Deck 30: Sole Proprietorships and Franchises

Question 1

The Franchise Rule requires a franchisor to establish and enforce rules with respect to its franchisees.

Answer 1

False

Question 2

Anyone who does business without creating a separate business organization has a franchise.

Answer 2

False

Question 3

Any business-except a sole proprietorship-must comply with business licensing requirements.

Answer 3

False

Question 4

A franchisee can operate as an independent businessperson and choose any business form but still obtain the advantages of a regional or national organization.

Question 5

To avoid conflicts with the First Amendment, no state requires a franchisor to submit ads aimed at prospective franchisees to the state for approval.

Question 6

Anyone who does business must create a separate business organization.

Question 7

In a sole proprietorship, the owner is not the business.

Question 8

To prevent deception, all representations by a franchisor to a prospective franchisee must have a reasonable basis at the time they are made.

Question 9

The law considers all new businesses to be sole proprietorships.

Question 10

The Franchise Rule requires a franchisor to provide potential earnings figures to its prospective franchisees.

Question 11

A proprietor's opportunity to raise capital for a sole proprietorship is limited.

Question 12

Limited legal liability can be an advantage for a small business wishing to raise capital.

Question 13

Because a franchise can involve the license of a trademark, a trade name, or a copyright, the law governing intellectual property may apply in some situations.

Question 14

To protect franchisees against arbitrary or bad faith termination, a state law may require certain procedures be followed in terminating a franchise.

Question 15

The proprietor pays only personal income taxes on a sole proprietorship's profits.

Question 16

Among the factors an entrepreneur will consider in selecting an organizational form for a business is the liability of the owners for the acts of the firm.

Question 17

State regulation of franchising is often aimed at protecting franchisees from unfair practices.

Question 18

When the owner of a sole proprietorship dies, the business does not dissolve-it is automatically transferred to family members or other heirs.

Question 19

In a sole proprietorship, the proprietor bears the burden of any liabilities incurred by the business enterprise.

Question 20

The Franchise Rule does not require a franchisor to make any disclosures to prospective franchisees but what is disclosed must be material and informative.

Question 21

Because each type of franchise relationship is similar, franchise contracts tend to be similar.

Question 22

To maintain the quality of a product or service, a franchisor can exercise any degree of control over a franchisee's operation without risking potential liability.

Question 23

A franchisor does not have good cause to terminate a franchise for a franchisee's failure to meet specified sales quotas.

Question 24

Case law governing franchising emphasizes the importance of good faith and fair dealing.

Question 25

Lara owns and operates Market Place, a venue for growers, crafters, and others to sell their goods, without creating a separate business organization. She receives all the profits from the vendors' fees and concession sales. This is most likely

A) a partnership.
B) a franchise.
C) a sole proprietorship.
D) none of the choices.

Question 26

Bayard organized, and owns and operates, Cypress Tours in the simplest form of business organization. This is

A) a partnership.
B) a franchise.
C) a corporation.
D) none of the choices.

Question 27

The duration of a franchise is a matter set by state law, not to be otherwise determined between the parties.

Question 28

After notice of termination, a franchisee must be given a reasonable time to wind up the business.

Question 29

A franchisor can mandate retail prices for the goods that a franchisee sells.

Question 30

Without creating a separate business organization, Rey starts up Street Cruisers, a pre-owned auto sales enterprise. This enterprise is

A) none of the choices.
B) a corporation.
C) a franchisee.
D) a sole proprietorship.

Question 31

Sandor wants to go into the business of construction contracting. Among the reasons that might convince Sandor to set up his business as a sole proprietorship would be

A) its greater organizational flexibility.
B) its limited liability.
C) its perpetual existence.
D) the ease of transferring the business to other family members.

Question 32

Because a franchisor's termination of a franchise can adversely affect a franchisee, much franchise litigation involves claims of wrongful termination.

Question 33

A court may decide that a franchisor has wrongfully terminated a franchise if the franchisor's decision to do so was made in the normal course of business.

Question 34

As a means of controlling quality, a franchise agreement can limit the franchisee's ability to sell the franchise to another party.

Question 35

In determining whether a franchisor acted in good faith when terminating a franchise agreement, a court will attempt to balance the rights of both parties.

Question 36

A court may decide that a franchisor has wrongfully terminated a franchise if the franchisor's decision was arbitrary.

Question 37

A franchisee's breach of the duty of honesty and fidelity is not enough to allow a franchisor to terminate a franchise if their contract contains a notice-and-cure provision.

Question 38

Carl starts up, and assumes the financial risk of, DataWorks, a new marketing enterprise. As a sole proprietorship, the enterprise must meet legal requirements relating to

A) none of the choices.
B) licensing and registration.
C) intellectual property laws.
D) all of the choices.

Question 39

To protect a franchisor's reputation, a franchise contract may provide a degree of control over the franchisee's operation to the franchisor.

Question 40

A franchise contract cannot give exclusive territorial rights to a certain geographic area to a franchisee, due to antitrust laws.

Question 41

Haute Dogs Inc. sells a franchise to Ilene's Cuisine, a lunch truck. Ilene's Cuisine is

A) a franchisee.
B) a franchisor.
C) a partner.
D) a principal.

Question 42

Flynn is interested in buying a franchise from Gas Up Inc. The franchisor must disclose material facts that Flynn needs to make an informed decision concerning this purchase, according to

A) no law.
B) federal antitrust laws.
C) the Federal Trade Commission's Franchise Rule.
D) the Petroleum Marketing Practices Act.

Question 43

Bev owns and operates City Delivery Service as a sole proprietorship. When she dies, the business will automatically

A) dissolve.
B) transfer to Bev's heirs.
C) reform with its employees as the owners.
D) transfer to its creditors.

Question 44

Maeve sells New Energy, a sole proprietorship that makes and sells solar panels, to Omar. This is

A) the establishment of a franchise.
B) the creation of a partnership.
C) none of the choices-a sole proprietorship cannot be sold.
D) a transfer of the ownership of the business.

Question 45

Instead of setting up a business to market her own products, Rita considers entering into a distributorship franchise with Sports Equipment Corporation. This involves the transfer of

A) a license.
B) a trade name.
C) the formula to make a certain product.
D) the ownership of the business.

Question 46

Ruby is interested in buying a franchise from Snax Stores Inc. This transaction, like other franchise deals, is regulated to protect

A) certain types of anticompetitive agreements.
B) franchisors from dishonest prospective franchisees.
C) prospective franchisees from dishonest franchisors.
D) the government's power to restrict freedom of contract.

Question 47

Juice Inc. offers entrepreneurs the opportunity to operate a franchise under the Juice trade name as a member of a group of dealers that engage in retail beverage sales. To prospective franchisees, Juice must disclose

A) the range of goods and services included.
B) the value of the franchise.
C) the estimated profitability of the franchise.
D) all of the choices.

Question 48

Nina, the owner of Organic Farm, a sole proprietorship, wants to obtain additional capital to operate. This can be accomplished by

A) a bank loan.
B) a Small Business Administration Loan.
C) an infusion of Nina's personal funds.
D) any of the choices.

Question 49

Spicy Sauces, Inc., and Tom's Bottling Plant have a manufacturing franchise arrangement. This involves the transfer of

A) a license.
B) a trade name.
C) the formula to make a certain product.
D) the ownership of the business.

Question 50

Donuts Whole Inc. offers an entrepreneur the opportunity to operate a franchise bakery under the Donuts Whole trade name. Before a franchise contract is signed, Donuts Whole must explain

A) the contract's termination provisions.
B) the nature and operation of a franchise.
C) the laws governing franchising.
D) all of the choices.

Question 51

Sam buys a franchise from Taco Mission Inc. This relationship, like all other franchise relationships, is governed by

A) contract law.
B) all of the choices.
C) the federal Franchise Rule.
D) applicable state law.

Question 52

Tasty Wings LLC wants to present information in "disclosure documents" via the Internet to prospective franchisees. Among other legal requirements with which the franchisor must comply, prospective franchisees must

A) agree to settle any lawsuits that may arise over the documents.
B) be able to download or save all electronic documents.
C) provide e-mail addresses for Savory Wraps to verify users' authenticity.
D) register with the Federal Trade Commission via Savory Wraps' website.

Question 53

Chase, the owner of Data Master, a sole proprietorship, wants to obtain additional business capital. This opportunity is most likely limited to

A) borrowing funds.
B) bringing in partners.
C) issuing stock.
D) selling the business.

Question 54

Ford is the sole proprietor of Go, a game subscription service. As a sole proprietor, on the business's profits, Ford pays

A) no income taxes.
B) only personal income taxes.
C) only business income taxes.
D) both personal and business income taxes.

Question 55

Beeline Inc. offers entrepreneurs the opportunity to operate a franchise under the Beeline trade name as a dealer that sells and leases Beeline equipment. To potential franchisees, Beeline must provide

A) no earnings figures.
B) hypothetical earnings figures.
C) projected earnings figures.
D) none of the choices.

Question 56

Espresso Brew Inc. uses a Web site to provide downloadable information to prospective franchisees. This electronic information is the equivalent of an offer that must comply with

A) no law.
B) federal antitrust laws.
C) the Federal Trade Commission's Franchise Rule.
D) the Dealers Day in Court Act.

Question 57

Raceway LLC licenses the trademarks to its products to Stadium Markets Inc. to reproduce on clothing and other goods for sale. This is

A) a franchise.
B) none of the choices.
C) a partnership.
D) a sole proprietorship.

Question 58

eSports Inc. offers entrepreneurs the opportunity to operate a franchise under the eSports trade name as the owner of a game-playing venue. To possible franchisees, eSports makes earnings claims. For those claims, the franchisor

A) can have a hypothetical basis.
B) must have a reasonable basis.
C) must have an actual basis.
D) can have any or no basis.

Question 59

Cathy buys an exclusive territory in which she is authorized to set up a plant to make Delite dairy products. After receiving the recipes, Cathy begins making Evie's-brand yogurt and other Delite products. This is

A) a chain-style franchise.
B) a distributorship franchise.
C) a manufacturing franchise.
D) not a franchise.

Question 60

Del owns Everlast Painting, a sole proprietorship. Del's liability is

A) limited by state statute and varies from state to state.
B) limited to the extent of capital expenditures.
C) limited to the extent of his or her original investment.
D) unlimited.

Question 61

Made in the USA Clothing Inc. gives notice to Neely that it is terminating their franchise arrangement. Winding up the business requires

A) a new franchise agreement.
B) nothing more than closing immediately.
C) Neely's death, disability, or insolvency.
D) the return of the franchisor's property.

Question 62

Anton enters into an agreement with Burgers Inc. to operate a franchise in Centre City. Later, the franchisor grants franchises to others within the same territory, causing Anton to suffer a significant loss in profits. In Anton's suit against the franchisor, his best argument is that Burgers

A) violated the antitrust laws.
B) violated the implied covenant of good faith and fair dealing.
C) violated the Federal Trade Commission's Franchise Rule.
D) granted Anton the first Burgers franchise in Centre City.

Question 63

Rugged Adventures Inc. wants to terminate its franchise arrangement with Stillwater Kayaking. Their contract does not provide for notice of termination or set a time for winding up the business. This means that to wind up, Stillwater

A) has a reasonable time, with notice.
B) has whatever time the franchisor determines, with or without notice.
C) is entitled to notice, but nothing more.
D) must close immediately.

Question 64

Riki contracts to buy a franchise from Sushi Company. In this contract, as in most franchise contracts, the determination of the territory to be served is made by

A) other Sushi franchisees within the same state.
B) Flo.
C) Sushi.
D) Sushi customers.

Question 65

Teresa buys a franchise from Urgent Care Clinics, LLC. If their agreement is like most franchise agreements, it will specify that Urgent can terminate the franchise

A) at will.
B) for any reason.
C) for cause only.
D) for no reason.

Question 66

Pay-More Convenience Stores, Inc., is a franchisor. Randy operates a Pay-More franchise. Seth is one of Randy's employees. As a franchisor, if Pay-More controls the day-to-day operations of the business to a significant degree, it may be liable for tortious acts by

A) no one.
B) any person on the franchise premises.
C) only persons with legitimate reasons to be on the franchise premises.
D) Pay-More, Randy, or Seth.

Question 67

Mai-Lin's Martial Arts, Inc., grants a franchise to Naomi to operate a Mai-Lin's school. Mai-Lin's may require Naomi to pay the franchisor a percentage of her

A) annual sales or volume of business.
B) weekly payroll expense.
C) monthly overhead savings.
D) income from unrelated business activities.

Question 68

Gary buys from Hook, Line & Sinker Corporation the exclusive right to sell its trademarked fishing gear in a certain area. Their franchise agreement requires Gary to pay certain administrative expenses. Their agreement may also require the franchisee to pay a percentage of the franchisor's

A) advertising costs.
B) personal expenses.
C) retirement income.
D) all of the choices.

Question 69

Mucho Tacos, Inc., sells franchises. Mucho Tacos imposes on its franchisees standards of operation and personnel training methods. What is the potential pitfall to Mucho Tacos if it exercises too much control over its franchisees?

Question 70

Owen plans to open Owen's Pets, a pet sales and supplies outlet, and to hire Quimby and Ruth. Owen will invest only his own money. He does not expect to make any profit for at least two years and to make almost no profit for the first three years, but he hopes to expand eventually. Which form of business organization would be most appropriate? What are the chief characteristics, advantages, and disadvantages of this form of business organization? If Owen wants to obtain additional capital to expand the business, but does not want to lose control of the firm, what is his best option?

Question 71

Digital Wizards, Inc., a franchisor of computer technicians, wishes to standardize the pricing practices of its franchisees because they have engaged in price-cutting to increase their respective shares of the market. The most prudent action might be for Digital Wizards to

A) mandate the prices at which its franchisees sell their services.
B) suggest the prices at which its franchisees sell their services.
C) require its franchisees to pay a premium based on their market share.
D) threaten its franchisees with a suit for material breach of contract.

Question 72

Bob buys a Club Fitness, Inc., franchise, which the franchisor later terminates. In determining whether the termination was proper, a court will generally

A) balance the rights of both parties.
B) emphasize the right of Club to its business operation.
C) focus on the right of Bob to be dealt with fairly.
D) underscore the interest of consumers in affordability.