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

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

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 advantage of having a code of conduct is that it provides specific guidance to entrepreneurs, managers, and ________ regarding expectations of them in terms of ethical behavior.

A) suppliers
B) employees
C) customers
D) outsiders
E) lenders

Question 5

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 6

Facebook's Code of Conduct has ________ sections.

A) 3
B) 13
C) 8
D) 11
E) 7

Question 7

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

Question 8

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 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

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 11

According to the 2016 Global Business Ethics Survey, ________ percent of U.S. respondents indicated that they reported observed misconduct in their workplace.

A) 52
B) 67
C) 76
D) 81
E) 94

Question 12

Billy Goat Ice Cream, the company profiled in the opening feature in Chapter 7, is a ________.

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

Question 13

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 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

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

Question 16

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

Question 17

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 18

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 19

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 20

According to the 2016 Global Business Ethics Survey, a total of ________ percent of U.S. employees surveyed report observing misconduct.

A) 7
B) 15
C) 24
D) 47
E) 30

Question 21

Jessica Marsh just took a job with Instagram. As part of her employment contract, Jessica signed an agreement that states that she 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 22

________ 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 23

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 24

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 25

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 26

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 27

Very few businesses require licenses and permits to operate.

Question 28

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 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 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 31

Partnerships are organized as either ________ or ________ partnerships.

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

Question 32

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

Question 33

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 34

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

Question 35

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

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

Question 36

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 37

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 38

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 39

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 40

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

Question 41

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 42

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 43

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 44

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 45

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 46

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 and preferred stock are issued in the same amount.

Question 47

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 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.

Question 49

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 50

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 51

________ 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 52

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 53

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 54

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 55

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 56

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 57

________ 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 58

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 59

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 60

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 61

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 62

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

Question 63

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

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

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

Question 66

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 67

Few entrepreneurial firms start as subchapter S corporations.

Question 68

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

Question 69

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

Question 70

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 71

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

Question 72

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

Question 73

Stock options are a special form of incentive compensation.

Question 74

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 75

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