Ch.12 | Verified Test Bank – Legal and Tax Issues, Including

Questions for Chapter 12

True/False

1. The corporate opportunity doctrine basically claims that a director cannot use his position to decide which acquisition deals the company should enter to. (pg. 374)
2. Every start-up should concentrate on hiring a litigation attorney from the very beginning.

(pg. 374)

1. Persuading your co-workers to leave your employer is not very risky, as long as their defections do not impact the company’s ability to function and the conversations are occurring after working hours. (pg. 375)
2. The number of workers you draw from your former employer to your new company does not matter from the viewpoint of liability. (pg. 375)
3. Legally, an employee may not compete with his or her employer. (pg. 375)
4. You can use any information you gathered at your previous job as long as it is not patented or copyright protected. (pg. 376)
5. Certain states do not enforce non-compete agreements. (pg. 376)
6. Even when a patent application is successfully completed, protecting Intellectual Property is not the end game; a patent doesn’t generate revenue. (pg. 377)
7. Although there are actually three different kinds of patents, the kind people usually obtain to protect an invention is a design patent. (pg. 377)
8. Patents today cover non-engineering subject matter ranging from holders for floral bouquets to business methods. (pg. 377)
9. Trademark law cannot be invoked in Internet search engines, pop-up ads, and websites.

(pg. 377)

1. Users of another company's products can be sued for patent infringement. (pg. 377)
2. To qualify the invention for a patent, the applicant must describe all things novel about the invention. (pg. 378)
3. The patent application must contain a complete and understandable explanation of the invention.

(pg. 378)

1. Once granted, a patent’s scope is limited to the content that companies disclose in the drawings and specification portion of the filing. (pg. 379)
2. In the United States, the patent application must be filed within one year of the first public disclosure, public use, sale, or even offer for sale of the product, or the opportunity to obtain a patent will be lost forever. (pg. 378)
3. The owner of the patent has the right to exclude others from making, using, selling, offering for sale or importing the patented invention during the term of the patent. (pg. 378)
4. From the date the application is filed, there is a “patent pending;” and from the date of a “patent pending,” there are real legal rights associated with that designation. (pg. 378)
5. Since each patent application is unique, the form of each individual patent does not necessarily contain the same sections. (pg. 379)
6. A sale more than a year before the application will generally bar a patent even if the invention is embedded so deeply within a larger system that it could never be discovered. (pg. 379)
7. People like provisional patents because of the future protection that they ensure. (pg. 382)
8. Provisionals have found favor because they are typically less expensive than full patent applications and allow companies to advertise “patent pending.” (pg. 382)
9. Because of the potential value of a patent, the cost of filing a patent is always worth it. (pgs. 382-383)
10. One benefit of trade secrets is they can cover everything patents cover, and much more.

(pg. 383)

1. A trade secret is defined as knowledge, which is kept secret for the purpose of gaining an advantage in business. (pg. 383)
2. Trade secrets cover proprietary information, but only if they are in the form of an engineering schematic. (pg. 383)
3. A benefit of trade secrets is there is no standard of invention to meet, as there is with a patent. (pg. 383)
4. The law protects companies from their employees disclosing trade secrets even if those employees did not sign confidentiality contracts. (pgs. 383-384)
5. Since there is no formal protection procedure, the necessary steps for establishing a trade secret are often not taken seriously until a lawsuit is brought by the owner against someone who has misappropriated them. (pg. 384)
6. Trademark protection cannot be obtained for just some word, symbol, or combination thereof that is used on goods to indicate their source. (pg. 385)
7. Trademarks can be more valuable to some companies than patents and trade secrets combined.

(pg. 385)

1. Trademarks can differentiate a business's products and services from those of others businesses.

(pgs. 385 – 386)

1. Although formally there is only one owner in the sole proprietorship, two or more people control the company. (pg. 390)
2. A board of directors makes all the long-term and significant policy decisions for the business as well as electing the officers of the corporation. (pg. 391)
3. If a business is not able to pay its debts, under a general partnership, the debt is transferred to the owners. (pg. 391)
4. Business angels prefer to invest in sole proprietorships. (pg. 391)
5. There are conditions under which a corporation can be taxed as a partnership.

(pg. 393)

1. Double taxation is not necessarily a problem for a company. (pg. 393)
2. S corporations have the same restrictions as the LLCs, while allocating profit, loss and control more creatively. (pg. 393)
3. Corporations do not necessarily operate in the same state where they were formed.

(pg. 395)

1. When choosing an official name, every company has to receive an approval from its respective state regulatory board. (pg. 395)
2. The employer is responsible for any damage done by the employees occurring within the scope of their employment. (pg. 399)
3. National statutes prohibit employment discrimination on the basis of sex, race, nationality, religion, sexual orientation, age, and disability. (pg. 399)

Multiple Choice

1. What is the advantage of hiring a specialized attorney for a startup? (pg. 374)
   1. Usually good at suing multinationals
   2. Will gladly accept equity as the fee
   3. May agree upon installment payments
   4. May substitute expensive software at the early stage
   5. Good at representing your national interests
2. What concept requires that an employee does not knowingly take action designed to harm the employer's business? (pgs. 374-375)
   1. Reasonable protection
   2. Employee’s obligation
   3. Duty of loyalty
   4. Corporate tact
   5. Generally accepted protection principle
3. If you decided to leave your current employer and establish your own venture, what actions will decrease the likelihood of being sued for convincing other employees from the company to leave with you? (pg. 375)
   1. Working in the Human Resources department of the employer
   2. Talking to them after the business hours
   3. Talking to them over e-mail or/phone
   4. Offering them better working conditions in the new company
   5. None of the above
4. Under what condition will the law consider the company to have taken reasonable protection of its information? (pgs. 377-387)
   1. If the company made its employees sign non-disclosure agreements
   2. If the company successfully kept the information confidential
   3. If the company protected the information through copyright laws
   4. If the company protected the information by registering patents
   5. All of the above
5. What, if possible, must the employer do to make its employees not compete with the company for a year after they quit the job? (pgs. 375-376)
   1. Issue an internal order
   2. Does not have to do anything – the obligation is imposed on any employee by statutes
   3. Obtain a court order
   4. Have the employees sign a non-competition agreement
   5. It cannot be done
6. Which of the following is not referred to as intellectual property creations of the mind?

(pg. 376)

• 1. inventions
  2. literary and artistic works
  3. symbols, names, and images
  4. designs used in commerce
  5. budget for a certain project

1. Which one of the following is within the range of Intellectual Property protection?

(pg. 376)

• 1. patents
  2. trade secrets
  3. trademarks
  4. copyrights
  5. all of the above

1. _______ protect authors’ original creations, including literary, musical, artistic, software, and other intellectual works. (pg. 376)
   1. Patents
   2. Trade secrets
   3. Trademarks
   4. Copyrights
   5. All of the above
2. _______ cover proprietary information, whether it’s in the form of a recipe, a customer list, or a unique way of conducting business. (pg. 376)
   1. Patents
   2. Trade secrets
   3. Trademarks
   4. Copyrights
   5. All of the above
3. _______ are key in differentiating a business’s products and services from those of others as well as in franchising arrangements. (pg. 376)
   1. Patents
   2. Trade secrets
   3. Trademarks
   4. Copyrights
   5. All of the above
4. ______can be considered a public use of an invention, sufficient to activate the one-year period.

(pg. 378)

• 1. Market testing
  2. Exhibitions
  3. Use by the inventor himself
  4. All of the above
  5. None of the above

1. The basic requirement for a utility patent is that the ______ be different in some way from what came before. (pg. 378)
   1. idea
   2. appearance
   3. value
   4. design
   5. product branding
2. The form of all patents contains the same basic sections, including: ____________. (pg. 379)
   1. drawings showing an embodiment of the invention
   2. a written description of the invention referring to the drawings akin to an engineering specification
   3. one or more claims—hybrid legal and technical language that “captures” the invention in words
   4. all of the above
   5. none of the above
3. The design patent covers only______. (pg. 382)
   1. the appearance of the product
   2. the idea of the product
   3. the underlying concept of the product
   4. the functionality of the product
   5. the rarity of the product
4. Which of the following could NOT be protected as a common form of trademarks? (pg. 385)
   1. Geometric shapes
   2. Natural shapes
   3. Combinations of shapes and colors
   4. Words used descriptively
   5. Colors
5. Which of these represent a word or symbol or combination used in connection with the offering and provision of services? (pg. 385)
   1. Utility patent
   2. Technique patent
   3. Design patent
   4. Service mark
   5. Copyright
6. People can establish which of the following without any formal governmental procedure?

(pg. 386)

• 1. Utility patent
  2. Technique patent
  3. Design patent
  4. Trademark
  5. Copyright

1. Copyrights cover many forms of writing; however, they will not cover which of the following?

(pg. 387)

• 1. Brochures
  2. Photographs
  3. Video presentations
  4. Architectural designs
  5. Biological materials

1. After the U.S. Patent and Trademark Office examines the application and determines that the mark could be registered, the applicant must show actual use within how many months? (pg. 386)
   1. 1 month.
   2. 3 months.
   3. 6 months.
   4. 12 months.
   5. 24 months.
2. In the U.S., how much does a typical search and registration for a trademark cost per mark?

(pg. 387)

• 1. $1,500 - $3,500
  2. $4,000 - $6,000
  3. $7,000 - $9,000
  4. $10,000 - $12,000
  5. $13,000 - $15,000

1. The benefit of a copyright registration is _______. (pgs. 387 – 388)
   1. the registration is easy to obtain
   2. protection lasts a long time
   3. the cost is low
   4. all of the above
   5. none of the above
2. Different countries have different conditions that entrepreneurs must meet to obtain any patent protection; the first and most important restriction is______. (pg. 389)
   1. the time limit
   2. the cost limit
   3. the term of protection limit
   4. the subject matter limit
   5. the value limit
3. By filing a special PCT patent application in a specially designated PCT office within one year of U.S. filing, and by designating certain countries, companies can preserve their right to file in those countries without further expense for ___ after the U.S. filing date; that will provide ______for test marketing the product. (pg. 389)
   1. 1 or 10 months and an additional 8 or 18 months
   2. 20 or 30 months and an additional 8 or 18 months
   3. 24 or 36 months and an additional 8 or 18 months
   4. 40 or 50 months and an additional 28 or 38 months
   5. 50 or 60 months and an additional 48 or 58 months
4. An S corporation can be distinguished from other types of corporations in: (pg. 390)
   1. Tax status
   2. Number of employees
   3. Areas of expertise
   4. Geographic location
   5. Annual income
5. The minimum number of owners in a general partnership is equal to: (pg. 390)
   1. 1
   2. 2
   3. 4
   4. 5
   5. 6
6. Which of the following cannot be considered non-profit entities? (pg. 390)
   1. Social welfare organizations
   2. Educational institutions
   3. Churches
   4. Limited liability corporations
   5. Industry associations
7. In regards to determining the choice of legal form, the most relevant factor(s) one should consider is/are: (pg. 390)
   1. Control
   2. Exposure to personal liability
   3. Tax factors
   4. Administrative costs
   5. All of the above
8. The business is not recognized as a legal entity separate from its owners under which form?

(pg. 391)

• 1. Professional corporation
  2. Limited Liability Company
  3. Partnership
  4. S corporation
  5. Non-profit

1. How long does an organization have to file for and secure non-profit status? (pg. 394)
   1. 14 weeks
   2. 1 year
   3. 18 months
   4. 2 years
   5. 26 months
2. Which is NOT a condition in which the law allows creditors to “pierce the corporate veil” and go after the owners of a failed corporation or LLC. (pg. 392)
   1. Failing to use Inc., Corp, LLC, or a similar legal indicator when dealing with third parties
   2. Commingling business and personal assets in a personal bank account
   3. Failing to keep business and legal records and hold regular directors’, stockholders’, or members’ meetings
   4. Allowing unreimbursed personal use of corporate assets
   5. None of the above
3. Which state is famous for its management-friendly corporate laws? (pg. 395)
   1. Ohio
   2. Massachusetts
   3. New Mexico
   4. California
   5. Delaware
4. As can be learned from the chapter, a redemption agreement is the covenant, in which: (pg. 397)
   1. The business owns insurance policies on the owners and is obligated to use the proceeds to purchase each stockholder’s equity upon his or her death.
   2. Each owner is required to take out insurance on the others and to buy a proportional amount of the deceased's equity.
   3. Business assets, such as inventory or marketable securities, equal to the value of owner’s share of the equity in the company will be transferred to relatives upon his or her death.
   4. Internal Revenue Service allows installment tax payments to be received within 2 years after an owner’s death.
   5. None of the above.
5. The doctrine of vicarious liability states that: (pg. 399)
   1. The employer’s liability for the employee’s actions is limited to a specific amount of money (the amount differs from state to state)
   2. The employer is responsible for any contract signed by the employee.
   3. The employer is responsible for any actions of the employee occurring within the scope of his/her employment
   4. The employee always answers for the consequences of his/her criminal actions without transferring the responsibility to the employer
   5. Employees can be held criminally liable if they contribute to the unlawful actions of an employer and should have reasonably understood the consequences.
6. An employer may not discriminate against anyone for any of the following characteristics, except for: (pg. 399)
   1. Religion
   2. Age
   3. National origin
   4. Sexual orientation
   5. Disability
7. What is the main attraction of an employment agreement for the employee? (pg. 400)
   1. Social benefits
   2. Protection against firing without cause
   3. Guaranteed promotion on a regular basis
   4. Fewer responsibilities
   5. Higher wages
8. What is the maximum dollar amount of a securities offering for it to still qualify for private placement exemption? (pgs. 400-401)
   1. $100,000
   2. $500,000
   3. $1,000,000
   4. $2,000,000
   5. $5,000,000

Open ended

1. Briefly explain the ideas behind the “corporate opportunity” and the “duty of loyalty” doctrines. (pgs. 374 – 375)
   1. If you work in a company and identify an opportunity the company may use, you must first notify the company.
   2. If the company turned down the opportunity, you may use it yourself, either individually or in your own venture.
   3. The duty of loyalty limits this obligation – low-position employees must only inform the company about opportunities directly related to the scope of their job. In contrast to the more strict obligations of executives.
2. How can a company protect itself from its employees competing against the company after they leave? What problems may the company face when preventing this kind of competition? (pgs. 375 – 376)
   1. Require employees to sign a non-disclosure contract
   2. Require a non-compete agreement.
   3. Sometimes the contract will not be enforceable due to local legislation
   4. Non-compete agreements may be limited by geography or time periods.
3. Please point out different classes of inventions that utility patents can cover, and the differences between them. (pgs. 377-378)
   1. Utility patents cover these classes of inventions:
   2. Chemical inventions that include new compounds, new methods of making old or new compounds, new methods of using old or new compounds, and new combinations of old compounds. Assays, biological materials and methods, drugs, foodstuffs, drug therapy, plastics, petroleum derivatives, synthetic materials, adhesives, pesticides, fertilizers, and feeds are all protectable.
   3. General/mechanical inventions include everything from gears and engines to tweezers and propellers, from zippers to Jacque Cousteau's scuba regulator. For example, complex textile-weaving machines, space capsule locks and seals, and diaper pins are all protectable.
   4. Electrical inventions include everything from lasers to light switches, from the smallest circuit details to overall system architectural concepts.
4. What are the benefits and the disadvantages of trade secrets? (pgs. 383 - 385)
   1. One benefit of trade secrets is they can cover everything patents cover, and much more. Another benefit of trade secrets is there is no standard of invention to meet as there is with a patent. Finally, a trade secret can be protected eternally against disclosure by all those who have received it in confidence and from all who would obtain it by theft, for as long as the knowledge or information is kept secret.
   2. The key disadvantage of trade secrets is that, unlike the case with patents, there is no protection against discovery by fair means, such as accidental disclosure, independent inventions, and reverse engineering. Trade secret protection would not permit the first inventor to prevent the second and subsequent inventors from exploiting the invention as a patent would.
   3. Many companies use both approaches, filing a patent application and during the time it is pending, keeping the invention secret. When the patent is ready to issue, the company reevaluates its position. If the competition is close, they let the patent issue. If not, they abandon the patent application and rely on trade secret protection. But, following a change in law, patent applications are now published eighteen months after their earliest filing date, voiding trade secret protection unless the filer takes active steps to prevent publication.
5. Many people think that only technical information can be protected. Is there any other kinds of information that can be protectable? (pgs. 376-388)
   1. Ideas for new products or product lines
   2. A new advertising or marketing program
   3. A new trademark idea
   4. The identity of a critical supplier
   5. A refinancing plan
6. Secrecy is essential to establishing trade secret rights; without it there is no trade secret property. Please identify the primary steps for ensuring secrecy. (pg. 384)
   1. Negotiate confidentiality agreements with all employees, agents, consultants, suppliers, and anyone else that will be exposed to the secret information. The agreement should bind them not to use or disclose the information without permission.
   2. Take security precautions to keep third parties from entering the premises where the trade secrets are used. Sturdy locks, perimeter fences, guards, badges, visitor sign-in books, escorts, and designated off-limits areas are just some of the ways that a trade secret owner can exercise control over the area containing the secrets.
   3. Stamp specific documents containing the trade secrets with a confidentiality legend and keep them in a secure place with limited access, such as a safe or locked drawer or cabinet.
   4. Make sure all employees, consultants, and others who are concerned with, have access to, or have knowledge about the trade secrets understand that they are trade secrets, and make sure they recognize the value to the company of this information and the requirement for secrecy.
7. What are the pros and cons of patenting a product? (pg. 388)
   1. Pros: you get legal protection against the use of your idea by competitors; you get exclusive rights for distributing your product.
   2. Cons: after you have patented the product, your idea becomes commonly known, and your competitors can build around it to create a new product; filing for a patent is expensive.
8. List the common business entities and describe them. (pgs. 390 – 391)
   1. Sole Proprietorship - owned and operated by one owner who is in total control
   2. Partnership - two or more persons go into business for profit, as co-owners, sharing profits and losses
   3. Corporation - separate legal entity, with legal existence apart from its owners, the stockholders
   4. Limited Partnership - one or more general partners, who conduct the business and take on personal risk, and one or more limited partners, who act as passive investors
   5. Limited Liability Company - owned by “members,” who either manage the business themselves or appoint “managers” to run it for them
9. Give several reasons for choosing a C corporation entity for a start-up. (pgs. 390 - 392)
   1. Limited personal liability
   2. It is easier to attract an investor, who can receive a partial ownership as a stockholder
10. What are the possible negative consequences of a company co-owner’s death and how can a company prepare itself to minimize them? (pgs. 396 - 397)
    1. The company’s decision making may be blocked if, for example, the deceased’s equity is inherited by a spouse who has no knowledge of the business.
    2. The company may be contractually obligated to purchase the deceased’s equity.
    3. To make this process easier, the company may have sign one of two agreements: a redemption agreement or a cross-purchase agreement.
    4. Key person insurance helps buy out the deceased’s share.
11. What legal issues can a company face when selling securities to investors? What are some of the misconceptions about stock and securities issuance? (pgs. 400-401)
    1. In general, the securities laws prohibit the offering of securities (including stock) to the public without prior (and very expensive) registration with an appropriate government authority such as SEC.
    2. These laws provide exceptions to the registration requirement in specific circumstances, but even these offerings are subject to the anti-fraud provisions of the laws.
    3. The Securities Act of 1933 necessarily exempts offerings that are purely local, however, the scope of this exemption is relatively narrow.