Sample Quizzes For Preparation: Types of Business Entity

AS Level Accounting – Chapter 1.1: Types of Business Entity – Quiz

1. Which of the following best describes a sole trader?

A. A business owned by shareholders
B. A business owned by one person
C. A business owned by two or more people
D. A business run by government officials

2. What is a key disadvantage of being a sole trader?

A. Limited liability
B. Lack of ownership
C. Unlimited liability
D. No profit retention

3. Which business entity has a separate legal identity from its owners?

A. Sole trader
B. Partnership
C. Private limited company
D. Informal enterprise

4. In a partnership, how are profits typically shared?

A. Equally among employees
B. Based on capital employed
C. According to an agreement between partners
D. Paid to the government

5. What type of liability does a shareholder in a plc usually have?

A. Joint and several
B. Unlimited
C. Personal
D. Limited

6. Which of the following is NOT a characteristic of a private limited company?

A. Limited liability
B. Public share offering
C. Legal personality
D. Continuity after death of a shareholder

7. What is the maximum number of shareholders in a private limited company?

A. 5
B. 20
C. 50
D. Unlimited

8. Which of these entities publishes their financial accounts publicly?

A. Sole trader
B. Partnership
C. Private limited company
D. Public limited company

9. Which source of finance is exclusive to limited companies?

A. Bank overdraft
B. Share capital
C. Trade credit
D. Leasing

10. What does the principle of limited liability mean?

A. Owner is liable for all debts
B. Liability is limited to unpaid share capital
C. Owner’s house is always at risk
D. Partners have unlimited liability

11. Which document outlines the rights and responsibilities of partners?

A. Certificate of incorporation
B. Partnership agreement
C. Articles of association
D. Prospectus

12. Which of these is most likely to apply to a sole trader?

A. High compliance cost
B. Long approval times
C. Full decision-making power
D. Complex legal structure

13. What happens to a partnership if one partner dies (without special agreement)?

A. It becomes a sole trader
B. It continues automatically
C. It dissolves
D. It becomes a limited company

14. Which is the most suitable form of business for a national supermarket chain?

A. Sole trader
B. Partnership
C. Private limited company
D. Public limited company

15. Why might a partnership have better access to finance than a sole trader?

A. Partnerships are always richer
B. There are multiple owners contributing capital
C. Banks avoid sole traders
D. Partners have limited liability

16. Which of these sources of finance is typically used for long-term asset purchase?

A. Overdraft
B. Bank loan
C. Cash in hand
D. Trade credit

17. A business that continues after the owner’s death likely has which feature?

A. Unlimited liability
B. Continuity
C. Joint ownership
D. High taxation

18. In which entity is there often a separation between ownership and control?

A. Sole trader
B. Partnership
C. Public limited company
D. Cooperative

19. What is the role of directors in a company?

A. To own the company
B. To supervise banks
C. To manage operations on behalf of shareholders
D. To conduct legal audits

20. Why might a business lease equipment instead of buying it?

A. It provides tax evasion
B. Leasing offers ownership
C. It avoids large initial payments
D. Leased items last longer

21. Which of the following is a key feature of a sole trader?

A. Issues shares to raise capital
B. Has unlimited liability
C. Has separate legal identity
D. Controlled by board of directors

22. Which of the following best defines a plc?

A. Can sell shares to the public
B. Restricted to 2–20 owners
C. Owned by one person only
D. Government-controlled

23. What is the major risk of unlimited liability?

A. Cannot raise capital
B. Higher profits
C. Personal assets may be seized
D. More legal requirements

24. What is the primary motive behind forming a limited company?

A. Avoid tax
B. Increase liabilities
C. Obtain limited liability and raise capital
D. Reduce employment

25. Which form of business has the highest start-up costs and legal requirements?

A. Sole trader
B. Partnership
C. Private limited company
D. Public limited company

26. What is trade credit?

A. Loan taken from shareholders
B. Buying goods now, paying later
C. A type of investment
D. Government aid

27. Which of these is NOT a benefit of being a sole trader?

A. Full control
B. Easy setup
C. Full liability protection
D. All profits retained

28. Which stakeholder is most concerned with return on investment?

A. Government
B. Supplier
C. Customer
D. Shareholder

29. What is meant by “pooling of resources” in partnerships?

A. Mixing customers
B. Sharing profit equally
C. Combining capital and skills
D. Setting up different bank accounts

30. Which type of business is likely to face double taxation?

A. Sole trader
B. Partnership
C. Private limited company
D. Public limited company

Answers with Explanations

1. B
   A sole trader is a business owned and controlled by one person, although they may employ others.
2. C
   Sole traders have unlimited liability, meaning personal assets can be used to cover business debts.
3. C
   Private limited companies have a separate legal identity from their owners (shareholders).
4. C
   Profits are shared as agreed in the partnership agreement, not necessarily equally.
5. D
   Shareholders in a plc have limited liability – only liable up to the value of their shares.
6. B
   Only public limited companies offer shares to the public; private ones do not.
7. D
   There is no legal maximum for shareholders in a private limited company, but it’s typically fewer than in a plc.
8. D
   Only public limited companies must publish their accounts; private companies may not need to.
9. B
   Share capital is a source of finance available only to limited companies.
10. B
    Limited liability protects personal assets – shareholders lose only the amount invested.
11. B
    Partnership agreements outline profit sharing, roles, and other rules.
12. C
    Sole traders have complete control over their business decisions.
13. C
    A partnership dissolves by default upon a partner’s death unless otherwise agreed.
14. D
    A plc suits large-scale businesses like national supermarkets due to capital needs and public investment.
15. B
    Multiple partners can contribute more capital and offer greater security to lenders.
16. B
    Bank loans are commonly used for long-term asset financing.
17. B
    Continuity refers to a company continuing to exist after the death of a shareholder.
18. C
    In a plc, ownership (shareholders) and control (directors) are separate.
19. C
    Directors are appointed to manage the company’s affairs on behalf of shareholders.
20. C
    Leasing helps avoid high upfront costs and preserves working capital.
21. B
    Sole traders face unlimited liability as they are personally responsible for debts.
22. A
    A plc can offer shares to the general public through a stock exchange.
23. C
    Unlimited liability risks personal asset loss if the business fails.
24. C
    A key advantage of limited companies is the ability to raise capital while protecting owners’ personal assets.
25. D
    Plcs have the most complex legal setup and face high regulatory requirements.
26. B
    Trade credit allows businesses to purchase goods/services now and pay later.
27. C
    Sole traders don’t have liability protection; that’s only in limited companies.
28. D
    Shareholders are mainly concerned with return on their investment in the company.
29. C
    Pooling resources means sharing financial and human capital among partners.
30. D
    Plcs may face double taxation – company profits are taxed, then dividends are taxed again.