Introduction to Entrepreneurship (Powerpoint Lecture) Final Exam

What are the main “choice of entity” options entrepreneurs usually compare?

Sole proprietorship, partnership, corporation (C corp / S corp), LLC, LLP, and limited partnership

What are the core criteria to consider when choosing a legal form?

Ownership vs management, duration/lifespan/future plans, ease of alienation (transfer/sale), liability, and taxation

What does “ease of alienation” mean in entity choice?

How easy it is to transfer/sell ownership interests (e.g., stock is easier than partnership interests)

What tradeoff is at the heart of entity choice for most founders?

Balancing liability protection vs tax treatment vs flexibility/control

What is a sole proprietorship?

One owner operates without forming a separate business organization; few formalities to establish

What’s the biggest legal downside of a sole proprietorship?

The owner has unlimited personal liability

How are sole proprietorship profits taxed?

The owner pays personal income taxes on profits (including Medicare and Social Security)

Can a sole proprietor still need “legal stuff” even without forming an entity?

Yes - licenses, zoning compliance, and often a bank account under a DBA (“doing business as”)

Why do many businesses start as sole proprietorships?

They’re simple to start, and founders can later convert to another form

What is a partnership (in this class’s definition)?

A voluntary contract between 2+ people to devote funds/labor/skills to a business and share profits/losses

What law generally governs partnerships in most states?

The Uniform Partnership Act (UPA) (adopted in all states except Louisiana)

How can a partnership be created “automatically”?

By two or more persons engaged in a joint venture for profit—even without a written agreement

What is “pass-through taxation” for partnerships?

Partnership income is taxed to each partner personally (no entity-level income tax like a C corp)

UPA default: How are profits shared if there’s no written agreement?

Presumptively equally

UPA default: How are losses shared if there’s no written agreement?

Losses are shared as profits are shared

UPA default: Who gets management rights?

Partners have an equal and undivided right to management

UPA default: What events can dissolve a partnership automatically?

Death, insanity, insolvency, or departure of any partner

Why is a written partnership agreement so important?

If you don’t write one, UPA governs—and you may not like the defaults

What topics should a partnership agreement cover?

Names, location/state law, duration, capital contributions, profit/loss shares, recordkeeping, and dissolution procedures

What are key fiduciary duties partners owe?

Duty of care and duty of loyalty (no self-dealing, misuse of partnership property, trade secret disclosure, or usurping opportunities)

What is the big liability rule for general partnerships?

Each partner is personally liable for partnership debts—often joint and several liability

Can a partner be liable for wrongful acts they didn’t know about?

Yes—liability can apply even without participation/ratification/knowledge

What makes a limited partnership different from a general partnership?

It has at least one general partner (manages + personal liability) and limited partners (invest, don’t manage, limited liability up to investment)

What formal step is required to form a limited partnership?

Filing a certificate of limited partnership with the state

What is a corporation (core definition)?

A legal entity created under state law by filing articles of incorporation; treated as a legal “person”

What’s the main reason founders choose corporations?

Limited liability for shareholders + easier equity financing via stock

What’s the difference between a closely held and publicly traded corporation?

Closely held: few shareholders, transfers may be restricted. Publicly traded: shares sold on markets (NYSE/NASDAQ) with heavy securities-law obligations

What is corporate governance (who does what)?

Shareholders elect a board of directors; the board sets policy and hires officers/employees who run daily operations

What is “piercing the corporate veil”?

A court reaching owners’ personal assets despite the corporation—an exception to limited liability

What facts can support piercing the corporate veil?

Alter ego domination + inadequate recordkeeping + improper conduct in formation/use + that conduct injures plaintiff

What is NOT enough by itself to pierce the veil?

Just becoming insolvent or going out of business

What fiduciary duties do directors/officers owe?

Duties of loyalty and care; protected by the business judgment rule in many decisions

What is the “double taxation” problem for C corporations?

Corporation pays corporate tax on profits, then shareholders pay tax again on dividends

What is an S corporation’s key advantage?

It avoids corporate-level tax via pass-through taxation while keeping limited liability

What are core eligibility requirements for S corp status?

Domestic corporation; limited number of U.S. citizen individual shareholders (up to 100); only natural persons as shareholders

What is an LLC (core definition)?

A limited liability entity formed by filing articles of organization; governed by an operating agreement with members and managers

What’s the main appeal of an LLC?

Limited liability with flexible management + potential to avoid corporate double taxation

How can an LLC be taxed (with 2+ members)?

It can elect taxation like a partnership (member-managed) or like a corporation (manager-managed)

What tax “gotcha” did the slide mention for LLC members?

Member earnings are generally subject to self-employment tax (15.3%) (while corporate distributions aren’t)

What’s the high-level difference between sole proprietorship and partnership?

Both have single taxation but personal liability; partnerships add shared management/UPA defaults and joint/several exposure

What’s the high-level difference between a corporation and an LLC?

Both can offer limited liability, but corporations often face double taxation (C corp) while LLCs often have single taxation (if taxed as partnership)

What is a B Corp?

A voluntary certification (through B Lab) based on chosen social impact criteria and audits

What is a Benefit Corporation?

A legal corporate form (state law) that allows decisions based on social benefit (e.g., sustainability, wages, community)

Can benefit corporations be sued by outsiders for “failing” at social benefit?

No third-party standing to sue for failure to achieve social benefit

What is an L3C?

A for-profit social enterprise LLC type with an explicit social mission, aimed at attracting certain foundation-related investments (PRIs)

What funding sources are common at the “emergence” stage?

Founders, friends/family, grants (SBIRs), customers/sales, and debt

What funding sources are common in the “transition” stage?

Angel investors, debt, strategic investors, customers, and early-stage VCs

What funding sources are common in “rapid growth”?

VCs, strategic investors, debt, and IPOs

What is the big warning about friends & family equity?

Don’t give away too much early, and personal life events (death/divorce/disability) can create messy ownership problems

What’s a common difference between angels and VCs?

Angels invest earlier and often invest in the person; VCs focus on high growth and may demand board control and faster exits

Name the four main IP protection categories

Trade secrets, copyrights, patents, trademarks

What makes trade secrets unique vs patents/trademarks/copyrights?

They’re protected by state law, must be kept secret, can last indefinitely if secret—and if reverse engineered, there’s no recourse

When does copyright protection arise?

Automatically when a work is “fixed in a tangible medium of expression”

What are the basic requirements for a utility patent?

Novelty, utility, and nonobviousness; you can’t patent abstract ideas or formulas

What does a patent give you (most accurate phrasing)?

Not a right to make/use—it's the right to exclude others from making/selling

What does a trademark protect?

Brand identifiers that signal source (name, logo, slogan, etc.)—must be used in commerce and not purely descriptive