Deck 20: Agency and Liability to Third Parties

Question 1

A limited partnership is one in which the partners share management responsibilities equally but some partners are limited in regards to the amount of profit distribution to which they are entitled.

Answer 1

False
Explanation: A limited partnership (LP) is an agreement between at least one general partner and at least one limited partner with the limited partner or partners having no part in the management of the company.

Question 2

A franchisee is the owner of a trade name or trademark who is a party to an arrangement whereby another party sells goods or services under the trade name or trademark.

Answer 2

False
Explanation: A franchisor is an owner of a trade name or trademark.

Question 3

Which of the following is the most popular form of business ownership in the U.S.?

A) Sole proprietorship
B) Limited partnership
C) Limited liability partnership
D) Corporation
E) Limited liability company

Answer 3

A
Explanation: Sole proprietorships are by far the most popular form of business organization in the United States.

Question 4

Which of the following is false regarding a limited liability partnership?

A) A limited liability partnership is considered a separate legal entity.
B) Limited liability partnerships are fairly new.
C) The business name must include "Limited Liability Partnership" or an abbreviation in the name.
D) The parties must file a form with the secretary of the state to create a limited liability partnership.
E) Each partner pays taxes on his or her share of the income of the business.

Question 5

Which of the following is false regarding a sole proprietorship?

A) A sole proprietorship requires few legal formalities.
B) A sole proprietor has complete control of the management of the business.
C) The sole proprietor keeps all the profits from the business.
D) Profits are taxed as the personal income of the sole proprietor.
E) A sole proprietor is not personally liable for obligations of the business.

Question 6

A franchise is a contractual relationship between the franchisor and the franchisee.

Question 7

Which of the following is the resulting entity when a person decides to go into business on his or her own and is solely responsible for management and profits?

A) Individual entity
B) Sole proprietorship
C) Single entity
D) Sole entrepreneurship
E) Single entrepreneurship

Question 8

Members of the board of directors of a corporation are elected by shareholders.

Question 9

Which of the following is distinguishable from other forms of partnerships because all the partners' liability for professional malpractice is limited to the partnership?

A) General partnership
B) Limited partnership
C) Professional partnership
D) Limited liability partnership
E) Loss limiting partnership

Question 10

A limited partnership and a limited liability partnership refer to the same type of business organization.

Question 11

In a manufacturing arrangement, the franchisor provides the franchisee with the formula or necessary ingredient to manufacture a product.

Question 12

A sole proprietor is considered a separate legal entity.

Question 13

Which of the following governs partnerships in many states in the absence of an express agreement?

A) The Joint Partnership Act
B) The Uniform Joint Agreement Act
C) The Uniform Partnership Act
D) The Associated Partnership Act
E) The Joint Agreement Act

Question 14

Which of the following is false regarding a partnership?

A) It is easy to create.
B) Income of the business is personal income.
C) Business losses can be deducted from taxes.
D) Each partner is considered an agent of the partnership.
E) In most cases partners do not have personal liability for losses.

Question 15

Which of the following is a type of partnership?

A) Limited partnerships
B) General partnerships
C) Limited liability partnerships
D) Limited partnerships, general partnerships, and limited liability partnerships
E) Limited partnerships and general partnerships, but not limited liability partnerships

Question 16

Officers of a corporation are hired by the shareholders.

Question 17

Cooperatives must be incorporated.

Question 18

Under Islamic law, a partnership and its partners are one unit.

Question 19

Which of the following is a voluntary association between two or more persons who co-own a business for a profit?

A) Co-owned business
B) Partnership
C) Joint proprietorship
D) Joint corporation
E) Joint entity

Question 20

A general corporation may only have up to 200 shareholders while an S corporation cannot have more than 75 shareholders.

Question 21

Which of the following is a business organization governed by a group of trustees who operate the trust for the beneficiaries?

A) A joint enterprise
B) A syndicate
C) A business trust
D) An S corporation
E) An E corporation

Question 22

Investor-owners of a corporation are called which of the following?

A) Profit owners
B) Profit and loss owners
C) Approved investors
D) Limited partners
E) Shareholders

Question 23

Which of the following is a way that a corporation can avoid double taxation?

A) By forming a C corporation.
B) By forming a D corporation.
C) By forming an S corporation.
D) By forming an F corporation.
E) None of these because there is no double taxation problem with corporations.

Question 24

Which of the following is a partnership agreement in which company members hold transferable shares while all the goods of the company are held in the names of the partners?

A) A joint stock company
B) A joint corporation
C) A joint partnership
D) A collusive partnership
E) A collusive corporation

Question 25

In which of the following does the franchise operate under the franchisor's business name and act subject to the franchisor's standards and methods of business operation?

A) Distributorship
B) Manufacturing arrangement
C) Chain-style business operation
D) Approved business franchise
E) Acknowledged standards operation

Question 26

Which of the following is true regarding corporations other than S corporations?

A) A corporation is not a separate legal entity.
B) A corporation may not be sued.
C) A corporation is created according to federal law.
D) Shareholders may typically be held liable for debts of the corporation.
E) The corporation must pay taxes on profits, and shareholders must pay taxes on dividends they receive from the corporation.

Question 27

Which of the following is false regarding limited liability companies?

A) The limited liability company was first recognized in Wyoming.
B) Limited liability companies have the limited liability of partnerships yet are taxed like corporations.
C) Limited liability companies must file a form with a state agency.
D) The company name must include "Limited Liability Company" or an abbreviation of those words.
E) Owners of an LLC are referred to as members.

Question 28

Which of the following is false regarding franchises?

A) The franchisee often receives help from the franchisor in starting the franchise.
B) The franchisor has the legal authority to ensure that the franchisee maintains the quality of goods and services associated with the franchise.
C) The franchisor is not liable for torts of the franchisee's employees regardless of the amount of control exerted by the franchisor.
D) A franchise is a contractual relationship between the franchisor and the franchisee.
E) The Federal Trade Commission has a franchise rule requiring franchisors to present prospective franchisees with material facts necessary for the franchisee to make an informed decision about entering a franchise relationship.

Question 29

In which of the following does the franchisor provide the franchisee with the formula or necessary ingredient to manufacture a product?

A) Distributorship
B) Manufacturing arrangement
C) Chain-style business operation
D) Approved business franchise
E) Acknowledged standards operation

Question 30

Which of the following is true regarding S corporations?

A) They are considered partnerships yet taxed like corporations as long as they follow regulations.
B) They cannot have more than 80 shareholders.
C) Shareholders do not report profit on their personal income tax forms.
D) They are formed under federal law.
E) Income of the corporation is not taxed when it is distributed to shareholders.

Question 31

Which of the following are franchises in which the franchisor manufactures a product and licenses a dealer to sell the product in an exclusive territory?

A) Distributorship
B) Manufacturing arrangement
C) Chain-style business operation
D) Approved business franchise
E) Acknowledged standards operation

Question 32

Which of the following is a group that comes together for the explicit purpose of financing a specific large project?

A) A business trust
B) A joint venture
C) A syndicate
D) A franchise
E) An enterprise

Question 33

Which of the following is true regarding joint ventures?

A) Generally, joint ventures are taxed like corporations.
B) If one of the members of a joint venture dies, the joint venture is automatically terminated.
C) Members of a joint venture are agents of the other members.
D) A joint venture may be formed without drawing up a formal agreement.
E) Courts frequently apply sole proprietorship law to joint ventures.

Question 34

Which of the following is responsible for running the day-to-day business of a corporation?

A) Investors
B) Shareholders
C) Officers
D) Administrators
E) Members of the board of directors

Question 35

Which of the following establishes how a franchise agreement will be terminated?

A) The franchise agreement
B) The Franchise Termination Act
C) The Franchisor-Franchisee Protection Act
D) The Franchisee Protection Act
E) The Franchise Wrap-Up Act

Question 36

Which of the following is an organization formed by individuals to market products?

A) A cooperative
B) A consortium
C) A corporation
D) A universe
E) An enterprise

Question 37

In which of the following is there generally unlimited transferability of ownership interests?

A) Corporations
B) General partnerships
C) Limited partnerships
D) Corporations, general partnerships, and limited partnerships
E) Corporations and general partnerships, but not limited partnerships

Question 38

Which of the following is responsible for managing the business of a corporation?

A) Investors
B) Shareholders
C) Officers
D) Administrators
E) Members of the board of directors

Question 39

Which of the following is a business that exists because of an arrangement between the owner of a trade name or trademark and a person who sells goods or services under the trade name or trademark?

A) Joint venture
B) Franchise
C) Joint partnership
D) Consensual seller
E) Approved arrangement

Question 40

Which of the following would likely be formed by farmers who want to pool certain crops together to ensure that they get a high market price for their crops?

A) A business trust
B) A syndicate
C) A joint venture
D) A joint stock company
E) A cooperative

Question 41

A limited partnership is an agreement between at least __________ general partner and _____________ limited partner.

A) 1; 2
B) 2; 1
C) 1; 1
D) 2; 2
E) 10; 10

Question 42

Which of the following is true of a joint stock company?

A) It is a mixture of a corporation and a partnership.
B) It is a mixture of a corporation and a joint venture.
C) It is a mixture of a partnership and a sole proprietorship.
D) It is a mixture of a limited liability company and a sole proprietorship.
E) It is a mixture of a limited liability company and a joint venture.

Question 43

Reference - Tutoring Concerns. Wally and Sally want to go into business together and plan on offering a tutoring service to high school and college students. Wally proposes that they share control of the business and split profits equally and not bother with a written agreement. Sally, however, is concerned about being able to pay their debts since they will have to rent tutoring space and purchase computers and supplies. She is also concerned about parents and students who may sue if the students' test scores do not improve. She tells Wally that she just bought a new boat and car, and that she does not want her assets to be in jeopardy. She tells Wally that they should form a corporation to shield their personal assets. Wally, however, says their personal assets are not in danger with his proposal because they are a business and that, furthermore, forming a corporation would likely result in double taxation. Is Wally correct that with his proposal that they share control of the business and split profits equally, there could be no personal liability for debts?

A) Yes, he is correct so long as they do not reach an agreement in writing.
B) Yes, he is correct because they will be considered a partnership regardless of whether any agreement is in writing.
C) Yes, because so long as they have nothing in writing, their arrangement will be considered a joint venture.
D) No, he is incorrect because members of the corporate form chosen would be personally liable for debt.
E) No, he is incorrect because partners have personal liability for debt.

Question 44

Which of the following was the result on appeal in Colette Bohatch v. Butler & Binion, the case in the text in which the plaintiff, the partner in a law firm, sued after she was expelled from the partnership following her complaint that one of the other partners was overbilling a client?

A) That as a matter of public policy, the law firm was liable to her for damages.
B) That under federal law, the law firm was liable to her for damages because she was given insufficient notice of her expulsion.
C) That under state law, the law firm was liable to her for damages because she was given insufficient notice of her expulsion.
D) That she was properly expelled because the partner about which she complained was senior to her in seniority.
E) That the law firm had a right to expel her regardless of her status as a whistleblower.

Question 45

In a limited partnership which of the following assume unlimited personal liability for the debts of the partnership?

A) General partners
B) Limited partners
C) Special partners
D) General partners, limited partners, and special partners
E) General and special partners, but not limited partners

Question 46

For purposes of federal jurisdiction, a limited liability company is considered a citizen in _____________.

A) Its place of organization only
B) The location of its principal place of business only
C) The location of either its place of organization or its principal place of business only
D) Every state in which its members reside
E) Every state in which a member resides, the location of its principal place of business, or the location of its organization

Question 47

How is a limited liability company formed?

A) By filing Articles of Statement with the Internal Revenue Service.
B) By filing a Limited Liability Company form with the Securities and Exchange Commission.
C) By filing a Certificate of Authority with the county in which the LLC is established.
D) By filing Articles of Organization in the state in which the LLC is established.
E) By filing a Statement of Operation in the state in which the LLC is established.

Question 48

Reference - Tutoring Concerns. Wally and Sally want to go into business together and plan on offering a tutoring service to high school and college students. Wally proposes that they share control of the business and split profits equally and not bother with a written agreement. Sally, however, is concerned about being able to pay their debts since they will have to rent tutoring space and purchase computers and supplies. She is also concerned about parents and students who may sue if the students' test scores do not improve. She tells Wally that she just bought a new boat and car, and that she does not want her assets to be in jeopardy. She tells Wally that they should form a corporation to shield their personal assets. Wally, however, says their personal assets are not in danger with his proposal because they are a business and that, furthermore, forming a corporation would likely result in double taxation. What type of arrangement did Wally propose with his suggestion that they share control of the business and split profits equally?

A) A joint sole proprietorship
B) A partnership
C) A corporation
D) An S corporation
E) A limited partnership

Question 49

Reference - Peanut Allergy. Kitty, who had a love of baking, decided to open her own bakery. She decided that she did not need and did not want to pay for a lawyer to advise her on different forms of ownership. Unfortunately, Kitty had not paid attention in business law class. She proceeded, with little thought, to simply open her business called Kitty's Baking. Bobby came in to order some cookies for his girlfriend, Bitsy, who was allergic to peanuts. Bobby told Kitty that he needed some cookies for Bitsy but that Bitsy had allergies to peanuts. Kitty told him not to worry because she would make up a special batch just for him. Kitty had hired some assistants because she was so busy. She told an assistant, Cathy, to make up several batches of cookies for different customers including Bobby and to leave out the peanuts in Bobby's order. Cathy, however, forgot the instruction and proceeded to make Bobby's cookies with crushed peanuts. Bobby picked up the cookies and gave one to Bitsy in the car while they were on the way to the movie in Bobby's new car. Bitsy became violently ill, vomited in Bobby's car, and had to have her stomach pumped. Bobby and Bitsy sought recovery from Kitty who told them that Bitsy's doctor bill and Bobby's car cleaning bill were business debts, that the business was new and not making any money at the moment, and that she had no personal liability. Following the incident involving Bobby and Bitsy, Kitty discussed with her parents her problems with the bakery. Kitty's parents would like to invest in her business and share in any profits, but they do not want to share in the management responsibilities. What type of business did Kitty initially set up?

A) A limited liability company
B) A sole proprietorship
C) An individual proprietorship
D) A general company
E) An S corporation

Question 50

Reference - Peanut Allergy. Kitty, who had a love of baking, decided to open her own bakery. She decided that she did not need and did not want to pay for a lawyer to advise her on different forms of ownership. Unfortunately, Kitty had not paid attention in business law class. She proceeded, with little thought, to simply open her business called Kitty's Baking. Bobby came in to order some cookies for his girlfriend, Bitsy, who was allergic to peanuts. Bobby told Kitty that he needed some cookies for Bitsy but that Bitsy had allergies to peanuts. Kitty told him not to worry because she would make up a special batch just for him. Kitty had hired some assistants because she was so busy. She told an assistant, Cathy, to make up several batches of cookies for different customers including Bobby and to leave out the peanuts in Bobby's order. Cathy, however, forgot the instruction and proceeded to make Bobby's cookies with crushed peanuts. Bobby picked up the cookies and gave one to Bitsy in the car while they were on the way to the movie in Bobby's new car. Bitsy became violently ill, vomited in Bobby's car, and had to have her stomach pumped. Bobby and Bitsy sought recovery from Kitty who told them that Bitsy's doctor bill and Bobby's car cleaning bill were business debts, that the business was new and not making any money at the moment, and that she had no personal liability. Following the incident involving Bobby and Bitsy, Kitty discussed with her parents her problems with the bakery. Kitty's parents would like to invest in her business and share in any profits, but they do not want to share in the management responsibilities. Which of the following would be a form of business organization for Kitty and her parents such that her parents could invest but not participate in management?

A) General partnership
B) Limited partnership
C) Managed partnership
D) Combined partnership
E) Family-Based partnership

Question 51

Under the Uniform Limited Liability Company Act, unless the operating agreement specifies otherwise, LLCs are _____________ managed.

A) Member
B) Manager
C) Operationally
D) Provisionally
E) Administratively

Question 52

In a limited partnership which of the following have no part in the management of the business?

A) General partners
B) Limited partners
C) Special partners
D) General partners, limited partners, and special partners
E) General and special partners, but not limited partners

Question 53

Which of the following was the result in Cousins Subs Systems, Inc. v. Michael R. McKinney, the case in the text in which defendant McKinney asserted in a counterclaim that he was entitled to terminate an agreement requiring that he operate submarine sandwich shops because Cousins Subs Systems, Inc. failed to meet promises it verbally made to him?

A) That based on principles of equity McKinney could rely on oral statements in contradiction of the written agreement involved.
B) That the oral agreements could be relied upon by McKinney because they supplemented, rather than contradicted, the written agreement.
C) That the alleged oral agreements contradicted the written agreement signed by McKinney and would not, therefore, be considered.
D) That the court would allow the jury to determine whether the written contract should be supplemented by the alleged oral statements.
E) That the written agreement failed to set forth fair principles but that the alleged oral agreements would be disregarded in favor of a form contract contained in the state's franchise law.

Question 54

Which of the following was the result on appeal in Kenneth Parker v. Concelia Parker, the case in the text in which the plaintiff in a divorce proceeding claimed that he was entitled to a significant portion of lottery winnings won by his wife on the theory that the parties were engaged in a joint venture?

A) The court ruled that because no written contract existed, the husband had no claim.
B) The court ruled that the wife was barred from disposing of the funds constituting the husband's claim prior to a court determination on the issue.
C) The court ruled that the wife was required to provide the funds at issue to the husband but that he was required to place them in a secure bank account prior to a court determination on the issue.
D) That the husband was not entitled to the funds because there was no oral or written contract entitling him to them.
E) That as a matter of law the wife was entitled to all the winnings because she bought the ticket regardless of whether a joint venture was involved.

Question 55

In a limited partnership which of the following assume no liability for the partnership beyond the capital they have invested?

A) General partners
B) Limited partners
C) Special partners
D) General partners, limited partners, and special partners
E) General and special partners, but not limited partners

Question 56

Which of the following was the result on appeal in Mary Kay, Inc. a/k/a Mary Kay Cosmetics, Inc. v. Janet Isbell, the case in the text in which it was claimed that Mary Kay, Inc. wrongfully terminated Isbell's franchise in violation of the Arkansas Franchise Practices Act on the basis that Isbell used retail store space to sell products as opposed to only conducting sales in customers' homes?

A) That the Arkansas Franchise Practices Act was inapplicable because it applied only to businesses with a fixed geographical location, and the plaintiff's claim of wrongful termination was dismissed.
B) That the Arkansas Franchise Practices Act was inapplicable because insufficient sales were involved, and the plaintiff's claim of wrongful termination was dismissed.
C) That the Arkansas Franchise Practices Act was applicable but that it allowed the franchisor to terminate the agreement.
D) That the Arkansas Franchise Practices Act was applicable and rendered void the contract at issue.
E) That the Arkansas Franchise Practices Act was applicable and rendered voidable the contract at issue based upon the choice of the franchisee.

Question 57

Reference - Peanut Allergy. Kitty, who had a love of baking, decided to open her own bakery. She decided that she did not need and did not want to pay for a lawyer to advise her on different forms of ownership. Unfortunately, Kitty had not paid attention in business law class. She proceeded, with little thought, to simply open her business called Kitty's Baking. Bobby came in to order some cookies for his girlfriend, Bitsy, who was allergic to peanuts. Bobby told Kitty that he needed some cookies for Bitsy but that Bitsy had allergies to peanuts. Kitty told him not to worry because she would make up a special batch just for him. Kitty had hired some assistants because she was so busy. She told an assistant, Cathy, to make up several batches of cookies for different customers including Bobby and to leave out the peanuts in Bobby's order. Cathy, however, forgot the instruction and proceeded to make Bobby's cookies with crushed peanuts. Bobby picked up the cookies and gave one to Bitsy in the car while they were on the way to the movie in Bobby's new car. Bitsy became violently ill, vomited in Bobby's car, and had to have her stomach pumped. Bobby and Bitsy sought recovery from Kitty who told them that Bitsy's doctor bill and Bobby's car cleaning bill were business debts, that the business was new and not making any money at the moment, and that she had no personal liability. Following the incident involving Bobby and Bitsy, Kitty discussed with her parents her problems with the bakery. Kitty's parents would like to invest in her business and share in any profits, but they do not want to share in the management responsibilities. Which of the following is true regarding Kitty's statement that she had no personal liability?

A) She was correct.
B) She was correct only if she can establish that she has paid all her business taxes on time.
C) She was correct only if she can establish that she has at least 5 employees.
D) She was incorrect.
E) She was incorrect unless she signed an agreement with a financial institution in order to get a loan for the business and agreed in the document that she would not accept personal liability for any losses.

Question 58

Which of the following is false regarding cooperatives?

A) Unincorporated cooperatives are treated like partnerships.
B) In unincorporated cooperatives, members share joint liability for the cooperative's actions.
C) Members of incorporated cooperatives enjoy limited liability just as do the shareholders of a corporation.
D) Cooperatives are usually formed as syndicates.
E) A cooperative is usually formed to market products.

Question 59

Under the Uniform Limited Liability Company Act, an LLC will dissolve after the passage of _____________ consecutive days during which the company has no members.

A) 30
B) 60
C) 90
D) 120
E) 180

Question 60

Reference - Tutoring Concerns. Wally and Sally want to go into business together and plan on offering a tutoring service to high school and college students. Wally proposes that they share control of the business and split profits equally and not bother with a written agreement. Sally, however, is concerned about being able to pay their debts since they will have to rent tutoring space and purchase computers and supplies. She is also concerned about parents and students who may sue if the students' test scores do not improve. She tells Wally that she just bought a new boat and car, and that she does not want her assets to be in jeopardy. She tells Wally that they should form a corporation to shield their personal assets. Wally, however, says their personal assets are not in danger with his proposal because they are a business and that, furthermore, forming a corporation would likely result in double taxation. Is Wally correct that forming a corporation would likely result in double taxation?

A) Yes, because the corporation would be required to pay tax on its profits, and the shareholders would also be required to pay taxes on dividends.
B) No, Wally is incorrect because all businesses are taxed in the same manner.
C) No, Wally is incorrect but only because the law involving taxation of corporations does not apply until there are at least 10 shareholders.
D) No, Wally is incorrect but only because the law involving taxation of corporations does not apply until there are at least 75 shareholders.
E) Yes, Wally is correct but only because his proposal does not involve a writing and the filing of paperwork with the secretary of their state.

Question 61

Describe a franchise that is a distributorship and give an example of a distributorship.

Question 62

Reference - Tutoring Concerns. Wally and Sally want to go into business together and plan on offering a tutoring service to high school and college students. Wally proposes that they share control of the business and split profits equally and not bother with a written agreement. Sally, however, is concerned about being able to pay their debts since they will have to rent tutoring space and purchase computers and supplies. She is also concerned about parents and students who may sue if the students' test scores do not improve. She tells Wally that she just bought a new boat and car, and that she does not want her assets to be in jeopardy. She tells Wally that they should form a corporation to shield their personal assets. Wally, however, says their personal assets are not in danger with his proposal because they are a business and that, furthermore, forming a corporation would likely result in double taxation. What type of arrangement, if any, would avoid double taxation for the endeavor of Wally and Sally?

A) An S corporation
B) A limited liability company
C) A corporation
D) An S corporation, a limited liability company, and a corporation
E) An S corporation and a limited liability company, but not a corporation

Question 63

Reference - Chocolate Chips. Molly makes great chocolate chip cookies and sells them. She calls them "Molly's Famous Chocolate Chips." Some of her friends are interested in selling her cookies. They want to use her name and identify the cookies as "Molly's Famous Chocolate Chips." Molly says, however, that she does not have enough time to bake any more cookies. She agrees, for a price, to allow her friends to use her recipe and her name. Suzette, one of Molly's friends who was selling the cookies, was not being sufficiently careful and negligently put a harmful ingredient into the cookie dough resulting in a customer, Fred, becoming ill. Fred threatens to sue both Suzette and Molly. Molly is so exasperated that she cancels all the franchise contracts on the basis of aggravation although the franchise agreements provided that so long as requirements were met, the franchise agreements were good for a period of two years, Molly took the position that the cookies involved a personal service and that she could not be held liable for discontinuation. Is Molly correct that she was entitled to cancel all franchise agreements?

A) No, she was not entitled to cancel any franchise agreements.
B) No, while she was arguably justified in canceling Suzette's franchise agreement, she was not justified in canceling other franchise agreements because no breach of the other franchise agreements had occurred.
C) No, she could only cancel all franchises after a judgment was entered against her, and that had not yet occurred.
D) Yes, because a personal service type of franchise was involved, she could cancel all the franchises at will.
E) Yes, she can cancel the franchises but only if she can establish that her profits were less than had been expected.

Question 64

Define a joint venture and set forth two differences under the law between a joint venture and a partnership.

Question 65

Brice just finished a residence in internal medicine and wants to go into practice with Horace and Joyce. Brice tells you that while he needs to practice with other physicians for call coverage and for other reasons, he does not want to be personally liable should the other physicians be found guilty of malpractice. You discuss various incorporation options with him, but he tells you that he would like to form a partnership. What business form would you recommend to him and why?

Question 66

List the advantages and disadvantages of a sole proprietorship form of business.

Question 67

Reference - Community Fair. Craig and Melinda are searching for a one-time business opportunity that will enable them to make a sufficient amount of cash to take a really great vacation to Galapagos. They live in a rather small rural community that has not, to date, had a community fair. Craig and Melinda decide to sponsor a fair on a weekend in October and to arrange for exhibits and awards, beauty contests, pie eating contests, food vendors, and amusement rides. The profit to Craig and Melinda will come from ticket sales and from charges to food vendors for the privilege of setting up shop. Apart from some minor skirmishes between Craig and Melinda regarding management rights, preparations go fairly well. When the weekend of the fair arrives, things initially go fairly smoothly. Unfortunately, however, one of the beauty contestants slips on the runway. An argument broke out during the pie eating contests resulting in angry contestants throwing pies and injuring spectators. Finally, an elderly lady, who was angry because she did not win the prize for the best honey, jabbed the volunteer judge with her cane. All injured parties threaten to sue Craig and Melinda. Craig tells Melinda that she should bear the larger percentage of any damages because the idea for the fair was initially hers, and she obtained all necessary permits. Melinda, on the other hand, tells Craig that he should be wholly responsible for any damages because he was put in charge of all competitions. They can reach no agreement regarding winding up the project and splitting the meager profits, and angrily go their separate ways with no resolution. As she is leaving, Melinda shouts to Craig that as her agent he should have done a better job with security. Which of the following is the type of business organization that best fits Craig and Melinda's project?

A) A partnership
B) A double proprietorship
C) A business trust
D) A joint venture
E) A distributorship

Question 68

Set forth the disadvantages of forming a corporation.

Question 69

Suzanne wants to open a legal litigation support business and market to attorneys for their needs in court preparation such as copying, preparation of exhibits, and the service of subpoenas. She expects to hire three employees to assist her. Assuming she has sufficient funding, what type of business form would you encourage her to adopt and why?

Question 70

Reference - Chocolate Chips. Molly makes great chocolate chip cookies and sells them. She calls them "Molly's Famous Chocolate Chips." Some of her friends are interested in selling her cookies. They want to use her name and identify the cookies as "Molly's Famous Chocolate Chips." Molly says, however, that she does not have enough time to bake any more cookies. She agrees, for a price, to allow her friends to use her recipe and her name. Suzette, one of Molly's friends who was selling the cookies, was not being sufficiently careful and negligently put a harmful ingredient into the cookie dough resulting in a customer, Fred, becoming ill. Fred threatens to sue both Suzette and Molly. Molly is so exasperated that she cancels all the franchise contracts on the basis of aggravation although the franchise agreements provided that so long as requirements were met, the franchise agreements were good for a period of two years, Molly took the position that the cookies involved a personal service and that she could not be held liable for discontinuation. Will Molly likely be held liable to Fred?

A) Yes, but only if Suzette has officially filed for bankruptcy protection.
B) Yes, but only if Suzette is insolvent.
C) Yes, because the cookies had her name on them.
D) No, because she was a franchisor.
E) It is unclear and depends on whether she exercised too much authority in the day-to-day affairs of Suzette's business.

Question 71

Reference - Chocolate Chips. Molly makes great chocolate chip cookies and sells them. She calls them "Molly's Famous Chocolate Chips." Some of her friends are interested in selling her cookies. They want to use her name and identify the cookies as "Molly's Famous Chocolate Chips." Molly says, however, that she does not have enough time to bake any more cookies. She agrees, for a price, to allow her friends to use her recipe and her name. Suzette, one of Molly's friends who was selling the cookies, was not being sufficiently careful and negligently put a harmful ingredient into the cookie dough resulting in a customer, Fred, becoming ill. Fred threatens to sue both Suzette and Molly. Molly is so exasperated that she cancels all the franchise contracts on the basis of aggravation although the franchise agreements provided that so long as requirements were met, the franchise agreements were good for a period of two years, Molly took the position that the cookies involved a personal service and that she could not be held liable for discontinuation. What type of arrangement did Molly make with her friends?

A) A franchise that was a production-style business operation.
B) A franchise that was a distributorship.
C) A franchise that was a manufacturing arrangement.
D) A franchise that was a manufacturing distributorship.
E) A joint venture.

Question 72

Reference - Community Fair. Craig and Melinda are searching for a one-time business opportunity that will enable them to make a sufficient amount of cash to take a really great vacation to Galapagos. They live in a rather small rural community that has not, to date, had a community fair. Craig and Melinda decide to sponsor a fair on a weekend in October and to arrange for exhibits and awards, beauty contests, pie eating contests, food vendors, and amusement rides. The profit to Craig and Melinda will come from ticket sales and from charges to food vendors for the privilege of setting up shop. Apart from some minor skirmishes between Craig and Melinda regarding management rights, preparations go fairly well. When the weekend of the fair arrives, things initially go fairly smoothly. Unfortunately, however, one of the beauty contestants slips on the runway. An argument broke out during the pie eating contests resulting in angry contestants throwing pies and injuring spectators. Finally, an elderly lady who was angry because she did not win the prize for the best honey jabbed the volunteer judge with her cane. All injured parties threaten to sue Craig and Melinda. Craig tells Melinda that she should bear the larger percentage of any damages because the idea for the fair was initially hers, and she obtained all necessary permits. Melinda, on the other hand, tells Craig that he should be wholly responsible for any damages because he was put in charge of all competitions. They can reach no agreement regarding winding up the project and splitting the meager profits, and angrily go their separate ways with no resolution. As she is leaving, Melinda shouts to Craig that as her agent he should have done a better job with security. Which of the following is true regarding the liability of Craig and Melinda for the fair?

A) Each party can be held responsible for the liability of the other.
B) Craig is solely responsible because he was charged with handling security.
C) The party who obtained the business license is solely responsible.
D) Under state law, neither party is generally exposed to liability in this type of project.
E) Under state law, it is generally required that the parties agree on the issue of liability prior to starting the project and file a copy of the liability agreement with the appropriate state agency.

Question 73

Reference - Community Fair. Craig and Melinda are searching for a one-time business opportunity that will enable them to make a sufficient amount of cash to take a really great vacation to Galapagos. They live in a rather small rural community that has not, to date, had a community fair. Craig and Melinda decide to sponsor a fair on a weekend in October and to arrange for exhibits and awards, beauty contests, pie eating contests, food vendors, and amusement rides. The profit to Craig and Melinda will come from ticket sales and from charges to food vendors for the privilege of setting up shop. Apart from some minor skirmishes between Craig and Melinda regarding management rights, preparations go fairly well. When the weekend of the fair arrives, things initially go fairly smoothly. Unfortunately, however, one of the beauty contestants slips on the runway. An argument broke out during the pie eating contests resulting in angry contestants throwing pies and injuring spectators. Finally, an elderly lady, who was angry because she did not win the prize for the best honey, jabbed the volunteer judge with her cane. All injured parties threaten to sue Craig and Melinda. Craig tells Melinda that she should bear the larger percentage of any damages because the idea for the fair was initially hers, and she obtained all necessary permits. Melinda, on the other hand, tells Craig that he should be wholly responsible for any damages because he was put in charge of all competitions. They can reach no agreement regarding winding up the project and splitting the meager profits, and angrily go their separate ways with no resolution. As she is leaving, Melinda shouts to Craig that as her agent he should have done a better job with security. Which of the following is true regarding any agency relationships between Craig and Melinda?

A) They were both agents of each other.
B) Neither was the agent of the other.
C) They were agents of each other for contracts only.
D) They were agents of each other for finances only.
E) They were agents of each other for insurance purposes only.

Question 74

Reference - Community Fair. Craig and Melinda are searching for a one-time business opportunity that will enable them to make a sufficient amount of cash to take a really great vacation to Galapagos. They live in a rather small rural community that has not, to date, had a community fair. Craig and Melinda decide to sponsor a fair on a weekend in October and to arrange for exhibits and awards, beauty contests, pie eating contests, food vendors, and amusement rides. The profit to Craig and Melinda will come from ticket sales and from charges to food vendors for the privilege of setting up shop. Apart from some minor skirmishes between Craig and Melinda regarding management rights, preparations go fairly well. When the weekend of the fair arrives, things initially go fairly smoothly. Unfortunately, however, one of the beauty contestants slips on the runway. An argument broke out during the pie eating contests resulting in angry contestants throwing pies and injuring spectators. Finally, an elderly lady, who was angry because she did not win the prize for the best honey, jabbed the volunteer judge with her cane. All injured parties threaten to sue Craig and Melinda. Craig tells Melinda that she should bear the larger percentage of any damages because the idea for the fair was initially hers, and she obtained all necessary permits. Melinda, on the other hand, tells Craig that he should be wholly responsible for any damages because he was put in charge of all competitions. They can reach no agreement regarding winding up the project and splitting the meager profits, and angrily go their separate ways with no resolution. As she is leaving, Melinda shouts to Craig that as her agent he should have done a better job with security. Which of the following is true regarding management rights in regard to the project?

A) Unless an agreement gives one party greater management responsibilities, Craig and Melinda would share equal management for the task for which they have come together.
B) For this type of project, generally state law requires that responsibilities of management be specifically assigned in writing to one of the parties.
C) For this type of project, generally state law requires that responsibilities of management be specifically assigned to one of the parties; but the assignment may be oral.
D) In the absence of an agreement between the parties, the party who filed for the business license for the project is charged with management responsibilities.
E) Regardless of any agreement existing between the parties, the party who filed for the business license for the project is charged with management responsibilities.