Deck 7: Preparing the Proper Ethical and Legal Foundation

Question 1

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.

Answer 1

True

Question 2

The What Went Wrong? feature in Chapter 7 focuses on Fitbit. Fitbit makes wearable activity trackers that measure data such as number of steps walked, quality of sleep, and other personal metrics. The feature centered on a product that Fitbit made (the Fitbit Force) that caused some users to develop skin rashes. The ethical issue at stake was whether Fitbit ________.

A) cut corners and used inferior material in producing the product
B) acted quickly enough in stopping production of the product
C) misrepresented the nature of the problem to the people affected
D) placed unfair blame on a supplier
E) placed unfair blame on a small number of employees

Answer 2

B

Question 3

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

Answer 3

A founders' (or shareholders')agreement 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 founders will have to remain with the firm for their shares to fully vest.An important issue addressed by most founders' agreements is what happens to the equity of a founder if the founder dies or decides to leave the firm.Most founders' agreements include a buyback clause,which legally obligates the departing founders to sell to the remaining founders their interest in the firm if the remaining founders are interested.In most cases,the agreement also specifies the formula for computing the dollar value to be paid.The presence of a buyback agreement is important for at least two reasons.First,if a founder leaves the firm,the remaining founders may need the shares to offer to a replacement person.Second,if founders leave because they are disgruntled,the buyback clause provides the remaining founders a mechanism to keep the shares of the firm in the hands of people who are fully committed to a positive future for the venture.

Question 4

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 5

Tempered Mind, the company profiled in the opening feature in Chapter 7, has created an iPhone app that teaches users' a foreign language as they progress through the stages of a game. To get Tempered Mind off to a strong ethical start, the company was careful to avoid a temptation that mobile app developers have. That temptation, mentioned in the profile, is to ________.

A) pay people to write positive reviews
B) misrepresent the quality of the app
C) copy material and action sequences that appear in other apps without obtaining permission from the owners
D) withhold payment from freelancers who worked on the project
E) ask employees to work unreasonable hours to get the project done

Question 6

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

Question 7

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

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

Question 8

According to the 2013 National Business Ethics Survey, a total of ________ percent of the employees surveyed said they had observed misconduct or unethical behavior in the past year.

A) 7
B) 15
C) 24
D) 33
E) 41

Question 9

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

Question 10

"Don't be evil" is the corporate motto for ________.

A) Facebook
B) Google
C) Apple
D) Microsoft
E) Amazon.com

Question 11

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 12

The Savvy Entrepreneurial Firm feature in Chapter 7 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 13

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 14

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 15

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

Question 16

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 17

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 18

According to the 2013 National Business Ethics Survey, which of the following forms of misconduct or unethical behavior was observed by the highest percentage of the U.S. workforce?

A) Discriminating against employees
B) Violating company policies related to Internet use
C) Abusive behavior that creates a hostile work environment
D) Lying to employees
E) Stealing or theft

Question 19

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 20

Most founders' agreements include a ________ clause, 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
B) buyback
C) statutory purchase
D) voluntary recoup
E) shareholder surrender

Question 21

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 22

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 23

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 24

The simplest and most common form of business entity is the ________.

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

Question 25

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 26

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

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

Question 27

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 28

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

Question 29

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 30

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 31

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 typically 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.

Question 32

________ 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 33

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

Question 34

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

Question 35

Jessica Marsh just took a job with Instagram. As part of her employment contract, Jessica signed an agreement that states that he will not disclose any of Instagram's trade secrets. The agreement that Jessica signed is called a(n) ________ agreement.

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

Question 36

Partnerships are organized as either ________ or ________ partnerships.

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

Question 37

Steven Diaz just took a job with Harley Davidson. As part of his employment agreement, Harley Davidson required Steven to sign an agreement, which states that if he leaves Harley Davidson, he will not work for a firm that competes against Harley Davidson for at least two years. The agreement that Steven signed is called a ________ agreement.

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

Question 38

Very few businesses require licenses and permits to operate.

Question 39

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 40

Most businesses that plan to use a fictitious name, which is any name other than the business owner's name, need a(n) ________ permit.

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

Question 41

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 42

Most C corporations have two classes of stock- ________ and ________.

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

Question 43

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 and limited partners.

Question 44

________ 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 45

Which of the following is true regarding common 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 46

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 47

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

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

Question 48

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 49

Corporations are organized as either ________ corporations or ________ corporations.

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

Question 50

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 51

________ stock 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
B) Partial
C) Preferred
D) Common
E) Limited liability

Question 52

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

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

Question 53

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 54

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 55

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 56

Large firms like Apple, Facebook, General Electric, 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 57

A ________ sets forth the rights and duties of the general 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 58

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

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

Question 59

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 60

A disadvantage of C 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 61

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 62

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

Question 63

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

Question 64

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 65

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

Question 66

Stock options are a special form of incentive compensation.

Question 67

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 68

Few entrepreneurial firms start as subchapter S corporations.

Question 69

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

Question 70

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

Question 71

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 72

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

Question 73

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

Question 74

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

Question 75

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