Chapter 7 Preparing the Proper Ethical and Legal Foundation
1) 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
Answer: E
Rationale:
Xplosafe selected the attorney primarily because he had more experience working with startups,
which would be beneficial for their specific needs. Additionally, his willingness to adjust his fee
structure demonstrated flexibility and a commitment to the success of Xplosafe.
2) 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
Answer: E
Rationale:
Establishing a strong ethical culture is crucial because it sets the tone for the entire organization,
influencing decision-making, employee behavior, and ultimately, the success and sustainability
of the venture.
3) 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
Answer: D
Rationale:
Nearly half (49 percent) of the employees surveyed reported observing misconduct or unethical
behavior in the past year, highlighting the prevalence of such issues in the workplace.
4) 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
Answer: A
Rationale:
Company resource abuse was observed by the highest percentage of the U.S. workforce,
indicating a significant issue that organizations need to address to maintain ethical standards.
5) 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
Answer: C
Rationale:
Leading by example is the most effective way to build a strong ethical culture, as actions speak
louder than words and set the standard for behavior within the organization.
6) 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
Answer: A
Rationale:
A code of conduct is a formal statement that outlines the ethical and social values that an
organization expects its members to uphold.
7) "Don't be evil" is the corporate motto for:
A) Facebook
B) Twitter
C) Zynga
D) Apple Inc.
E) Google
Answer: E
Rationale:
"Don't be evil" is the corporate motto for Google, emphasizing the company's commitment to
ethical behavior and social responsibility.
8) 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
Answer: C
Rationale:
An ethical dilemma is a situation where a choice must be made between two options, both of
which are morally acceptable but conflict with each other.
9) 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
Answer: C
Rationale:
A founders' agreement is a crucial document that outlines key aspects of the founders'
relationship and their rights and responsibilities within the venture.
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
Answer: B
Rationale:
A buyback clause is included in founders' agreements to ensure a smooth transition in the event
that a founder decides to leave the venture, providing a mechanism for the remaining founders to
purchase the departing founder's interest.
11) 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
Answer: A
Rationale:
A marketing plan is a strategic document that outlines a company's marketing efforts and
strategies. While important for the overall business strategy, it is typically not included in the
founders' agreement, which focuses more on the internal structure and operations of the
company.
12) 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
Answer: D
Rationale:
The typical vesting schedule for a startup lasts 36 months (3 years) and includes a 12-month
cliff, meaning that no stock vests until the employee has been with the company for at least 12
months.
13) 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
Answer: A
Rationale:
Green Plant was sued by Jamba Juice for copyright infringement, indicating that Green Plant
may have used copyrighted material without authorization, leading to legal issues and potentially
contributing to its failure.
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
Answer: A
Rationale:
A nondisclosure agreement (NDA) binds an individual to not disclose a company's trade secrets,
while a noncompete agreement prevents the individual from competing against the former
employer for a specific period of time.
15) 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
Answer: A
Rationale:
Trevor signed a nondisclosure agreement (NDA) which prevents him from disclosing Twitter's
trade secrets, ensuring that confidential information is protected.
16) 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
Answer: D
Rationale:
Rachael signed a noncompete agreement, which prevents her from working for a competitor of
IKEA for a specified period after leaving the company.
17) ________ 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
Answer: E
Rationale:
Mediation is a process where an impartial third party facilitates communication between parties
in a dispute to help them reach a mutually acceptable agreement.
18) 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: A
Rationale:
Most business licenses and permits must be obtained before a business is launched to ensure
compliance with local regulations and avoid potential legal issues.
19) 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: E
Rationale:
Businesses that plan to use a fictitious name (any name other than the business owner's name)
need to obtain a fictitious business name permit to legally operate under that name.
20) 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: B
Rationale:
A sole proprietorship is a poor choice for an aggressive entrepreneurial firm because it offers no
liability protection, meaning the owner is personally responsible for all debts and liabilities of the
business.
21) 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
Answer: C
Rationale:
The four factors identified in the textbook as critical in selecting a form of business ownership
are the cost of setting up and maintaining the legal form, the number and types of investors
involved, tax considerations, and the extent to which personal assets can be shielded from the
liabilities of the business. Accounting considerations are not typically listed as a critical factor.
22) 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
Answer: A
Rationale:
The sole proprietorship is considered the simplest form of business entity because it involves just
one individual who owns and operates the business.
23) 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
Answer: B
Rationale:
Unlimited liability is a disadvantage of a sole proprietorship, not an advantage. It means that the
owner is personally responsible for all debts and obligations of the business.
24) 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.
Answer: D
Rationale:
The statement "Liquidity of the investment is high" is incorrect. In a sole proprietorship, the
liquidity of the investment is typically low because the owner must raise money on their own,
and the business ends if the owner dies or loses interest.
25) 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
Answer: D
Rationale:
Partnerships are organized as either general partnerships or limited partnerships, depending on
the level of liability protection for the partners.
26) 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
Answer: A
Rationale:
A partnership agreement is a legal document that outlines the terms and conditions of the
partnership, including the responsibilities and ownership shares of the partners.
27) 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.
Answer: C
Rationale:
The liquidity of each partner's investment being low is not an advantage of a general partnership.
It refers to the difficulty of converting the investment into cash without significant loss in value.
28) A ________ partnership is a modified form of a general partnership.
A) restricted
B) limited
C) partial
D) constrained
E) fractional
Answer: B
Rationale:
A limited partnership is a modified form of a general partnership where there are both general
partners and limited partners, with the limited partners having limited liability.
29) 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.
Answer: D
Rationale:
In a limited partnership, only the general partners are responsible for the debts and obligations of
the partnership. Limited partners have limited liability.
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
Answer: E
Rationale:
A limited partnership agreement is a legal document that outlines the rights, duties, and
management of a limited partnership, including how it will be dissolved.
31) 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
Answer: D
Rationale:
Limited partnerships are commonly used in industries such as real estate development, oil and
gas exploration, and motion picture ventures because they allow for the pooling of resources and
spreading of risk among investors.
32) 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
Answer: E
Rationale:
A corporation is a separate legal entity that is organized under the authority of a state and is
distinct from its owners. It can enter into contracts, sue and be sued, and own property in its own
name.
33) 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
Answer: D
Rationale:
Corporations are organized as either C corporations or subchapter S corporations, depending on
how they are taxed and the number and type of shareholders they can have.
34) 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
Answer: D
Rationale:
Large publicly traded companies like 3M, Google, Oracle, and Microsoft are typically structured
as C corporations because of the advantages they offer in terms of limited liability and access to
capital markets.
35) 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
Answer: B
Rationale:
Most C corporations have two classes of stock: common stock and preferred stock. Common
stock represents ownership in the corporation and typically carries voting rights, while preferred
stock often has preferential rights to dividends and assets in the event of liquidation.
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.
Answer: C
Rationale:
Common stock is typically issued more broadly than preferred stock because it represents
ownership in the corporation and is often the primary form of equity financing for corporations.
37) ________ 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
Answer: C
Rationale:
Preferred stock is typically issued to conservative investors who seek a fixed dividend and
preferential rights over common stockholders in the event of liquidation.
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.
Answer: A
Rationale:
The statement "Common stock is issued more narrowly than preferred stock" is incorrect.
Common stock is typically issued more broadly than preferred stock because it represents
ownership in the corporation and carries voting rights.
39) 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
Answer: E
Rationale:
A corporation is formed by filing articles of incorporation with the Secretary of State's office in
the state of incorporation. These articles contain basic information about the corporation, such as
its name, purpose, and registered agent.
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
Answer: A
Rationale:
One disadvantage of corporations is that they are subject to double taxation, where the
corporation is taxed on its profits and then shareholders are taxed again on any dividends they
receive from those profits.
41) 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
Answer: C
Rationale:
Public corporations are those whose stock is traded on organized exchanges and is available to
the general public to purchase and trade.
42) 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
Answer: E
Rationale:
A closely held corporation is one in which the voting stock is held by a small number of
individuals, and the stock is not widely traded or held by the public.
43) 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
Answer: D
Rationale:
Piercing the corporate veil is a legal concept where a court disregards the limited liability
protection of a corporation and holds the owners personally liable for the corporation's actions
due to the owners' failure to maintain corporate formalities or commit fraud.
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
Answer: D
Rationale:
Stock options are a form of incentive compensation that gives employees the right to purchase a
specified number of shares of company stock at a fixed price over a certain period of time,
usually as a reward for performance or to align the interests of employees with those of
shareholders.
45) 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.
Answer: A
Rationale:
One disadvantage of a C Corporation is that income is subject to double taxation, where the
corporation is taxed on its profits and then shareholders are taxed again on any dividends they
receive from those profits.
46) 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.
Answer: B
Rationale:
One advantage of a C Corporation is that its stock is liquid if traded on a major stock exchange,
meaning that shareholders can easily buy and sell their shares.
47) 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
Answer: A
Rationale:
A subchapter S corporation is a type of corporation that combines the legal protections of a
corporation with the tax benefits of a partnership, allowing income to be passed through to
shareholders and taxed at their individual tax rates.
48) 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.
Answer: A
Rationale:
To qualify for status as a subchapter S corporation, a business must meet several standards,
including having no more than 100 shareholders, having only one class of stock, and having
shareholders who are U.S. citizens or resident aliens.
49) 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
Answer: C
Rationale:
The limited liability company (LLC) is a form of business organization that offers the limited
liability of a corporation and the flexibility of a partnership, making it increasingly popular
among small businesses in the United States.
50) 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
Answer: C
Rationale:
In a limited liability company (LLC), the owners are called "members," and they have the
flexibility to choose how the company is managed and taxed.
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.
Answer: True
Rationale:
Establishing a strong ethical culture is critical for preventing ethical misconduct in a business. It
sets the tone for behavior within the organization and helps ensure that employees understand
and adhere to ethical standards.
52) 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.
Answer: False
Rationale:
While hiring a competent attorney is important for legal advice and compliance, the most
important thing for building a strong ethical culture is for leaders to demonstrate ethical
behavior, establish clear ethical standards, and ensure these standards are upheld throughout the
organization.
53) An ethical dilemma is a situation that involves doing something that is beneficial to oneself
or the organization, but may be unethical.
Answer: True
Rationale:
An ethical dilemma is a situation where a person must choose between two or more conflicting
ethical principles or decisions, often involving a choice between what is morally right and what
is in the best interest of the individual or organization.
54) It is important for an entrepreneur to select an attorney as early as possible when developing
a business venture.
Answer: True
Rationale:
Selecting an attorney early in the process of developing a business venture can help
entrepreneurs navigate legal complexities, avoid potential legal issues, and ensure that their
business is set up properly from the start.
55) 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.
Answer: True
Rationale:
A founders' agreement is a crucial document for startup ventures as it outlines key aspects of the
business relationship among the founders, including equity ownership, roles and responsibilities,
and decision-making processes.
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.
Answer: False
Rationale:
Getting agreements in writing is crucial for clarifying expectations, avoiding misunderstandings,
and protecting the interests of all parties involved. It helps ensure that everyone is on the same
page and can prevent potential conflicts or disputes.
57) A noncompete agreement prevents an individual from competing against a former employer
for a specific period of time.
Answer: True
Rationale:
A noncompete agreement is a legal contract that restricts an individual from engaging in business
that competes with their former employer for a certain period of time and within a specified
geographic area.
58) Mediation is the process in which an impartial third party helps those involved in a dispute
reach an agreement.
Answer: True
Rationale:
Mediation is a form of alternative dispute resolution where a neutral mediator facilitates
communication between parties to help them reach a mutually acceptable resolution to their
dispute.
59) A narrow group of businesses are required to have a federal business license, including
investment advising, drug manufacturing, and interstate trucking.
Answer: True
Rationale:
Certain businesses, such as those involved in investment advising, drug manufacturing, and
interstate trucking, are required to have federal licenses or permits due to the nature of their
operations and the need for regulatory oversight.
60) 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.
Answer: False
Rationale:
While choosing a legal entity is an important decision, it is not necessarily a one-time event. As a
business grows and evolves, its legal structure may need to be reevaluated and potentially
changed to better suit its needs and circumstances.
61) A disadvantage of a sole proprietorship is that it is subject to double taxation.
Answer: False
Rationale:
A sole proprietorship is not subject to double taxation. Instead, the owner reports business
income and losses on their personal tax return and is taxed at the individual tax rate.
62) A disadvantage of a general partnership is that the liquidity of each partner's investment is
low.
Answer: True
Rationale:
In a general partnership, the partners' investments are not easily converted into cash because
there is no market for selling partnership interests. This lack of liquidity can be a disadvantage
for partners who want to exit the partnership.
63) 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.
Answer: True
Rationale:
In a general partnership, all partners have unlimited liability and participate in the management
of the business. In a limited partnership, there are two classes of partners: general partners who
have unlimited liability and participate in management, and limited partners who have limited
liability and do not participate in management.
64) Corporations are organized as either C Corporations, T Corporation, or subchapter S
corporations.
Answer: False
Rationale:
Corporations are primarily organized as either C corporations or subchapter S corporations. T
Corporation is not a common designation for a type of corporation.
65) 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.
Answer: True
Rationale:
Corporations can raise capital by selling shares of stock, which allows them to attract investment
without exposing shareholders to personal liability beyond their investment in the company.
66) The vast majority of corporations in the United States are public corporations.
Answer: False
Rationale:
The vast majority of corporations in the United States are private corporations, meaning that
their stock is not traded on public stock exchanges like the New York Stock Exchange or
NASDAQ.
67) Stock options are a special form of incentive compensation.
Answer: True
Rationale:
Stock options give employees the right to purchase company stock at a specified price, typically
as a reward for performance or to align the interests of employees with those of shareholders.
68) A subchapter S corporation combines the advantages of a partnership and a C corporation.
Answer: True
Rationale:
A subchapter S corporation is a type of corporation that combines the legal protections of a
corporation with the tax benefits of a partnership, allowing income to be passed through to
shareholders and taxed at their individual tax rates.
69) Few entrepreneurial firms start as subchapter S corporations.
Answer: False
Rationale:
Many entrepreneurial firms start as subchapter S corporations because they offer the benefits of
limited liability and pass-through taxation, making them an attractive option for small
businesses.
70) The limited liability corporation is a form of business organization that is rapidly losing
popularity in the United States.
Answer: False
Rationale:
The limited liability company (LLC) is a form of business organization that is rapidly gaining
popularity in the United States due to its flexibility and the limited liability protection it offers to
its owners.
71) List and briefly describe three specific steps that an entrepreneurial organization can take to
build a strong ethical culture.
Answer: (1) Lead by example. The most important thing that any entrepreneur, or team of
entrepreneurs, can do to build a strong ethical culture in their organization is to lead by example.
(2) Establish a code of conduct. A code of conduct is a formal statement of an organization's
values on certain ethical and social issues. The advantage of having a code of conduct is that it
provides specific guidance to managers and employees regarding what is expected of them in
terms of ethical behavior. (3) Implement an ethics training program. Firms also use ethics
training programs to promote ethical behavior. Ethics training programs teach business ethics to
help employees deal with ethical dilemmas and improve their overall ethical conduct.
72) What is a founders' agreement? Describe the purpose of a buyback clause and why it's
important?
Answer: A founders' agreement (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.
73) Describe the purpose of a nondisclosure agreement. Provide an example of when a
nondisclosure agreement kicks in.
Answer: A nondisclosure agreement is a promise made by an employee or other party (such as a
supplier) to not disclose the company's trade secrets. An example would be an employee who is
privy to a company's marketing strategy. If the employee quit her job and went to work for a
competitor, it would be a violation of her nondisclosure agreement to tell her new employer the
details of her previous employer's marketing strategy.
74) Describe what is meant by a "general partnership" and a "limited partnership." Describe the
major difference between the two.
Answer: A general partnership is a form of business organization where two or more people pool
their skills, abilities, and resources to run a business. A limited partnership is a modified form of
a general partnership. The major difference between the two is that a limited partnership includes
two classes of owners: general partners and limited partners. Similar to a general partnership, the
general partners are liable for the debts and obligations of the partnership, but the limited
partners are liable only up to the amount of their investment.
75) What is meant by the term "piercing the corporate veil"? How can the corporate veil be
pierced?
Answer: In most states, corporations must file papers annually, to maintain their status as a
corporation and to comply with state regulations. It is important that a corporation's owners fully
comply with these regulations. 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 help personally liable for actions of the
corporation. This chain of events is referred to as "piercing the corporate veil."
Test Bank for Entrepreneurship: Successfully Launching New Ventures
Bruce R. Barringer, R. Duane Ireland
9780132555524, 9780131393905, 9780134729534, 9780133797190
