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ch12 Key 1. The conduct that violates the The anti bribery provisions of the FCPA may also give rise to a private

cause of action for treble damages under the Racketeer Influenced and Corrupt Organizations Act(RICO).TRUE

The conduct that violates the antibribery provisions of the FCPA may also give rise to a private causeof action for treble damages under the Racketeer Influenced and Corrupt Organizations Act (RICO).

AACSB: Analytic

Blooms: Understand Difficulty: 2 Medium

Learning Objective: 12-01 To understand the legal risk inherent in international transactions; including the requirements of the Foreign Corrupt Practices Act. Reed - Chapter 12 #1

Topic: Risks Involved in International Trade 2. Expropriation is the seizure of foreign-owned property by a government.

TRUE

Expropriation, as used in the context of international law, is the seizure of foreign- owned property bya government.

AACSB: Analytic

Blooms: Remember Difficulty: 1 Easy


Topic: Risks Involved in International Trade 3. Under U.S. law, a firm or individual can compel the U.S. government to press a claim on its behalf

before the International Court of Justice.FALSE

No device exists under U.S. law by which a firm or individual can compel the U.S. government topress a claim on its behalf before the ICJ.

AACSB: Analytic


Learning Objective: 12-02 To identify the basic sources of international law and major institutions. Reed - Chapter 12 #3

Topic: International Law and Organizations 4. A country may choose to accept the Court's jurisdiction only when the use of the Court may suit its

own interests.TRUE

A country may choose to accept the Court's jurisdiction only when the use of the Court may suit itsown interests.

AACSB: Analytic Blooms: Understand Difficulty: 2 Medium


Topic: International Law and Organizations



5. The International Court of Justice has been a major force in settling disputes since it beganfunctioning in 1946.FALSE

Article 38 of the Statute of the International Court of Justice (ICJ) is the traditional place forascertaining what public international law is. The ICJ has not been a major force in settling disputessince it began functioning in 1946.

AACSB: Analytic



Topic: International Law and Organizations 6. The International Monetary Fund (IMF) encourages international trade by maintaining stable foreign

exchange rates and works closely with commercial banks to promote orderly exchange policies withmembers.TRUE

The International Monetary Fund (IMF) encourages international trade by maintaining stable foreignexchange rates and works closely with commercial banks to promote orderly exchange policies with

members.

AACSB: Analytic



Topic: International Law and Organizations 7. The WTO does not have the power to hear disputes involving member states.

FALSE

The WTO has the power to hear disputes involving member states.

AACSB: Analytic

Blooms: Understand

Difficulty: 2 Medium Learning Objective: 12-02 To identify the basic sources of international law and major institutions.

Reed - Chapter 12 #7 Topic: International Law and Organizations

8. The World Trade Organization is the only global international trade organization dealing with therules of trade between nations.TRUE

The WTO is the only global international trade organization dealing with the rules of trade betweennations.

AACSB: Analytic


Learning Objective: 12-02 To identify the basic sources of international law and major institutions.

Reed - Chapter 12 #8 Topic: International Law and Organizations



9. The European Union, as it is known today, began when six nations signed the Treaty of Rome.TRUE

In 1957, six European countries, Belgium, France, Germany, Luxembourg, and the Netherlandssigned the Treaty of Rome, creating the European Community. Six successive enlargements createdthe European Union (EU), as it is known today.

AACSB: Analytic



Topic: International Law and Organizations 10. The Convention on the International Sale of Goods (CISG) outlines standard international practices

for the sale of goods.TRUE

The Convention on the International Sale of Goods (CISG) outlines standard international practicesfor the sale of goods.

AACSB: Analytic


Learning Objective: 12-03 To consider the importance of free trade agreements on the global economy. Reed - Chapter 12 #10

Topic: International Law and Organizations 11. Public international law examines relationships created by commercial transactions.

FALSE

Public international law examines relationships between nations and uses rules that are binding on allcountries in the international community.

AACSB: Analytic




12. Under the CSIG, parties are not allowed to negotiate contract terms and cannot opt out of theCISG.FALSE

Under the CSIG, the parties may negotiate contract terms as they deem fit for their business practicesand may, if desired, even opt out of the CISG entirely.

AACSB: Analytic






13. The Convention on the International Sale of Goods does not require contracts for the sale of goods tobe in writing.TRUE

One of the most interesting provisions in the CISG includes a rule that contracts for the sale of goodsneed not be in writing.

AACSB: Analytic



Topic: International Law and Organizations 14. The CISG applies to contracts for the commercial sale of goods (consumer sales for personal, family,

or household use are excluded) between parties whose businesses are located in different nations.TRUE

The CISG applies to contracts for the commercial sale of goods (consumer sales for personal, family,or household use are excluded) between parties whose businesses are located in different nations.

AACSB: Analytic



Topic: International Law and Organizations 15. The Convention on the International Sale of Goods resolves all areas of contract law.

FALSE

The CISG does not resolve all areas of contract law; parties are still subject to local laws and customs,which makes international agreements complex and tricky to negotiate.

AACSB: Analytic




16. If the United States enters into a trade deal with Costa Rica, with Costa Rica as the seller, and anirrevocable letter of credit is involved, the issuing bank will be located in Costa Rica.FALSE

Transactions using such a letter involve, in addition to a seller and buyer, an issuing bank in thebuyer's country.

AACSB: Analytic


Learning Objective: 12-04 To grasp the basic methods of transacting international business. Reed - Chapter 12 #16

Topic: Methods of Transacting International Business



17. The issuing bank's commitment to pay is given to the seller directly in the case of a letter of credit.FALSE

The issuing bank's commitment to pay is given, not to the seller directly, but to a confirming banklocated in the United States from which the seller obtains payment.



Topic: Methods of Transacting International Business 18. Irrevocable letters of credit have little effect on reducing uncertainties in international

transactions.FALSE

Use of a letter of credit in the transaction thus reduces the uncertainties involved.

AACSB: Analytic



Topic: Methods of Transacting International Business 19. By using of a letter of credit, the buyer need not pay the seller for goods prior to shipment and the

seller can obtain payment for the goods immediately upon shipment. Use of a letter of credit in thetransaction reduces the uncertainties involved.TRUE

Use of a letter of credit in the transaction thus reduces the uncertainties involved. The buyer neednot pay the seller for goods prior to shipment, and the seller can obtain payment for the goodsimmediately upon shipment.

AACSB: Analytic



Topic: Methods of Transacting International Business 20. Irrevocable letters of credit do not recognize the concept of substantial performance.

TRUE

There is no room in documentary transactions for substantial performance.

AACSB: Analytic






21. A licensing agreement allows an international business to enter a foreign market without any directforeign investment.TRUE

A licensing arrangement allows the international business to enter a foreign market without any directforeign investment.

AACSB: Analytic



Topic: Methods of Transacting International Business 22. The Alien Tort Claims Act was enacted 20 years ago to address tort actions arising from the recent

initiatives in global trade.FALSE

The Alien Tort Claims Act (ATCA), enacted in 1789, grants jurisdiction to U.S. federal districtcourts over "any civil action by an alien for a tort only, committed in violation of the law of nationsor a treaty of the United States." In the last 20 years it has been revived in a number of human rightscontexts, including claims brought against U.S. global companies.

AACSB: Analytic


Learning Objective: 12-05 To realize the complexity of resolving international disputes. Reed - Chapter 12 #22

Topic: Resolving International Disputes 23. A nationalization of assets is most likely to be considered an act in the "public interest" and immune

from suit under the FSIA.TRUE

A nationalization of assets, however, probably will be considered an act in the "public interest" andimmune from suit under the FSIA.

AACSB: Analytic



Topic: Resolving International Disputes 24. The notion of sovereign immunity has always been, and continues to be, absolute in its

application.FALSE

Until approximately 1952, this notion was absolute. From 1952 until 1976, U.S. courts adhered to arestrictive theory under which immunity existed with regard to sovereign or public acts but not withregard to private or commercial acts.

AACSB: Analytic



Topic: Resolving International Disputes



25. Under the doctrine of sovereign immunity, the foreign sovereign claims to be immune from suitentirely based on its status as a state.TRUE

The doctrine of sovereign immunity provides that a foreign sovereign is immune from suit in theUnited States. Under the doctrine of sovereign immunity, the foreign sovereign claims to be immunefrom suit entirely based on its status as a state.

AACSB: Analytic



Topic: Resolving International Disputes 26. In suing a foreign firm in the United States, a plaintiff must comply with the terms of the Convention

of International Sale of Goods.FALSE

Once the plaintiff decides to sue in the United States, he or she also must comply with the terms ofThe Hague Service Convention when serving the foreign defendant notice of the lawsuit.



Topic: Resolving International Disputes 27. The Hague Service Convention is a treaty designed to provide a simpler way to serve process abroad

when suing foreign businesses.TRUE

The Hague Service Convention is a treaty that was formulated "to provide a simpler way to serveprocess abroad, to assure that defendants sued in foreign jurisdictions would receive actual and timelynotice of suit, and to facilitate proof of service abroad."

AACSB: Analytic



Topic: Resolving International Disputes 28. Parties can use arbitration to avoid the unwanted publicity that often results in open court

proceedings.TRUE

Moreover, the parties can avoid the unwanted publicity that often results in open court proceedings.

AACSB: Analytic


Learning Objective: 12-05 To realize the complexity of resolving international disputes.

Reed - Chapter 12 #28 Topic: Resolving International Disputes



29. The World Intellectual Property Organization (WIPO) Arbitration and Mediation Center hears casesinvolving domain name disputes and cyber-squatting.TRUE

The World Intellectual Property Organization (WIPO) Arbitration and Mediation Center hears casesinvolving domain name disputes and cybersquatting.

AACSB: Analytic



Topic: Resolving International Disputes 30. The arbitration process likely is more will be more streamlined and easier for the parties to understand

than litigating the dispute in a foreign court.TRUE

The arbitration process likely will be more streamlined and easier for the parties to understand thanlitigating the dispute in a foreign court.

AACSB: Analytic



Topic: Resolving International Disputes 31. Which of the following is true of the Foreign Corrupt Practices Act of 1977?

A. It prosecutes any foreign official body that bribes American officials.B. It is designed to watch over the import-export transactions.C. It prohibits American citizens from doing business with countries that have a high level of

corruption.D. It is designed to stop bribery of foreign officials by American citizens.E. It governs the corrupt practices in countries doing business with American citizens.

Congress enacted the Foreign Corrupt Practices Act (FCPA) in 1977. The law is designed to stopbribery of foreign officials and to prohibit U.S. citizens and companies from making payments toforeign officials whose duties are not "essentially ministerial or clerical" for the purpose of obtainingbusiness.

AACSB: Analytic



Topic: Risks Involved in International Trade



32. Intermediaries, under the FCPA, are:A. given restricted rights to make payments to a foreign official.B. allowed to make payments to a foreign official.C. prohibited from making payments that can go to a foreign official.D. prohibited from all types of international trade.E. a recommended mode to make payments to foreign officials.

The FCPA also prohibits corrupt payments through intermediaries. It is unlawful to make a paymentto a third party, while knowing that all or a portion of the payment will go directly or indirectlyto a foreign official. The term knowing includes conscious disregard and deliberate indifference.Additionally, the anti-bribery provisions of the FCPA apply to foreign firms and persons who takeaction in furtherance of a corrupt payment while in the United States.

AACSB: Analytic



Topic: Risks Involved in International Trade 33. What does the term ‘knowing' refer to under the FCPA?

A. Conscious disregard and deliberate indifference.B. Working with a country that is indexed for high corruption practices.C. Stating in an official document that all parties involved are free from corrupt practices.D. Settlement of payments as per the contract.E. Understanding of the antibribery provisions and the laws that prohibit corruption.

The term knowing includes conscious disregard and deliberate indifference.

AACSB: Analytic



Topic: Risks Involved in International Trade 34. Which of the following is not a permissible payment for routine government action under the Foreign

Corrupt Practices Act?

A. Obtaining permits.B. Processing visas.C. Travel expenses to a foreign official for performing a contractual obligation.D. Scheduling inspections associated with the transit of goods across the country.E. Loading and unloading cargo.

Travel expenses of a foreign official for the purpose of demonstrating a product or for performing acontractual obligation.

AACSB: Analytic






35. _____ is used in the context of international law as the seizure of foreign-owned property by agovernment.A. NationalizationB. PossessionC. Power of eminent domainD. Export ControlsE. Expropriation

Expropriation, as used in the context of international law, is the seizure of foreign-owned property bya government.

AACSB: Analytic



Topic: Risks Involved in International Trade 36. _____ is used in the context of international law as the seizure of foreign-owned property by a

government.A. NationalizationB. PossessionC. Power of eminent domainD. Export ControlsE. Expropriation

Expropriation, as used in the context of international law, is the seizure of foreign-owned property bya government.

AACSB: Analytic



Topic: Risks Involved in International Trade 37. When a government assumes ownership of confiscated property, it also includes the process of

_____.

A. nationalizationB. expropriationC. power of eminent domainD. mortgageE. exclusion

Usually, the expropriating government also assumes ownership of the property, so the processincludes nationalization as well.

AACSB: Analytic






38. Which of the following is a risk involved with regard to the sale of U.S. strategic products andtechnology abroad?A. Import controlsB. Material controlsC. Export controlsD. Sales controlsE. Transaction controls

Another risk involved in doing business abroad is export controls placed on the sale of U.S. strategicproducts and technology abroad.

AACSB: Analytic



Topic: Risks Involved in International Trade 39. Export controls:

A. function in the same way as import controls.B. are placed on U.S. products and technology abroad.C. are the confiscation of foreign-owned property by a government.D. are similar to nationalization.E. are the power of eminent domain.

Another risk involved in doing business abroad is export controls placed on the sale of U.S. strategicproducts and technology abroad.

AACSB: Analytic



Topic: Risks Involved in International Trade 40. The Wassanaar Arrangement was entered into by 33 countries in order to control:

A. monetary value fluctuations encountered by nations when conducting international trade.B. the spread of military and dual use technology to unstable nations.

C.

the quality control of food and perishables between nations with different individual quality controlregulations.

D. price gouging by dominant countries when dealing with smaller or weaker countries.E. the impact of corruption on international trade, investments, and business policies.

Since that time, a new organization supported by 33 countries, known as the Wassanaar Arrangement,has come into existence to help control the spread of both military and dual-use technology to unstableareas of the world.

AACSB: Analytic






41. In the United States, the counterpart of expropriation is called:A. nationalism.B. zoning.C. police powers.D. eminent domain.E. confiscation

In the United States, the counterpart of expropriation is called the power of eminent domain.

AACSB: Analytic



Topic: Risks Involved in International Trade 42. Generally, international law is classified as:

A. public international law.B. criminal international law.C. common international law.D. civil international law.E. business international law.

Generally, international law is classified as either public international law or private international law.

AACSB: Analytic



Topic: International Law and Organizations 43. Which of the following statements is true of sources of international law?

A. Public international law examines relationships between businesses.B. Public international law uses rules that are binding on all countries in the international community.C. Private international law examines relationships created by private individuals.D. Private international law utilizes U.S. law to resolve international business disputes.E. Public international law examines the relationships between different populations.

Public international law examines relationships between nations and uses rules that are binding on allcountries in the international community.

AACSB: Analytic






44. The International Court of Justice is also called the:A. World Court.B. Supreme World Court.C. World Chancery Court.D. Court of International Acclaim.E. World Trade Court.

The decisions made by the ICJ, the World Court, do not create binding rules of law or precedent infuture cases.

AACSB: Analytic



Topic: International Law and Organizations 45. Which of the following is true of the International Court of Justice?

A. Private parties and corporations have access to the court and can directly present their claims.B.

Using legal devices, firms and individuals can compel the U.S. government to press claims on theirbehalf before the Court.

C. Only countries that have submitted to the Court's jurisdiction may be parties.D.

The Court has enforcement authority and does not rely on diplomacy or economic sanctions againstcountries.

E.

It is compulsory for all countries to accept the Court's jurisdiction, whether or not the use of theCourt suits their interests.

Only countries that have submitted to the Court's jurisdiction may be parties, since there is nocompulsory process for forcing a country to come before the Court.

AACSB: Analytic



Topic: International Law and Organizations 46. The International Court of Justice:

A. is made up of nine judges.B. allows all nations to initiate a case before it.C. hears cases of countries that have submitted to the Court's jurisdiction.D. can render opinions only when faced with an actual case.E. has been a major force in settling disputes since it began functioning.

Only countries that have submitted to the Court's jurisdiction may be parties, since there is nocompulsory process for forcing a country to come before the Court.

AACSB: Analytic






47. Infractions of international law are most frequently settled by:A. diplomacy.B. formal charges.C. economic sanctions.D. ICJ decision.E. penalties and damages.

Infractions of international law often are settled through diplomacy or arbitration, rather than by thepresentation of formal charges to the ICJ.

AACSB: Analytic



Topic: International Law and Organizations 48. The Charter of the United Nations sets forth as its primary goal:

A. combating corruption and corrupt practices in other countries.B. providing individual measures for the prevention and removal of threats to peace.C. ensuring that justice is delivered at all levels in all member countries.D. implementing a just and fair international law that guides international commercial transactions.E. eradicating cyber-squatting and criminal practices involving the Internet, in all member countries.

The Charter of the United Nations sets forth as its primary goal "to save succeeding generations fromthe scourge of war" and, to that end, authorizes "collective measures for the prevention and removal ofthreats to the peace, and for the suppression of acts of aggression or other breaches of the peace."

AACSB: Analytic



Topic: International Law and Organizations 49. The World Trade Organization was created as a result of the:

A. Geneva Convention.B. Uruguay Round.

C. Bretton-Woods Conference.D. Asian-Pacific Round.E. Convention of International Sale of Goods

Since GATT was created in 1948, it has undergone eight major revisions, including the 1994 UruguayRound, which culminated in the creation of the World Trade Organization (WTO) as an umbrellaorganization to regulate world trade.

AACSB: Analytic






50. The _____ encourages international trade by maintaining stable foreign exchange rates and worksclosely with commercial banks to promote orderly exchange policies with members.A. World BankB. World Trade OrganizationC. General Agreement in Tariffs and TradeD. International Monetary FundE. Convention on International Sale of Goods

The International Monetary Fund (IMF) encourages international trade by maintaining stable foreignexchange rates and works closely with commercial banks to promote orderly exchange policies withmembers.

AACSB: Analytic



Topic: International Law and Organizations 51. In 1994, the Uruguay Round incorporated all of the following principles from the General Agreement

on Tariffs and Trades except:A. equalization of import quotas.B. national treatment.C. non-discrimination.D. elimination of trade barriers.E. reducing tariffs.

At the heart of the 1994 Uruguay Round are several enduring GATT principles -nondiscrimination(treating all member countries equally with respect to trade); national treatment (countries notfavoring their domestic products over imported products; elimination of trade barriers (reducing tariffsand other restrictions in foreign products).

AACSB: Analytic



Topic: International Law and Organizations 52. Which of the following is true of the Commission of the European Union?

A. It coordinates the policies of the member states in a variety of areas from economics to foreignaffairs.

B. It is composed of elected representatives from each member state.C. It plays an active role in drafting legislation that has an impact on the daily lives of its citizens.D. It has joint power with the Council over the annual budget of the European Union.E.

It consists of individuals who represent the will and interests of the entire EU, rather than specificnational concerns.

The Commission consists of individuals who represent the will and interests of the entire EU, ratherthan specific national concerns.

AACSB: Analytic






53. _____ decides the nature and parameters of EU law.A. The ParliamentB. The CommissionC. The Court of JusticeD. The CouncilE. The Council of Ministers

The Court of Justice decides the nature and parameters of EU law. Justices are appointed by theCouncil, and each member state has a justice seated on the Court.

AACSB: Analytic



Topic: International Law and Organizations 54. Which of the following is true of the Convention on the International Sale of Goods?

A. It outlines standard international practices for the sale of goods.B. It encourages international trade by maintaining stable foreign exchange rates.C.

It promotes economic development in poor countries by making loans to finance necessarydevelopment projects and programs.

D. It ascertains what public international law is.E.

It grants jurisdiction to U.S. federal district courts over "any civil action by an alien for a tort only,committed in violation of the law of nations or a treaty of the United States."

The Convention on the International Sale of Goods (CISG) outlines standard international practicesfor the sale of goods.

AACSB: Analytic



Topic: International Law and Organizations 55. With respect to the sale of goods, which of the following is true as per the CISG?

A. All contracts for the sale of goods must be written.

B. All contracts for the sale of goods must be in the oral form.C. Contracts for the sale of goods need not be in writing.D. The parties should sign the contract in the presence of attorneys.E. Contracts concerning sale of goods above $500 must be in writing.

One of the most interesting provisions in the CISG includes a rule that contracts for the sale of goodsneed not be in writing.

AACSB: Analytic






56. Which of the following is a major institution of the European Union?A. The Secretary CouncilB. The International Court of JusticeC. The Council of MembersD. The House of RepresentativesE. The Council of Ministers

The major institutions of the EU are the Council of Ministers, the Commission, the Parliament, andthe Court of Justice.

AACSB: Analytic



Topic: International Law and Organizations 57. ______ opened up many opportunities for business between Costa Rica, El Salvador, Guatemala,

Honduras, Nicaragua, the Dominican Republic, and the United States.A. North America Free Trade AgreementB. Central America- Dominican Republic Free Trade AgreementC. U.S.-Colombia Free Trade AgreementD. Uruguay Round AgreementsE. Convention on the International Sale of Goods

The passage of the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) in2005 opened up many opportunities for business in Central America. CAFTA-DR is a comprehensivetrade agreement between Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, the DominicanRepublic, and the United States.

AACSB: Analytic



Topic: International Law and Organizations 58. The _____ provides for a dispute settlement mechanism that makes it easier to resolve trade disputes

between the United States, Mexico, and Canada.A. Convention on the International Sale of GoodsB. North American Free Trade AgreementC. Central America-Dominican Republic Free Trade AgreementD. Foreign Corrupt Practices ActE. General Agreement on Tariffs and Trade

The passage of the North American Free Trade Agreement (NAFTA) in 1993 set in motion increasedtrade and foreign investment and opportunities for economic growth in the United States, Mexico,and Canada. NAFTA also provides for a dispute settlement mechanism that makes it easier to resolvetrade disputes between the three countries.

AACSB: Analytic






59. Transactions using _____ involve, in addition to a seller and buyer, an issuing bank in the buyer'scountry.A. a bill of ladingB. a bill of exchangeC. an irrevocable promissory noteD. a negotiable instrumentE. an irrevocable letter of credit

Commonly, an irrevocable letter of credit is used to ensure payment. Transactions using such a letterinvolve, in addition to a seller and buyer, an issuing bank in the buyer's country.

AACSB: Analytic



Topic: Methods of Transacting International Business 60. When a buyer receives a receipt from a carrier stating that the goods ordered have been shipped to the

designated place for delivery, the receipt is called _____.A. an irrevocable letter of creditB. a bill of exchangeC. a bill of ladingD. an identity noteE. a promissory note

The buyer obtains a commitment from the bank to advance (pay) a specified amount (i.e. the price ofthe goods) upon receipt, from the carrier, of a bill of lading, stating that the goods have been shipped.

AACSB: Analytic



Topic: Methods of Transacting International Business 61. Which type of a contract can be adopted in case of a domestic firm granting a foreign firm the means

to produce and sell its product?

A. Transfer contractB. Franchise contractC. Promotion contractD. Foreign investment contractE. Foreign subsidiary contract

In appropriate circumstances, a domestic firm may choose to grant a foreign firm the means toproduce and sell its product. The typical method for controlling these transfers of information is thelicense or franchise contract.

AACSB: Analytic






65. Which of the following is true of a foreign subsidiary?A. A foreign subsidiary has fewer formalities in its creation and operation.B. A foreign subsidiary allows the parent company to have greater control.C. A foreign subsidiary is one of the cost-effective ways to expand business in foreign markets.D. A foreign subsidiary must be a national of the host country.E. A foreign subsidiary is a risk-free alternative that most corporations adopt for global expansion.

Since this designation may create difficulties in control and result in unnecessary expense, the usualpractice for multinational corporations is to create a foreign subsidiary in the host country.

AACSB: Analytic



Topic: Methods of Transacting International Business 66. In many cases, the only legal or political means a firm has to invest directly in a foreign country is to

engage in _____, with an entity from the host country.A. a foreign subsidiary arrangementB. a franchise agreementC. a license contractD. a mergerE. a joint venture

In many instances, however, the only legal or political means a firm has to invest directly in a foreigncountry is to engage in a joint venture with an entity from that host country.

AACSB: Analytic



Topic: Methods of Transacting International Business 67. Which of the following is true of a joint venture?

A.

It takes place when a domestic firm may choose to grant a foreign firm the means to produce andsell its product.

B.

It takes place when a company launches another company which it partially or completely owns ina foreign country.

C.

It takes place when a company designates a national firm or individual of the host country as itslegal representative.

D.

It takes place when a company invests in a country by engaging in business with an entity from thatcountry.

E. It takes place when a company merges with a company from the host country.

In many instances, however, the only legal or political means a firm has to invest directly in aforeign country is to engage in a joint venture with an entity from that host country. A host country'sparticipant may be a private enterprise or, especially in developing countries, a government agency orgovernment-owned corporation.

AACSB: Analytic






68. The _____ grants jurisdiction to U.S. federal district courts over "any civil action by an alien for a tortonly, committed in violation of the law of nations or a treaty of the United States."A. Federal Torts ActB. Alien Tort Claims ActC. Foreign Tort Claims ActD. International Tort ActE. Tort Claims in International Trade Act

The Alien Tort Claims Act (ATCA), enacted in 1789, grants jurisdiction to U.S. federal district courtsover "any civil action by an alien for a tort only, committed in violation of the law of nations or atreaty of the United States."

AACSB: Analytic



Topic: Resolving International Disputes 69. Under the doctrine of sovereign immunity, the foreign sovereign claims to be immune from suit

entirely based on _____.A. its status as a commercial center.B. its membership with the World Trade Organization.C. its status as a state.D. its political and economic conditions.E. its commercial acts.

Under the doctrine of sovereign immunity, the foreign sovereign claims to be immune from suitentirely based on its status as a state.

AACSB: Analytic



Topic: Resolving International Disputes 70. _____ is defined as the supreme, absolute, and uncontrollable power by which any state is

governed.A. SovereigntyB. GovernmentC. IntegrityD. FraternityE. Federation

Sovereignty is defined as the supreme, absolute, and uncontrollable power by which any state isgoverned.

AACSB: Analytic



Topic: Resolving International Disputes



71. The World Intellectual Property Organizations Arbitration and Mediation Center hears casesinvolving:A. international patent and copyright.B. sovereign immunity.C. international trademark and trade secret.D. domain name and cybersquatting.E. copyright and patent violation.

The World Intellectual Property Organization (WIPO) Arbitration and Mediation Center hears casesinvolving domain name disputes and cybersquatting.

AACSB: Analytic



Topic: Resolving International Disputes 72. The Foreign Sovereign Immunities Act codified which of the following?

A. Foreign governments cannot be sued under any cause of action within the United States.B. Foreign governments can be sued for most causes of action except when participating in

commercial acts.C.

Foreign governments cannot be sued for most causes of action but can be sued when participatingin commercial acts.

D.

Sovereign immunity was abolished making foreign governments liable for all acts committed withinthe United States, whether commercial or not.

E. Sovereign immunity held that governments could be held liable for nationalization of assets.

Congress enacted the Foreign Sovereign Immunities Act (FSIA), which codifies this restrictive theoryand rejects immunity for commercial acts carried on in the United States or having direct effects inthis country.

AACSB: Analytic



Topic: Resolving International Disputes 73. The Foreign Sovereign Immunities Act ______:

A. codifies the modern-traditional theory of trade and tariffs.B. provides immunity for private acts.C. rejects immunity for commercial acts carried on in the countries trading with the U.S.D. provides immunity for commercial acts having direct effects in the U.S.E. rejects immunity for commercial acts carried on in the U.S.

Foreign Sovereign Immunities Act (FSIA), which codifies this restrictive theory and rejects immunityfor commercial acts carried on in the United States or having direct effects in this country.

AACSB: Analytic

Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 To realize the complexity of resolving international disputes.

Reed - Chapter 12 #73 Topic: Resolving International Disputes



74. To sue a foreign firm in the United States, the plaintiff must:A. establish maximum contacts between the foreign defendant and the forum court.B. demonstrate that exercise of personal jurisdiction over the defendant will be ineffective.C. comply with the terms of the Hague Service Convention when serving notice of the lawsuit.D. comply with the terms of the Convention of International Sale of Goods when filing a lawsuit.E. establish legal representation in the area of personal jurisdiction.

Once the plaintiff decides to sue in the United States, he or she also must comply with the terms of theHague Service Convention when serving the foreign defendant notice of the lawsuit.

AACSB: Analytic



Topic: Resolving International Disputes 75. Which of the following is true concerning the arbitration of international disputes?

A. Arbitration is not widely practiced and, hence, is not an easily available option.B. Arbitration creates more publicity than litigation.C. Arbitration is complex alternative for the parties involved.D. Arbitration can be compelled, where previously agreed upon by the parties.E. Arbitration has been proven to have limited effectiveness concerning international disputes.

Under the New York Convention it is easier to compel arbitration, where previously agreed upon bythe parties, and to enforce the arbitrator's award once a decision is reached.

AACSB: Analytic



Topic: Resolving International Disputes 76. What are the criticisms the FCPA faces for its strict prohibition of American businesses bribing

officials of other countries?

Many legal observers criticized the FCPA for creating a significantly chilling effect on U.S.

companies seeking business in many developing countries where under-the-table payments togovernment officials are an accepted practice. Indeed, many civil servants in other nations areexpected to supplement their salaries in this manner. The U.S. prohibition of such payments isperceived as an attempt to impose U.S. standards of morality in other parts of the world, and it hascaused resentment and discrimination against U.S. businesses. Moreover, the FCPA arguably putsU.S. firms at a competitive disadvantage with businesses in other countries that are not operatingunder similar constraints.

AACSB: Analytic






ch14 Key 1. The three basic forms of business organizations are limited partnerships, S corporations, and limited

liability companies.FALSE

The law recognizes three basic forms of business organizations and several hybrid forms that containattributes of two or more basic forms. The three basic forms include sole proprietorships, partnerships,and corporations. Refer: Sidebar 14.1

AACSB: Analytic

AACSB: Ethics Blooms: Remember

Difficulty: 1 Easy Learning Objective: 14-01 To describe the factors to consider when deciding on the form of organization.

Reed - Chapter 14 #1 Topic: Introduction

2. Family-owned and family-operated businesses are common examples of publicly heldorganizations.

FALSE

Some organizations are owned by only a few persons. Such organizations are said to be closely held.Family-owned and family-operated businesses are common examples of closely held organizations.

AACSB: Analytic

AACSB: Ethics Blooms: Apply

Difficulty: 2 Medium Learning Objective: 14-01 To describe the factors to consider when deciding on the form of organization.


3. Corporate form of organizations enables shareholders to transfer their ownership without interferingwith the organization's management.

TRUE

When a business is publicly held by a large number of owners, the form of organization usually isa corporation. The reason for this corporate form being used is that shareholders can transfer theirownership without interfering with the organization's management.

AACSB: Analytic




4. Usually, the cost of creation of a business entity is not a major factor in considering which form ofoperation to choose.

TRUE

Significant factors to consider in selecting the best organizational form for a particular businessactivity include the cost of creating the organization.

AACSB: Analytic



Reed - Chapter 14 #4 Topic: Factors to Consider When Selecting a Businesss Organizational Form



5. Factor continuity refers to the legal steps necessary to form a particular business organization.

FALSE

The word "creation" means the legal steps necessary to form a particular business organization. Themost significant creation-related issues are how long it will take to create a particular organization andhow much paperwork is involved.

AACSB: Analytic




6. A dissolution is any change in the ownership of an organization that changes the legal existence of theorganization.TRUE

The crucial issue with this continuity factor is the method by which a business organization can bedissolved. A dissolution is any change in the ownership of an organization that changes the legalexistence of the organization.

AACSB: Analytic




7. The failure to consider how to overcome disputes involving managerial control can cause businessactivities to suffer and the organization to fail.TRUE

The failure to consider how to overcome disputes involving managerial control can cause businessactivities to suffer and the organization to fail. Therefore, consideration of potential conflict andmechanisms to resolve disputes are essential to consider when selecting a form for a business venture.

AACSB: Analytic




8. Although expensive to create, the use of sole proprietorships is becoming all the more common.

FALSE

The use of sole proprietorship is very limited because multiple owners cannot create a proprietorship.A sole proprietorship is the easiest and least expensive business organization to create.

AACSB: Analytic

AACSB: Ethics Blooms: Understand Difficulty: 2 Medium

Learning Objective: 14-02 To contrast the basic organizational forms that businesses select to conduct business. Reed - Chapter 14 #8

Topic: Selecting the Best Organizational Form



9. A business might shift away from the proprietorship form as it becomes more successful.TRUE

The ease of the steps used to create a proprietorship makes it an attractive alternative when beginninga new business venture. However, as the other factors might dictate, a business might shift away fromthe proprietorship form as it becomes more successful.

AACSB: Analytic


Difficulty: 1 Easy Learning Objective: 14-02 To contrast the basic organizational forms that businesses select to conduct business.

Reed - Chapter 14 #9 Topic: Selecting the Best Organizational Form

10. One of the advantages for a proprietor is that he may transfer the ownership of his proprietorshipwhenever desired.FALSE

The fact that the proprietorship's business activity may be more stable than the proprietor's willingnessto remain actively involved in the business indicates that the sole proprietorship is a less desirableorganizational form. Ownership of a sole proprietorship cannot be transferred.

AACSB: Analytic



Topic: Selecting the Best Organizational Form 11. A sole proprietor has limited liability for the obligations of the proprietorship.

FALSE

A sole proprietor is personally obligated for the debt of the proprietorship. Legally speaking, thisowner has unlimited liability for the obligations of this type of business organization.

AACSB: Analytic




12. A sole proprietorship is not taxed as an organization.TRUE

A sole proprietorship is not taxed as an organization. All the proprietorship's income subject totaxation is attributed to the proprietor.

AACSB: Analytic






13. Whenever two or more people wish to own a business together, a joint venture is a possibleorganizational form.FALSE

Whenever two or more people wish to own a business together, a partnership is a possibleorganizational form.

AACSB: Analytic




14. Partnership is the most easily formed business organization compared to all others.

FALSE

When compared to other forms of business organizations (other than the sole proprietorship), apartnership is easily formed. The cost of forming a partnership is relatively minimal.

AACSB: Analytic

AACSB: Ethics



Topic: Selecting the Best Organizational Form 15. The creation of a partnership requires permission from each state in which it does business.

FALSE

The cost of forming a partnership is relatively minimal. In addition, the creation of a partnership ismade easier since it does not need to get permission from each state in which it does business.

AACSB: Analytic




16. A common interest in business is one of the satisfying definitional elements of partnershipexistence.TRUE

The key to a partnership's existence is satisfying the elements of its definition. It includes (1) two ormore persons, (2) a common interest in business, and (3) sharing profits and losses.

AACSB: Analytic






17. A dissolution essentially terminates the business of a partnership.FALSE

A dissolution does not necessarily destroy the business of a partnership. Dissolution is not the samething as terminating an organization's business activity.

AACSB: Analytic AACSB: Ethics Blooms: Remember



18. All partners in a general partnership have unlimited liability for their organization's debts.TRUE

All partners in a general partnership have unlimited liability for their organization's debts. Thesepartners' personal assets, which are not associated with the partnership, may be claimed by thepartnership's creditors.

AACSB: Analytic

AACSB: Ethics



Topic: Selecting the Best Organizational Form 19. Shareholders elect the officers of a corporation.

FALSE

In the corporate form of organization, the shareholders elect the members of the board of directors.These directors set the objectives or goals of the corporation, and they appoint the officers.

AACSB: Analytic




20. A limited partnership is solely made up of limited partners.FALSE

A limited partnership basically has all the attributes of a partnership except that one or more of thepartners are designated as limited partners. The management is left in the hands of one or moregeneral partners who remain personally liable for the organization's debts.

AACSB: Analytic


Difficulty: 1 Easy Learning Objective: 14-03 To compare the hybrid organizational forms businesses may utilize to take advantage of attributes of various basic structures.




21. A limited partner may assign his/her interest to another without dissolving the limited partnership.TRUE

The principles guiding partnerships also apply to limited partnerships if there is a change in thegeneral partners. A limited partner may assign his/her interest to another without dissolving thelimited partnership.

AACSB: Analytic




22. A limited partner, even if he/she participates in management, cannot be held liable as a generalpartner.FALSE

Under the RULPA, a limited partner who participates in the organization's management becomesliable as a general partner if a third party had knowledge of the limited partner's activities.

AACSB: Analytic




23. Any operating loss suffered by an S corporation is shared and immediately deductible on the returnsof its shareholders.

TRUE

As a rule of thumb, S corporations have distinct advantages for a business operating at a loss becausethe loss is shared and immediately deductible on the returns of the shareholders.

AACSB: Analytic




24. The IRS treats LLCs as taxable entities.FALSE

In 1988, the Internal Revenue Service ruled that limited liability companies (LLCs) would be treatedas nontaxable entities, much like partnerships, for federal income tax purposes.

AACSB: Analytic






25. In a limited liability company, members act as agents of the LLC but are not personally liable to thirdparties.TRUE

For liability purposes, members do act as agents of their LLC. However, they are not personally liableto third parties. Thus, these members have attributes of both partners and shareholders with respect toliability.

AACSB: Analytic




26. A periodical review of the criteria used to select a form of organization enables the advantages of anorganizational form to be balanced against the disadvantages.

TRUE

The criteria used to select a form of organization needs to be reviewed periodically. The reviewersweigh the factors and costs involved and then select the most suitable organizational form forthe business's needs at that time. Because this selection process balances advantages againstdisadvantages, the decision often is to choose the least objectionable form of organization.

AACSB: Analytic


Learning Objective: 14-04 To understand the complexity of making a decision on the organizational form and recognize trends in managing organizations. Reed - Chapter 14 #26

Topic: Operating the Organization 27. It is usual for the growth in a business to be reflected in changes in organizational forms as a part of a

life cycle.TRUE

It is not unusual for the growth in a business to be reflected in changes in organizational forms as a

part of a life cycle.

AACSB: Analytic


Difficulty: 1 Easy Learning Objective: 14-04 To understand the complexity of making a decision on the organizational form and recognize trends in managing organizations.

Reed - Chapter 14 #27 Topic: Operating the Organization

28. In the current business environment, corporate boards are less likely to engage shareholders ingovernance decisions.

FALSE

A first significant trend in corporate governance relates to shareholders becoming increasingly active.In the current business environment, corporate boards are now more likely to engage shareholders in

governance decisions.

AACSB: Analytic






29. In the current business environment, there is an increased focus on legal liability for directors andofficers.TRUE

In the current business environment, there is an increased focus on legal liability for directors andofficers. The business judgment rule provides protection from liability to shareholders for businessdecisions, and corporations are generally obligated to indemnify directors and officers for third-party

harm resulting from company business.

AACSB: Analytic




30. Criminal prosecutions for corporate wrongdoing are rising, given the current trend of businessenvironment.FALSE

In a counter-trend, criminal prosecutions for corporate wrongdoing may be declining due to theincreased use of "deferred prosecution agreements" (DPA) by the federal government.

AACSB: Analytic




31. Which of the following is a basic form of business organization?A. LLCB. Limited partnershipC. LLP

D. Sole proprietorship

E. S corporation

The three basic forms of business organization include sole proprietorships, partnerships, andcorporation. Refer: Sidebar 14.1

AACSB: Analytic






32. Which of the following is true about publicly held business organizations?A. These organizations are owned only by a few persons.B. Decisions regarding selection of appropriate organizational forms are usually limited to these

organizations.

C.

Shareholders of such organizations can transfer their ownership without interfering with theorganization's management.

D. A family-operated business is a classic example of a publicly held business organization.

E.

The status of a shareholder in these organizations limits their liability for torts and shareholdersmostly forgo their limited liability for cosigning contracts.

When a business is publicly held by a large number of owners, the form of organization usually isa corporation. The reason for this corporate form being used is that shareholders can transfer theirownership without interfering with the organization's management.

AACSB: Analytic


Learning Objective: 14-01 To describe the factors to consider when deciding on the form of organization. Reed - Chapter 14 #32 Topic: Introduction

33. "Creation" means:

A. the legal steps required to form a particular business organization.B. the concept of a business.C. the intent to create a business.D. a paradigm shift in a business.E. the relation of the organization's existence to its owners.

The word "creation" means the legal steps necessary to form a particular business organization.

AACSB: Analytic




34. The crucial issue with the continuity factor of a business's organizational form is:A. management style.B. profit distribution.

C. the method by which the business can be dissolved.

D. the method of customer service observed.E. the control exercised by managers.

The crucial issue with the continuity factor is the method by which a business organization can bedissolved. A dissolution is any change in the ownership of an organization that changes the legalexistence of the organization.

AACSB: Analytic


Difficulty: 2 Medium Learning Objective: 14-01 To describe the factors to consider when deciding on the form of organization.




35. When selecting a form of business venture, considering potential conflicts and mechanisms to resolvedisputes refers to which of the following factors?A. CreationB. ContinuityC. Liability

D. Managerial control

E. Taxation

Usually, when people are excited about getting started in a business opportunity, no one takes time todiscuss methods of resolving potential deadlocks. The failure to consider how to overcome disputesinvolving managerial control can cause business activities to suffer and the organization to fail.Therefore, consideration of potential conflict and mechanisms to resolve disputes are essential toconsider when selecting a form for a business venture.

AACSB: Analytic


Learning Objective: 14-01 To describe the factors to consider when deciding on the form of organization. Reed - Chapter 14 #35

Topic: Factors to Consider When Selecting a Businesss Organizational Form 36. Which of the following qualifies a sole proprietorship?

A. Owned by one personB. Owned by one familyC. Has only one locationD. Activities in only one stateE. Has only one activity

A sole proprietorship is the easiest and least expensive business organization to create. In essence, theproprietor obtains whatever business licenses are necessary and begins operations.

AACSB: Analytic



Reed - Chapter 14 #36 Topic: Selecting the Best Organizational Form 37. Which of the following forms of organization requires no formal documentation but only business

licenses for formation?A. Limited partnershipB. CorporationC. Limited liability company

D. Sole proprietorship

E. S corporation

Sole proprietorship requires no formal documentation but only business licenses for formation. Refer: Figure 14.1


Difficulty: 2 Medium Learning Objective: 14-02 To contrast the basic organizational forms that businesses select to conduct business.




38. In a(n) _____, the shareholders are taxed only on income distributed.A. limited partnership

B. corporation

C. Limited liability companyD. sole proprietorshipE. S corporation

In a corporation, the shareholders are taxed only on income distributed. Refer: Figure 14.1

AACSB: Analytic




39. Which of the following organizations is equally managed by the members unless a manager isdesignated?A. Limited partnershipB. Corporation

C. Limited liability company

D. Sole proprietorshipE. S corporation

Limited Liability Companies are equally managed by the members unless a manager is designated. Refer: Figure 14.1

AACSB: Analytic




40. Which of the following has a perpetual existence so long as the number of shareholders is limited?A. Limited partnershipB. PartnershipC. Limited liability companyD. Sole proprietorship

E. S corporation

S corporation has a perpetual existence so long as the number of shareholders is limited. Refer: Figure 14.1

AACSB: Analytic






41. The creation of _____ is automatic based on business conduct and is modified by agreement.A. limited partnershipB. corporationC. partnership

D. sole proprietorshipE. S corporation

The creation of partnership is automatic based on business conduct and is modified by agreement. Refer: Figure 14.1

AACSB: Analytic




42. Which of the following requires organizers to file articles of organization with state official forformation?A. Limited partnershipB. Partnership

C. Limited liability company

D. Sole proprietorshipE. S corporation

A limited liability company requires its organizers to file articles of organization with state official forformation. Refer: Figure 14.1

AACSB: Analytic




43. Which of the following makes sole proprietorship a less desirable form of organization?A. Creation of sole proprietorship is expensive and requires formal documentation.

B.

Proprietorship's business activity may be more stable than the proprietor's willingness to remainactively involved in the business.

C.

Proprietor may have to share his/her voice of control and responsibility for the business' successwith the other acting members of the organization.

D. The business is always held liable for 100 percent of the debts.E. The proprietorship is a victim of double taxation.

The fact that the proprietorship's business activity may be more stable than the proprietor's willingnessto remain actively involved in the business indicates that the sole proprietorship is a less desirableorganizational form. Ownership of a sole proprietorship cannot be transferred.

AACSB: Analytic AACSB: Ethics Blooms: Understand Difficulty: 2 Medium





44. Jonathan wants to start a business. Which form of business organization will give him the mostcomplete and exclusive control over business decisions?

A. Sole proprietorship

B. PartnershipC. CorporationD. S corporationE. Limited liability company

The sole proprietor is in total control of his/her business's goals and operations. While the proprietorhas complete responsibility for the business's success or failure, the owners of all other organizationalforms usually share control to some degree.

AACSB: Ethics

AACSB: Reflective Thinking Blooms: Apply



45. Two or more individuals, an individual and a corporation, a partnership and a corporation, or anycombination of these entities may agree to create a(n):A. sole proprietorship.

B. partnership.C. corporation.D. S corporation.E. limited liability company.

Whenever two or more people wish to own a business together, a partnership is a possibleorganizational form. Two or more individuals, an individual and a corporation, a partnership and acorporation, or any combination of these entities may agree to create a business organization called apartnership.

AACSB: Analytic



Topic: Selecting the Best Organizational Form 46. Which of the following forms of organization is most easily formed at minimal costs?

A. Limited partnership

B. Partnership

C. CorporationD. S corporationE. Limited liability company

When compared to other forms of business organizations (other than the sole proprietorship), apartnership is easily formed. The cost of forming a partnership is relatively minimal.






47. A partnership must have:A. one or more people.B. no personal liability.C. a nonprofit focus.

D. a common interest in business.

E. a taxability factor built within.

The key to a partnership's existence is satisfying the elements of its definition, which are, (1) two ormore persons, (2) a common interest in business, and (3) sharing profits and losses.

AACSB: Analytic




48. Whenever two or more people wish to own a business together, they enter into a formal agreementcalled the:A. articles of confederation.B. articles of incorporation.

C. articles of partnership.

D. articles of association.E. articles of integration.

Whenever two or more people wish to own a business together, a partnership is a possibleorganizational form. Partners should never rely on implied agreements. Rather, their agreement shouldbe explicitly stated among the parties and drafted into a formal document. The formal agreement iscalled the articles of partnership. Refer: Sidebar 14.2

AACSB: Analytic



Reed - Chapter 14 #48 Topic: Selecting the Best Organizational Form 49. While selecting a name for the partnership, if the name is other than that of the partners, the partners

must give notice as to their actually identity under the state's:A. fictitious-name certification law.B. annexed-name statute.C. suppositious-name law.D. fictive-name rule.

E. assumed-name statute.

Since a partnership is created by agreement, the partners select the name of the partnership. If thename is other than that of the partners, the partners must give notice as to their actual identity underthe state's assumed-name statute. Refer: Sidebar 14.2

AACSB: Analytic






50. Which of the following is true about a general partnership?

A. It is dissolved any time there is a change in partners.

B. It can be transferred to new owners without affecting the original agreement.C. It has no liability.D. It is taxed as an entity.E. It requires permission from each state in which it does business during formation.

A general partnership is dissolved any time there is a change in the partners. For example, if a partnerdies, retires, or otherwise withdraws from the organization, the partnership is dissolved. Likewise, if aperson is added as a new partner, there is a technical dissolution of the organization.

AACSB: Analytic



Topic: Selecting the Best Organizational Form 51. To prevent problems that may arise when a partner dies or withdraws from a partnership, the articles

of partnership should include a(n):

A. buy and sell agreement.

B. escrow instruction.

C. dissolution contract.D. purchase contract.E. interest agreement.

To prevent problems that may arise when a partner dies or withdraws from a partnership, the articlesof partnership should include a buy and sell agreement. This agreement, which should be enteredinto when the business entity is created, provides for the amount and manner of compensation for theinterest of the deceased or withdrawing owner. Refer: Sidebar 14.3

AACSB: Analytic




52. Which of the following is true about managerial control in a general partnership?A. The agreement has to provide for each partner to have equal voice in the firm's affairs.

B. Control may be divided for the firm to include controlling partners and minority partners.

C. The differences in the degree of control do not affect the business's success.D.

The possibility of deadlock is higher when there are more number of partners and an odd numberof them.

E. Language governing issues of managerial control need to be made orally clear to all partners.

In a general partnership, unless the agreement provides to the contrary, each partner has an equalvoice in the firm's affairs. Partners may agree to divide control in such a way as to make controllingpartners and minority partners.

AACSB: Analytic






53. Which of the following is true about liability of partners in a general partnership?A. Partners have limited liability for the organization's debts.B. Partners personal assets, which are not associated with the partnership, may not be claimed by the

creditors.C. From a creditor's perspective, the liability of each partner extends only to a pro rata share.D. Any partner who has to pay beyond his pro rata share will have to make use of his future buyout

interest.

E. A partner having unlimited liability will be jointly and severally liable for the partnership'sobligations.

All partners in a general partnership have unlimited liability for their organization's debts. Thesepartners are jointly and severally liable for the partnership's obligations.

AACSB: Analytic



Topic: Selecting the Best Organizational Form 54. Which of the following is a disadvantage of partnerships?

A. The cost of formation is high.

B. They are based on consensual contracts.C. They are subject to more governmental supervision than corporations.D. A partnership needs to obtain a license if it wishes to operate in more than one state.

E. A partnership will be dissolved any time a partner leaves the partnership.

Disadvantages of partnerships include limitation of partners, dissolution at anytime with change inpartners, unlimited liability of partners, and partners being required to pay income tax on money notreceived.

AACSB: Analytic


Learning Objective: 14-02 To contrast the basic organizational forms that businesses select to conduct business. Reed - Chapter 14 #54 Topic: Selecting the Best Organizational Form

55. A partnership:A. cannot operate in more than one state without obtaining a license to do so.B. is generally subject to more regulation and governmental supervision than a corporation.C. provides general partners with unlimited liability.

D. involves significant formation costs.E. allows unlimited number of people to become partners.

Disadvantages of partnerships include limited number of partners; can be dissolved any time a partnerleaves the partnership; unlimited liability; and, partners are taxed on their share of the profits even ifthey did not receive them.

AACSB: Analytic AACSB: Ethics Blooms: Understand Difficulty: 2 Medium





56. A corporation created under the authority of a foreign country may be called a(n) _____corporation.A. importedB. offshore

C. alien

D. distantE. external

A corporation created under the authority of a foreign country may be called an alien corporation.

AACSB: Analytic




57. Which of the following is true about the creation of a corporation?A. It is created under federal law.

B. It created under state law.

C. The formal application for a corporate charter is called the articles of association.D. It is regulated only by local statutes.

E. Corporations are inexpensive to form.

A corporation is an artificial, intangible entity created under the authority of a state's law. Acorporation is created by a state issuing a charter upon the application of individuals known asincorporators.

AACSB: Analytic



Topic: Selecting the Best Organizational Form 58. The most difficult and complicated business organization to create is the:

A. sole proprietorship.B. partnership.C. limited partnership.

D. corporation.

E. limited liability partnership.

As a creature of state legislative bodies, the corporation is much more complex to create and tooperate than other forms of businesses.

AACSB: Analytic






59. A corporate charter is issued following an application made by individuals known as:

A. incorporators.

B. corporate officers.C. board members.D. corporate panel.E. proxies.

A corporation is created by a state issuing a charter upon the application of individuals known asincorporators.

AACSB: Analytic




60. The formal application for a corporate charter is called the:A. articles of confederation.

B. articles of incorporation.

C. articles of partnership.D. articles of association.

E. articles of integration.

The formal application for a corporate charter is called the articles of incorporation. These articlesmust contain the proposed name of the corporation. Refer: Sidebar 14.4

AACSB: Analytic




61. In a closely held corporation, the majority shareholders:A. have no influence on management.B. elect the members of the board of directors.

C. cannot be employed by the corporation.D. have the same impact on policy as minority stockholders.E. bring upon derivative suits on behalf of the corporation.

Unlike the situation with a large, publicly held corporation, one shareholder (or at least a smallgroup of shareholders) may be able to control a closely held corporation. This can result because thisindividual (or the group) can own an actual majority of the issued shares. This majority can control theelection of a board of directors.

AACSB: Analytic

AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 14-02 To contrast the basic organizational forms that businesses select to conduct business.




62. When a derivative law suit is filed:A. majority shareholders may complain that minority shareholders are not cooperating with the board.

B.

majority shareholders are required to prove that they are not acting illegally or oppressing the rightsof minority shareholders.

C.

minority shareholders are required to provide evidence that the majority shareholders are actingillegally or oppressing the rights of the minority shareholders.

D.

directors are suing the officers and asking for their termination due to illegal or oppressive acts

directed at all shareholders.E. majority shareholders act on behalf of the organization.

If the majority is acting illegally or oppresses the rights of the minority shareholders, a lawsuit knownas a derivative suit may be brought by a minority shareholder on behalf of the corporation. If a suit isbrought, the burden is on the director or officer (who may be the majority shareholder) to prove goodfaith and inherent fairness in such transactions.

AACSB: Analytic



Topic: Selecting the Best Organizational Form 63. When one person, or a very few persons, own all the shares of stock in a corporation, it is considered a

_____ organization.A. publicly heldB. narrowly held

C. closely held

D. tightly heldE. minority held

Unlike the situation with a large, publicly held corporation, one shareholder (or at least a smallgroup of shareholders) may be able to control a closely held corporation. This can result because thisindividual (or the group) can own an actual majority of the issued shares.

AACSB: Analytic






64. When a court finds that the shareholders of a corporation are using the corporate structure to shieldthemselves from liability when acting for purely personal purposes, the court may disregard thecorporate structure and impose personal liability on the shareholders treating them like partners. Thisis called:A. cracking the corporate shell.

B. piercing the corporate veil.

C. breaking the corporate shield.

D. breaching the corporate defense.E. rupturing the corporate law.

When courts find that the corporate organization is being misused, the corporate entity can bedisregarded. This has been called piercing the corporate veil. When this veil of protection has beenpierced, the shareholders are treated like partners who have unlimited liability for their organization'sdebts.

AACSB: Analytic



Topic: Selecting the Best Organizational Form 65. If a corporate entity is disregarded by officers or directors so that there is such a unity of ownership

and interest that separateness of the corporation has ceased to exist, the corporate veil may be piercedbased on the:

A. alter-ego theory.

B. negligent conduct theory.C. corporate confusion theory.D. corporate envelopment theory.E. corporate doppelganger theory.

The alter-ego theory, by which the corporate veil can be pierced, may also be used to impose personalliability upon corporate officers, directors, and stockholders. If the corporate entity is disregarded bythese officials themselves, so that there is such a unity of ownership and interest that separateness ofthe corporation has ceased to exist, the alter-ego theory will be followed and the corporate veil will be

pierced.

AACSB: Analytic




66. Which of the following is a taxable entity?A. A partnershipB. An S corporationC. A limited liability companyD. A corporation

E. A sole proprietorship

Corporations must pay income taxes on their earnings. The fact that there is a separate corporateincome tax may work as an advantage.

AACSB: Analytic






67. Which of the following is an advantage of the corporate organization?A. License fees and franchise taxes are rarely assessed against corporations.

B. Control of a corporation may be held by those with a minority of the investment.

C. The cost of forming and maintaining a corporation is minimal.D. Once a corporation is properly formed, it becomes automatically eligible to do business in all 50

states.E. Ownership must be divided into three or more equal shares.

Advantages of corporations include best means for bringing together large number of investors,control held by those with a minority of the investment, ownership divided into many unequal shares,limited liability of shareholders, perpetual existence, and benefits for shareholders.

AACSB: Ethics

AACSB: Reflective Thinking Blooms: Understand

Difficulty: 3 Hard Learning Objective: 14-02 To contrast the basic organizational forms that businesses select to conduct business.


68. Disadvantages of the corporate form of organization include:A. single taxation.

B. cost of formation and maintenance.

C. unlimited liability.D. dissolution from change in memberships.E. lack of benefits for shareholders.

Disadvantages of corporations include cost of forming and maintaining a corporation, assessment oflicense fees and franchise taxes, requirement of qualification in each state of operation, subjection togovernmental regulations at all levels, and double taxation.

AACSB: Ethics

AACSB: Reflective Thinking Blooms: Understand

Difficulty: 3 Hard Learning Objective: 14-02 To contrast the basic organizational forms that businesses select to conduct business.


69. For limited partners to retain their status of limited liability, the partnership must evidence _____compliance with all technical requirements of the limited partnership law.A. completeB. nominalC. minorD. reasonable

E. substantial

If an accurate certificate is not on record and the limited partnership continues its operation, thelimited partners become liable as general partners. Substantial compliance with all the technicalrequirements of the limited partnership law is essential if the limited partners are to be assured of theirlimited liability.

AACSB: Analytic






70. Limited partners:A. are personally responsible for debts of the business.B. control operations of the limited partnership.C. may dissolve the limited partnership by assigning their interest in a business to another person.D. may have their surnames used in the partnership's name.

E. may act as a guarantor of the partnership's obligations.

A limited partner may participate in the following activities and not be considered participatingin management: being an agent or employee of the partnership; being a consultant; a guarantor ofpartnership debt; inspecting the books; receiving profits or other compensation from the business;voting on an amendment to the partnership certificate; voting on major partnership issues; and, havingcontributions returned after dissolution. Refer: Sidebar 14.7

AACSB: Analytic


Learning Objective: 14-03 To compare the hybrid organizational forms businesses may utilize to take advantage of attributes of various basic structures. Reed - Chapter 14 #70

Topic: Selecting the Best Organizational Form 71. Which of the following is an activity that a limited partner may NOT engage in?

A. Acting as an agent of the partnershipB. Approving an amendment to the partnerships' certificate

C. Participating in management

D. Inspecting any of the partnership's financial recordsE. Advising or consulting with a general partner

Limited partners may not participate in the management of the limited partnership. Under the RULPA,a limited partner who participates in the organization's management becomes liable as a generalpartner if a third party had knowledge of the limited partner's activities.

AACSB: Analytic



Topic: Selecting the Best Organizational Form 72. Which of the following is true about an S corporation?

A. It has the same legal characteristics as any other corporation except for the issue of taxation.

B. It is the official designation for a corporation with 500 or less employees.C. It is the same as any other corporation except for management participation by stockholders.D. It is exactly the same as any other corporation.E. It need not file an information return with the IRS since it does not pay any taxes.

The S corporation has all the legal characteristics of the corporation. The one exception to this similartreatment is that shareholders in the S corporation are responsible for accounting on their individualincome tax returns for their respective shares of their organization's profits or losses.

AACSB: Analytic






73. An LLC is created through filing the _____ with a state official, usually the secretary of state.A. articles of confederationB. articles of incorporation

C. articles of organization

D. articles of associationE. articles of integration

An LLC is created through filings much like those used when creating a corporation. Articles oforganization are filed with a state official, usually the secretary of state. Instead of "incorporators," theterm "organizers" is used.

AACSB: Analytic




74. The owners of LLCs are called:A. shareholders.B. partners.C. proprietors.

D. members.E. directors.

The owners of LLCs are called members rather than shareholders or partners.

AACSB: Analytic




75. Which of the following is true about the trends in operating business organizations?A. With the recent financial crises, public attention is moving toward management of limited

partnerships.B. Shareholders are losing interest and are becoming less active.C.

The Dodd-Frank Act has mandated rules that prevent shareholders from including their own boardcandidates in proxy materials.

D.

In many cases, corporations and individuals reasonably have an equal claim to rights andprotections under the law.

E. The focus on legal liability for directors and officers is decreasing.

A recent trend is the continued definition of the nature of corporate personhood. In many cases,corporations and individuals reasonably have an equal claim to rights and protections under the law.

AACSB: Analytic

AACSB: Ethics Blooms: Understand Difficulty: 2 Medium Learning Objective: 14-04 To understand the complexity of making a decision on the organizational form and recognize trends in managing organizations.


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