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AICPA CPA-Business Exam Prep
CPA Business Environment and Concepts (Page 26 )

Updated On: 30-Sep-2026
Page 21 of 107
PDF with 530 Questions

Which of the following statements describes the same characteristic for both an S corporation and a C corporation?

  1. Both corporations can have more than 100 shareholders.
  2. Both corporations have the disadvantage of double taxation.
  3. Shareholders can contribute property into a corporation without being taxed.
  4. Shareholders can be either citizens of the United States or foreign countries.

Answer(s): C

Explanation:

Choice "c" is correct. Either entity's shareholders may contribute property to the corporations without being taxed and may contribute such property as an exchange for stock as appraised by the directors.
Choice "a" is incorrect. An S corporation may not have more than 100 shareholders, although a C corporation may have as many shareholders as desired.
Choice "b" is incorrect. Only the C corporation is subject to the double taxation disadvantage. Choice "d" is incorrect. Only an S corporation is prohibited from having foreign country shareholders.



Smith was an officer of CCC Corp. As an officer, the business judgment rule applies to Smith in which of the following ways?

  1. Because Smith is not a director, the rule does not apply.
  2. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused.
  3. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, but CCC may elect to reimburse Smith for any damages Smith paid.
  4. If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, and CCC is prohibited from reimbursing Smith for any damages Smith paid.

Answer(s): B

Explanation:

Choice "b" is correct. The business judgment rule applies to officers as well as directors, who in their capacity, act in a manner the officer believes to be in the best interest of the corporation, and with the care an ordinarily prudent person in a like position would exercise. If the standards of the business judgment rule are met, the officer is not liable to the company for resulting damages. Choices "a", "c", and "d" are incorrect, per the above rule.



In which type of business entity is the entire ownership interest most freely transferable?

  1. General partnership.
  2. Limited partnership.
  3. Corporation.
  4. Limited liability company.

Answer(s): C

Explanation:

Choice "c" is correct. Among the business entities listed, entire ownership interests are most freely transferable in a corporation. Unless transferability is restricted by contract (restricted shares or voting trusts or voting agreements), there are no restrictions on the sale of corporate stock (the common stock represents the stockholders' ownership interest). The right to transfer ownership interests freely is one of the advantages of the corporate form of business. Choice "a" is incorrect. A general partner in a general partnership may assign his or her right to receive profits or surplus. A general partner cannot assign his interest and confer partnership status on the assignee without unanimous consent of all other partners. Choice "b" is incorrect. Both general partners and limited partners in a limited partnership may assign the right to receive profits and surplus. Neither general nor limited partners can confer general or limited partnership status on the assignee without the unanimous consent of all general and all limited partners.
Choice "d" is incorrect. In most states, limited liability company (LLC) members may not sell and confer ownership interest without the consent of all LLC members.



Which of the following statements is correct regarding both debt and common shares of a corporation?

  1. Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest.
  2. Common shareholders and debt holders have an ownership interest in the corporation.
  3. Common shares typically have a fixed maturity date, but debt does not.
  4. Common shares have a higher priority on liquidation than debt.

Answer(s): A

Explanation:

Choice "a" is correct. Common shares represent an investment in the corporation whereby the common shareholder becomes a part owner of the corporation. A debt holder is a creditor of the corporation. The corporation has borrowed money from the debt holder and promises to repay at a later date. A debt holder is not an owner of the corporation. Choice "b" is incorrect. Unlike a common shareholder, a debt holder does not have an ownership interest in the corporation.
Choice "c" is incorrect. Common shares do not have a fixed maturity date, but debt securities do. This answer is backwards.
Choice "d" is incorrect. Upon liquidation of a corporation, the creditors of the corporation are paid first.
After the creditors are paid, the shareholders are paid on a pro rata basis. Thus, debt holders (creditors) have a higher priority than stockholders.



Which of the following is an advantage of forming a limited liability company (LLC) as opposed to a partnership?

  1. The entity may avoid taxation.
  2. The entity may have any number of owners.
  3. The owner may participate in management while limiting personal liability.
  4. The entity may make disproportionate allocations and distributions to members.

Answer(s): C

Explanation:

Choice "c" is correct. A member in a limited liability company has limited liability and the ability to manage, while a partner in a general partnership has full liability and the ability to manage. Choice "a" is incorrect. Generally, both entities' profits are taxable at the ownership level, but a Limited Liability Company may be taxed as an entity if it so elects. Choice "b" is incorrect. Both entities may have any number of owners. Choice "d" is incorrect. Both entities may make disproportionate allocations and distributions to their owners.



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