IAB Business Law & Ethics 4 — Questions and Answers
Question 1: A sole proprietor's personal assets are at risk in a lawsuit against their business because of:
- The pass-through taxation rule
- Unlimited personal liability (Correct answer)
- Lack of business registration
- The alter ego doctrine
Correct answer: Unlimited personal liability
Sole proprietors face unlimited personal liability, meaning creditors and plaintiffs can pursue the owner's personal assets to satisfy business debts or judgments.
Question 2: In ethics, 'utilitarianism' as applied to business decisions means choosing actions that:
- Strictly follow established rules and duties
- Produce the greatest good for the greatest number of people (Correct answer)
- Maximize profit for shareholders above all else
- Align with virtue and personal character
Correct answer: Produce the greatest good for the greatest number of people
Utilitarianism is a consequentialist ethical theory that judges actions based on whether they maximize overall well-being or utility across all affected parties.
Question 3: When a court 'pierces the corporate veil,' it means that:
- The corporation's trade secrets are made public
- Shareholders are held personally liable for corporate debts (Correct answer)
- A corporation is dissolved by court order
- All corporate contracts are voided
Correct answer: Shareholders are held personally liable for corporate debts
Piercing the corporate veil allows courts to hold shareholders personally liable when they have abused the corporate form, for example by commingling personal and business funds.
Question 4: A 'void' contract differs from a 'voidable' contract in that a void contract:
- Can be enforced by one party but not the other
- Has no legal effect and cannot be ratified by either party (Correct answer)
- Can be cancelled by the injured party at their option
- Requires court approval to become enforceable
Correct answer: Has no legal effect and cannot be ratified by either party
A void contract has no legal force from the outset (e.g., a contract for illegal activity), while a voidable contract is valid until one party chooses to rescind it.
Question 5: Under the Fair Labor Standards Act (FLSA), non-exempt employees must be paid overtime at what rate for hours worked over 40 in a workweek?
- Double their regular rate
- 1.5 times their regular rate (Correct answer)
- 1.25 times their regular rate
- Their regular rate plus a flat bonus
Correct answer: 1.5 times their regular rate
The FLSA requires that non-exempt employees receive overtime pay of at least 1.5 times (time and a half) their regular hourly rate for all hours worked beyond 40 in a workweek.
Question 6: Which of the following is an example of 'insider trading'?
- A CEO purchasing stock in a competitor company using public information
- An employee trading company stock based on non-public material information (Correct answer)
- A hedge fund manager using legal research to identify undervalued stocks
- A retail investor buying stock after reading a published analyst report
Correct answer: An employee trading company stock based on non-public material information
Insider trading occurs when someone trades securities based on material, non-public information, violating securities laws and the duty of trust.
Question 7: A bookkeeper who inflates expense reports for personal gain is committing:
- Negligence
- A breach of fiduciary duty and fraud (Correct answer)
- An error of principle
- Constructive dismissal
Correct answer: A breach of fiduciary duty and fraud
Intentionally falsifying expense reports for personal enrichment constitutes both fraud (intentional deception for gain) and a breach of fiduciary duty owed to the employer.
IAB Business Law & Ethics 4
A sole proprietor's personal assets are at risk in a lawsuit against their business because of: