Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
Chapter 15: Navigating Legal and IP Issues
Test Bank
Multiple Choice
1. What two characteristics should a lawyer have when working with a startup?
a. years of experience and willingness to work at reduced charges
b. knowledge of laws across states and knowledge of the industry
c. industry knowledge and a willingness to work with startups
d. knowledge about all aspects of the business and laws across states
2. How does the author suggest that the Internet’s legal resources be used?
a. to access low-cost legal forms and advice
b. to identify the type of legal counsel you will need
c. to seek advice from free legal services
d. to find sample documents that match your industry, products, and services
3. What is a major risk in following legal advice found on the Internet?
a. The advice may be given by a lawyer who does not have an official office.
b. The advice may not be strictly accurate or relevant to your type of business.
c. The service is free and there is no paperwork to document the advice.
d. Sample documents and forms will not be available.
4. What support service is offered by the U.S. Patent and Trademark Office?
Instructor Resource
Neck, Entrepreneurship
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a. general advice to startup companies
b. pro bono legal program
c. small business grants
d. tax preparation services
5. Which of the following can be affected by the type of legal structure your company
has?
a. the authorities you need to notify, taxes, record-keeping, and decision process
b. taxes and ability to sue the company
c. taxes and marketability of your company
d. taxes only
6. What business entity refers to a business owner who has not formed a seperate
entity to run the business?
a. sole practitioner
b. self-employed
c. sole proprietorship
d. nonentity small business
7. What action will most likely be required of someone who starts his/her company as a
sole proprietorship?
a. obtain a license or business permit in your jurisdiction
b. file for status as a C corporation
c. file for status as an S corporation
d. file as an LLC
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
8. What is the simplest and most inexpensive form of legal structure for startups?
a. sole proprietorship
b. general partnership
c. C corporation
d. S corporation
9. In an LLC, how are profits and losses reported?
a. on individual tax returns
b. on the corporation’s tax return
c. on both the corporate and individual tax return
d. on either the corporate or individual tax return
10. In an S corporation, taxes are “passed through.” This means which of the following?
a. the individual pays twice, taxes on profits and taxes on income
b. the individual pays no taxes because the company has already been taxed
c. income that the owner takes is reported on personal income taxes only
d. the revenue that the owner takes to live on is not taxed
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
11. In an S corporation, what is the maximum number of shareholders allowed?
a. 12
b. 50
c. 75
d. 100
12. A C corporation has transferable ownership, which refers to the fact that:
a. a C corporation can change its structure at any time after the first year.
b. it can issue stock in exchange for capital and can pass on to new owners.
c. it can adapt to more employees as the company grows.
d. it can be owned by an unlimited number of shareholders.
13. In a C corporation, who is liable for its actions?
a. the corporation
b. the shareholders
c. the owner of the company
d. the board of directors
14. A C corporation’s disadvantage is double taxation. This means that:
a. the corporation is taxed on the profit it makes and the shareholders are taxed on the
dividends
b. the corporation pays taxes in April and October
c. corporations are taxed more heavily than other corporate structures
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d. corporations pay taxes on the goods they purchase to create the product rather than
on the profits from the sale of the goods
15. Which of the following is NOT a way that a C corporation can minimize double
taxation?
a. use profits to fund the growth of the company
b. pay out profits in the form of additional compensation to the owners
c. reserve the reporting of taxed income into the next fiscal year
d. not realize enough revenue to make a profit
16. Which of the following is NOT true of an LLC?
a. profits and losses are reported on individual tax returns
b. there is double taxation—on the corporation and on personal income
c. LLCs have continuous existence
d. there is potential tax sheltering from losses while personal assets are protected.
17. An LLP is best suited for what type of business?
a. a business with more than two partners
b. a sole owner who wants to guard against liability
c. a professional practice, such as a legal or accounting group
d. a company with less than 10 employees
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Neck, Entrepreneurship
SAGE Publishing, 2018
18. A limited partnership is made up of which of the following?
a. general partners and limited partners
b. general partners and shareholders
c. general partners only
d. limited partners only
19. In a general partnership, which of the following is true?
a. a general partner and a limited partner jointly manage the business
b. two or more people manage and share in the profits and losses of the business
c. two or more people manage the business under the direction of a board of directors
d. taxes are paid on the corporation
20. Which of the following conditions is applicable to all 501(c)(3) organizations?
a. they must be classified as a church, educational, or charitable institution
b. their earnings should be used to benefit the shareholders
c. profit must be reinvested and used for the organization’s exempt purpose
d. shareholder earnings are limited by the tax code
21. What government agency authorizes a C-corp?
a. the state government.
b. the federal government
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c. local county and city jurisdictions
d. the federal courts
22. What characteristic of a C corporation will make it possible to pass the corporation
on to new owners after the original owners pass away?
a. vesting
b. the laws of inheritance
c. transferable ownership
d. stockholder rights
23. The term vesting can best be described as which of the following?
a. paying shares out to employees on a regular, usually annual basis
b. imposing equity forfeitures on cofounders over a certain period of time on a
piecemeal basis should they not stay with the company
c. defining a particular time and range of duties the cofounders must contribute to the
business
d. determining the investment that each cofounder must contribute to the start and
growth of the business
24. If you want to seek immediate external funding, what type of organization would be
the best to form?
a. not for profit
b. benefit corporation
c. S corporation
d. C corporation
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Neck, Entrepreneurship
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25. Which of the following is NOT a characteristic of a benefit corporation?
a. it is certified by the nonprofit B Lab
b. it follows strict standards of social and environmental performance and accountability
c. it must fulfill a social mission
d. it is only available to C corporations
26. Which of the following would be considered fair use of copyrighted material?
a. a T-shirt company uses a famous clause from a song and places it on their T-shirts.
b. a high school teacher copies a portion of a song sheet to explain the use of timing
and syncopation
c. a nonprofit organization sells copies of a copyrighted cookbook at a fundraiser
d. a movie producer uses a popular song as background to one of her movie scenes
27. Which of the following would be considered fair use of copyrighted material?
a. A writer references a portion of a comedian’s script in a book in order to demonstrate
a key point.
b. A writer copies a portion of a new book on chess in which he reveals the secrets in
the competitor’s book. He credits the original author.
c. A songwriter puts the words of a poem to a musical score.
d. A writer and biologist copy 30 diagrams from another textbook, citing the original
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AACSB Standard: General business and management knowledge areas
28. Any word, name, symbol, or device used in business to identify and promote a
product is called a ______.
a. trademark
b. copyright
c. brand
d. patent
29. Unless otherwise defined, who owns the product idea when an employer hosts a
“hackathon” where participants share their ideas?
a. the employee who generated it
b. all the employees who brainstormed and contributed to the idea
c. the company hosting it
d. the team that presents the product idea
30. An employee for a beverage company combines the ingredients used in creating the
mix. Later he is fired from the company and decides to sell the same mix under a new
label to a competing company. What concept might be represented in this action?
a. a copyright violation
b. a trade secret, provided a nondisclosure was signed by the employee
c. a trade secret, regardless of the lack of a nondisclosure agreement
d. No violation. Secrets are secrets only until they are known.
31. An employee has been developing a company product for the last 3 years when he
decides to leave the company. That product is a glue that remains tacky for hours,
enabling certain types of artwork to be performed. After he leaves the company, the
employee joins another company and finalizes the glue development for his new
Instructor Resource
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company. Who is likely to own the rights of the intellectual property involved in the
formulation of the glue?
a. The employee; he invented it.
b. The original company who paid for the product to be developed.
c. The new company because the product was released while the employee worked for
them.
d. The glue cannot be considered intellectual property.
32. Gary is fascinated by a new device that uses a GPS-like tracker to help owners
locate their pets. He purchases the product, disassembles it, and uses it as a pattern for
a similar device. The new device uses a less expensive casing, but otherwise has
duplicated the technology. What legal concept may be represented in this action?
a. a copyright violation
b. a trademark violation
c. a patent violation
d. a fair use violation
33. What should an entrepreneur do if he or she worked on a product with a former
employer and wants to market the product as his or her own?
a. market it before the former employer does
b. consult an IP attorney to review employee contracts and applicable laws
c. keep all documentation proving that you are the inventor
d. market the product in another country
34. How much does IP theft cost the United States in lost revenue every year?
a. $3 million
b. $100 million
c. $3 billion
Instructor Resource
Neck, Entrepreneurship
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d. $300 billion
35. IP protection doesn’t always work. What contributes to this failure?
a. laws protecting the company’s rights may not be recognized in other countries
b. there are too many patents on record, making it difficult to monitor them
c. companies fail to renew their patents after the expiration date
d. the product or service has evolved after the original protection was filed
36.What is a key difference between U.S. law and that of most other countries regarding
patents on publicly disclosed innovations?
a. most nations other than the U.S. allow a one year grace period after public disclosure
b. the U.S. requires innovations to be public disclosed for one year before a patent is
filed
c. the U.S. allows a one year grace period after a public disclosure
d. U.S. patents only last for one year
37. What pitfall might affect the ability to attain a patent?
a. developing a prototype
b. disclosing the product or service to the public before the patent is filed
c. not filing for the patent 45 days after the invention of the product
d. not having the company logo on the product
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Neck, Entrepreneurship
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38. What step might be taken if some disclosure of your product is necessary in order to
obtain funding, obtain raw materials, or otherwise develop the product?
a. mark all prototypes and designs with the company name
b. file for a patent under your personal name instead of the company
c. file for a provisional patent
d. change the nature of the product after you have disclosed it
39. After filing for a provisional patent, how long do you have before developing the idea
into a working prototype?
a. 1 year
b. 2 years
c. 3 years
d. 4 years
40. Failure to assign ownership occurs in which of the following situations?
a. when someone makes significant contributions to a product design without a formal
agreement of who owns the idea
b. only when someone makes a significant contribution and is not paid for the
contribution
c. only when someone makes a significant contribution and is paid for the contribution
d. when someone fails to place the company name on the patent
41. Which of the following indicates that an employee is eligible to work in the United
States?
a. Declaration of U.S. Citizenship
b. I-9
c. W-4
d. Form 940
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42. Which of the following forms will let the employer know how much money to
withhold from paychecks for federal taxes?
a. I-9
b. T-140
c. W-4
d. Form 940
43. Which of the following forms will be needed to indicate federal unemployment tax
that will be used should the employee lose his or her job?
a. Form 940
b. W-2
c. I-9
d. W-4
44. What number of employees must a company have before they are required to
provide family and medical leave and sick leave?
a. any size company
b. a company with over 10 employees
c. a company with 15 employees or more
d. a company with over 50 employees
Instructor Resource
Neck, Entrepreneurship
SAGE Publishing, 2018
45. Which of the following would be a disadvantage of hiring a contractor?
a. you would not be able to have the contractor arrive at a certain time or perform the
job in a certain way
b. the contractor would not be required to perform the job to the same level as an
employee
c. the contractor could be terminated if he or she did not fulfill their contracts
d. the contractor generally would have less of a personal commitment to doing the job
well
46. Federal law does NOT prohibit discrimination in hiring on the basis of __________.
a. age
b. race
c. sex
d. sexual orientation
47. The most significant factor in determining whether a worker is a contractor or an
employee is ______________.
a. the amount of control the employer has over the work being carried out
b. the number of hours worked
c. whether the worker or employer pays expenses
d. whether the worker gets vacation time
48. Before hiring its first employee, a company must get a(n) _____ to use on
documents and tax returns for the IRS.
a. EEO
b. SSN
c. TIN
d. EIN
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Neck, Entrepreneurship
SAGE Publishing, 2018
49. Which of the following is true when compensating employees with company equity?
a. the equity to be issued will be considered salary and not subject to securities laws
b. the equity will be considered a gift since no cash was issued
c. the shares may be considered a taxable item
d. the shares cannot be tied to performance
50. In the case of FedEx where contractor/drivers sued for overtime pay and benefits,
what was the primary reason why the courts ruled that they had been misclassified and
were, in fact, employees?
a. the contractors paid for their own uniforms
b. the company controlled the activities of the drivers
c. the contractors owned their own trucks
d. the contractors worked for FedEx for a long period of time
51. Hiring an unpaid intern is considered illegal if:
a. the employer provides a minimum wage and overtime pay.
b. the internship is solely for the benefit of the intern’s education.
c. the employer benefits from the arrangement.
d. the intern receives academic credit from an educational institution.