Deck 26: Sole Proprietorships and Private Franchises

Question 1

In choosing a form of business organization for a new enterprise, important factors include the liability of the owner.

Answer 1

True

Question 2

In choosing a form of business organization for a new enterprise, important factors include the ease of creation.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

A sole proprietor must create a separate business organization to create a sole proprietorship.

Question 5

A sole proprietor may own and manage any type of business.

Question 6

Some states require that a franchisor submit advertising aimed at prospective franchisees to the state for approval.

Question 7

Some states require franchisors to provide presale disclosures to prospective franchisees.

Question 8

In raising capital, a sole proprietor is limited to his or her personal funds-a loan is not possible.

Question 9

A sole proprietor has unlimited liability for all obligations that arise in doing business.

Question 10

The simplest form of business is a sole proprietorship.

Question 11

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

Question 12

In a sole proprietorship, the owner receives 90 percent of the profits and the government receives 10 percent.

Question 13

In a manufacturing arrangement, a franchisor transmits to a franchisee the ingredients to make a particular product.

Question 14

A franchise exists when the owner of a trademark licenses its use to an?other party to sell goods or services.

Question 15

Laws governing franchising are designed in part to prevent franchisors from terminating franchises without good cause.

Question 16

A franchisor is the purchaser of a franchise.

Question 17

A franchise is a contractual arrangement.

Question 18

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

Question 19

A franchise exists when the owner of a copyright licenses its use to an?other party to sell goods or services.

Question 20

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

Question 21

The validity of a provision permitting the franchisor to establish and enforce certain quality standards is questionable.

Question 22

Most franchise agreements provide that notice of termination of a franchise is not necessary.

Question 23

The termination provision of a franchise contract is usually more favorable to the franchisor.

Question 24

In determining whether a franchisor acted in good faith in terminating a franchise relationship, a court would balance the rights of both parties.

Question 25

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 26

A franchise agreement may specify that the premises for the business must be leased.

Question 27

A franchisee may be required to pay for certain of the franchisor's administrative expenses.

Question 28

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

Question 29

If a party to a franchise contract fails to perform, he or she may be subject to a suit for breach of contract.

Question 30

The duration of a franchise is a matter to be determined between the parties.

Question 31

A franchisee normally does not pay a fee for a franchise license until after the first year of using it.

Question 32

Normally, a franchisee determines the territory that it will serve.

Question 33

Cal sells "DownSize," a weight-reduction program, from a Web site, in competition with Eat-Less Inc.'s product "Fit 'n Trim." Eat-Less files a suit against Cal, alleging in part that he is a sole proprietor, but his enterprise should be deemed a different form of business. Cal's enter?prise should most likely be considered

A) a corporation because DownSize is sold online.
B) a franchisee because DownSize is sold in competition to Fit 'n Trim.
C) a sole proprietorship because Cal is a sole proprietor.
D) no form of business entity because Cal has no formal organization.

Question 34

A franchisor can require a franchisee to purchase certain supplies from the franchisor at an established price.

Question 35

Kelly, the owner of Llama Farms, a sole proprietorship, wants to obtain additional busi?ness 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 36

Phillipa is the sole proprietor of Fun Floral Arrangements. As a sole proprietor, on Fun Floral Arrangements' profits, Phillipa

A) does not pay income taxes.
B) pays only personal income taxes.
C) is taxed twice.
D) pays both personal and sole proprietor income taxes.

Question 37

A franchisee normally pays an initial lump sum for a franchise license.

Question 38

Julia owns and operates Collectable Dolls without creating a separate business organization. She receives all the profits from the doll sales. Collectable Dolls is most likely a

A) a corporation.
B) a limited liability company.
C) a partnership.
D) a sole proprietorship.

Question 39

Much franchise litigation involves claims of wrongful termination.

Question 40

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

Question 41

Fern contracts to buy a franchise from Gooseberry Grocers, Inc. The contract is silent on the issue of territorial rights. Gooseberry allows a competing franchise to be established near Fern's store, which suffers a significant loss in profits. This is most likely a violation of

A) no law.
B) the ban on certain types of anticompetitive agreements.
C) the Federal Trade Commission's Franchise Rule.
D) the implied covenant of good faith and fair dealing.

Question 42

Events Promotion Corporation licenses trademarks to Fandom Souvenirs, Inc., to use in selling caps, sweatshirts, and similar goods. This is

A) a franchise.
B) an entrepreneur.
C) a principal-agent relationship.
D) a sole proprietorship.

Question 43

Frooty Drinks, Inc., and Great Gulp Bottling Company have a processing-plant franchise arrange?ment. 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

Fact Pattern 26-1 (Questions 18-19 apply)
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) actual earnings figures.
B) hypothetical earnings figures.
C) projected earnings figures.
D) none of the choices.

Question 45

CheezBurger Heaven, Inc., conducts a chain-style franchise. This involves the transfer to Clive, one of its franchisees, of

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

Question 46

Otis is interested in buying a franchise from Plentiful 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

Paradise Footwear buys a franchise from Reliant 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) the rules of the National Collegiate Athletic Association.

Question 48

Pilar is interested in buying a franchise from Quixotic Travel & Tours Corporation. Quixotic must disclose material facts that Pilar needs to make an informed decision concerning this purchase, according to

A) no law.
B) the Petroleum Marketing Practices Act of 1979.
C) the Federal Trade Commission's Franchise Rule.
D) the Uniform Commercial Code.

Question 49

Mello Coffee Shops, Inc., sells a franchise to Noah's Arch, a café. Mello is

A) a franchisee.
B) a franchisor.
C) an agent.
D) a principal.

Question 50

Fact Pattern 26-1 (Questions 18-19 apply)
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 must have

A) a hypothetical basis.
B) a reasonable basis.
C) an actual basis.
D) no basis.

Question 51

Robert owns Textbooks Plus, a sole proprietorship that sells textbooks. When Robert dies, Textbooks Plus will

A) be automatically dissolved.
B) pass directly to his oldest child.
C) pass directly to the state.
D) be evenly divided among all Robert's heirs.

Question 52

Worldwide Realtors, Inc., sells a franchise to XL Sales Company. XL is

A) a franchisee.
B) a franchisor.
C) an agent.
D) a principal.

Question 53

In-Home Maid Service Company uses a Web site to provide downloadable information to prospective franchises. This online information is the equivalent of an offer that must comply with

A) the Automobile Dealers' Franchise Act of 1965.
B) no law.
C) the Federal Trade Commission's Franchise Rule.
D) the state Franchise Disclosure Document, or FDD.

Question 54

Echo enters into an agreement with Deep Pan Pies, Inc., to operate a franchise in Centre City. Later, Deep grants franchises to others within the city. Echo files a suit to close them. If the court rules in Echo's favor it will most likely be on the ground that

A) Deep violated the an?titrust laws.
B) Deep violated the implied covenant of good faith and fair dealing.
C) Echo paid a franchise fee.
D) Echo was the first Deep franchisee in Centre City.

Question 55

Flip Gymnastics & Karate, Inc., grants a franchise to Gibby to operate a Flip gym. Flip may require Gibby to pay the franchisor a percentage of his

A) annual sales or volume of business.
B) weekly payroll expense.
C) monthly overhead savings.
D) none of the choices.

Question 56

Cluckee Chick'n Corporation provides its prospective franchisees with projected earnings figures based on actual data. Cluckee Chick'n must also disclose

A) the number and percentage of franchisees that achieved the figures.
B) hypothetical examples of potential earnings.
C) an answer to the entrepreneur's question, "How much will I make?"
D) none of the choices.

Question 57

Pepsi-Cola Bottling Company is

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

Question 58

Leo buys an exclusive territory in which he is authorized to set up a plant to make Midwest Dairy, Inc., products. After receiving the formula, Leo begins making Nice-brand ice cream and other Midwest products. This is

A) a chain-style franchise.
B) a distributorship franchise.
C) a manufacturing franchise.
D) no franchise.

Question 59

Instead of setting up a business to market her own products, Krissy con?sid?ers entering into a distributorship franchise with Little Breweries 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 60

Jody owns KuppaJava Kiosks, a sole proprietorship. Jody'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

Doc's Sports Club enters into a franchise agreement with Elite Fitness Centers that provides for termination at any time for "cause." Doc's fails to meet Elite's "Friends and Family" membership sales quota. Is this "cause" for termination? Explain.

Question 62

Gage buys from Fishing Guide Corporation the exclusive right to sell Fishing Guide rods and reels in a certain area. Their franchise agreement requires Gage to pay certain administrative expenses. Their agreement may also require Gage to pay a percentage of the franchisor's

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

Question 63

Pricey Auto Corporation gives notice to Quint that Pricey is terminating their franchise arrangement. Winding up the business requires

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

Question 64

Star Resorts Corporation wants to terminate its franchise arrangement with Tony. Their contract does not provide for notice of termination or set a time for winding up the business. This means that to wind up, Tony

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

Question 65

Pronto Tacos LLC grants a franchise to Omar to open and operate a Pronto Tacos restaurant. Pronto will likely charge Omar

A) an initial fee or lump sum price for the franchise license.
B) a percentage of Omar's weekly payroll expense.
C) an amount of Omar's monthly overhead savings, if any.
D) none of the choices.

Question 66

Jack buys a Kitchens, Inc., franchise, which the franchisor later termi?nates. In determining whether the termination was proper, a court will generally

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

Question 67

Rita buys a Super Grill franchise. Super Grill requires that its fran?chi?sees buy its products for every phase of their op?erations. Be?cause Rita wishes to buy less expensive products, she challenges the re?quirement. Her best argument is probably that the re?quirement violates

A) the commerce clause.
B) the Equal Protection Clause.
C) the federal antitrust laws.
D) the First Amendment.

Question 68

Sweet Styles, Inc., a franchisor of clothing stores, wishes to standardize the pricing practices of its franchisees that have engaged in price-cutting to increase their respective shares of the market. The most prudent action might be for Sweet to

A) mandate the prices at which its franchisees sell their products.
B) suggest the prices at which its franchisees sell their products.
C) require its franchisees to buy inventory exclusively from Sweet.
D) threaten its franchisees with a material breach of contract.

Question 69

Owen plans to open Owen's Pets Store, a pet sales and pet supplies outlet, and to hire Quimby and Ruth. Owen will invest only his own money. He does not ex?pect 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 busi?ness 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 70

Bret buys a franchise from Comida Mexicano Ltd. If their agreement is like most franchise agree?ments, it will specify that Comida can ter?minate the franchise

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

Question 71

Bob operated a pet grooming shop under a franchise agreement with Clean Pets Corp (CPC). The agreement allowed CPC to terminate the franchise if Bob was fined for cruelty to animals. After an investigation initiated by a customer complaint, Bob was fined for cruelty. CPC termi?nated the franchise. Bob filed a suit against CPC for wrongful termina?tion. The court will most likely rule in favor of

A) Bob, because CPC had no good cause to terminate the franchise.
B) Bob, because the fine for cruelty was based on a customer complaint.
C) CPC, because a franchisor can terminate a franchise at any time.
D) CPC, because the franchise was ter?minated for good cause.

Question 72

A franchise agreement between Simple Software Company and Total Game, Inc., is silent on a time for termination of the franchise. Simple may

A) never terminate.
B) terminate at any time.
C) terminate on reasonable notice.
D) terminate on three days notice.