Entrepreneurship Overview Guide 2 — Questions and Answers
Question 1: What is the primary difference between a sole proprietorship and a limited liability company (LLC)?
- LLCs require at least two owners
- Sole proprietors have unlimited personal liability while LLC owners are generally protected (Correct answer)
- LLCs cannot be taxed as pass-through entities
- Sole proprietorships must file articles of incorporation
Correct answer: Sole proprietors have unlimited personal liability while LLC owners are generally protected
In a sole proprietorship, the owner is personally responsible for all business debts, whereas an LLC protects members' personal assets from business liabilities.
Question 2: Which concept describes an entrepreneur's ability to identify a gap between what currently exists and what customers truly need?
- Market saturation
- Opportunity recognition (Correct answer)
- Competitive advantage
- Value depreciation
Correct answer: Opportunity recognition
Opportunity recognition is the entrepreneurial process of spotting unmet needs or underserved markets that a new venture can profitably address.
Question 3: A startup that reinvests all profits back into growth rather than distributing them to owners is pursuing which strategy?
- Bootstrapping
- Dividend reinvestment
- Plowback strategy (Correct answer)
- Debt financing
Correct answer: Plowback strategy
The plowback (or retention) strategy involves retaining earnings within the business to fund expansion instead of paying out dividends.
Question 4: What does 'product-market fit' mean for an early-stage startup?
- The product is manufactured locally to match the market geography
- The product satisfies a strong market demand and customers actively want it (Correct answer)
- The product's price matches average market pricing
- The product has been patented in the target market
Correct answer: The product satisfies a strong market demand and customers actively want it
Product-market fit occurs when a startup's offering resonates so well with its target customers that demand grows organically and retention is high.
Question 5: Which type of business structure offers pass-through taxation AND limited liability without the formality requirements of a corporation?
- General partnership
- S-Corporation
- LLC (Correct answer)
- Sole proprietorship
Correct answer: LLC
An LLC provides limited liability protection to its members while allowing profits and losses to pass through to personal tax returns, avoiding double taxation.
Question 6: An entrepreneur who funds her startup entirely from personal savings and early customer revenue without outside investment is practicing:
- Venture backing
- Bootstrapping (Correct answer)
- Angel financing
- Crowdfunding
Correct answer: Bootstrapping
Bootstrapping means building and growing a business using only internal resources—personal savings, sweat equity, and revenue—without external capital.
Question 7: What is the purpose of a non-disclosure agreement (NDA) in entrepreneurship?
- To register a trademark with the USPTO
- To protect confidential business information shared with third parties (Correct answer)
- To formally incorporate a business
- To outline the equity split between co-founders
Correct answer: To protect confidential business information shared with third parties
An NDA is a legal contract that prevents the receiving party from sharing or using proprietary information disclosed during business discussions.
Entrepreneurship Overview Guide 2
What is the primary difference between a sole proprietorship and a limited liability company (LLC)?