Chapter 8—The Organizational Plan: Teams, Legal Structures, Alliances, and
Directors
TRUE/FALSE
1. Effective leadership is more important for prospective managerial personnel than for investors.
2. A management team is often stronger than an individual entrepreneur because it provides a diversity of
skills and assurance of continuity.
3. The concept of balance on the management team means that the entrepreneur should not be wrapped
up too much in one area, such as sales or production, but be well rounded.
4. The management team of a small business should focus on competent insiders as opposed to outside
specialists.
5. The sole proprietorship is a business owned by two or more people but operated by only one person.
6. There are no limits on the owner’s personal liability in a sole proprietorship.
7. Sole proprietors often benefit from fringe benefits such as tax-free insurance plans.
8. Creating a partnership allows a business to pool the managerial talents and capital of those individuals
joining together as partners.
9. Partners must contribute capital or assets to form a partnership.
10. Partners always share profits and losses equally.
11. A partnership agreement states explicitly the rights and duties of partners with each party assuming
joint and several liability.
12. An ownership interest does not automatically confer a right to act for or to share in the management of
a corporation.
13. Incorporation will not protect a firm’s owners from liability if it is used to perpetrate a fraud, skirt a law,
or commit some wrongful act.
14. The liability of owners is greater with a sole proprietorship than with a general partnership.
15. A partnership reports the income it earns to the Internal Revenue Service, but the partnership itself
does not pay any taxes.
16. A limited partnership must have at least two general partners and one or more limited partners.
17. S corporations can have nonresident alien stockholders but no more than 50 stockholders.
18. The LLC differs from the C corporation in that the LLC avoids financial complications from double
taxation.
19. A professional corporation shields owners from liability of other individuals in certain professional
practices.
20. A nonprofit corporation can be for civic, educational, charitable, or religious purposes and must pass
the organizational test of not making a profit.
21. For the best success, strategic alliance partners should sign contracts with stated expectations and an
“easy out” clause.
22. Typically strategic alliances are harder to set up than to maintain.
23. The board of directors is elected by the stockholders of a corporation.
24. Sometimes small business board members are given company stock in lieu of compensation.
25. An advisory board functions like a board of directors does, except that the members are compensated
for their services and the company must have Directors and Officers Liability insurance.
26. By utilizing the experience of a board of directors, the chief executive of a small corporation may have
to relinquish active control of its operations.
MULTIPLE CHOICE
1. Webster is reviewing resumes looking for candidates for leadership positions in his very young
company. Webster is putting together his:
a.
business plan.
b.
advisory board.
c.
board of directors.
d.
management team.
2. After working together for a few months, disputes began to arise between two of the young company’s
leaders. Their differences seemed to be irreconcilable. The owner’s best action would be:
a.
to let one or both of the individuals go.
b.
call in an arbitrator.
c.
sell the business.
d.
form a strategic alliance with a larger company.
3. Vicenzo is the sole owner and manager of a startup company. As the business grows, he finds it more
difficult to fulfill the needs of all the management positions. Although he is the creative genius
behind the company, he lacks experience in other areas. At this point, Vicenzo should:
a.
seek the advice of an investment banker.
b.
hire a management team with expertise in complementary areas.
c.
encourage his advisors to take an active role in managing the company.
d.
form an alliance with another startup company.
4. Among the advantages of hiring family for leadership positions in a new company is the fact that:
a.
federal wage and hour laws do not apply to family members.
b.
the owner does not have to provide fringe benefits for them.
c.
they will often work for less compensation than non-family candidates.
d.
they share liability in the event of a business failure.
5. The key to strong management in a new firm is
a.
balance, with each member having competence in at least one area.
b.
financial competence of the chief executive.
c.
a strong marketing manager who understand financial statements.
d.
close friendship among all members of the team.
6. Startup owners may increase their chances for success by seeking _____ over a management team with
family and friends.
a.
a good CPA
b.
an outstanding law firm
c.
members with a balance of expertise
d.
a business consultant team
7. As it relates to new businesses, one function of a social network is to:
a.
promote the enterprise during conversations with potential rivals.
b.
provide a pool of candidates for leadership positions.
c.
assure a steady flow of applicants for production positions.
d.
connect the enterprise to a social network that provides access to a wide range of
resources.
8. An entrepreneur can best build social capital by
a.
joining several social networking sites.
b.
building contacts through community organizations.
c.
letting others know when the company has done something well.
d.
using reciprocation.
9. Reciprocation is
a.
responding to competitor’s marketing efforts.
b.
a sense of obligation to repay what has been done for you.
c.
not important when building social capital.
d.
only important once you have established your business.
10. Robbie’s financial advisor referred a customer to Robbie’s new business. Under the concept of
___________, Robbie is now obligated to return the favor.
a.
reciprocation
b.
social capital
c.
social networking
d.
unlimited liability
11. Sam does not want to share the fruits of his labor with anyone. It is important to him that he have
total control over his new business. Which form of ownership would you recommend for Sam?
a.
Partnership
b.
Sole proprietorship
c.
Corporation
d.
Limited liability partnership
12. Unlimited liability for business debts is imposed on
a.
shareholders in a C corporation.
b.
shareholders in an S corporation.
c.
sole proprietors.
d.
limited partners.
13. Max chose to operate his production studio as a sole proprietorship even though his attorney cautioned
that he was
a.
reducing its overall profit potential.
b.
increasing his taxable income.
c.
exposing himself to unlimited personal liability.
d.
violating an existing partnership agreement.
14. Trevor is in his early 60s but still wants to “strike out on his own” by starting a new business. One
roadblock he may face is:
a.
resistance from creditors to lend money for the enterprise.
b.
resistance from his heirs about the distribution of assets at his death.
c.
resistance from customers who fear he may become ill and unable to fulfill their orders.
d.
resistance from the federal government regarding his tax identification number.
15. What legal form has the smallest percentage of new businesses?
a.
Sole Proprietorship
b.
Partnership
c.
C Corporations
d.
S Corporations
16. Millie has a sole proprietorship which is her only source of income What legal action should she take
to prevent the business from being ruined if she became incapacitated?
a.
Give someone who is competent power of attorney to continue the business.
b.
State in her will what she would like done with the company.
c.
Find a partner and change the legal organization of the company
d.
Tell her heirs to sell as she can’t prevent ruin with a sole proprietorship
17. Which group best defines a partnership?
a.
A business owned and operated by one person who hires part time employees
b.
A voluntary association of two persons to have a business for profit
c.
The governing body for a corporation
d.
A group of three persons in which each person has limited personal liability
18. Any person capable of ____ may legally become a business partner.
a.
assenting to liability
b.
contracting
c.
contributing capital
d.
having a claim on assets
19. A key characteristic of a partnership is that each partner
a.
must contribute capital to the business.
b.
shares in company assets upon the dissolution of the partnership.
c.
is capable of legally contracting.
d.
must manage the business.
20. Which legal form allows owners to contribute no capital but still play a part in managing the business
and share in its profits?
a.
S corporation
b.
C Corporation
c.
Partnership
d.
Sole proprietorship
21. Upton was surprised to find his partner had signed an agreement to sell product to a customer at below
cost. He tried to cancel the contract but found out that:
a.
partners have legal power of attorney to do as they please.
b.
each partner is in essence a sole proprietor.
c.
partners are seldom trustworthy.
d.
any partner can legally bind the company without the consent of any other partner.
22. As she considered becoming a partner in a new business venture, Valerie asked her potential partner
about a(n) ___________ in the event that the partnership did not work out as expected.
a.
liquidation plan
b.
equity split
c.
exit strategy
d.
asset distribution plan
23. The legal document that spells out the partners’ rights and duties is called the
a.
articles of incorporation.
b.
partnership agreement.
c.
partnership by-laws.
d.
SS-4 form.
24. Zeno, Zella, and Zorro wish to form a partnership. Zeno is putting up 60 % of the capital; Zella is
putting up 40%, and Zorro is putting in no capital but will manage the business. In the absence of a
provision in the partnership agreement, how will the liability and profits be distributed?
a.
According to the input of capital.
b.
According to the amount of work each does in the business
c.
Equally
d.
According to the laws of the state where the partnership is formed
25. If partners cannot resolve disputes between themselves they may be wise to hire a(n)
a.
business mediator.
b.
arbitrator.
c.
business judge.
d.
business attorney.
26. Abby, Adam, and Arnold are partners. They have planned to continue the partnership even after the
death of any one partner. To this end, the partners have:
a.
stipulated in their wills that their share of the partnership is bequeathed to the other two
partners.
b.
purchased life insurance policies naming the other two partners as beneficiaries.
c.
created trust funds that can be used to pay off the heirs of the deceased partner.
d.
secretly signed documents to be opened only after the death that the deceased partner
relinquishes all claims to the partnership.
27. A corporation
a.
is chartered under state laws.
b.
is chartered under federal laws.
c.
remains in existence only as long as its owners are alive.
d.
shifts liability of its debts to its owners.
28. Which entity is liable for a corporation’s debts?
a.
Stockholders
b.
Board of Directors
c.
The corporation itself
d.
The corporation’s president
29. For a corporate charter to be obtained,
a.
one or more persons must apply to the secretary of state for permission to incorporate.
b.
the owner(s) must agree to be interviewed by a state department official.
c.
the owner(s) must negotiate an incorporation fee.
d.
the partners involved must outline a division of assets.
30. Becky wants to organize her startup as a regular corporation. One of the first steps Becky should take
is:
a.
hire the officers (president, treasurer, etc.) of her company.
b.
file her corporate charter with the secretary of state
c.
apply for permission to incorporate in her state.
d.
obtain financing for her venture.
31. A corporate charter should be
a.
very detailed.
b.
prepared by the founder.
c.
broad in the statement of the firm’s power.
d.
lengthy and precise.
32. A corporate charter should
a.
be detailed.
b.
be in accord with state law.
c.
include bylaws.
d.
indicate profit potential.
33. Cameron is creating the document that specifies the size of the board, the duties of the directors, voting
rights, etc. This document is known as:
a.
the articles of incorporation.
b.
the partnership agreement.
c.
the employment contract.
d.
the stock certificate.
34. Dylan has purchased stock in a new corporation. As proof of ownership, Dylan will receive:
a.
a dividend
b.
a stock certificate.
c.
a corporate charter.
d.
a pre-emptive right.
35. A basic legal principle involving stockholders is that
a.
an ownership interest in a corporation does not confer a legal right to manage the firm.
b.
the board of directors cannot elect the principal owner as president.
c.
all dividends are nontaxable.
d.
stockholders cannot buy new stock until it is offered for public sale.
36. A typical common stockholder of a corporation
a.
has the right to act for the firm.
b.
has the right to receive declared dividends.
c.
can always buy new stock in proportion to stock already owned.
d.
can fire employees of the corporation.
37. The right to buy new shares of stock in proportion to stock already owned is called a
a.
stock right.
b.
stock option.
c.
Section 1244 right.
d.
pre-emptive right.
38. Stockholders have limited liability unless they
a.
are active in the management of the corporation.
b.
personally endorse company notes.
c.
own preferred stock.
d.
convert their shares to partnership status.
39. Evan has received permission from his state to form a corporation for his startup, expecting his
liability would be limited to the amount of his investment. But his bank asked him to assume
personal liability before it would grant him a business loan. Why would the bank make this demand?
a.
Evan did not invest enough into the business.
b.
Evan is the only stockholder.
c.
Evan has more assets than the business.
d.
Evan’s business has no credit history.
40. Upon the death of the majority stockholder in a corporation, direct control may pass to
a.
an heir’s dependents.
b.
an executor.
c.
the founder of the firm.
d.
employees as directed by an employee stock ownership plan.
41. Ownership in a corporation
a.
is difficult to transfer.
b.
is more easily transferable than ownership in other forms of organization.
c.
is transferred in much the same way as stock in a partnership.
d.
noticeably affects the operation of the business.
42. Which organizational type results in the business owner having unlimited liability?
a.
Sole proprietorship
b.
LLC
c.
Limited partnership
d.
Corporation
43. To maintain status as a corporation, the corporation must:
a.
reapply for a charter annually.
b.
submit its bylaws to the secretary of the state of incorporation every year.
c.
hold annual meetings of both the shareholders and the board of directors.
d.
properly declare annual dividends.
44. Because the corporation is a legal entity, one of its responsibilities is to:
a.
have its accounting records audited.
b.
sell stock.
c.
pay dividends.
d.
file annual tax returns.
45. Emile has very little money with which to start his business so he wants to keep the cost or forming his
company as low as possible. Which for of ownership would you recommend for Emile?
a.
sole proprietorship
b.
partnership
c.
C corporation
d.
S corporation
46. Frank would like to avoid personal financial loss if his business idea does not work. Which form of
ownership would you suggest?
a.
sole proprietorship
b.
partnership
c.
professional corporation
d.
corporation
47. Ralph formed a corporation as a fund manager. He accepted money from his customers promising to
invest it and build cash value for them. Instead he kept the money for himself to enjoy a lavish
lifestyle. The court removed liability protection from his corporate entity because the incorporation
had been used to perpetuate fraud. This is an example of:
a.
piercing the corporate veil.
b.
unlimited liability.
c.
reciprocation.
d.
a pre-emptive right.
48. Glenda, an employee of a corporation, caused a traffic accident while on company business. Who
will pay for the damages?
a.
The stockholders
b.
The board of directors
c.
The founder
d.
The corporation
49. The two dimensions of management control of a small corporation usually involves which individuals?
a.
Stockholders owning the majority of the voting common stock
b.
Corporate officers in conducting daily operations
c.
Both stockholders and corporate officers
d.
Neither the stockholders or the corporate officers
50. Jane and Randy have a partnership with their company of JR Enterprises. Which statements reflect
how the partnership pays taxes?
a.
JR Enterprises does not pay any taxes.
b.
JR Enterprises pays taxes only as a partnership.
c.
Jane and Randy each pay taxes on the total income.
d.
Jane and Randy do not pay taxes since they are married.
51. In a limited partnership, which partner remains bound by all debts of the business?
a.
Limited partner
b.
Special partner
c.
Partner with the greatest capital investment
d.
General partner