CHAPTER 3

ORGANIZING AND FINANCING A NEW VENTURE

True-False Questions

T. 1. The difference between a limited partnership and a general partnership is

that the limited partnership has partners who actively manage the day-to-day
operations but also has passive investors.

T. 2. A limited partnership limits certain partners’ liabilities to pay the venture’s

obligations to the amount each paid for their partnership interests.

F. 3. In a corporate legal entity, the personal assets of the owners are separate
from the business’ assets, but the personal liabilities of the owners are not.

F. 4. Limited liability in the corporate business structure means creditors can

seize only some of the corporation’s assets.

T. 5. The articles of incorporation are the basic legal declarations contained in

the corporate charter.

F. 6. Limited liability companies (LLCs) are owned by shareholders with limited

liability and its earnings are taxed at the corporate rate.

T. 7. Partnerships are treated with pass-through taxation. This means that profits
and losses of the business pass directly through to investors on the basis
specified in the partnership agreement.

T. 8. An employment contract is an agreement between an employer and

employee about the terms and conditions of employment including the
employee’s agreement to keep confidential information secret and to assign
ideas and inventions to the employer.

F. 9. Financial bootstrapping maximizes the need for financial capital.

T. 10. The income received by a proprietorship is taxed at personal tax rates.

F. 11. The equity capital sources for a proprietorship are partners, families, and
friends.

F. 12. The maximum number of owners in a Subchapter S corporation is 150.

F. 13. An S corporation provides unlimited liability for its shareholders.

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18 Chapter 3: Organizing and Financing a New Venture

T. 14. Professional corporations (PCs) and service corporations (SCs) are

corporate structures that “states” provide for professionals such as physicians,
dentists, lawyers, and accountants.

T. 15. The marginal tax rate for the first dollar of taxable income is higher for
corporations than for individuals.

T. 16. Based on the 2015 tax laws, the highest possible marginal tax rate for
corporations is less than the highest rate for individuals.

F. 17. The highest marginal income tax rate for taxable personal income is 45
percent.

T. 18. There are four types of “marks” that can be used to try to protect
intellectual property.

T. 19. Patents, trade secrets, trademarks, and copyrights are intangible assets.

F. 20. “Certification marks” cover memberships in groups (e.g., a sorority or a

labor union).

T. 21. “Collective marks” cover memberships in groups (e.g., a sorority or a

labor union).

T. 22. Most trademarks take the form of names, words, or graphic designs.

F. 23. A “color mark” is considered to be one four types of “marks” used to try
to protect intellectual property.

F. 24. A copyright must be registered with the U.S. Copyright Office in order for
a work to be protected.

T. 25. A work does not need to be registered to receive copyright protection; the
work’s creation is enough to provide copyright protection.

T. 26. There are four kinds of patents.

T. 27. “Business method” is one kind of patent.

F. 28. An idea is enough to be patented.

F. 29. “Design patents” cover most inventions pertaining to new products,

services, and processes.
 Chapter 3: Organizing and Financing a New Venture 19

T. 30. “Business method” patents protect a specific way of doing business and
the underlying computer codes, programs, and technology.

F. 31. “Patents” are intellectual property rights granted for inventions that are
useful, novel, and obvious.

F. 32. Nondisclosure agreements prohibit the creator of an idea or other form of

intellectual property from sharing it with others once it has been presented the
first time.

T. 33. Confidential disclosure agreements are used to protect intellectual property

when disclosure must be made to an outside individual or organization.

F. 34. “Certification marks” are intellectual property rights in the form of

inventions and information (e.g., formulas, processes, customer lists, etc.) not
generally known to others.

T. 35. “Trademarks” are intellectual property rights that allow firms to

differentiate their products and services through the use of unique marks.

F. 36. A trademark must be novel in order to receive protection.

T. 37. Business angels are wealthy individuals who invest in early-stage ventures
in exchange for the excitement of launching the business, as well as a share of
the firm’s financial gains.

F. 38. “Service marks” refer to services such as those provided by a sorority or a

labor union.

T. 39. “Certification marks” provide indications of quality.

T. 40. Copyrights are intellectual property rights to writings in printed and

electronically stored forms.

T. 41. The Leahy-Smith America Invents Act of 2011 was passed, in part, to
alleviate the backlog of patent-related lawsuits.

F. 42. Patent Trolls are firms authorized by the U.S. Congress to help reduce the
number of patent-related lawsuits.

T. 43. If you are an inventor with a patent, the burden of enforcing the patent is
yours.

Multiple-Choice Questions
20 Chapter 3: Organizing and Financing a New Venture

a. 1. In which form of business organization are the owners not offered the
protection of limited liability?
a. proprietorship
b. limited partnership
c. corporation
d. subchapter S corporation
e. limited liability corporation

d. 2. In which form of business organization is the taxation effects characterized

by the income flowing to shareholders taxed at personal tax rates?
a. proprietorship
b. limited partnership
c. corporation
d. subchapter S corporation
e. general partnership

a. 3. Which form of business organization is characterized by having the shortest

start-up time and lowest legal costs?
a. proprietorship
b. limited partnership
c. corporation
d. subchapter S corporation
e. limited liability corporation

c. 4. Which form of business organization typically offers the easiest transfer of

ownership?
a. proprietorship
b. limited partnership
c. corporation
d. subchapter S corporation
e. general partnership

d. 5. Which form of business organization is characterized as having unlimited

life?
a. proprietorship
b. limited partnership
c. limited liability corporation
d. subchapter S corporation
e. general partnership

b. 6. Which of the following is not a right or a duty of general partners?

a. participation in profits and losses
b. some liability for partnership obligations
c. veto right on new partners
 Chapter 3: Organizing and Financing a New Venture 21

d. eventual return of capital

e. access to partnership books

c. 7. The rules and procedures established to govern the corporation are called
the
a. corporate charter
b. articles of incorporation
c. corporate bylaws
d. confidentiality disclosure agreements
e. partnership agreements

b. 8. In a general partnership, legal action that treats all partners equally as a

group is called:
a. joint and several liability
b. joint liability
c. limited liability
d. accrued liability
e. general liability

f. 9. Which of the following business organizational forms provides the owners

with limited investor liability and passes its income before taxes through to the
owners?
a. partnership
b. subchapter S (or S) corporation
c. regular or (C ) corporation
d. limited liability company (LLC)
e. both a and b
f. both b and d

a. 10. Which of the following numbers of shareholders is allowed in a

Subchapter S (or S) corporation business form?
a. 100
b. 125
c. 130
d. 500

b. 11. Based on 2015 tax schedules, the first dollar of personal taxable income is
taxed at which of the following marginal tax rates:
a. 5.0%
b. 10.0%
c. 15.0%
d. 20.0%
e. 25.0%
22 Chapter 3: Organizing and Financing a New Venture

c. 12. Based on 2015 tax schedules, the first dollar of corporate income is taxed
at which of the following marginal tax rates:
a. 05.0%
b. 10.0%
c. 15.0%
d. 20.0%
e. 25.0%

d. 13. Based on 2015 tax schedules, the highest marginal tax rate on personal
taxable income is:
a. 25.0%
b. 28.0%
c. 33.0%
d. 39.6%
e. 45.0%

e. 14. Based on 2015 tax schedules, the highest marginal tax rate on corporate
taxable income is:
a. 25.0%
b. 28.0%
c. 35.0%
d. 38.0%
e. 39.0%

Note: The following information should be used for multiple choice questions 15-19.
Following is a partial 2015 personal income tax schedule for a single filer:
Taxable Income

Beginning Ending Bracket Marginal

Amount Amount Amount Tax Rate
$1 $9,225 $9,225 0.10
$9,225 $37,450 $28,225 0.15
$37,450 $90,750 $53,300 0.25

b. 15. The dollar amount of income taxes paid by a single filer who has taxable
income of $9,225 would be:
a. $1
b. $922.50
c. $1,383.75
d. $2,306.25
e. $4,612.50

d. 16. The cumulative dollar amount of income taxes paid by a single filer who
has taxable income of $37,450 would be:
a. $1
 Chapter 3: Organizing and Financing a New Venture 23

b. $922.50
c. $4,233.75
d. $5,156.25
e. $10,385

e. 17. The maximum dollar amount of income taxes in the $37,450-$90,750

“bracket” paid by a single filer with taxable income of $90,750 would be:
a. $1
b. $922.50
c. $4,233.75
d. $5,156.25
e. $13,325

b. 18. The average tax rate for a single filer with taxable income of $37,450
would be:
a. 10.0%
b. 13.8%
c. 15.0%
d. 16.7%
e. 20.0%

d. 19. The average tax rate for a single filer with taxable income of $90,750
would be:
a. 15.0%
b. 16.5%
c. 19.7%
d. 20.4%
e. 25.0%

Note: The following information should be used for multiple choice questions 20-24.
Following is a partial 2015 corporate income tax schedule:

Taxable Income
Beginning Ending Bracket Marginal
Amount Amount Amount Tax Rate
$1 $50,000 $50,000 0.15
$50,000 $75,000 $25,000 0.25
$75,000 $100,000 $25,000 0.34

c. 20. The dollar amount of income taxes paid by a corporation with taxable
income of $50,000 would be:
a. $1,500
b. $6,250
c. $7,500
d. $8,500
24 Chapter 3: Organizing and Financing a New Venture

e. $10,850

d. 21. The cumulative dollar amount of income taxes paid by a corporation with
taxable income of $75,000 would be:
a. $6,250
b. $7,500
c. $8,500
d. $13,750
e. $22,250

c. 22. The maximum dollar amount of income taxes in the $75,000-$100,000

bracket paid by a corporation with taxable income of $100,000 would be:
a. $6,250
b. $7,500
c. $8,500
d. $13,750
e. $22,250

b. 23. The average tax rate for a corporation with taxable income of $75,000
would be:
a. 15.0%
b. 18.3%
c. 20.0%
d. 22.7%
e. 25.0%

d. 24. The average tax rate for a corporation with taxable income of $100,000
would be:
a. 15.0%
b. 16.75%
c. 20.0%
d. 22.25%
e. 25.0%

c. 25. Intellectual property can be protected by all of the following except:

a. patents
b. trademarks
c. legal disclaimers
d. copyrights
e. trade secrets

a. 26. Which of the following are intellectual property rights granted for
inventions that are useful, novel, and non-obvious?
a. patents
b. trademarks
 Chapter 3: Organizing and Financing a New Venture 25

c. legal disclaimers
d. copyrights
e. trade secrets

e. 27. Which of the following are intellectual property rights in the form of
inventions and information such as formulas, processes, and customer lists that
are not generally known to others and which convey economic advantage to
the holders?
a. patents
b. trademarks
c. legal disclaimers
d. copyrights
e. trade secrets

b. 28. Which of the following are intellectual property rights that allow firms to
differentiate their products and services through the use of unique marks which
allow consumers to easily identify the source and quality of the products and
services?
a. patents
b. trademarks
c. legal disclaimers
d. copyrights
e. trade secrets

d. 29. Which of the following are intellectual property rights to writings in

written and electronically stored forms?
a. patents
b. trademarks
c. legal disclaimers
d. copyrights
e. trade secrets

e. 30. Which of the following are not sources of seed and start-up financing?
a. family and friends
b. the entrepreneur’s physical and financial assets
c. business angels
d. venture capitalists
e. stock and bond markets

d. 31. Wealthy individuals who invest in early stage ventures in exchange for the
excitement of launching a business and a share in any financial rewards are
known as:
a. creditors
b. white knights
c. corporate raiders
26 Chapter 3: Organizing and Financing a New Venture

d. business angels
e. stakeholders

a. 32. Business angels typically initiate their investments during the:

a. early stages of a venture’s lifecycle
b. middle stages of a venture’s lifecycle
c. maturity stage of a venture’s lifecycle
d. all of the above

c. 33. Which of the following forms of protecting intellectual property had its
protection limit increased from 17 to 20 years?
a. copyrights
b. trademarks
c. patents
d. trade secrets

c. 34. Patents are intellectual property rights granted for inventions that are:
a. not useful, novel, and non-obvious
b. not useful, not novel, and obvious
c. useful, novel, and non-obvious
d. useful, not novel, and obvious

c. 35. Patents that cover most inventions pertaining to new products, services,
and processes, are referred to as:
a. design patents
b. plant patents
c. utility patents
d. electrical patents
e. mechanical patents

b. 36. Intellectual property rights to “writings” in written and electronically-

stored forms are protected by:
a. Patents
b. copyrights
c. trade secrets
d. trademarks

b. 37. Which of the following forms of protecting intellectual property currently

has a protection limit of 20 years?
a. copyrights
b. patents
c. trade secrets
d. trademarks

c. 38. Certification marks are typically used to:

 Chapter 3: Organizing and Financing a New Venture 27

a. indicate membership in a trade group

b. indicate a certain brand of service
c. indicate quality
d. are symbols used to associate products to a specific brand

c. 39. Which of the following is not a “kind” of patent?

a. Utility
b. Design
c. Mark
d. Plant
e. Business method

e. 40. Which of the following is not a “type” of mark?

a. Trademark
b. Service mark
c. Collective mark
d. Certification mark
e. Design mark

e. 41. During the development stage, seed financing chiefly comprises:

a. funds from business angels and venture capitalists
b. the entrepreneur’s personal assets
c. funds from family and friends
d. a, b, and c
e. only b and c

a. 42. The term that refers only to words, symbols, shapes, and similar items
associated with products is:
a. trademarks
b. service marks
c. collective marks
d. certification marks

b. 43. The Leahy-Smith America Invents Act of 2011 was the first major change
since 1952 involving how:
a. Patent Trolls can operate
b. the U.S. patent system operates
c. patents differ from trademarks
d. trade secrets can be converted to patents

c. 44. If you are an inventor with a patent, the:

a. U.S. Patent Office will enforce your rights
b. U.S. Government will enforce your rights
c. burden of enforcing your patent is yours
d. Leahy-Smith America Invents Act provides patent protection