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
A1. An attorney may be helpful when a business negotiates a franchise agreement.
A2. Business networks do not help to identify a knowledgeable attorney.
A3. Factors to consider when choosing a business form include continuity of life.
A4. A limited liability organization’s limited liability may be lost by failure to comply with
the rules for a business form.
A5. A business entity’s limited personal liability obviates the need to obtain insurance for
significant business liability risks.
A6. There are no benefits to establishing a more formal business arrangement than a sole
proprietorship.
A7. A member of a limited liability company must be a natural person.
A8. A limited liability company’s members must be its managers.
A9. The duties of a limited liability company’s members may not be limited by its
operating agreement.
A10. To incorporate, you must first choose a corporate name and file it with the
appropriate state office.
A11. Corporate bylaws are the company’s governing rules.
A12. Generally, your trademark must be the same as another’s mark or so similar that
confusion results.
A13. Companies may require employees who have access to trade secrets to agree in their
employment contracts never to divulge those secrets.
A14. One way to raise capital to expand a business is to borrow the funds.
A15. A business plan describes a company, its products, and its anticipated future
performance.
A16. The states and the Securities and Exchange Commission jointly created a simplified
securities registration process for large businesses.
A17. If a new company has only two owners, they do not need a shareholder agreement
that defines their relative ownership rights and interests.
A18. Standard-form contracts are available on the Internet, but they should be adapted to
the specific circumstances of a transaction.
NAT: AACSB Analytic AICPA Legal
A19. Federal immigration laws do not require verifying whether workers are U.S. citizens or
are otherwise authorized to work in this country.
A20. Promises made to an employee in a contract or a handbook may prevent an employer
from firing the employee without fulfilling the promise.
MULTIPLE CHOICE QUESTIONS
A1. Philo wants to start a new business enterprise. Because it is difficult, if not
impossible, to keep up with the many legal rules that govern business conduct, Philo
most likely needs to consult
a. an accountant.
b. an attorney.
c. an experienced small-business owner.
d. a partner.
A2. Reb wants to start a new business enterprise. Shari is an accountant. Reb most likely
needs to consult Shari because
a. an accountant can be less expensive than an attorney.
b. bookkeeping errors can provoke litigation.
c. ignorance of the law is a defense against liability.
d. keeping up with laws that govern business conduct is difficult.
A3. Max wants to open Max’s Medical Equipment Supply with the assistance of an
attorney. To find an attorney, Max should most likely
a. ask a court to appoint a lawyer to assist him.
b. advertise in the “Help Wanted” section of a newspaper or database.
c. review listings in the Martindale-Hubbell Law Directory.
d. audit classes at a local law school.
A4. Bemis is forming Cool Air Company to make and sell a device that removes the heat
from working kitchens and other hot rooms. In exchange for legal services to Bemis
and his new firm at the start-up stage, an attorney is not likely to accept
a. an equity stake in Cool Air.
b. a promise of Bemis’s future legal business.
c. a flat fee or a retainer.
d. a promise to keep the attorney’s legal advice confidential.
A5. Quia and Rafi form SA, LLC, a limited liability company, to operate Superior Athletics, a
fitness center. Compared to a sole proprietorship and a general partnership, a limited
liability company has limited
a. business purposes.
b. investment opportunities.
c. personal liability.
d. requirements.
A6. Stingo operates Tropic Burger Restaurant as a corporation. A customer slips and
breaks her ankle in the restaurant and is awarded damages by a court. Those damages
must most likely be paid by
a. Stingo.
b. Tropic Burger.
c. the customer.
d. the company that supplies the restaurant’s burgers.
A7. Josh and Kya form Longview Associates, a limited partnership, to invest in real estate.
Compared to a sole proprietorship and a general partnership, a limited partnership
has limited
a. business purposes.
b. investment opportunities.
c. personal liability.
d. requirements.
A8. Quisha operates River Valley Soccer, an athletic equipment shop, as a sole
proprietorship. Taxes on the business’s income are paid by
a. no one.
b. Quisha.
c. the state or federal government.
d. the business.
A9. Dallas and Ellyn operate Freestyle Riders, a bicycle shop, as a partnership. Taxes on
the business’s income are paid by
a. Dallas and Ellyn.
b. no one.
c. the state or federal government.
d. the business.
A10. Global Tours, a travel agency, is a limited liability company. Global is exempt from
legal requirements that relate to
a. business name registration.
b. occupational licensing.
c. state tax registration.
d. none of the choices.
A11. Jess and Kaley own and operate Little Tykes, a small-business enterprise. Little Tykes
pays taxes on its profits, and Jess and Kaley pay taxes on the profits that are
afterwards distributed to them. Little Tykes is
a. a corporation.
b. a limited liability company.
c. a partnership.
d. a sole proprietorship.
A12. Mabel and Nahim want to start up and incorporate a new business enterprise. The
first step in the incorporation process is to
a. choose and file a corporate name with a state office.
b. draft the bylaws to govern the corporation.
c. hold an initial board of directors’ meeting.
d. prepare and file articles of incorporation with a state office.
A13. Finn wants to incorporate his game store as GameZ, Inc., and files the name with the
Idaho secretary of state. Filing will protect the name
a. only within Idaho.
b. throughout the Pacific Northwest.
c. throughout the United States.
d. throughout North America.
A14. Klee wants to make and sell a computer operating system under a trademark. To
obtain the most protection under the law, Klee should choose a mark that is
a. distinctive.
b. similar to an existing mark.
c. the same as an existing mark.
d. non-distinctive.
A15. National Standard Company (NSC) products are identified with a trademark. For
several years, NSC allows others to use the mark without permission and without
protest. This may be deemed, on NSC’s part,
a. abandonment of the mark.
b. anticompetitive conduct.
c. liability for misleading consumers.
d. liability for misleading competitors.
A16. Demi operates Eyes Wide Open, a small-business optician enterprise. To raise capital,
Demi contacts Foster, a venture capitalist. Besides capital, Foster 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 marketing.
d. refrain from demanding operational control.
A17. Elan Elite Service Company’s offer of shares of stock in itself to anyone who is willing
to pay $600 per share is
a. a shareholder agreement.
b. key-person insurance.
c. a private offering.
d. a public offering.
A18. The five shareholders of Orthopedic Ease, Inc., a medical equipment firm, want to
prevent each other from selling the shares to third parties without first being given
the opportunity to buy them. This can be provided for in
a. a shareholder agreement.
b. key-person insurance.
c. a private offering.
d. a public offering.
A19. Nero opened Oh! Fudge!, a candy store, as a corporation. When doing business on
behalf of the store, to avoid personal liability, Nero should sign contracts
a. as an agent for the corporation.
b. in his individual capacity.
c. as a gourmand.
d. under a false name.
A20. Bild-It-Rite Corporation uses independent contractors. Bild-It-Rite can
a. be sued by a contractor for a violation of discrimination laws.
b. exercise little control over how the contractors perform.
c. obtain workers’ compensation insurance for the contractors.
d. withhold income taxes from payments to the contractors.
ESSAY QUESTIONS
A1. Ben owns Copyshop and wants to sell Copyshop franchises throughout the United
States. In doing so, Ben wants to prevent competitors from imitating the distinctive
Copyshop logo and thereby misleading consumers. How can Ben protect the logo?
A2. Electro, Inc., makes and sells electric bikes, as well as parts and service, to customers
in the United States and other countries. Can Electro prevent its employees from
revealing its customer lists, pricing policies, and other confidential information, if the
employees resign to work for a competitor or to enter the same business themselves?
How?
