Drill 1 ·
What Is a Business and Organizational Roles Drill 1 is a practice drill. It contains 5 original questions created by Brian Stewart, a Barron's test prep author with over 20 years of tutoring experience.
Three founders compare ownership structures for a new coffee-roasting venture; uses an invented company and original figures.
Three friends are starting Wrenfield Coffee Roasters and must choose an ownership structure. The table compares four common forms on three attributes. Below it, the founders list how much cash each is contributing.
Wrenfield Coffee Roasters: Ownership Structure Comparison
| Structure | Owner liability | Taxation | Ability to raise capital |
|---|---|---|---|
| Sole proprietorship | Unlimited | Personal (pass-through) | Lowest |
| Partnership | Unlimited (shared) | Personal (pass-through) | Limited |
| LLC | Limited | Pass-through (default) | Moderate |
| Corporation | Limited | Corporate (can be taxed twice) | Highest |
Founder cash contributions: Avery 30,000; Ben 30,000; Cara 15,000. The founders plan to assign ownership shares in proportion to each person's contribution.
Question 1. According to the table, which structure offers both limited owner liability and the highest ability to raise capital?
Explanation: Q1: Data interpretation. The answer is corporation. Reading the table, the corporation row shows limited liability and the highest ability to raise capital. The sole proprietorship and partnership both show unlimited liability. The LLC shows limited liability but only moderate ability to raise capital, not the highest.
Question 2. 'Unlimited liability,' shown for the sole proprietorship and partnership, means that:
Explanation: Q2: Concept. The answer is that the owners' personal assets can be used to pay the business's debts. Unlimited liability means the owners can be personally responsible for the business's debts, so personal assets are exposed. Selling shares describes a corporation's capital-raising, not liability. A cap on revenue is unrelated to liability. Owing no taxes is false; these forms still have pass-through personal taxation.
Question 3. Using the contribution amounts, what ownership share will Cara receive?
Explanation: Q3: Calculation. The answer is 20 percent. Total contributions are 30,000 + 30,000 + 15,000 = 75,000; Cara's 15,000 is 15,000 / 75,000 = 0.20, or 20 percent. 15 percent mistakes her dollar amount in thousands for a percentage. 33 percent assumes an equal three-way split. 25 percent treats her share as one-quarter, which her smaller contribution does not support.
Question 4. Why might the three founders choose an LLC over a general partnership for Wrenfield?
Explanation: Q4: Why-reasoning. The answer is that an LLC offers limited liability, protecting the owners' personal assets in a way a partnership does not. The table shows the partnership with unlimited shared liability but the LLC with limited liability, so switching generally protects the founders' personal assets from business debts. The first choice is false because the LLC still has pass-through taxation. The third is wrong because an LLC has owners, usually called members. The fourth is wrong because the corporation, not the LLC, shows the highest ability to raise capital.
Question 5. As Wrenfield grows, Avery will run daily store operations, Ben will manage roasting and supply, and Cara will keep the books and handle payroll. Dividing the work this way is an example of:
Explanation: Q5: Concept/role. The answer is organizing the business by roles, so each owner specializes in a function. Assigning operations, production, and finance to different owners is division of labor by organizational role, which is how a small firm structures its work. Unlimited liability concerns who pays the firm's debts, not who does which job. Double taxation is a tax feature of corporations. Raising financial capital is about obtaining funding, not assigning duties.