Corporate Structures and Ownership quiz

A sole proprietorship is legally an extension of the individual who owns and operates it. The owner has unlimited liability for obligations the business incurs.

From the issuer’s perspective, bonds are riskier than stocks for the same reason bonds are safer than stocks for investors. Bonds increase risk to the corporation by increasing leverage. If the company is struggling and cannot meet its promised obligations to bondholders, bondholders have the legal standing to force certain actions upon the corporation, such as bankruptcy and liquidation

(sole proprietorship) is correct because "the simplest business structure is the sole proprietorship, also called the sole trader....key features of sole proprietorships include: Operational simplicity and flexibility".

(limited partnership) is incorrect because "key features of limited partnerships include the following:

• GP operates the business, having unlimited liability,
•  LPs have limited liability but lack control over business operations.

" Due to multiple partners and partnership agreement, this structure is not as simple and flexible as a sole proprietorship. "Key features of sole proprietorships include: Operational simplicity and flexibility." 

(general partnership) is incorrect because "a general partnership...has two or more owners called partners whose roles and responsibilities in the business are outlined in a partnership agreement." As such, this structure is not as simple and flexible as a sole proprietorship. "Key features of sole proprietorships include: Operational simplicity and flexibility".

(Nonprofit corporations by definition cannot generate profits) is incorrect. If they are run well, nonprofits can generate profits; however, all profits must be reinvested in promoting the mission of the organization.

(Transferring ownership from seller to buyer is more difficult for a private company than for a public company) is correct. In contrast to public companies, private company shares do not trade on an exchange, so no visible valuation or price transparency exists for the company. Private company shares are not liquid. This means that transferring ownership from seller to buyer is more difficult than it is for a public company.

(Companies are categorized as public when they have greater than a minimum number of shareholders) is correct. In many countries, if there are a large number of shareholders (usually greater than 50), the company is categorized as a public company and subject to more onerous regulatory requirements whether or not it is listed on a stock exchange

Leveraged buyouts can result in a public company going private. Direct listings and special purpose acquisition companies are methods for a private company to go public.

Because the upside for lenders is limited to the promised interest payments and repayment of principal, they do not benefit from an increased growth rate of the company and are unlikely to favor actions that increase a company's risk exposure and potential for default. Because owners have potentially unlimited upside from a company's growth, they are more likely to favor actions that increase a company's potential growth rate.

(share transferability) is correct: because public shares trade on exchange whereas private shares do not. "In most cases, public companies have their shares listed and traded on an exchange. An exchange listing allows ownership to be more easily transferred because buyers and sellers transact directly with one another in the secondary market, on the exchange" . "If an owner of a private company wants to sell shares, he must find a willing buyer".

(return potential) is incorrect : because "the potential returns in private companies can be much larger than those earned from investing in public companies."

(control over management) is incorrect because "with often smaller numbers of shareholders in private companies, investors have greater control over management."

An initial public offering is a sale of equity shares to the public. Proceeds from the sale increase the issuer's equity capital. A direct listing does not raise capital. A management buyout is a method to take a public company private.

(partner in a general partnership) is correct because general partnerships are like sole proprietorships with the important distinction that they allow for additional resources to be brought into the business along with the sharing of business risk among a larger group of individuals. 

(sole trader) is incorrect because a sole trader "retains all return and assumes all risk ". 

(general partner in a limited partnership) is incorrect because "a limited partnership must have at least one general partner with unlimited liability who is responsible for the management of the business " .

Double taxation refers to a situation in which a country taxes corporations' gross earnings and then taxes net earnings distributed to owners (dividends) as personal income. Partnership profits are subject to only one level of taxation (they are personal income of the partners) .