READING 20 ORGANIZATIONAL FORMS, CORPORATE ISSUER FEATURES, AND OWNERSHIP

Question 1

Which of the following best describes the liability structure of a sole proprietorship?
A. Limited liability for business debts
B. Unlimited liability for business debts
C. Liability limited to initial capital investment

Answer 1

Correct Answer: B

Explanation:
The sole proprietor is personally responsible for all business obligations, including debts and claims, which indicates unlimited liability.
Option A is incorrect because limited liability is a feature of corporations or limited partners.
Option C is incorrect because there’s no cap on the liability in a sole proprietorship.

Question 2

In which business structure are the owners and the business considered legally the same entity?
A. Corporation
B. General Partnership
C. Sole Proprietorship

Answer 2

Correct Answer: C

Explanation:
In a sole proprietorship, the business is legally indistinguishable from the owner.
Option A is incorrect because corporations are separate legal entities.
Option B is incorrect as partnerships involve multiple individuals but are also pass-through entities, not considered the same as an individual.

Question 3

Which of the following best explains why corporations have better access to capital compared to sole proprietorships?
A. Shareholders are personally liable for business debts
B. Corporations do not face regulatory requirements
C. Corporations can raise funds through both debt and equity markets

Answer 3

Correct Answer: C

Explanation:
Corporations have legal status that allows them to issue equity and borrow more easily than unincorporated businesses.
Option A is incorrect because shareholders have limited liability.
Option B is incorrect because corporations usually have more regulatory obligations, not fewer.

Question 4

In a general partnership:
A. Only managing partners face unlimited liability
B. All partners have limited liability
C. All partners have unlimited liability

Answer 4

Correct Answer: C

Explanation:
All partners in a general partnership are personally liable for the business’s debts.
Option A is incorrect; there’s no differentiation between managing and non-managing partners in a general partnership.
Option B is incorrect as limited liability applies to limited partnerships or corporations.

Question 5

Which of the following is a feature of a limited partnership but NOT of a general partnership?
A. Pass-through taxation
B. Unlimited liability of partners
C. Existence of limited partners with no managerial role

Answer 5

Correct Answer: C

Explanation:
Limited partnerships have limited partners who do not manage and have liability limited to their investment.
Option A is incorrect; both partnership types enjoy pass-through taxation.
Option B is incorrect because limited partnerships include limited liability for some partners.

Question 6

In which business structure is there the clearest separation between ownership and management?
A. Sole Proprietorship
B. Corporation
C. General Partnership

Answer 6

Correct Answer: B

Explanation:
Corporations’ separate shareholders (owners) from the board and management.
Option A is incorrect because the owner runs the business directly.
Option C is incorrect because partners are both owners and operators.

Question 7

Which of the following statements about taxation is most accurate?
A. Corporations are not subject to double taxation.
B. Limited partners are taxed on profits only when distributed.
C. General partnerships are taxed at the individual partner level.

Answer 7

Correct Answer: C

Explanation:
General partnerships are pass-through entities, meaning profits are taxed only at the individual level.
Option A is incorrect; corporations may be taxed at both the corporate and shareholder levels.
Option B is incorrect; taxation is based on allocated income, not distribution.

Question 8

Which of the following best describes the role of a board of directors in a corporation?
A. Directly manage daily operations
B. Represent creditors in bankruptcy cases
C. Oversee management and act in the interests of shareholders

Answer 8

Correct Answer: C

Explanation:
The board of directors hires management and ensures they act in shareholders’ best interest.
Option A is incorrect because day-to-day operations are handled by executives.
Option B is incorrect; representing creditors is not a board function.

Question 9

In which of the following structures can the investors lose only the amount they invested?
A. General Partnership
B. Limited Partnership (limited partner)
C. Sole Proprietorship

Answer 9

Correct Answer: B

Explanation:
Limited partners have liability restricted to their investment.
Option A is incorrect; general partners face unlimited liability.
Option C is incorrect because sole proprietors have unlimited personal liability.

Question 10

What is the primary reason most large firms adopt a corporate structure?
A. Reduced taxes
B. Less regulatory burden
C. Greater access to capital

Answer 10

Correct Answer: C

Explanation:
Corporations can issue stocks and bonds, making it easier to fund growth.
Option A is incorrect; corporations often face higher taxes due to double taxation.
Option B is incorrect; regulatory burden is usually higher in corporations.

Question 11

Which of the following is most accurate regarding LLPs in the U.S.?
A. All partners have unlimited liability
B. They are generally used for professional services
C. A general partner is always required

Answer 11

Correct Answer: B

Explanation:
LLPs in the U.S. are mainly for professionals (lawyers, accountants).
Option A is incorrect; LLPs limit liability.
Option C is incorrect; LLPs can exist without a general partner.

Question 12

Which of the following is an advantage of a private limited company over a public company?
A. Greater ability to raise funds from the public
B. Fewer regulatory requirements
C. Easier transfer of shares

Answer 12

Correct Answer: B

Explanation:
Private limited companies have fewer regulations and reporting obligations.
Option A is incorrect; public companies can raise capital from the public.
Option C is incorrect; private companies often have restrictions on share transfers.

Question 13

Which of the following business structures does NOT involve the owners in the day-to-day operations?
A. Sole Proprietorship
B. Corporation
C. General Partnership

Answer 13

Correct Answer: B

Explanation:
In corporations, professional managers typically run the business.
Option A is incorrect; the owner runs the business.
Option C is incorrect; partners typically manage the business.

Question 14

Which of the following is the most accurate description of a public limited company?
A. It is not allowed to raise capital from the public.
B. Its shares are traded on an organized exchange.
C. It has unlimited shareholders but restricted share transfer.

Answer 14

Correct Answer: B

Explanation:
Public limited companies trade their shares on stock exchanges.
Option A is incorrect; public companies exist to raise capital from public investors.
Option C is incorrect; restrictions on share transfer usually apply to private companies.

Question 15

Which of the following characteristics is unique to corporations compared to partnerships?
A. Ability to pass through tax obligations
B. Legal existence separate from owners
C. Allocation of profits based on agreement

Answer 15

Correct Answer: B

Explanation:
Corporations are separate legal entities.
Option A is incorrect; corporations face corporate tax.
Option C is incorrect; partnerships use agreements, but corporations distribute profits as dividends.

Question 16

Which of the following best describes the legal status of a corporation?
A. A corporation is an entity owned by the government but operated privately.
B. A corporation is legally inseparable from its shareholders.
C. A corporation is a separate legal entity with rights similar to an individual.

Answer 16

Correct Answer: C

Explanation:
Correct: C – A corporation is a distinct legal entity from its owners, meaning it can enter contracts, sue or be sued, and own assets.
Incorrect:

A – Corporations are not necessarily owned by the government.

B – A corporation is separate from its shareholders in law.

Question 17

Which of the following is a primary advantage of corporations in raising capital?
A. Issuing debt that cannot be defaulted on.
B. Issuing shares that are easily transferable.
C. Avoiding regulatory scrutiny.

Answer 17

Correct Answer: B

Explanation:
Correct: B – Corporations can issue shares that are traded on exchanges, providing liquidity and facilitating capital raising.
Incorrect:

A – Corporations can default on debt.

C – Public corporations are subject to significant regulation.

Question 18

Which feature allows shareholders to influence corporate governance?
A. Receiving dividends quarterly.
B. Voting for the board of directors.
C. Access to private company financials.

Answer 18

Correct Answer: B

Explanation:
Correct: B – Shareholders exercise control primarily by voting in board elections.
Incorrect:

A – Dividends are not guaranteed or governance-related.

C – This applies to private equity due diligence, not public shareholders.

Question 19

The disadvantage of double taxation of corporate income is mitigated when:
A. Dividends are paid in stock, not cash.
B. The company distributes all profits as dividends.
C. The company reinvests a significant portion of earnings.

Answer 19

Correct Answer: C

Explanation:
Correct: C – Reinvesting earnings avoids dividend taxation, minimizing double taxation.
Incorrect:

A – Stock dividends still represent taxable income in many jurisdictions.

B – Increases tax burden by maximizing dividend taxation.

Question 20

Which of the following best describes “free float” in the context of a publicly listed company?
A. Shares held by insiders and strategic investors.
B. Shares available for trading on public exchanges.
C. Total authorized shares of a company.

Answer 20

Correct Answer: B

Explanation:
Correct: B – Free float refers to shares not held by insiders or large stakeholders and are available for public trading.
Incorrect:

A – These are excluded from the free float.

C – Authorized shares may include unissued shares and do not represent float.

Question 21

Compared to public companies, private companies typically:
A. Have greater liquidity in share transfer.
B. Disclose less information.
C. Face stricter regulatory requirements.

Answer 21

Correct Answer: B

Explanation:
Correct: B – Private firms generally disclose less and have fewer reporting obligations.
Incorrect:

A – Private shares are hard to transfer.

C – Public companies face stricter regulations.

Question 22

Which characteristic distinguishes a public company from a private company?
A. Ability to issue shares to employees.
B. Shares traded on a stock exchange.
C. Ownership by institutional investors.

Answer 22

Correct Answer: B

Explanation:
Correct: B – Public companies list their shares on exchanges, enabling open market trading.
Incorrect:

A – Both private and public companies can issue shares to employees.

C – Institutional investors may invest in either.

Question 23

A private company seeking to raise capital without becoming public is most likely to:
A. Conduct a direct listing.
B. Launch an IPO.
C. Use a private placement.

Answer 23

Correct Answer: C

Explanation:
Correct: C – Private placements raise capital from accredited investors without public issuance.
Incorrect:

A – A direct listing does not raise new capital.

B – IPOs make a company public.

Question 24

Which method of going public does not raise any new capital for the company?
A. Initial Public Offering (IPO)
B. Direct Listing
C. SPAC Merger

Answer 24

Correct Answer: B

Explanation:
Correct: B – In direct listings, existing shares are listed without raising funds.
Incorrect:

A – IPOs raise capital by issuing new shares.

C – SPAC mergers involve capital raised earlier via SPAC IPO.

Question 25

A SPAC is best described as a: A. Private equity firm focused on distressed assets. B. Public shell company created to acquire a private company. C. Regulatory vehicle for foreign listings.

Answer 25

Correct Answer: B Explanation: Correct: B – A SPAC is a publicly traded entity formed to merge with or acquire a private company. Incorrect: A – Not necessarily focused on distressed assets. C – Not created for regulatory or international listing purposes.

Question 26

Why might investors prefer companies that reinvest earnings rather than pay dividends? A. To reduce tax on capital gains. B. To increase income in the current year. C. To avoid regulatory requirements.

Answer 26

Correct Answer: A Explanation: Correct: A – Reinvested earnings increase capital gains, which are taxed later (and sometimes at a lower rate). Incorrect: B – No current income is received. C – Reinvestment doesn’t exempt companies from regulation.

Question 27

Which of the following is a disadvantage of private ownership for investors? A. Lower reporting costs B. Higher liquidity C. Limited exit opportunities

Answer 27

Correct Answer: C Explanation: Correct: C – Private company shares are illiquid and difficult to sell. Incorrect: A – This is an advantage. B – Private ownership reduces liquidity, not increases it.

Question 28

Which statement best describes why a company might go private after being public? A. To comply with new accounting standards B. To increase the free float C. To reduce regulatory costs and restructure

Answer 28

Correct Answer: C Explanation: Correct: C – Going private reduces reporting burdens and can facilitate restructuring. Incorrect: A – Doesn’t require delisting. B – Going private eliminates public float entirely.

Question 29

One key reason companies choose an IPO instead of a direct listing is to: A. Avoid financial disclosure requirements B. Raise capital from new investors C. Bypass underwriters

Answer 29

Correct Answer: B Explanation: Correct: B – IPOs raise new capital; direct listings do not. Incorrect: A – Both routes involve disclosure. C – Avoiding underwriters applies to direct listings.

Question 30

What is a likely effect of a company listing its shares on a public exchange? A. Reduced ability to attract capital B. Decreased liquidity C. Increased transparency and reporting obligations

Answer 30

Correct Answer: C Explanation: Correct: C – Public companies must adhere to strict disclosure and reporting rules. Incorrect: A – Public status enhances capital-raising. B – Liquidity increases post-listing.

Question 31

A company’s shares are not held by insiders or strategic investors. These shares are referred to as: A. Authorized capital B. Free float C. Treasury shares

Answer 31

Correct Answer: B Explanation: Correct: B – Free float = publicly available shares for trading. Incorrect: A – Authorized capital includes issued and unissued shares. C – Treasury shares are bought back and not traded.

Question 32

Which group of investors is eligible for private placements? A. All retail investors B. Accredited and institutional investors C. Day traders and brokers

Answer 32

Correct Answer: B Explanation: Correct: B – Private placements are restricted to sophisticated/accredited investors. Incorrect: A – Retail investors are generally excluded. C – Not necessarily accredited.

Question 33

Which of the following actions must a public company take when a material change occurs? A. Report it in the next fiscal year B. Disclose immediately to the regulator C. Notify only its largest shareholders

Answer 33

Correct Answer: B Explanation: Correct: B – Timely disclosure is required for transparency. Incorrect: A – Too late for material changes. C – Disclosure must be to the public, not selective.

Question 34

Why might a company choose a SPAC over an IPO? A. It avoids becoming public. B. It allows access to capital without identifying the buyer in advance. C. It raises more money without listing shares.

Answer 34

Correct Answer: B Explanation: Correct: B – SPACs raise funds before identifying a target. Incorrect: A – The company becomes public via the SPAC. C – SPACs involve listing and do not guarantee more capital.

Question 35

Which of the following is most accurate about publicly traded companies? A. They rarely disclose their financial performance. B. They issue shares directly to investors on exchanges. C. Their shares trade on exchanges and are subject to market price discovery.

Answer 35

Correct Answer: C Explanation: Correct: C – Public companies benefit from continuous price discovery through exchange trading. Incorrect: A – Public firms must disclose performance regularly. B – Shares trade between investors, not directly issued post-IPO.