she does not want to be involved in management. She wants to form a business in the quickest way possible under her circumstances. Which form of business would be best for Rita?

· LLC

· Corporation

· Limited partnership

· Sole proprietorship

14. Bookmark question for later

What is the appropriate description for a plant-processing franchise?

· A franchisee makes or sells a franchisor’s product.

· A franchisee produces and sells a franchisor’s product using the franchisor’s name.

· A franchisee sells a franchisor’s product in a specific geographic area.

15. Bookmark question for later

Zoey is the CEO of a corporation she organized herself, and the corporation has 15 shareholders. The company operates in several states, as well as outside of the U.S. Her business consists mostly of training services for in-home medical care personnel. Her company would be a __________ corporation.

· Subchapter S

· Closely-held

· Domestic

· Alien

· Professional

16. Bookmark question for later

Koffman Corporation is trying to raise capital. What method would be the least risky to raise capital if it has a less-than-favorable credit rating?

· Stock issuance, since stocks are more valuable as finance instruments.

· Stock issuance, since a credit rating won’t negatively affect Koffman’s ability to sell stock.

· Bond issuance, since additional debt can provide the company with more leverage.

· Bond issuance, since nobody wants to buy shares of a company with a less-than-perfect credit rating.

17. Bookmark question for later

Hal and Miranda have a general partnership business for landscaping projects. Hal makes a contract with a customer for a project one day while Miranda is absent and leaves on vacation the next day. Miranda does not feel she has the time to perform the contract for the customer. Which of the following is true?

· Indeterminable without more information.

· Only Hal is obligated to perform the contract.

· Miranda may relinquish her obligation to perform the contract since Hal signed it without her knowledge.

· Miranda is obligated to perform the contract.

18. Bookmark question for later

Cadence works for WilderCorp. She meets with a team to make all-encompassing decisions concerning the direction of the business. She also personally supervises managers and conducts training for supervisors and plant managers. Cadence also buys stock in WilderCorp. What is Cadence’s position in the company?

· Director

· More than one option

· Shareholder

· Executive

19. Bookmark question for later

Lenny organized his business in Delaware. He has customers in Delaware, other states in the U.S., and in foreign countries. Lenny’s business is __________ in Delaware.

· Professional

· Domestic

· Closely-held

· Subchapter S

· Alien

20. Bookmark question for later

Piper is a manager in a corporation that was organized in Canada by one of his former coworkers. The company provides consulting services and training for architects employed by construction companies. The company recently went public, with shares being sold to about 500 investors. Piper’s company would be a __________ corporation.

· Professional

· Alien

· Closely-held

· Domestic

· Subchapter S