Entrepreneurship, 3e (Bamford)
Chapter 9 Legal Issues with a New Business
1) Emerging economies are based upon laws.
2) It is illegal for sole proprietors to run their business by deducting business expenses from their
business incomes.
3) A sole proprietorship is where the owner, for legal purposes, is treated the same as the business.
4) In a sole proprietorship, all the income and losses are reported on schedule D of the 1040 tax
form.
5) An advantage of a sole proprietorship is that a business is very easy to form and dissolve
because there is virtually no separation between the founder and the business.
6) An advantage of a sole proprietorship is that the owner reaps the benefits and doesn’t have to
share the equity.
7) One of the advantages as a Subchapter S Corporation is having legitimacy in the market.
8) In a Subchapter C Corporation, it is possible to have a double taxation situation.
9) A contract must always be in written form, and it must be signed by the parties involved.
10) A lease need not specify a length of validity as it is assumed to remain in effect as long as a
tenant is able to pay for it.
11) Lease contracts commonly give landlords the right to enter occupying businesses to inspect
facilities.
12) If a new business deals with toxic waste such as asbestos, it can expect to be subject to
significant regulation, regardless of the size of the firm.
13) If a small business has employees, it must have an EIN (Employer Identification Number).
14) The Americans with Disabilities Act (ADA) applies fully to any firm with more than 15
employees.
15) Any business needs to acquire a license to do business in the county or city where the firm will
be operating.
16) The Americans with Disabilities Act requires that there should be no discrimination in the
hiring, management, or dismissal of employees with disabilities.
17) In the context of business licenses, a business is required to pay a business license tax that is
determined by the number of employees it has.
18) An Employer Identification Number is required of any business that has employees.
19) A copyright can only be claimed on creative works if they are published or made available for
public consumption.
20) A trademark is legal protection of intellectual property that is associated with a specific
business.
21) A copyright is good for the life of the author plus 70 years.
22) A patent is a claim of intellectual property that covers a specific innovation.
23) A difference between copyrights and patents is that copyrights apply to creative materials
generated while patents cover specific innovations that are generally industrial or process-based.
24) A copyright is valid for the life of the author plus 70 years.
25) A trademark cannot be renewed once it has been issued even when the firm or the product is
active.
26) Patents are inexpensive and easy to obtain and maintain.
27) A business can obtain liability insurance, which helps protect the business against lawsuit
judgments.
28) Bonding is a type of insurance in which the business is covered in case the workers cause any
damage in the performance of their work.
29) The insurance coverage obtained by a small business is directly proportional to the cost. As the
coverage increases, the cost also increases.
30) Damage from floods and earthquakes is covered by a special form of insurance coverage. A
small business owner, who chooses, may purchase it in addition to basic insurance.
31) A business that chooses to form a corporation must have a board of directors. In new small
corporations, the board of directors and shareholders must be different individuals.
32) Boards of advisors are composed of key employees who advise a firm.
33) ________ economies are based on laws.
A) Emerging
B) Depressed
C) Mature
D) Developing
34) In the context of legal forms of business, identify a true statement about limited liability
partnership (LLP).
A) All partners in a limited liability partnership are jointly responsible for any debts or judgments
against the firm.
B) In a limited liability partnership, limited partners can work at the firm but not be active in its
management.
C) Limited partners in a limited liability partnership must be external advisors who do not have a
stake in the ownership of the firm.
D) General partners in a limited liability partnership are indirectly responsible for federal taxes
owed by the firm.
35) A ________ is the simplest form of a business to establish, as the person who owns it and the
business itself are treated as the same entity.
A) Subchapter C
B) limited liability corporation
C) limited partnership
D) sole proprietorship
36) Carla and John enter into a partnership and form a business. Under the partnership agreement,
Carla is directly responsible for the management of the firm and its liabilities. John has a minor
financial stake in the firm and works there, but he is not held responsible for the taxes and debts
owed by the firm. In the context of the legal forms of business, Carla and John have formed a
________,
A) limited liability partnership
B) sole proprietorship
C) general partnership
D) Subchapter C Corporation
37) Trilane Systems is a small business. Its owner, Myra, is also its only employee. She handles the
business’s operations herself and is responsible for all of the business’s income and losses. In the
context of the legal forms of business, Trilane Systems is a
A) limited liability partnership.
B) sole proprietorship.
C) Subchapter S Corporation.
D) general partnership.
38) In the context of legal forms of business, identify a true statement about sole proprietorship
firms.
A) These firms can have multiple founders with equal stakes so long as a single individual is
considered to be the owner.
B) Laws governing business practices do not recognize other equity investors, which limits the
growth potential of such firms.
C) Because of the limited nature of the growth potential of such firms, any profits they make are
exempt from federal taxation.
D) Many communities discourage the formation of these firms because their operations are
difficult to regulate.
39) In the context of legal forms of business, a general partner in a limited liability partnership
A) has unlimited liability for any debts or judgments against the firm.
B) is not active in the management of the firm.
C) acts as an independent external advisor to the firm.
D) is not responsible for liabilities owed if the firm goes bankrupt.
40) In the context of legal forms of business, identify an accurate statement about a general
partnership.
A) Established partners can bring in new equity partners by surrendering a portion of their
ownership position.
B) A single partner operates as the firm’s manager and is directly responsible for any debts owed
by the firm.
C) Owners report their shares of losses or profits independent of their interest in the firm.
D) The partner with the largest equity stake makes decisions about the firm’s operations.
41) James and Mary own a business. When they pay themselves an advance in salary or a bonus, it
is called a(n) ________.
A) payout
B) cash out
C) draw
D) expected outlay
42) If a partnership agreement is not developed or signed, the partnership will be ruled by the
A) Small Business Act.
B) Uniform Partnership Act.
C) Fair Labor Act.
D) Sarbanes-Oxley Act.
43) In the context of legal forms of business, which of the following is an area in which sole
proprietorships differ from general partnerships?
A) How the firm’s income and losses are reported on tax forms
B) Where the liability for the firm’s debts and finances rests
C) How much responsibility the owner or owners have for making business decisions
D) The possibility of bringing in new equity partners
44) In the context of legal forms of business, a Subchapter S Corporation
A) gives the owners of the firm virtually unlimited liability for its debts and liabilities.
B) treats the owners of the firm and the firm itself as the same entity.
C) allows the owners to treat the income of the firm as part of their personal incomes.
D) treats the owners of the firm as advisory members with little say in the operations of the firm.
45) When forming a sole proprietorship or a partnership, the business debts are
A) the responsibility of the firm’s equity investors.
B) the responsibility of the owners.
C) paid by purchase order.
D) paid the first day of the month.
46) In the context of business designs, one of the advantages of a corporation is that when it suffers
losses, the founders will
A) lose only their investment in the business rather than their life’s savings.
B) be absolved of responsibility for the debts of the company.
C) be expected to pool their personal finances to rescue the business.
D) surrender control of the company to investors.
47) In the context of legal forms of business, identify a benefit of a Subchapter S Corporation over
a Subchapter C Corporation.
A) A Subchapter S Corporation can have a larger number of investors than a Subchapter C
Corporation.
B) A Subchapter S Corporation is easier to form than a Subchapter C Corporation.
C) A Subchapter S Corporation generally pays lower taxes than a Subchapter C Corporation.
D) A Subchapter S Corporation has more potential for future expansion than a Subchapter C
Corporation.
48) A ________ is an organizational form that treats a firm as a unique entity and is responsible for
its own taxes.
A) Subchapter A Corporation
B) Subchapter X Corporation
C) Subchapter B Corporation
D) Subchapter C Corporation
49) All of the following are benefits of a Subchapter C Corporation EXCEPT
A) no limit to the number of shareholders.
B) fringe benefits being treated as income.
C) health benefits paid by the corporation.
D) owners being treated as employees of the company.