1
Entrepreneurship: Starting & Operating a Small Business, 4e (Mariotti)
Chapter 11 Addressing Legal Issues and Managing Risk
1) Tax-exempt, nonprofit corporations ________.
A) cannot make a profit
B) do not have legal liability
C) are set up with a specific mission to improve society
D) pay dividends more often than for-profit corporations
Learning Object.: 11.1 Choose a legal structure for your business.
AACSB Category: Analytical thinking
2) In limited liability companies ________.
A) income is taxed only once, as the personal earnings of members
B) personal assets of the owners are left legally unprotected
C) income is never taxed
D) income is taxed twice, corporately and personally
Learning Object.: 11.1 Choose a legal structure for your business.
AACSB Category: Analytical thinking
3) In a corporation, all profits go to ________.
A) reduce the surplus
B) the owners and the shareholders
C) the stockholders as salaries
D) the partners according to the terms of the agreement
Learning Object.: 11.1 Choose a legal structure for your business.
AACSB Category: Analytical thinking
4) Which of the following are not usually not-for-profit organizations?
A) trade associations
B) charitable foundations
C) churches
D) book stores
Learning Object.: 11.1 Choose a legal structure for your business.
AACSB Category: Reflective thinking
2
5) The number of stockholders in a Subchapter S Corporation is limited to ________.
A) 75
B) 50
C) 100
D) 250
Learning Object.: 11.1 Choose a legal structure for your business.
AACSB Category: Analytical thinking
6) The main disadvantage of corporations is that corporate income is ________.
A) taxed only once
B) always high
C) taxed twice
D) taxed three times
Learning Object.: 11.1 Choose a legal structure for your business.
AACSB Category: Analytical thinking
7) The limited liability company (LLC) combines the best features of partnerships and
corporations and can be an excellent choice for small business with a limited number of owners.
Learning Object.: 11.1 Choose a legal structure for your business.
8) How is a legal entity, such as a corporation, similar to a person? If you owned a business, why
might you want it to be incorporated?
Learning Object.: 11.1 Choose a legal structure for your business.
AACSB Category: Analytical thinking
3
9) Compare the legal structure implications of a sole proprietorship and a Subchapter S
Corporation for the seven parameters of 1) ownership, 2) liability, 3) taxation issues, 4) profit
distribution, 5) voting on policy, 6) life of the legal structure, and 7) capitalization.
Answer:
1) Ownership
• Sole proprietorship – the proprietor
2) Taxation
• Sole proprietorship – individual (the lowest rate)
3) Profit distribution
• Sole proprietorship – proprietor receives all
• Subchapter S – earnings paid to stockholders/shareholders as dividends in proportion to
4) Liability
• Sole proprietorship – unlimited
5) Voting on policy
• Sole proprietorship – not necessary
6) Life of the legal structure
• Sole proprietorship – death of the proprietor terminates the business
7) Capitalization
• Sole proprietorship – difficult
• Subchapter S – good – easier than a proprietorship: can use both debt and equity.
Learning Object.: 11.1 Choose a legal structure for your business.
Learning Object.: 11.2 Discover the importance of contracts.
AACSB Category: Analytical thinking
4
11) A(n) ________ is an agreement between two or more parties that is enforceable by law.
A) trust
B) contract
C) understanding
D) None of the above.
Learning Object.: 11.2 Discover the importance of contracts.
12) ________ are the building blocks of business.
A) Letters of agreements
B) Contracts
C) Personal relationships
D) Customer services
Learning Object.: 11.2 Discover the importance of contracts.
AACSB Category: Analytical thinking
13) A good contract will spell out ________, or unforeseeable “acts of God” beyond anyone’s
control, for which neither party is responsible.
A) contingencies
B) liabilities
C) amendments
D) disasters
Learning Object.: 11.2 Discover the importance of contracts.
AACSB Category: Analytical thinking
14) An injured party whose rights in a contract have been breached can bring a(n) ________
against the other party.
A) arbitration
B) motion
C) mediation
D) lawsuit
Learning Object.: 11.2 Discover the importance of contracts.
AACSB Category: Reflective thinking
5
15) The time period in which legal action may be taken is the ________.
A) limit of liability
B) statute of legal obligations
C) statute of limitations
D) None of the above.
Learning Object.: 11.2 Discover the importance of contracts.
AACSB Category: Analytical thinking
16) Some contracts specify that conflicts may be settled through ________ instead of court.
A) negotiation
B) coercion
C) arbitration
D) small claims
Learning Object.: 11.2 Discover the importance of contracts.
17) The four “A’s” of a successful contract include ________.
A) avoid misunderstanding and assure work
B) assure payment and avoid liability
C) assess risk and analyze profit
D) Both A and B.
Learning Object.: 11.2 Discover the importance of contracts.
AACSB Category: Analytical thinking
18) Contract drafting and review is something the business owner can do and should do using
law books at the local library.
Learning Object.: 11.2 Discover the importance of contracts.
AACSB Category: Reflective thinking
19) Why are contracts useful to business owners?
Learning Object.: 11.2 Discover the importance of contracts.
AACSB Category: Analytical thinking
6
20) Every corporation is recognized and treated under the law as ________.
A) an entity, much like a person, that has expenses and earnings
B) a small business
C) a large business
D) if it were its owners and employees
Learning Object.: 11.3 Recognize key components of commercial law.
AACSB Category: Analytical thinking
21) Of the three types of bankruptcies, Chapter 7 or Liquidation is the best choice to take.
Learning Object.: 11.3 Recognize key components of commercial law.
AACSB Category: Analytical thinking
22) Obtain a trademark in order to ________.
A) protect your logo
B) register your business name
C) protect all your intellectual property
D) protect your business name
Learning Object.: 11.4 Evaluate ways to protect your intellectual property.
AACSB Category: Analytical thinking
23) Infringement of intellectual property is ________.
A) a business tactic
B) a crime
C) profitable
D) legal in some states
Learning Object.: 11.4 Evaluate ways to protect your intellectual property.
AACSB Category: Analytical thinking
24) If you invent something and don’t patent it, it falls into the public domain, meaning that
________.
A) you can sell your invention publicly without paying the U.S. Patent Office
B) anyone can manufacture your invention and profit from selling it without paying you
C) you can sell the right to manufacture the invention
D) you can save a lot of money
Learning Object.: 11.4 Evaluate ways to protect your intellectual property.
AACSB Category: Reflective thinking