Deck 26: Sole Proprietorships and Private Franchises

Question 1

A sole proprietor is free to make any decision he or she wishes concerning the business.

Answer 1

True

Question 2

A sole proprietor does not own the entire business.

Answer 2

False

Question 3

A franchise relationship may be governed by the law covering sales contracts as expressed in Article 2 of the Uniform Commercial Code.

Answer 3

True

Question 4

Any lawsuit against the business does not lead to unlimited personal liability for the owner of a sole proprietorship.

Question 5

Any suit against the business or its employees does not lead to unlimited personal liability for the owner of a sole proprietorship.

Question 6

A franchisee can operate as an independent businessperson but still obtain the advantages of a national organization.

Question 7

In a sole proprietorship, the proprietor shares the burden of any losses or liabilities incurred by the business enterprise with the government.

Question 8

A franchisee is generally legally independent of the franchisor.

Question 9

In choosing a form of business organization for a new enterprise, important factors include the ability to raise capital.

Question 10

A sole proprietorship lacks continuity on the death of the proprietor.

Question 11

In a manufacturing arrangement, a franchisor transmits to a franchisee the essential ingredients or formula to make a particular product. ​

Question 12

A sole proprietor pays personal and business income taxes on the business's profits.

Question 13

The franchise agreement may specify whether the premises for the business must be leased or purchased outright.

Question 14

A franchisee is generally economically independent of the franchisor's integrated business system.

Question 15

A sole proprietor does not own the entire business.

Question 16

Traditionally, entrepreneurs have used one major business form-the sole proprietorship.

Question 17

A sole proprietorship offers less flexibility than does a partnership or a corporation.

Question 18

To protect franchisees against arbitrary of bad faith termination, state law may prohibit termination without good cause.

Question 19

State deceptive trade practices acts do not apply to actions by franchisors.

Question 20

The federal government regulates franchising through laws that apply to specific industries.

Question 21

Corbin organized, and owns and operates, Corbin’s Deep Sea Fishing Tours in the simplest form of business organization. This is

A)a franchise.
B)a partnership.
C)a corporation.
D)a sole proprietorship.

Question 22

The duration of a franchise is a matter determined by federal or state statutes.

Question 23

Some states require the termination of a franchise when there is no "good cause" for it to continue.

Question 24

A franchisor's decision to terminate a franchise may be made in the normal course of business operations.

Question 25

As a general rule, the validity of a provision permitting the franchisor to establish and enforce certain quality standards is questionable.

Question 26

A franchisor can suggest retail prices for the goods that a franchisee sells but cannot mandate them.

Question 27

The laws governing franchising are primarily designed to protect franchisors from dishonest franchisees.

Question 28

The day-to-day operation of the franchise business normally is under the control of the franchisor.

Question 29

Good faith and fair dealing are not important in terminating a franchise relationship.

Question 30

No state requires franchisors to provide presale disclosures to prospective franchisees.

Question 31

A franchisee ordinarily does not pay a fee for a franchise license (the privilege of being granted a franchise).

Question 32

Nadia, the owner of Organic Farms, a sole proprietorship, wants to obtain additional business capital but to maintain control. This can best be accomplished by​

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

Question 33

If a franchisor's decision to terminate a franchise is made in the normal course of business and reasonable notice is given, it is less likely that the termination will be considered wrongful.

Question 34

Typically, the franchisee determines the territory to be served by the franchise.

Question 35

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

Question 36

Without creating a separate business organization, Reynold starts up, and assumes the financial risk of, Sole Savers, a new, pre-owned auto sales enterprise. Reynold is the financial risk of, Sole Savers, a new, pre-owned auto sales enterprise. Reynold is

A)a partner.
B)a franchisor.
C)a franchisee.
D)a sole proprietor.

Question 37

Most franchise contracts provide that notice of termination must be given.

Question 38

Leigh wants to go into the business of construction contracting. Among the reasons that would probably convince Leigh 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 39

Wren owns and operates Yoga Center without creating a separate business organization. She receives all the profits from the fees for the classes and the sales of the center’s merchandise. Yoga Center is most likely

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

Question 40

The franchise agreement is not likely to set out standards for the franchise to meet.

Question 41

Kari owns and operates Living Earth Garden Shop, an outdoor tool and landscaping supplies retail store, as a sole proprietorship. When Kari dies, Living Earth will automatically​

A) ​cease to continue.
B) ​cease to continue.
C) ​pass to the state.
D) ​be offered for sale to its creditors and competitors.

Question 42

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

A) ​advertising costs.
B) ​personal expenses.
C) ​retirement income.
D) ​none of the choices.

Question 43

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 44

Cathy buys an exclusive territory in which she is authorized to set up a plant to make Delite Dairy, Inc., 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 45

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 Wizardsto

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 any increase in their market share.
D) ​threaten its franchisees with a suit for material breach of contract.

Question 46

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

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

Question 47

Sauces n' Syrups, Inc., and Thad's Sweet & Spicy 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 48

Without creating a separate business organization, Reynold starts up, and assumes the financial risk of, Sole Savers, a new, pre-owned auto sales enterprise. Reynold is​

A) ​a franchisee.
B) ​a franchisor.
C) ​a partner.
D) ​a sole proprietor.

Question 49

Challenge Games Corporation licenses the trademarks to its products to Direct Marketing, Inc., to reproduce on caps, sweatshirts, and similar goods for sale. This is​

A) ​a franchise.
B) ​none of the choices.
C) ​an agency relationship.
D) ​a sole proprietorship.

Question 50

Paradise Footwear buys a franchise from Quadrangle Athletic Shoes Inc. This relationship, like all other franchise relationships, is governed by​

A) ​contract law.
B) ​no law.
C) ​the Franchise Disclosure Document, or FDD.
D) ​Article 2 of the Uniform Commercial Code.

Question 51

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 52

Olav owns Precision Painting, a sole proprietorship. Olav'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 53

Foster enters into an agreement with Grab n' Eat Burgers, Inc., to operate a franchise in Home Town. Later, Grab n' Eat grants franchises to others within the same territory, causing Foster to suffer a significant loss in profits. In Foster's suit against Grab n' Eat, Foster's best argument is that the franchisor

A) ​violated the antitrust laws.
B) ​violated the implied covenant of good faith and fair dealing.
C) ​charged Foster a franchise fee.
D) ​granted Foster the first Grab n' Eat franchise in Home Town.

Question 54

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

A) ​other Genuine Asian franchisees within the same state.
B) ​Fong.
C) ​Genuine Asian Sushi House.
D) ​the Federal Trade Commission.

Question 55

Bill sells Corner Deli & Groceries, a sole proprietorship, to Diane. This is​

A) ​a franchise.
B) ​not a transfer of ownership without the approval of the other owners of the business.
C) ​not a transfer of ownership because a sole proprietorship cannot be transferred.
D) ​a transfer of the ownership of the business.

Question 56

Ralph is interested in buying a franchise from Sparkle Beverages Inc. For Ralph to make an informed decision concerning this purchase, Sparkle Beverages must disclose in writing or in electronic form​

A) ​general estimates of costs and sales, but not the basis for them.
B) ​material facts such as the basis of projected earnings figures.
C) ​no information.
D) ​start-up requirements, but not renewal conditions.

Question 57

Esperanza is interested in buying a franchise from Fire Mountain Gemstones, Inc. Fire Mountain must disclose material facts that Esperanza 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 Uniform Commercial Code.

Question 58

Bob is the sole proprietor of ClamBooks, an electronic book subscription service. As a sole proprietor, on the business's profits, Bob pays​

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

Question 59

We-Haul Equipment Rentals, 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) ​the Automobile Dealers' Franchise Act of 1965.
B) ​the Petroleum Marketing Practices Act of 1979.
C) ​the Federal Trade Commission's Franchise Rule.
D) ​no federal statute or rule.

Question 60

Faye is interested in buying a franchise from Gas n' 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. an>
D) ​the government's power to restrict freedom of contract.

Question 61

Fact Pattern 26-1
Jumbo Juice Inc. offers entrepreneurs the opportunity to operate a franchise under the Jumbo Juice trade name as a member of a select group of dealers that engage in retail juice sales.
Refer to Fact Pattern 26-1. Jumbo Juice makes earnings claims to potential investors. 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 62

Shop n' Pay Convenience Stores, Inc., is a franchisor. Tonya operates a Shop n' Pay franchise. Ulysses is one of Tonya's employees. As a franchisor, if Shop n' Pay 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) ​Shop n' Pay only.
C) ​Shop n' Pay and Tonya, but not Ulysses.
D) ​Shop n' Pay, Tonya, or Ulysses.

Question 63

Level Fencing Company wants to present information in "disclosure documents" via the Internet to prospective franchisees. Among other legal requirements with which Level Fencing 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 Level Fencing to verify users' authenticity.
D) ​register with the Federal Trade Commission via Level Fencing's Web site.

Question 64

Oberon buys a Pro Club Health & 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 Pro Club to its business operation.
C) ​focus on the right of Oberon to be dealt with fairly.
D) ​underscore the interest of consumers in affordability.

Question 65

Restful Inn Motel Corporation wants to terminate its franchise arrangement with Steve's Cabins. Their contract does not provide for notice of termination or set a time for winding up the business. This means that to wind up, Steve's​

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

Question 66

Mix n' Match Clothing Corporation gives notice to Neely that Mix n' Match 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 Mix n' Match's property.

Question 67

Fact Pattern 26-1
Jumbo Juice Inc. offers entrepreneurs the opportunity to operate a franchise under the Jumbo Juice trade name as a member of a select group of dealers that engage in retail juice sales.
Refer to Fact Pattern 26-1. To potential investors, Jumbo Juice must provide a member of a select group of dealers that engage in retail juice sales.

A) ​actual earnings figures.
B) ​hypothetical earnings figures.
C) ​projected earnings figures.
D) ​none of the choices.

Question 68

Riki, the owner of Simply Sushi, is a sole proprietor. What are the chief characteristics, advantages, and disadvantages of this form of business organization? Riki wants to obtain additional capital to expand Simply Sushi, but she does not want to lose control of the firm. As a sole proprietor, what is her best option to attain these goals?​

Question 69

Eudora is interested in buying a franchise from First Home Realty Company. In this transaction, the Federal Trade Commission's Franchise Rule

A) ​does not apply.
B) ​enables Eudora to weigh the deal's risks and benefits.
C) ​enables First Home to weigh the deal's risks and benefits.
D) ​prohibits certain types of anticompetitive agreements.

Question 70

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

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

Question 71

Fletcher buys a Greesy's Burgers, Inc., franchise. Greesy's requires that its franchisees buy its products exclusively for every phase of their operations. Because Fletcher wishes to buy less expensive products, he challenges the requirement. His best argument is probably that the requirement violates​

A) ​the implied covenant of good faith and fair dealing.
B) ​the Federal Trade Commission's Franchise Rule.
C) ​federal antitrust laws.
D) ​Greesy's marketing image.

Question 72

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