Deck 7: Preparing the Proper Ethical and Legal Foundation

Question 1

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

Answer 1

B

Question 2

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

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

Answer 2

C

Question 3

The What Went Wrong? feature in Chapter 7 focuses on Green Planet Juicery, a smoothie drink restaurant that went out of business. According to the feature, the primary reasons that Green Planet Juicery went out of business were:

A) accounting and financial mistakes
B) management and legal snafus
C) marketing mistakes and financing snafus
D) legal snafus and poor feasibility analysis
E) failure to incorporate and financing mistakes

Answer 3

D

Question 4

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 5

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 corporate opposed to an S-corporation
E) establish a strong ethical culture for their firms

Question 6

________ 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 7

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

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

Question 8

A ________ agreement binds an employee or another part 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 9

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 if often required.
D) Some business licenses are hard to get.
E) The business licenses and permits that are needed vary by city, country, and state.

Question 10

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

Question 11

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

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

Question 12

RealKidz, the company profiled in the opening feature for Chapter 7, experienced one particularly startling legal challenge early in the life of the firm. What was the challenge?

A) It did not obtain the proper business licenses.
B) It hired an employee who misrepresented the company in a contract negotiation.
C) It got into a legal dispute with an investor.
D) It hired an accountant who stole money from the firm.
E) It contracted with a clothing designer who turned out to be a scam artist.

Question 13

According to the 2007 National Business Ethics Survey, a total of ________ of the employees surveyed said they had observed conduct that violated company ethical standards, policy, or law during the past year.

A) 12 percent
B) 25 percent
C) 37 percent
D) 55 percent
E) 70 percent

Question 14

A ________ 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 15

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 and financial reporting considerations
D) tax considerations
E) the extent to which personal assets can be shielded from the liabilities of the business

Question 16

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 17

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

A) Amazon.com
B) Starbucks
C) eBay
D) Apple Inc.
E) Google

Question 18

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 19

The Savvy Entrepreneurial Firm feature in Chapter 7 focuses on Globat.com, a Web hosting company, which encountered a crisis described in the feature. The main point of the feature was to illustrate that the manner in which a company handles a crisis:

A) has a bearing on its ability to develop high quality business partnerships
B) provides an important standard for how it handles crises in the future
C) limits its legal liability
D) limits or contains the damage to its brand
E) sends a message to its customers regarding its values and trustworthiness

Question 20

All of the following is an advantage of a sole proprietorship except:

A) creating one is easy and inexpensive
B) limited 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 21

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 22

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 23

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 24

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 issues more broadly than common stock.
E) Common stock and preferred stock are issued in the same amount.

Question 25

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 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 26

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 27

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 28

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 29

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 30

________ 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 31

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 32

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 33

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 34

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 effects 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 35

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 36

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 37

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 38

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

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

Question 39

A ________ 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 40

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

A) Businesses losses can be deducted against the partners' other source 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 41

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 42

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 43

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 cannot 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 75 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 44

The most compelling advantage of stock options is the potential rewards to participants when:

A) the stock splits
B) the stock price increases
C) the stock price more than triples
D) the stock is placed in a trust fund
E) the stock price decreases

Question 45

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 46

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 47

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 48

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

Question 49

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

Question 50

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

Question 51

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 52

In a small number of communities across the United States, a business needs a license to operate.

Question 53

Which of the following is a disadvantage of a limited liability company?

A) Because profits are taxed only at the shareholder level, there is no double taxation.
B) The number of shareholders is unlimited.
C) The number of members, tax issues, and implementation is flexible.
D) Tax accounting can be complicated.
E) limited liability.

Question 54

Its recommended that a startup wait one to three years before hiring an attorney to represent their firm.

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

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 57

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 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

According to the textbook, the limited liability company combines the limited liability advantage of the ________ with the tax advantages of the ________.

A) partnership, sole proprietorship
B) corporation, sole proprietorship
C) corporation, partnership
D) sole proprietorship, corporation
E) partnership, corporation

Question 61

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 62

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

Question 63

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

Question 64

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

Question 65

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

Question 66

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

Question 67

Stock options are a special form of incentive compensation.

Question 68

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 69

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

Question 70

Few entrepreneurial firms start as subchapter S corporations.

Question 71

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

Question 72

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

Question 73

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

Question 74

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

Question 75

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