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
A1. The simplest form of business is a sole proprietorship.
A2. A franchise contract may use only one type of business organization—the sole
proprietorship.
A3. A franchise is a contractual arrangement.
A4. In a sole proprietorship, the proprietor shares the burden of any losses or liabilities
incurred by the business enterprise with the government.
A5. A sole proprietorship lacks continuity on the death of the proprietor.
A6. A franchisor is the purchaser of a franchise.
A7. A franchisee can operate as an independent businessperson but cannot then obtain
the advantages of a national organization.
A8. A manufacturer’s license to a dealer to sell a product is a chain-style business
operation.
A9. A franchise relationship may be governed by the law covering sales contracts as
expressed in Article 2 of the Uniform Commercial Code.
A10. Laws governing franchising are designed in part to prevent franchisors from
terminating franchises without good cause.
A11. Some states require franchisors to provide presale disclosures to prospective
franchisees.
A12. If a party to a franchise contract fails to perform its contractual duties, the other party
may be subject to a lawsuit for breach of contract.
A13. A franchisee ordinarily pays an initial fee or lump sum price for a franchise license.
A14. Typically, the franchisee determines the territory to be served by the franchise.
A15. The day-t-day operation of franchise business normally is left up to the franchisee.
A16. A franchisor can require a franchisee to purchase certain supplies from the franchisor
at an established price.
A17. The duration of a franchise is a matter to be determined between the parties.
A18. Normally, a franchisee receives a windfall on the termination of a franchise.
A19. Good faith and fair dealing are not important in terminating a franchise relationship.
A20. A franchisor’s decision to terminate a franchise may be made in the normal course of
business operations.
MULTIPLE CHOICE QUESTIONS
A1. Hermione starts up, and assumes the financial risk of, Graphic Ads, a new enterprise.
Hermione is
a. a franchisee.
b. a franchisor.
c. an agent.
d. a sole proprietor.
A2. Carl sells Direct Marketing Enterprises, a sole proprietorship, to Eve. This is a transfer
of
a. a license.
b. a trade name.
c. the formula to make a product.
d. the ownership of the business.
A3. Jim organized, and owns and operates, Jim’s Landscaping Service in the simplest form
of business organization. This is
a. a corporation.
b. a limited liability company.
c. a partnership.
d. a sole proprietorship.
A4. 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.
A5. Real Events Promotion Corporation licenses trademarks to Stadium 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.
A6. Otis is interested in buying a franchise from Plentiful Markets 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.
A7. Pilar is interested in buying a franchise from Quixotic Bike 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.
A8. Burger Heaven, Inc., conducts a chain-style franchise. This involves the transfer to
Chester, 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.
A9. Effervescent Soda Bottling Company is
a. a chain-style franchise.
b. a distributorship franchise.
c. a manufacturing franchise.
d. no franchise.
A10. 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. the Petroleum Marketing Practices Act of 1979.
c. the Federal Trade Commission’s Franchise Rule.
d. the state Franchise Disclosure Document, or FDD.
A11. 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 Ice–
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.
A12. 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 antitrust 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.
A13. 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.
A14. Stacy contracts to buy a franchise from Tender Steak House Company. In this contract,
as in most franchise contracts, the determination of the territory to be served is made
by
a. a court.
b. Stacy.
c. Tender Steak House.
d. the Federal Trade Commission.
A15. Dominique buys a franchise from Cheyenne Artisans, Inc. This provides Cheyenne with
an outlet for the firm’s goods, some of which Dominique is required to buy at an
established price. In their agreement, Cheyenne may also specify
a. the franchisor’s non-culpability for any breach of the agreement.
b. the franchise’s business organizational form.
c. the retail prices at which Dominique must resell the goods she buys.
d. none of the choices.
A16. Inger is a franchisee of Honey Bear Restaurants, LLC Their contract gives Honey Bear
the right to control virtually all aspects of Inger’s operation, including the hiring of
employees. One of the employees, Joris commits a tort against Kiley, one of Inger’s
customers. Kiley files a suit against Honey Bear. Honey Bear is most likely
a. liable because Honey Bear exercises control over Inger’s operation.
b. liable because Kiley was Honey Bear’s customer.
c. not liable because Inger is responsible for the employees.
d. not liable because Kiley was Inger’s customer.
A17. 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.
A18. 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.
A19. Bret buys a franchise from Comida Mexicano Ltd. If their agreement is like most
franchise agreements, it will specify that Comida can terminate the franchise
a. at will.
b. for any reason.
c. for cause only.
d. for no reason.
A20. Mika buys a Nuance Cabinets, 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 Nuance to its business operation.
c. focus on the right of Mika to be dealt with fairly.
d. underscore the interest of consumers in affordability.
ESSAY QUESTIONS
A1. Owen plans to open Owen’s Pets Store, a pet supplies outlet, and to hire Quinn and
Ruth. Owen will invest only his own money. He does not expect 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?
A2. Doc’s Sports Club and Elite Fitness Corporation enter into a franchise agreement that
provides for its termination at any time for “cause.” Doc’s fails to meet Elite’s
membership sales quota. Is this “cause” for termination? Explain.
