Question 1

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

Accepted Answer

In a limited liability company (LLC), the owners are called members. The other options do not use the term "members" to refer to their owners/shareholders/partners.

Question 2

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.

Accepted Answer

Stock in a C Corporation is more liquid because it can be traded on a major stock exchange. This is an advantage for investors who want to buy or sell shares quickly and easily.

Question 3

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.

Accepted Answer

The correct limit for the number of shareholders in a subchapter S corporation is 100, not 75.

Question 4

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

Accepted Answer

Stock options provide participants with the potential for financial gain when the stock price increases. As the stock price goes up, the value of the option increases, allowing the participant to purchase the stock at a lower price and sell it at a higher price, realizing a profit. The potential for reward is greatest when the stock price experiences a significant increase.

Question 5

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

Accepted Answer

A subchapter S corporation combines the tax advantages of a partnership with the liability protection of a C corporation. This type of corporation allows owners to avoid double taxation, while still benefitting from limited liability protection.

Question 6

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

Accepted Answer

The limited liability company (LLC) is a form of business organization that is rapidly gaining popularity in the United States due to its flexible structure, limited liability protection for its owners, and favorable tax treatment. The concept originated in Germany and was first introduced in the United States in the state of Wyoming in 1977. A limited partnership (A) is a form of business organization in which there are one or more general partners who manage the business and are personally liable for the partnership's debts, as well as one or more limited partners who invest in the business but have limited liability. A general partnership (B) is a form of business organization in which two or more people share ownership of a business and are personally liable for its debts. A subchapter S corporation (D) is a type of corporation that passes through its income, losses, deductions, and credits to its shareholders for tax purposes. A C corporation (E) is a type of corporation that is taxed separately from its owners and can issue multiple classes of stock.

Question 7

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.

Accepted Answer

Getting everything in writing can help clarify expectations and prevent misunderstandings or disputes. It also provides a record of the agreement for future reference. Failing to do so can lead to problems down the line and harm the relationship between business partners.

Question 8

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

Accepted Answer

A noncompete agreement is a legal agreement between an employer and employee that restricts the employee from working for a competitor or starting a competing business for a certain period of time after leaving their current job.

Question 9

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

Accepted Answer

A federal business license is required for certain types of businesses, including investment advising, drug manufacturing, and interstate trucking. However, the majority of businesses are not required to have a federal license and instead must obtain state and local licenses and permits.

Question 10

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

Accepted Answer

An ethical dilemma is a situation where one is faced with a decision to choose between two or more alternatives, each of which carries a moral principle or value. One option may benefit oneself or the organization, but it may not be morally right or ethical.

Question 11

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.

Accepted Answer

A strong ethical culture helps to establish the expectations and standards for ethical behavior within the company, which can minimize the likelihood of unethical conduct by employees. This culture begins at the top with the founders and should be reinforced by policies, training, and consistent enforcement. Without a strong ethical culture, a company may be more susceptible to ethical misconduct and the negative consequences that come with it.

Question 12

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

Accepted Answer

The answer of In a small number of communities across...

Question 13

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.

Accepted Answer

Tax accounting can be complicated for a limited liability company, which can be a disadvantage for those who may not have the resources or knowledge to handle it effectively. However, the other options listed are advantages of an LLC.

Question 14

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

Accepted Answer

It is not recommended for a startup to wait one to three years before hiring an attorney. Startups should seek legal advice and representation as soon as possible to ensure that they are compliant with regulations, protect their intellectual property, and avoid potential legal issues.

Question 15

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.

Accepted Answer

One of the main disadvantages of a C Corporation is that income is subject to double taxation, meaning that income is first taxed at the corporate level and then taxed again when distributed to shareholders as dividends.

Question 16

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.

Accepted Answer

A founders' agreement is a written document that outlines key aspects of a startup's operation, such as each founder's share of ownership, decision-making processes, and roles and responsibilities.

Question 17

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.

Accepted Answer

This statement is false. While changing the legal entity of a firm may be difficult or require going through a formal process, it is not impossible to change the legal entity type. For example, a sole proprietorship can be changed to an LLC or corporation.

Question 18

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.

Accepted Answer

Hiring an aggressive attorney is not the most important thing for building a strong ethical culture. Rather, it is important for entrepreneurs to lead by example, establish clear values and standards, and communicate them effectively to all stakeholders in the organization. It is also important to train employees on ethical practices, create systems for reporting and addressing ethical issues, and hold individuals accountable for unethical behavior.

Question 19

________ 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

Accepted Answer

Stock options provide employees the option to buy company stock at a certain price over a certain period of time. This can incentivize employees to work towards the success of the company and benefit financially from its growth.

Question 20

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

Accepted Answer

The limited liability company (LLC) combines the limited liability advantage of the corporation with the tax advantages of the partnership. Therefore, option C, which pairs corporation and partnership, is the correct answer. Option A, which pairs partnership and sole proprietorship, does not accurately represent the advantages of an LLC, as a sole proprietorship does not offer limited liability. Option B, which pairs corporation and sole proprietorship, is also incorrect, as a sole proprietorship does not offer limited liability. Option D, which pairs sole proprietorship and corporation, is incorrect for the same reason as option B. Option E, which pairs partnership and corporation, is incorrect because it does not accurately represent the tax advantages offered by an LLC.

Quiz 7: Preparing the Proper Ethical and Legal Foundation

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

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

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

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

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

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.