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Chapter Nine: Establishing the Legal Foundation
Key Terms
American’s with Disabilities Act (ADA) Specifies protections in business for those
with disabilities. (LO 9-4)
Board of Advisors: A group formed at the discretion of the founders (regardless of the
legal form chosen) and composed of individuals outside the business who advise the
founders. (LO 9-7)
Contract: An agreement between two parties to perform certain activities for some
consideration. (LO 9-2)
Copyright: The legal means to protect intellectual property. It grants ownership on
creative materials generated, such as books, magazines, advertising copy, music,
awards, or virtually any other creative product, whether published or unpublished. (LO
9-5)
Draws: A distribution of funds from the business. It is usually in the form of a cash
dispersion in advance of salary, bonus, expected year-end distribution, and the like.
(LO 9-1)
General Partner: In an LLP, the individual considered the manager of the firm, who, as
such, has unlimited liability for any debts or judgments against the firm. (LO 9-1)
LLC: Limited Liability Corporation. (LO 9-1)
LLP: Limited Liability Partnership. (LO 9-1)
Partnership: A type of business formed between individuals directly. It includes both
general and limited varieties. (LO 9-1)
Patent: Claim of intellectual property that covers a specific innovation. (LO 9-.5)
Sole Proprietorship: The simplest form of business organization, characterized by the
fact that the person who owns the business and the business itself are treated as the
same entity. (LO 9-1)
Subchapter C Corporation: An organizational form that treats the firm as a unique
entity responsible for its own taxes. There are no limitations to shareholder participation
and the “owners” are protected beyond their equity investment. (LO 9-1)
IM 9-1
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Nine: Establishing the Legal Foundation
Subchapter S Corporation: An organizational form that treats the firm as an entity
separate from the individuals. This allows the owners to treat the income as they would
if the firm were a sole proprietorship or a partnership. It has limitations in the number
and type of shareholders. (LO 9-1)
Trademark: Claim of intellectual property that is associated with a specific business.
This may be the name of the firm, a symbol representing the firm, or the names of its
products. (LO 9-5) Suggested Text Responses
IM 9-2
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Nine: Establishing the Legal Foundation
Opening Vignette – “Marcella Sapone and Jessica Beck – Hello Alfred” – p. 163
Student responses will vary.
Exercise 1 – p.173
Student responses will vary.
Ethical Challenge – p. 173
Student responses will vary.
Exercise 2 – p. 175
Student responses will vary.
Review Questions Responses p. 181
1. Why is a legal system so critical to a new business? There are many decisions
2. Do you think such legal protections are more or less important to a new
business than to an established business? They are important to both types
3. What are the impacts on a business that chooses to form as a sole
proprietorship? Sole proprietorships are simpler to form and to dissolve. The net profit
IM 9-3
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Nine: Establishing the Legal Foundation
4. What are the impacts on a business that chooses to form as a partnership?
5. What are the impacts on a business that chooses to form as a Subchapter S
6. What are the impacts on a business that chooses to form as a Subchapter C
7. What are the impacts on a business that chooses to form as an LLC? LLCs are
8. What are the major differences between a Board of Directors and a Board of
Class Activities and Sample Assignments
1. Divide students in groups of three. Next assign the first student as a buyer, the
second student as a seller, and the third student as an attorney. Ask each group to
devise a contract and execute that contract. (LO 9-2)
2. Ask the students to form teams with two or three classmates in each team. Ask the
teams to list the important elements needed to negotiate a valid contract between a
small business owner and a customer. Ask each team to discuss the legal
ramifications that a small business owner could face if the owner fails to negotiate a
valid contract. What options does an entrepreneur have to assure they have a
contract is valid and to prevent mistakes when a contract is negotiated? (LO 9-2)
IM 9-4
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Nine: Establishing the Legal Foundation
3. In groups, ask students to create a small business that is a sole proprietorship. Then
ask them to describe the features, benefits, and drawbacks or limitations of the
business that they created. Do they expect their new small business to be a
success? Why or why not? (LO 9-1)
4. In groups, ask the students to discuss why an entrepreneur follows regulations to
assure that the new business has the appropriate licenses. Then ask them to
evaluate the type of licenses that are required for each of the following businesses:
(LO 9-4)
a. Construction company
b. Gas station
c. Liquor store
d. Restaurant
5. Ask students to discuss why an entrepreneur should purchase insurance for anew
business. (LO 9-6)
6. In groups, ask students to discuss copyrights, trademarks, and patents. Next, ask
the students to discuss the potential outcomes if an entrepreneur failed to acquire
adequate intellectual property protection for a new business. (LO 9-5)
7 Ask students to discuss why it is important for an entrepreneur to have a lease
for the property of the new business. What are some of the important elements
that should be in the lease? (LO 9-3
Discussion Questions for Online/Hybrid classes
1. Summarize the three forms of intellectual property protection that a new business
owner can choose to implement in the new small business. Discuss the
similarities and differences for each. (LO 9-5)
2. What are the key characteristics of a sole proprietorship? Why is it considered to
be the simplest form of business? How does the sole proprietor report business
taxes? (LO 9-1)
3. Discuss why lease contracts are important for a new business? Summarize some
of the key contents of a lease and discuss why they are important. (LO 9-3)
IM 9-5
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Nine: Establishing the Legal Foundation
4. Why is it important for entrepreneurs to hire an attorney or other professional prior
to the establishment of a new business? (LO 9-1, 9-2, 9-3, 9-4, 9-5, 9-6, 9-7)
5. What can entrepreneurs purchase to minimize the amount of risk in the new
business? What are the disadvantages to the new small business owner if it not
obtained? (LO 9-6)
6. Discuss why entrepreneurs need to have legal contracts when they conduct
business. What are the important elements of a contract? What are the
disadvantages if the entrepreneur fails to negotiate legal and valid contracts? (LO
9-2)
7. Discuss the similarities and differences of a Subchapter S Corporation and a
Subchapter C Corporation. Do research on the internet and list at least two
existing business that are a Subchapter S Corporation and a Subchapter C
Corporation. What do these corporations sell or produce? (LO 9-1)
8. What is a Board of Directors or Board of Advisors and why do entrepreneurs form
them? What do they do for the small business? (LO 9-7)
9. Explain the features and benefits of a patent. How long does it last? Where are
patents filed and what agency accepts or declines them? Do patents provide
organizations with a sustainable competitive advantage? (LO 9-5)
10.Why do certain businesses require that their workers are bonded? What are the
disadvantages to a small business if the workers are not required to get bonded?
(LO 9-6)
Discussion Questions for Online/Hybrid classes – Responses
1. Summarize the three forms of intellectual property protection that a new
business owner can choose to implement in the new small business.
Discuss the similarities and differences for each. (LO 9-5) Copyrights are the
IM 9-6
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Nine: Establishing the Legal Foundation
2. What are the key characteristics of a sole proprietorship? Why is it
considered to be the simplest form of business? How does the sole
proprietor report business taxes? (LO 9-1) A sole proprietorship is simplest to
3. Discuss why lease contracts are important for a new business? Summarize
some of the key contents of a lease and discuss why they are important.
4. Why is it important for an entrepreneur to hire an attorney or other
professional prior to the establishment of the new business? (LO 9-1, 9-2,
5. What can entrepreneurs purchase to minimize the amount of risk in the new
business? What are the disadvantages to the new small business owner if
they fail to obtain it? (LO 9-6) The new business owner needs to obtain
6. Discuss why entrepreneurs need to have legal contracts when they conduct
business. What are the important elements of a contract? What are the
disadvantages if the entrepreneur fails to negotiate a legal and valid
contract? (LO 9-2) A contract is an agreement between two parties to perform
7. Discuss the similarities and differences of a Subchapter S Corporation and
a Subchapter C Corporation. Do research on the internet and list at least
two existing businesses that are a Subchapter S Corporation and a
Subchapter C Corporation. What do these corporations sell or produce? (LO
IM 9-7
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
Chapter Nine: Establishing the Legal Foundation
9-1) Both type corporations are similar. However, a subchapter S corporation is
8. What is a Board of Directors or Board of Advisors and why do
entrepreneurs form them? What do they do for the small business? (LO 9-7)
9. Explain the features and benefits of a patent. How long do they last? Where
are patents filed and what agency accepts or declines them? Do patents
provide organizations with a sustainable competitive advantage? (LO 9-5) A
10.Why do certain businesses require that their workers get bonded? What are the
disadvantages to a small business if the workers are not required to get bonded?
(LO 9-6) Bonding protects the business from mistakes made by its employees.
Bonding also protects the business from employees embezzling from
IM 9-8
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
