Clark 11e TB a Ch42

433

Chapter 42

Law for Small Businesses

TRUE/FALSE QUESTIONS

A1. The law considers all new, single-owner businesses to be limited liabilitycompanies unless the owner affirmatively adopts some other form.

ANSWER: F PAGE: 863 TYPE: =NAT: AACSB Analytic AICPA Legal

A2. All corporate business forms offer limited liability to their owners.

ANSWER: T PAGE: 864 TYPE: =NAT: AACSB Analytic AICPA Legal

A3. All states permit a businessperson to operate as a limited liabilitycompany.


A4. A limited liability company’s limited liability may be lost by contract.

ANSWER: T PAGE: 864 TYPE: NNAT: AACSB Analytic AICPA Legal

A5. Corporate income is taxed twice unless it is distributed to shareholders.


A6. It costs nothing to establish a limited partnership.

ANSWER: F PAGE: 865 TYPE: NNAT: AACSB Analytic AICPA Legal

434 TEST BANK A—UNIT EIGHT: BUSINESS ORGANIZATIONS

A7. Without copyright or patent protection for a product, a competitor cancopy it.

ANSWER: T PAGE: 869 TYPE: +NAT: AACSB Analytic AICPA Legal

A8. Registration is required to have a national right to a particulartrademark.

ANSWER: T PAGE: 870 TYPE: +NAT: AACSB Analytic AICPA Legal

A9. Allowing others to use a trademark without protesting that use can con-stitute abandonment of the mark.


A10. To protect trade secrets, a company can require its employees to agreenot to divulge those secrets.


A11. No capital can be raised through an offering of stock without registeringthe shares as securities with the Securities and Exchange Commission.


A12. In a private offering, capital is raised through a private placementmemorandum distributed to select potential investors.


A13. A buy-sell agreement establishes the criteria for the price to be paid ashareholder for his or her ownership interest.

ANSWER: T PAGE: 874 TYPE: =NAT: AACSB Reflective AICPA Critical Thinking

A14. Key-person insurance helps to cover business losses caused by the deathof the employee who “turns the key” to open a business each working day.

ANSWER: F PAGE: 874 TYPE: NNAT: AACSB Reflective AICPA Risk Analysis

CHAPTER 42: LAW FOR SMALL BUSINESSES 435

A15. A shareholder agreement defines relative ownership rights andinterests.

ANSWER: T PAGE: 874 TYPE: =NAT: AACSB Reflective AICPA Critical Thinking

A16. A corporate agent is not personally liable on a contract entered into onthe corporation’s behalf unless the agent expressly agrees to suchliability.


A17. Generally, no employment agreement should be in writing.


A18. The regulations of the Occupational Safety and Health Administrationhave no small business exemptions.


A19. When a worker is fired, severance pay is required.


A20. Independent contractors are not considered to be employees.


MULTIPLE CHOICE QUESTIONS

A1. Philo wants to start a new business enterprise. Because it is difficult, ifnot impossible, to keep up with the many legal rules that governbusiness conduct, Philo most likely needs to consult

a. an accountant.b. an attorney.c. an experienced small-business owner.d. a partner.

ANSWER: B PAGE: 862 TYPE: NNAT: AACSB Reflective AICPA Critical Thinking


A2. Reb wants to start a new business enterprise. Shari is an accountant.Reb most likely needs to consult Shari because

a. an accountant can be less expensive than an attorney.b. bookkeeping errors can provoke litigation.c. ignorance of the law is a defense against liability.d. keeping up with laws that govern business conduct is difficult.

ANSWER: B PAGE: 863 TYPE: NNAT: AACSB Reflective AICPA Critical Thinking

A3. Rachel wants to open Star Ad Agency with the assistance of an attorney.To find an attorney, Rachel could

a. ask other small businesspersons.b. look in a telephone directory.c. review listings in the Martindale-Hubbell Law Directory.d. all of the choices.

ANSWER: D PAGE: 863 TYPE: =NAT: AACSB Reflective AICPA Research

A4. Dave is opening an office as EZ Property Management Company. Anattorney may provide legal services to Dave and EZ in exchange for

a. an equity stake in EZ, but not a promise of its future legalbusiness.

b. an equity stake in EZ or a promise of its future legal business.c. a promise of EZ’s future legal business, but not an equity stake in

the firm.d. neither an equity stake in EZ nor a promise of future legal

business.

ANSWER: B PAGE: 863 TYPE: =NAT: AACSB Reflective AICPA Critical Thinking

A5. Quia and Rafi form SA, LLC, a limited liability company, to operateSuperior Athletics, a fitness center. Compared to a sole proprietorshipand a general partnership, a limited liability company has limited

a. business purposes.b. investment opportunities.c. personal liability.d. requirements.

ANSWER: C PAGE: 864 TYPE: =NAT: AACSB Reflective AICPA Legal


A6. Howie operates Island Burger Restaurant as a corporation. A customerslips and breaks her ankle in the restaurant and is awarded damages bya court. Those damages must be paid by

a. Howie only.b. Island Burger only.c. Howie and Island Burger.d. neither Howie nor Island Burger.

ANSWER: B PAGE: 864 TYPE: =NAT: AACSB Reflective AICPA Legal

A7. Josh and Kya form Longview Associates, a limited partnership, to investin real estate. Compared to a sole proprietorship and a generalpartnership, a limited partnership has limited

a. business purposes.b. investment opportunities.c. personal liability.d. requirements.


A8. Misha operates Napa Valley Runners, an athletic equipment shop, as asole proprietorship. Taxes on the business’s income are paid by

a. Misha and the business.b. Misha only.c. neither Misha nor the business.d. the business only.

ANSWER: B PAGE: 864 TYPE: NNAT: AACSB Reflective AICPA Legal

A9. Dana and Etta operate Fast Bikes, a bicycle shop, as a partnership.Taxes on the business’s income are paid by

a. Dana and Etta only.b. Dana, Etta, and the business.c. not Dana, Etta, or the business.d. the business only.

ANSWER: A PAGE: 864 TYPE: +NAT: AACSB Reflective AICPA Legal


A10. Jess and Kaley own and operate Little Tykes, a small-businessenterprise. Little Tykes pays taxes on its profits, and Jess and Kaley paytaxes on the profits that are afterwards distributed to them. Little Tykesis

a. a corporation.b. a limited liability company.c. a partnership.d. a sole proprietorship.

ANSWER: A PAGE: 864 TYPE: NNAT: AACSB Reflective AICPA Legal

A11. Global Tours, a travel agency, is a limited liability company. Global is ex-empt from legal requirements that relate to

a. business name registration.b. occupational licensing.c. state tax registration.d. none of the choices.

ANSWER: D PAGE: 866 TYPE: =NAT: AACSB Reflective AICPA Legal

A12. Mabel and Nahim want to start up and incorporate a new businessenterprise. The first step in the incorporation process is to

a. choose and file a corporate name with a state office.b. draft the bylaws to govern the corporation.c. hold an initial board of directors’ meeting.d. prepare and file articles of incorporation with a state office.

ANSWER: A PAGE: 868 TYPE: NNAT: AACSB Reflective AICPA Legal

A13. Fay wants to incorporate her video game store as Game Ball, Inc., andfiles the name with the Idaho secretary of state. With approval, Fay canuse the name

a. in Idaho only.b. in Idaho and the states that border it only.c. throughout the United States.d. throughout the world.

ANSWER: A PAGE: 868 TYPE: =NAT: AACSB Reflective AICPA Legal


A14. Klee wants to make and sell a computer operating system under a trade-mark. To obtain the most protection under the law, Klee should choose amark that is

a. distinctive.b. similar to an existing mark.c. the same as an existing mark.d. non-distinctive.


A15. Demi operates Eyes Wide Open, a small-business optician enterprise. Toraise capital, Demi contacts Foster, a venture capitalist. Besides capital,Foster will most likely

a. assist in the drafting of a business plan.b. decline a proportion of future profits.c. offer assistance with respect to marketing.d. refrain from demanding operational control.

ANSWER: C PAGE: 871 TYPE: NNAT: AACSB Reflective AICPA Critical Thinking

A16. National Standard Company (NSC) products are identified with a trade-mark. For several years, NSC allows others to use the mark withoutpermission and without protest. This may constitute, on NSC’s part,

a. abandonment of the mark.b. anticompetitive conduct.c. liability for misleading consumers.d. liability for misleading competitors.


A17. Select Sales Company’s offer of shares of stock in itself to anyone who iswilling to pay $60 per share is

a. a private offering.b. a private offering and a public offering.c. a public offering.d. neither a private offering nor a public offering.



A18. The three shareholders of Omega, Inc., want to prevent each other fromselling the shares to third parties without first being given the opportu-nity to buy them. The shareholders can provide for this in

a. a buy-sell agreement that includes a right of first refusal.b. a buy-sell agreement that includes a “take-along” clause.c. a key-person clause that specifies who can sell what to whom.d. a stop-and-desist clause that dissolves the firm on a sale of shares.

ANSWER: A PAGE: 874 TYPE: =NAT: AACSB Reflective AICPA Risk Analysis

A19. Nero opened Oh! Fudge!, a candy store, as a corporation. When doingbusiness on behalf of the store, to avoid personal liability, Nero shouldsign contracts

a. as an express agent for the corporation.b. as an express party to the contract.c. as an express agent and a party to the contract.d. under a false name.


A20. Bild-It-Rite Corporation uses independent contractors. Bild-It-Rite can

a. be sued by a contractor for a violation of discrimination laws.b. exercise little control over how the contractors perform.c. obtain workers’ compensation insurance for the contractors.d. withhold income taxes from payments to the contractors.

ANSWER: B PAGE: 878 TYPE: =NAT: AACSB Reflective AICPA Legal

ESSAY QUESTIONS

A1. Ben owns Copyshop and wants to sell Copyshop franchises throughoutthe United States. In doing so, Ben wants to prevent competitors fromimitating the distinctive Copyshop logo and thereby misleading consum-ers. How can Ben protect the logo?

ANSWER: A logo is a trademark. Assuming that a trademark is not toosimilar to existing marks, it can be registered with the U.S. Patent andTrademark Office (PTO). This provides national protection for a markthat is in use (or will be within six months). Once a mark is federally reg-istered, the symbol ® may be used with it to give notice of the


registration. (If a mark is not registered, the symbol ™ can be used.)Registration can be renewed after five years, and every ten yearsthereafter. The owner of a mark must be vigilant against its misuse.Allowing others to use a mark without restrictions or without protestcan constitute abandonment. Also, a mark registered with the PTO thatis not used for two years is presumed abandoned.

PAGES: 869–870 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

A2. Electro, Inc., makes and sells electric bikes, as well as parts and service,to customers in the United States and other countries. Can Electro pre-vent its employees from revealing its customer lists, pricing policies, andother confidential information, if the employees resign to work for a com-petitor or to enter the same business themselves? How?

ANSWER: Customer lists, pricing policies, and other trade secrets canbe protected. An employer can require employees to agree not to revealtrade secrets or other confidential information if the employees go towork for a competitor or go into business for themselves. An employercan also insist that employees not work for competitors or enter acompeting business, in which the employer’s trade secrets will likely bedisclosed and utilized. To be enforceable, these covenants not to competemust be reasonable in time and geographic limits.

PAGES: 870–871 TYPE: =NAT: AACSB Reflective AICPA Decision Modeling

Clark 11e TB a Ch42

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