Chapter 43
Law for Small Business
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
B1. An attorney is not helpful when a business negotiates agreements to license
intellectual property.
B2. Many states have certification programs that identify specialists in various legal areas.
B3. Significant factors to consider when choosing a business form include the titles of its
officers.
B4. Legal limited liability generally is necessary for those who wish to raise outside capital.
B5. Limited liability organizations do not protect their owners’ personal assets from
liability for the organizations’ obligations.
B6. A limited liability company has less legal flexibility than a corporation.
B7. The owners of a limited liability company are called shareholders.
B8. Like a corporation, a limited liability company is required to hold an annual meeting.
B9. The duties of a limited liability company’s managers may be limited by its operating
agreement.
B10. Filing a corporate name with the appropriate state official will protect the name as a
trade name within the state and within contiguous states.
B11. Unlike corporate bylaws, the articles of incorporation are easily modified.
B12. Generally, your trademark must not be the same as another’s mark or so similar that
confusion results.
B13. To protect trade secrets, a company may include a covenant not to compete in an
employment contract.
B14. One way to raise capital to expand a business is to exchange equity in the company
for funds.
B15. Trade secrets should not be disclosed to a venture capitalist without a confidentiality
agreement.
B16. The Small Corporate Offering Registration can be used for large offerings of shares for
purchase by members of the public.
B17. A “take–along” right allows a corporate investor to participate in any sale of the
corporate shares to a third party.
B18. Standard-form contracts are available on the Internet, and they should be used “as is”
to save time and money.
B19. An employer cannot check to see if a job applicant has any history of criminal
conduct.
B20. Federal and state laws prohibiting discrimination in employment relationships protect
employees and independent contractors.
MULTIPLE CHOICE QUESTIONS
B1. Hopper wants to start Ice Rinx as a new business enterprise. Josh is an attorney.
Hopper most likely needs to consult Josh because
a. ignorance of the law is a defense against liability.
b. it adds credibility with potential investors and lenders.
c. keeping up with laws that govern business conduct is difficult.
d. managing accounts receivable and accounts payable is critical.
B2. Page opens Quik Xpress, a local delivery service. Unless Page expressly adopts a
certain form of business organization, the law considers Quik to be
a. a corporation.
b. a limited liability company.
c. a partnership.
d. a sole proprietorship.
B3. Elise and Flair are partners in Gourmet Cupcakes, a new general partnership and
business enterprise. As general partners, Elise and Flair are subject to liability that is
a. limited to the amount of their investment in Gourmet Cupcakes.
b. limited to the deductible on Gourmet Cupcakes’s insurance policy.
c. limited to the extent that Elise and Flair believe to be reasonable.
d. not limited with respect to Gourmet Cupcakes’s obligations.
B4. Price and Quint are starting a small machine shop—Riverside Boat Repair—and are
considering whether to organize the business as a limited liability partnership. This
form
a. does not limit its owners’ personal liability for business debts.
b. limits its owners’ personal liability for business obligations.
c. obviates the need to obtain insurance for business liability risks.
d. requires three partners to accept liability for potential risks.
Fact Pattern 43-B1 (Questions B5–B6 apply)
Jordan and Kacy own and operate Safety Tables, a small-business enterprise that sells
adjustable tables that allow workers to safely work with large, heavy, or oddly shaped
objects. The enterprise does not pay taxes on its profits, but distributes them to Jordan and
Kacy who pay taxes on these amounts as their individual income. Jordan and Kacy’s personal
liability for Safety Tables’s debts and obligations is limited.
B5. Refer to Fact Pattern 43-B1. Safety Tables is
a. a corporation.
b. a general partnership.
c. a limited liability company.
d. a sole proprietorship.
B6. Refer to Fact Pattern 43-B1. Safety Tables is exempt from legal requirements that
relate to
a. health and environmental permits.
b. zoning and building codes.
c. import/export regulations.
d. none of the choices.
B7. Joy and Kersey want to open a magic and novelty shop as Jo-Kers, with a plan to open
other shops in the future. To attain limited liability for the lowest cost and the fewest
start-up formalities, their best option is to form
a. a corporation.
b. a limited liability company.
c. a limited partnership.
d. a sole proprietorship.
B8. B2B, Inc., an inventory management firm, is a corporation. Cody is one of B2B’s
owners—a shareholder. If Cody’s dies, B2B
a. automatically terminates.
b. continues in business.
c. dissolves unless the other owners agree to continue.
d. distributes Cody’s shares to the other shareholders.
B9. Huck decides to open River Raft Adventures as a tourist service and operate the
business as a corporation. At the directors’ initial meeting, the directors are most
likely to
a. draft articles of incorporation.
b. adopt bylaws.
c. choose a corporate name.
d. print and distribute stock certificates.
B10. Bro wants to incorporate Chop Shop, a motor vehicle repair business. Incorporating
requires filing, with the appropriate state office,
a. a copy of the corporate liability insurance policy.
b. a corporate name.
c. corporate bylaws.
d. nothing.
B11. Lee wants to begin importing athletic shoes under the corporate name Mercury, Inc.
Mercury should include most of its corporate rules in
a. the articles of incorporation.
b. the bylaws.
c. the corporate charter.
d. the minutes of the first meeting of the board of directors.
B12. When Flash Flush Company is incorporated in Georgia, the state agency with which
the business name is filed approves it as a trade name. This filing will protect the
name
a. only within Georgia.
b. throughout the United States.
c. in every United Nations member country.
d. wherever the name might be used.
B13. Mick starts a business to market nationally long–distance phone time as Mick’s
Minutes. Registering his trademark with the U.S. Patent and Trademark Office
provides nationwide protection for the mark
a. if the mark is currently in use.
b. only if the mark has not yet been used.
c. only if the mark will not be used for at least six months.
d. only if the mark is currently in national use.
B14. To protect its trade secrets, Gnu Processes, Inc., may require employees that have
access to the secrets to agree in their employment contracts not to
a. compete with Gnu.
b. memorize the trade secrets.
c. quit working for Gnu.
d. think about the trade secrets after work.
B15. Rudy operates Silver Buckles, a small-business equine enterprise. To raise capital,
Rudy contacts Thad, a venture capitalist. Besides capital, Thad will most likely
a. assist in the drafting of a business plan.
b. decline a proportion of future profits.
c. offer assistance with respect to business strategy.
d. refrain from demanding operational control.
B16. Mountain Valley Winery Corporation’s attempt to raise $1 million from a few select
investors is
a. a shareholder agreement.
b. key-person insurance.
c. a private offering.
d. a public offering.
B17. Nichel designs a new office-management software program and incorporates Nichel’s
Niche, Inc., to make and market it. To sell a limited number of shares of stock to the
public, the firm must register the shares with
a. an attorney with securities law expertise.
b. a venture capitalist.
c. the Securities and Exchange Commission.
d. the U.S. Patent and Trademark Office.
B18. Payroll Services Company is a small business with ten employees. The regulations of
the Occupational Safety and Health Administration exempts
a. all small businesses.
b. businesses for whom penalties would be difficult to absorb.
c. businesses with fewer than fifteen employees.
d. no small businesses.
B19. Loudon Machinery, Inc., wants to fire its employee Newt, who is an at-will employee.
This means that Newt can be fired
a. for any reason or no reason.
b. for cause only.
c. only if Newt agrees to quit.
d. under no circumstances.
B20. Brent’s Barber Shop hires only independent contractors such as Christi as workers.
This hiring practice allows the employer to avoid all laws governing
a. employment relationships.
b. workplace safety.
c. business liability.
d. tax obligations.
ESSAY QUESTIONS
B1. Winnie opened her first Xtreme Sportz outlet six years ago. To open outlets in more
locations, Winnie needs capital and wants to attract investors. How can she do this?
B2. Diana and Earl incorporate their computer technical support business as Fast Aid, Inc.
Diana contracts with Gina to respond to Fast Aid’s customer service calls on a
commission basis. What are the advantages and disadvantages to Fast Aid of
classifying Gina as an independent contractor rather than as an employee? Earl
obtains a loan from First National Bank and signs a promissory note for repayment of
the amount without indicating that he is doing so on behalf of Fast Aid. Fast Aid does
not make enough profit its first year to make payments on the loan. Charging default,
the bank files a suit against Earl for the unpaid amount. Earl responds that he was
acting on behalf of Fast Aid. Will the bank succeed against Earl? Why or why not?