Deck 2: Small Businesses and Franchises

Question 1

Any suit against the business or its employees can lead to unlimited personal liability for the owner of a sole proprietorship.

Answer 1

True

Question 2

State deceptive trade practices acts apply to actions by franchisors.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

Limited legal liability generally is necessary for small businesses that wish to raise outside capital.

Question 6

Anyone who does business must create a separate business organization.

Question 7

The federal government regulates franchising in part through the Franchise Rule.

Question 8

A sole proprietor owns the entire business.

Question 9

In choosing a form of business organization for a new enterprise, important factors include tax considerations.

Question 10

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

Question 11

When lending capital to a small business, a bank may require a personal guaranty of its repayment from the owner.

Question 12

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

Question 13

A franchisee is not generally legally independent of the franchisor.

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

A sole proprietor does not own the entire business.

Question 19

The law considers all new businesses to be sole proprietorships regardless of the number of owners.

Question 20

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

Question 21

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

Question 22

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

Question 23

A number of states require franchisors to provide presale disclosures to prospective franchisees.

Question 24

Laura owns and operates Meditation 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. This is most likely

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

Question 25

A franchisor's decision to terminate a franchise is always considered wrongful.

Question 26

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

Question 27

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

Question 28

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

Question 29

The franchise agreement is likely to set out standards for the franchise.

Question 30

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

Question 31

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

Question 32

Without creating a separate business organization, Roy starts up Sole Savers, a new, pre-owned auto sales enterprise. Roy is

A) ​none of the choices.
B) ​a franchisor.
C) ​a franchisee.
D) ​a sole proprietor.

Question 33

A franchise agreement may allow the franchisee to cure a breach of the franchise agreement within a certain time so as to avoid termination.

Question 34

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

Question 35

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

Question 36

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 37

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

A) ​business name and state tax registration.
B) ​occupational licensing.
C) ​intellectual property laws.
D) ​all of the choices.

Question 38

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) ​a state grant.
D) ​any of the choices.

Question 39

Franchise agreements typically limit the franchisee's ability to sell the franchise to another party.

Question 40

Lee wants to go into the business of architectural design. Among the reasons that might convince Lee 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 41

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 42

Fact Pattern 2-1
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 2-1.To potential investors, Jumbo 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 43

Diane organized, and owns and operates, Reliable Roofing, a construction outfit, in the simplest form of business organization. This is

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

Question 44

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.
D) ​the government's power to restrict freedom of contract.

Question 45

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

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 Frank the first Grab n' Eat franchise in Homeville.

Question 46

Soup Factory, 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 Petroleum Marketing Practices Act.

Question 47

Paradise Footwear buys a franchise from Quad 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 Automobile Dealers' Day in Court Act.

Question 48

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 49

Emma is interested in buying a franchise from Fine Jewelry, Inc. The franchisor must disclose material facts that Emma 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 50

Champions 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) ​a business loan.
D) ​a sole proprietorship.

Question 51

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 52

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 53

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 54

Bill sells Corner Deli, a sole proprietorship, to Debra. This is

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

Question 55

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 56

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 57

Ford is the sole proprietor of Go, a game app 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 58

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 59

Ken owns and operates Living Earth Garden Shop as a sole proprietorship. When Ken dies, Living Earth will automatically

A) ​dissolve.
B) ​pass to Ken's heirs.
C) ​pass to the state.
D) ​be offered for sale to its creditors and competitors.

Question 60

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 61

Fact Pattern 2-1
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 2-1.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 62

Pay-Mor Convenience Stores, Inc., is a franchisor. Randy operates a Pay-Mor franchise. Sam is one of Randy's employees. As a franchisor, if Pay-Mor 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-Mor, Randy, or Sam.

Question 63

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 64

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 65

Fact Pattern 2-1
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 2-1.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 66

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 67

Fact Pattern 2-1
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 2-1.Before a franchise contract is signed, Jumbo Juice 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 68

Flynn buys a Greasy Burger, Inc., franchise. Greasy requires that its franchisees buy its products exclusively for every phase of their operations. Because Flynn 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) ​the franchisor's marketing image.

Question 69

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 70

Savory Sandwiches 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 Level Fencing to verify users' authenticity.
D) ​register with the Federal Trade Commission via Level Fencing's Web site.

Question 71

Rico, the owner of Simply Sushi, is a sole proprietor. What are the chief characteristics, advantages, and disadvantages of this form of business organization? Rico 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 72

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.