Deck 7: Preparing the Proper Ethical and Legal Foundation

Question 1

All businesses that plan to use a fictitious name, which is any name other than the business owner's name, need a(n):

A) unreal business name permit
B) fabricated business name permit
C) invented business name permit
D) conjured business name permit
E) fictitious business name permit

Answer 1

E

Question 2

Which of the following statements regarding business licenses and permits is incorrect?

A) Most business licenses and permits can wait until after a business is launched to be obtained.
B) A business license can be obtained at the city clerk's office in the community where the business will be located.
C) If a business will be run out of a home, a home occupation business license is often required.
D) Some business licenses are hard to get.
E) The business licenses and permits that are needed vary by city, county, and state.

Answer 2

A

Question 3

Most founders' agreements include a ________, which legally obligates the departing founder to sell to the remaining founders his or her interest in the firm if the remaining founders are interested.

A) redemption clause
B) buyback clause
C) statutory purchase clause
D) voluntary recoup clause
E) shareholder surrender clause

Answer 3

B

Question 4

Xplosafe, the company profiled in the opening feature for Chapter 7, interviewed four attorneys before selecting the attorney they now use. They selected the attorney they did for two reasons:

A) his fees were the lowest and he is an entrepreneur himself
B) his references were the strongest and he is a former examiner for the U.S. Copyright Office
C) he is the President of the Oklahoma City, Oklahoma, bar association and he had experience working with startups
D) he is a startup entrepreneur himself and he is a former examiner for the U.S. Patent and Trademark Office
E) he had more experience working with startups and he agreed to alter his fee structure to charge less at the beginning and more as Xplosafe became profitable

Question 5

Which of the following is typically not included in the founders' agreement for a firm?

A) marketing plan
B) legal form of business ownership
C) buyback clause
D) apportionment of stock
E) identity and proposed titles of the founders

Question 6

A(n) ________ agreement binds an employee or another party to not disclose a company's trade secret. A ________ agreement prevents an individual from competing against a former employer for a specific period of time.

A) nondisclosure, noncompete
B) non breach-of-trust, nonchallenge
C) voluntary truth, nonparticipate
D) binding confidentiality, noncompete
E) ethics, nonparticipate

Question 7

A ________ is a formal statement of an organization's values on certain ethical and social issues.

A) code of conduct
B) code of behavior
C) code of performance
D) code of principles
E) code of morals

Question 8

Rachael James just took a job with IKEA. As part of her employment agreement, IKEA required Rachael to sign an agreement, which states that if she leaves IKEA, she will not work for a firm that competes against IKEA for at least two years. The agreement that Rachael signed is called a:

A) nondisclosure agreement
B) nonparticipate agreement
C) nonchallenge agreement
D) noncompete agreement
E) noncontend agreement

Question 9

Which of the following is the most important thing that an entrepreneur, or team of entrepreneurs, can do to build a strong ethical culture in their organization?

A) implement an ethics training program
B) write a mission statement
C) lead by example
D) hire an ethics compliance officer
E) write a code of conduct

Question 10

The Savvy Entrepreneurial Firm feature in Chapter 6 focuses on the topic of vesting company stock. According to the feature, a typical startup's vesting schedule lasts ________ and includes a 12-month cliff.

A) 12 months
B) 12 months to 24 months
C) 24 months to 36 months
D) 36 months to 48 months
E) 48 months to 60 months

Question 11

According to the textbook, the single most important thing the founders of an entrepreneurial venture can do is:

A) start a board of advisors
B) establish business partnerships
C) make money
D) select a limited liability corporation as opposed to an S-corporation
E) establish a strong ethical culture for their firms

Question 12

A(n) ________ is a written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the cash or the "sweat equity" they put into the firm, and how long the founder will have to remain with the firm for their shares to fully vest.

A) entrepreneurs' agreement
B) creators' agreement
C) founders' agreement
D) initiators' agreement
E) originators' agreement

Question 13

Trevor Parsons just took a job with Twitter. As part of his employment contract, Trevor signed an agreement that states that he will not disclose any of Twitter's trade secrets. The agreement that Trevor signed is called a(n):

A) nondisclosure agreement
B) non breach-of-trust agreement
C) ethics agreement
D) binding confidentiality agreement
E) legitimacy agreement

Question 14

According to Chapter 7, which of the following forms of misconduct or unethical behavior was observed by the highest percentage of the U.S. workforce?

A) company resource abuse
B) employee privacy breach
C) health or safety violations
D) lying to outside stakeholders
E) discrimination

Question 15

A situation that involves doing something that is beneficial to oneself or the organization, but may be unethical, is called a(n):

A) ethical quandary
B) ethical predicament
C) ethical dilemma
D) principled quandary
E) just dilemma

Question 16

"Don't be evil" is the corporate motto for:

A) Facebook
B) Twitter
C) Zynga
D) Apple Inc.
E) Google

Question 17

The What Went Wrong? feature in Chapter 7 focuses on the failure of Green Plant, a company that sold smoothie drinks. Green Plant failed in part because it was sued by Jamba Juice for:

A) copyright infringement
B) trademark infringement
C) violating a nondisclosure agreement
D) theft of trade secrets
E) patent infringement

Question 18

According to the 2009 National Business Ethics Survey, a total of ________ of the employees surveyed said they had observed misconduct or unethical behavior in the past year.

A) 12 percent
B) 21 percent
C) 32 percent
D) 49 percent
E) 60 percent

Question 19

Which form of business ownership is a particularly poor choice for an aggressive entrepreneurial firm?

A) C corporation
B) sole proprietorship
C) subchapter S corporation
D) limited partnership
E) limited liability corporation

Question 20

________ is the process in which an impartial third party helps those involved in a dispute reach an agreement.

A) Conciliation
B) Reconciliation
C) Negotiation
D) Appeasement
E) Mediation

Question 21

According to the textbook, ________ are common in real estate development, oil and gas exploration, and motion picture ventures.

A) sole proprietorships
B) limited liability companies
C) Subchapter S Corporations
D) limited partnerships
E) general partnerships

Question 22

Large firms like 3M, Google, Oracle, and Microsoft, that trade on organized stock exchanges, are:

A) limited partnerships
B) limited liability companies
C) subchapter S corporations
D) C corporations
E) general partnerships

Question 23

The simplest form of business entity is the:

A) sole proprietorship
B) general partnership
C) C Corporation
D) limited liability company
E) subchapter S corporation

Question 24

Partnerships are organized as either:

A) specific or general partnerships
B) narrow or broad partnerships
C) inward or outward partnerships
D) general or limited partnerships
E) partial or full partnerships

Question 25

A separate legal entity organized under the authority of a state is referred to as a:

A) limited partnership
B) conglomerate
C) general partnership
D) sole proprietorship
E) corporation

Question 26

________ is typically issued to conservative investors who have preferential rights over common stockholders in regard to dividends and to the assets of the corporation in the event of liquidation.

A) Restricted stock
B) Partial stock
C) Preferred stock
D) Common stock
E) Limited liability stock

Question 27

A corporation is formed by filing ________ with the Secretary of State's office in the state of incorporation.

A) certificate of intent to incorporate
B) articles of business
C) corporate credentials
D) a corporation permit
E) articles of incorporation

Question 28

All of the following are advantages of a sole proprietorship except:

A) creating one is easy and inexpensive
B) unlimited liability
C) it is not subject to double taxation
D) the owner maintains complete control of the business
E) business losses can be deducted against the sole proprietor's other sources of income

Question 29

Which of the following is not an advantage of a general partnership?

A) Business losses can be deducted against the partners' other sources of income.
B) The skills and abilities of more than one individual are available to the firm.
C) The liquidity of each partner's investment is low.
D) Creating one is relatively easy and inexpensive compared to a c corporation or limited liability company.
E) It is not subject to double taxation.

Question 30

A ________ sets forth the rights and duties of the general partners and limited partners, along with the details of how the partnership will be managed and eventually dissolved.

A) partnership accord
B) restricted partnership agreement
C) business partnership agreement
D) limited partnership concurrence
E) limited partnership agreement

Question 31

A ________ partnership is a modified form of a general partnership.

A) restricted
B) limited
C) partial
D) constrained
E) fractional

Question 32

Corporations are organized as either:

A) permanent corporations or temporary corporations
B) general corporations or limited corporations
C) voluntary corporations or statutory corporations
D) C corporations or subchapter S corporations
E) regular corporations or limited liability corporations

Question 33

Which of the following statements about limited partnerships is incorrect?

A) A limited partnership is a modified form of a general partnership.
B) Limited partnerships are common in real estate and oil and gas exploration.
C) A limited partnership is usually formed to raise money or to spread out the risk of a venture without forming a corporation.
D) Both the limited partners and the general partners are responsible for the debts and obligations of the partnership.
E) A limited partnership contains two classes of owners: general partners and limited partners.

Question 34

Which of the following is not one of the four factors identified in the textbook as critical in selecting a form of business ownership?

A) the cost of setting up and maintaining the legal form
B) the number and types of investors involved
C) accounting considerations
D) tax considerations
E) the extent to which personal assets can be shielded from the liabilities of the business

Question 35

A(n) ________ details the responsibilities and the ownership shares of the partners involved with an organization.

A) partnership agreement
B) industry contract
C) business pledge
D) business agreement
E) partnership pledge

Question 36

Which of the following is true regarding common stock and preferred stock?

A) Preferred stock is rarely issued.
B) Common stock is rarely issued.
C) Common stock is issued more broadly than preferred stock.
D) Preferred stock is issued more broadly than common stock.
E) Common stock and preferred stock are issued in the same amount.

Question 37

Most C corporations have two classes of stock:

A) premium and normal
B) common and preferred
C) standard and substandard
D) regular and special
E) ordinary and distinct

Question 38

Which of the following statements is incorrect regarding common stock?

A) Common stock is issued more narrowly than preferred stock.
B) The common stockholders have voting rights.
C) The common stockholders get paid after the creditors in the event of the liquidation of the corporation.
D) Common stock is the form of stock that most shareholders of a corporation own.
E) The common stockholders elect the board of directors.

Question 39

Which of the following statements is incorrect regarding sole proprietorships?

A) There is one owner.
B) Sole proprietor is in full control.
C) Business ends at the owner's death or loss of interest in the business.
D) Liquidity of the investment is high.
E) Money must be raised by the sole proprietor.

Question 40

A disadvantage of corporations is that they are subject to ________, which means that a corporation is taxed on its net income and when the same income is distributed to shareholders in the form of dividends it is taxed again on shareholders' personal income tax returns.

A) double taxation
B) dual toll
C) double duty
D) double assessment
E) dual harm

Question 41

Which of the following is not one of the standards that a business must meet to qualify for status as a subchapter S corporation?

A) The business must be a subsidiary of another corporation.
B) All shareholders must agree to have the corporation formed as a subchapter S corporation.
C) It can have no more than 100 members (husbands and wives count as one member).
D) It can have only one class of stock issued and outstanding.
E) The shareholders must be U.S. citizens.

Question 42

If the owners of a corporation don't file their annual paperwork, neglect to pay their annual fees, or commit fraud, a court could ignore the fact that a corporation has been established and the owners could be held personally liable for the actions of the corporation. This chain of events is referred to as:

A) vacating the corporate status
B) yielding the corporate privilege
C) surrendering the corporate shield
D) piercing the corporate veil
E) capitulating the corporate doctrine

Question 43

Which of the following is an advantage of a C Corporation?

A) Setting up and maintaining one is more difficult than for a sole proprietorship or a partnership.
B) Stock is liquid if traded on a major stock exchange.
C) Business losses cannot be deducted against the shareholders' other sources of income.
D) Income is subject to double taxation.
E) Small shareholders typically have little voice in the management of the firm.

Question 44

The ________ is a form of business organization that is rapidly gaining popularity in the United States. The concept originated in Germany and was first introduced in the United States in the state of Wyoming.

A) limited partnership
B) general partnership
C) limited liability company
D) subchapter S corporation
E) C corporation

Question 45

It is important for an entrepreneur to select an attorney as early as possible when developing a business venture.

Question 46

A narrow group of businesses are required to have a federal business license, including investment advising, drug manufacturing, and interstate trucking.

Question 47

Mediation is the process in which an impartial third party helps those involved in a dispute reach an agreement.

Question 48

A ________ combines the advantages of a partnership and a C corporation.

A) subchapter S corporation
B) limited partnership
C) general partnership
D) sole proprietorship
E) subchapter K corporation

Question 49

Choosing a legal entity for a firm is a one-time event. Once a form of legal entity has been chosen, it cannot be changed.

Question 50

In a ________, the voting stock is held by a small number of individuals and is very thinly or infrequently traded.

A) public corporation
B) private corporation
C) narrow corporation
D) cautious public corporation
E) closely held corporation

Question 51

Corporations that trade their stock on organized exchanges like the New York Stock Exchange and the NASDAQ are called:

A) national corporations
B) civil corporations
C) public corporations
D) premier corporations
E) common corporations

Question 52

In which form of business ownership are the owners called "members"?

A) general partnership
B) limited partnership
C) limited liability company
D) subchapter C corporation
E) C corporation

Question 53

An ethical dilemma is a situation that involves doing something that is beneficial to oneself or the organization, but may be unethical.

Question 54

A noncompete agreement prevents an individual from competing against a former employer for a specific period of time.

Question 55

Which of the following is a disadvantage of a C Corporation?

A) Income is subject to double taxation.
B) limited liability
C) Raising capital is easier than a partnership or sole proprietorship.
D) Stock is liquid if traded on a major stock exchange.
E) No restrictions exist on the number of shareholders.

Question 56

The idea that it's important to get "everything in writing" in regard to business agreements causes unnecessary work and can lead to an erosion of trust between business partners.

Question 57

A founders' agreement is a written document that deals with issues such as the relative split of the equity among the founders of the firm.

Question 58

The most important thing that any entrepreneur, or team of entrepreneurs, can do to build a strong ethical culture in their organization is to hire an aggressive attorney.

Question 59

________ are a special form of incentive compensation. These plans provide employees the option or right to buy a certain number of shares of their company's stock at a stated price over a certain period of time.

A) Corporate options
B) Collective plans
C) Share plans
D) Stock options
E) Dividends

Question 60

The single most important thing the founders of an entrepreneurial venture can do to avoid ethical misconduct is to establish a strong ethical culture for their firms.

Question 61

It is usually easier for a corporation to raise investment capital than a sole proprietorship or a general partnership because the shareholders are not liable beyond their investment in the firm.

Question 62

Corporations are organized as either C Corporations, T Corporation, or subchapter S corporations.

Question 63

Few entrepreneurial firms start as subchapter S corporations.

Question 64

A disadvantage of a sole proprietorship is that it is subject to double taxation.

Question 65

The vast majority of corporations in the United States are public corporations.

Question 66

Stock options are a special form of incentive compensation.

Question 67

Describe the purpose of a nondisclosure agreement. Provide an example of when a nondisclosure agreement kicks in.

Question 68

Describe what is meant by a "general partnership" and a "limited partnership." Describe the major difference between the two.

Question 69

What is a founders' agreement? Describe the purpose of a buyback clause and why it's important?

Question 70

The major difference between a general and a limited partnership is that a limited partnership includes two classes of owners: general partners and limited partners.

Question 71

List and briefly describe three specific steps that an entrepreneurial organization can take to build a strong ethical culture.

Question 72

The limited liability corporation is a form of business organization that is rapidly losing popularity in the United States.

Question 73

A subchapter S corporation combines the advantages of a partnership and a C corporation.

Question 74

A disadvantage of a general partnership is that the liquidity of each partner's investment is low.

Question 75

What is meant by the term "piercing the corporate veil"? How can the corporate veil be pierced?