Chapter 36
Sole Proprietorships
and Franchises
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank.
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
B1. A sole proprietor owns the entire business but doe not receive all of the profit.
B2. In choosing a form of business organization for a new enterprise, important factors
include the liability of the owner.
B3. The parties to a franchise arrangement may be two corporations.
B4. A sole proprietor has unlimited liability for all obligations that arise in doing business.
B5. In raising capital, a sole proprietor is limited to his or her personal funds—a personal
loan is not possible.
B6. A franchisee can operate as an independent businessperson but obtain the
advantages of a national organization.
B7. A franchise exists when the owner of a copyright licenses its use to another party to
sell goods or services.
B8. In a manufacturing arrangement, a franchisor transmits to a franchisee the
ingredients to make a particular product.
B9. The laws governing franchising are primarily designed to protect franchisors from
dishonest franchisees.
B10. Franchisors are not required to disclose certain material facts to prospective
franchisees.
B11. Some states require that a franchisor submit advertising aimed at prospective
franchisees to the state for approval.
B12. Some states require the termination of a franchise when there is no “good cause” for
it to continue.
B13. A franchisor is entitled to use fraud to induce a prospective franchisee to enter into a
franchise.
B14. A franchise agreement may specify that the premises for the business must be leased.
B15. A franchisor may retain stringent control over the training of personnel involved the
operation of a franchise.
B16. The validity of a provision permitting the franchisor to establish and enforce certain
quality standards is questionable.
B17. Most franchise agreements provide that notice of termination of a franchise is not
necessary.
B18. A franchisor can set the retail prices for the goods that a franchisee sells.
B19. Good faith and fair dealing are important in terminating a franchise relationship.
B20. A court will not provide a remedy for the “wrongful” termination of a franchise
relationship.
MULTIPLE CHOICE QUESTIONS
B1. Bernie wants to go into the business of construction contracting. Among the reasons
that would probably convince Bernie to set up his business as a sole proprietorship
would be
a. its greater flexibility.
b. its limited liability.
c. its perpetual existence.
d. the ease of transferring the business to other family members.
B2. Kelly, the owner of Llama 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.
B3. Hometown Realtors, Inc., sells a franchise to Group Sales Company. Group Sales is
a. a franchisee.
b. a franchisor.
c. an agent.
d. a principal.
B4. 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.
B5. Sylvester buys a franchise from Resistance 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 Uniform Commercial Code.
B6. Nicole is interested in buying a franchise from Oz Inc. For Nicole to make an informed
decision concerning this purchase, Oz must disclose in writing or online
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.
B7. Rafe is interested in buying a franchise from Sportz Warez Company. In this
transaction, the Federal Trade Commission’s Franchise Rule
a. does not apply.
b. enables Rafe to weigh the deal’s risks and benefits.
c. enables Sportz Warez to weigh the deal’s risks and benefits.
d. prohibits certain types of anticompetitive agreements.
B8. Instead of setting up a business to market her own products, Teresa considers
entering into a distributorship franchise with Sparkly Beer 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.
B9. Frooty Drinx, Inc., and Erwin 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.
B10. Euro Autos & Trucks, Inc., licenses Downtown Motors, an automobile dealership, to
sell its products. This is
a. a chain-style franchise.
b. a distributorship franchise.
c. a manufacturing franchise.
d. no franchise.
B11. Vim+Vigor Fitness Corporation 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. no law.
b. the Uniform Commercial Code.
c. the Federal Trade Commission’s Franchise Rule.
d. the state Franchise Disclosure Document, or FDD.
B12. Dingo Bangles Company wants to present information in “disclosure documents” via the
Internet to prospective franchisees. Among other legal requirements with which Dingo
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 Dingo to verify users’ authenticity.
d. register with the Federal Trade Commission via Dingo’s Web site.
B13. Fern contracts to buy a franchise from Greene Grocery Inc. The contract is silent on
the issue of territorial rights. Greene 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.
B14. 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.
B15. Gustoso Gelato Company is a franchisor. Singh operates a Gustoso franchise. Reba is
one of Singh’s employees. As a franchisor, if Gustoso 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. Gustoso only.
c. Gustoso and Singh, but not Reba.
d. Gustoso, Singh, or Reba.
B16. 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.
B17. 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.
B18. Tawny buys a Super Grill franchise. Super Grill requires that its franchisees buy its
products for every phase of their operations. Because Tawny wishes to buy less
expensive products, she challenges the requirement. Her 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. the federal antitrust laws.
d. the Uniform Commercial Code.
B19. Princely Auto Detailing Corporation gives notice to Quint that Princely 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 Princely’s property.
B20. A franchise agreement between Software2 Company and Games3, Inc., is silent on a
time for termination of the franchise. Software2 may
a. never terminate.
b. terminate at any time.
c. terminate on reasonable notice.
d. terminate on three days notice.
ESSAY QUESTIONS
B1. Ewa, the owner of Finest Enterprises, is a sole proprietor. What are the chief
characteristics, advantages, and disadvantages of this form of business organization?
Ewa wants to obtain additional capital to expand Finest, but she does not want to lose
control of the firm. As a sole proprietor, what is her best option to attain these goals?
B2. Caffeine Coffee Shops, Inc., sells franchises. Caffeine imposes on its franchisees
standards of operation and personnel training methods. What is the potential pitfall
to Caffeine if it exercises too much control over its franchisees?
