Entrepreneurship: Successfully Launching New Ventures, 5e, Global Edition
(Barringer/Ireland)
Chapter 7 Preparing the Proper Ethical and Legal Foundation
1) Tempered Mind, the company profiled in the opening feature in Chapter 7, has created an
iPhone app that teaches users’ a foreign language as they progress through the stages of a game.
To get Tempered Mind off to a strong ethical start, the company was careful to avoid a
temptation that mobile app developers have. That temptation, mentioned in the profile, is to
________.
A) pay people to write positive reviews
B) misrepresent the quality of the app
C) copy material and action sequences that appear in other apps without obtaining permission
from the owners
D) withhold payment from freelancers who worked on the project
E) ask employees to work unreasonable hours to get the project done
2) According to the textbook, the single most important thing the founders of an entrepreneurial
venture can do is ________.
A) start a board of advisors
B) establish business partnerships
C) make money
D) select a limited liability corporation as opposed to an S-corporation
E) establish a strong ethical culture for their firms
3) According to the 2013 National Business Ethics Survey, a total of ________ percent of the
employees surveyed said they had observed misconduct or unethical behavior in the past year.
A) 7
B) 15
C) 24
D) 33
E) 41
4) According to the 2013 National Business Ethics Survey, which of the following forms of
misconduct or unethical behavior was observed by the highest percentage of the U.S. workforce?
A) Discriminating against employees
B) Violating company policies related to Internet use
C) Abusive behavior that creates a hostile work environment
D) Lying to employees
E) Stealing or theft
5) Which of the following is the most important thing that an entrepreneur, or team of
entrepreneurs, can do to build a strong ethical culture in their organization?
A) Implement an ethics training program
B) Write a mission statement
C) Lead by example
D) Hire an ethics compliance officer
E) Write a code of conduct
6) A code of ________ is a formal statement of an organization’s values on certain ethical and
social issues.
A) conduct
B) behavior
C) performance
D) principles
E) morals
7) “Don’t be evil” is the corporate motto for ________.
A) Facebook
B) Google
C) Apple
D) Microsoft
E) Amazon.com
8) A situation that involves doing something that is beneficial to oneself or the organization, but
may be unethical, is called a(n) ________.
A) ethical quandary
B) ethical predicament
C) ethical dilemma
D) principled quandary
E) just dilemma
9) The What Went Wrong? feature in Chapter 7 focuses on Fitbit. Fitbit makes wearable activity
trackers that measure data such as number of steps walked, quality of sleep, and other personal
metrics. The feature centered on a product that Fitbit made (the Fitbit Force) that caused some
users to develop skin rashes. The ethical issue at stake was whether Fitbit ________.
A) cut corners and used inferior material in producing the product
B) acted quickly enough in stopping production of the product
C) misrepresented the nature of the problem to the people affected
D) placed unfair blame on a supplier
E) placed unfair blame on a small number of employees
10) 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.
11) 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.
12) An ethical dilemma is a situation that involves doing something that is beneficial to oneself
or the organization, but may be unethical.
13) List and briefly describe three specific steps that an entrepreneurial organization can take to
build a strong ethical culture.
14) What is a founders’ agreement? Describe the purpose of a buyback clause and why it’s
important?
15) Describe the purpose of a nondisclosure agreement. Provide an example of when a
nondisclosure agreement kicks in.
16) A(n) ________ is a written document that deals with issues such as the relative split of the
equity among the founders of the firm, how individual founders will be compensated for the cash
or the “sweat equity” they put into the firm, and how long the founder will have to remain with
the firm for their shares to fully vest.
A) entrepreneurs’ agreement
B) creators’ agreement
C) founders’ agreement
D) initiators’ agreement
E) originators’ agreement
17) Most founders’ agreements include a ________ clause, which legally obligates the departing
founder to sell to the remaining founders his or her interest in the firm if the remaining founders
are interested.
A) redemption
B) buyback
C) statutory purchase
D) voluntary recoup
E) shareholder surrender
18) Which of the following is typically not included in the founders’ agreement for a firm?
A) Marketing plan
B) Legal form of business ownership
C) Buyback clause
D) Apportionment of stock
E) Identity and proposed titles of the founders
19) The Savvy Entrepreneurial Firm feature in Chapter 7 focuses on the topic of vesting
company stock. According to the feature, a typical startup’s vesting schedule lasts ________ and
includes a 12-month cliff.
A) 12 months
B) 12 months to 24 months
C) 24 months to 36 months
D) 36 months to 48 months
E) 48 months to 60 months
20) A(n) ________ agreement binds an employee or another party to not disclose a company’s
trade secret. A ________ agreement prevents an individual from competing against a former
employer for a specific period of time.
A) nondisclosure; noncompete
B) non breach-of-trust; nonchallenge
C) voluntary truth; nonparticipate
D) binding confidentiality; noncompete
E) ethics; nonparticipate
21) Jessica Marsh just took a job with Instagram. As part of her employment contract, Jessica
signed an agreement that states that he will not disclose any of Instagram’s trade secrets. The
agreement that Jessica signed is called a(n) ________ agreement.
A) nondisclosure
B) non breach-of-trust
C) ethics
D) binding confidentiality
E) legitimacy
22) Steven Diaz just took a job with Harley Davidson. As part of his employment agreement,
Harley Davidson required Steven to sign an agreement, which states that if he leaves Harley
Davidson, he will not work for a firm that competes against Harley Davidson for at least two
years. The agreement that Steven signed is called a ________ agreement.
A) nondisclosure
B) nonparticipate
C) nonchallenge
D) noncompete
E) noncontend
23) ________ is the process in which an impartial third party helps those involved in a dispute
reach an agreement.
A) Conciliation
B) Reconciliation
C) Negotiation
D) Appeasement
E) Mediation
24) It is important for an entrepreneur to select an attorney as late as possible when developing a
business venture.
25) 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.
26) 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.
27) A noncompete agreement prevents an individual from competing against a former employer
for a specific period of time.
28) Mediation is the process in which an impartial third party helps those involved in a dispute
reach an agreement.
29) Which of the following statements regarding business licenses and permits is incorrect?
A) Most business licenses and permits can wait until after a business is launched to be obtained.
B) A business license can typically be obtained at the city clerk’s office in the community where
the business will be located.
C) If a business will be run out of a home, a home occupation business license is often required.
D) Some business licenses are hard to get.
E) The business licenses and permits that are needed vary by city, county, and state.
30) Most businesses that plan to use a fictitious name, which is any name other than the business
owner’s name, need a(n) ________ permit.
A) unreal business name
B) fabricated business name
C) invented business name
D) conjured business name
E) fictitious business name
31) Very few businesses require licenses and permits to operate.
32) Which form of business ownership is a particularly poor choice for an aggressive
entrepreneurial firm?
A) C corporation
B) Sole proprietorship
C) Subchapter S corporation
D) Limited partnership
E) Limited liability corporation
33) Which of the following is not one of the four factors identified in the textbook as critical in
selecting a form of business ownership?
A) The cost of setting up and maintaining the legal form
B) The number and types of investors involved
C) Accounting considerations
D) Tax considerations
E) The extent to which personal assets can be shielded from the liabilities of the business
34) The simplest and most common form of business entity is the ________.
A) sole proprietorship
B) general partnership
C) C Corporation
D) limited liability company
E) subchapter S corporation
35) All of the following are advantages of a sole proprietorship except ________.
A) creating one is easy and inexpensive
B) unlimited liability
C) it is not subject to double taxation
D) the owner maintains complete control of the business
E) business losses can be deducted against the sole proprietor’s other sources of income
36) Which of the following statements is incorrect regarding sole proprietorships?
A) There is one owner.
B) Sole proprietor is in full control.
C) Business ends at the owner’s death or loss of interest in the business.
D) Liquidity of the investment is high.
E) Money must be raised by the sole proprietor.
37) Partnerships are organized as either ________ or ________ partnerships.
A) specific; general
B) narrow; broad
C) inward; outward
D) general; limited
E) partial; full
38) A(n) ________ details the responsibilities and the ownership shares of the partners involved
with an organization.
A) partnership agreement
B) industry contract
C) business pledge
D) business agreement
E) partnership pledge
39) Which of the following is not an advantage of a general partnership?
A) Business losses can be deducted against the partners’ other sources of income.
B) The skills and abilities of more than one individual are available to the firm.
C) The liquidity of each partner’s investment is low.
D) Creating one is relatively easy and inexpensive compared to a C corporation or limited
liability company.
E) It is not subject to double taxation.
40) A ________ partnership is a modified form of a general partnership.
A) restricted
B) limited
C) partial
D) constrained
E) fractional
41) Which of the following statements about limited partnerships is incorrect?
A) A limited partnership is a modified form of a general partnership.
B) Limited partnerships are common in real estate and oil and gas exploration.
C) A limited partnership is usually formed to raise money or to spread out the risk of a venture
without forming a corporation.
D) Both the limited partners and the general partners are responsible for the debts and
obligations of the partnership.
E) A limited partnership contains two classes of owners-general and limited partners.
42) A ________ sets forth the rights and duties of the general and limited partners, along with
the details of how the partnership will be managed and eventually dissolved.
A) partnership accord
B) restricted partnership agreement
C) business partnership agreement
D) limited partnership concurrence
E) limited partnership agreement
43) According to the textbook, ________ are common in real estate development, oil and gas
exploration, and motion picture ventures.
A) sole proprietorships
B) limited liability companies
C) subchapter S corporations
D) limited partnerships
E) general partnerships
44) A separate legal entity organized under the authority of a state is referred to as a ________.
A) limited partnership
B) conglomerate
C) general partnership
D) sole proprietorship
E) corporation
45) Corporations are organized as either ________ corporations or ________ corporations.
A) permanent; temporary
B) general; limited
C) voluntary; statutory
D) C; subchapter S
E) regular; limited liability
46) Large firms like Apple, Facebook, General Electric, and Microsoft, that trade on organized
stock exchanges, are ________.
A) limited partnerships
B) limited liability companies
C) subchapter S corporations
D) C corporations
E) general partnerships
47) Most C corporations have two classes of stock— ________ and ________.
A) premium; normal
B) common; preferred
C) standard; substandard
D) regular; special
E) ordinary; distinct
48) Which of the following is true regarding common and preferred stock?
A) Preferred stock is rarely issued.
B) Common stock is rarely issued.
C) Common stock is issued more broadly than preferred stock.
D) Preferred stock is issued more broadly than common stock.
E) Common stock and preferred stock are issued in the same amount.
49) ________ stock is typically issued to conservative investors who have preferential rights
over common stockholders in regard to dividends and to the assets of the corporation in the event
of liquidation.
A) Restricted
B) Partial
C) Preferred
D) Common
E) Limited liability
50) Which of the following statements is incorrect regarding common stock?
A) Common stock is issued more narrowly than preferred stock.
B) The common stockholders have voting rights.
C) The common stockholders get paid after the creditors in the event of the liquidation of the
corporation.
D) Common stock is the form of stock that most shareholders of a corporation own.
E) The common stockholders elect the board of directors.
51) A corporation is formed by filing ________ with the Secretary of State’s office in the state of
incorporation.
A) a certificate of intent to incorporate
B) articles of business
C) corporate credentials
D) a corporation permit
E) articles of incorporation
52) A disadvantage of C corporations is that they are subject to ________, which means that a
corporation is taxed on its net income and when the same income is distributed to shareholders in
the form of dividends it is taxed again on shareholders’ personal income tax returns.
A) double taxation
B) dual toll
C) double duty
D) double assessment
E) dual harm
53) Corporations that trade their stock on organized exchanges like the New York Stock
Exchange and the NASDAQ are called ________ corporations.
A) national
B) civil
C) public
D) premier
E) common
54) In a ________ corporation, the voting stock is held by a small number of individuals and is
very thinly or infrequently traded.
A) public
B) private
C) narrow
D) cautious public
E) closely-held
55) If the owners of a corporation don’t file their annual paperwork, neglect to pay their annual
fees, or commit fraud, a court could ignore the fact that a corporation has been established and
the owners could be held personally liable for the actions of the corporation. This chain of events
is referred to as ________.
A) vacating the corporate status
B) yielding the corporate privilege
C) surrendering the corporate shield
D) piercing the corporate veil
E) capitulating the corporate doctrine
56) ________ 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
57) 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.
58) 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.
59) 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
60) 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 must 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 100 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.
61) 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
62) 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
63) 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.
64) A disadvantage of a sole proprietorship is that it is subject to double taxation.
65) A disadvantage of a general partnership is that the liquidity of each partner’s investment is
low.
66) The major difference between a general and a limited partnership is that a limited partnership
includes two classes of owners-general and limited partners.
67) Corporations are organized as either C corporations, T corporations, or subchapter S
corporations.
68) It is usually easier for a corporation to raise investment capital than a sole proprietorship or a
general partnership because the shareholders are not liable beyond their investment in the firm.
69) The vast majority of corporations in the United States are public corporations.
70) Stock options are a special form of incentive compensation.
71) A subchapter S corporation combines the advantages of a partnership and a C corporation.
72) Few entrepreneurial firms start as subchapter S corporations.
73) The limited liability corporation is a form of business organization that is rapidly losing
popularity in the United States.
74) Describe what is meant by a “general partnership” and a “limited partnership.” Describe the
major difference between the two.
75) What is meant by the term “piercing the corporate veil”? How can the corporate veil be
pierced?