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1
Chapter 17
Small Business Organizations
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
1. A sole proprietor does not own the entire business.
2. In choosing a form of business organization for a new enterprise, important
factors include the ability to raise capital.
3. A sole proprietor is free to make any decision he or she wishes concerning the
business.
4. The intent to associate is a key element of a partnership.
5. One can join a partnership even if all other partners do not consent.
2 TEST BANK—UNIT FOUR: THE BUSINESS ENVIRONMENT
6. The partnership is a pass-through entity and a taxpaying entity.
7. The majority rule controls decisions that significantly affect the nature of the
partnership or that are outside the ordinary course of the partnership business.
8. A partner may pursue his or her own interests without automatically violating
the partner’s fiduciary duties to the partnership and the other partners.
9. Limits on a partner’s authority normally are effective only with respect to third
parties who are notified of the limitation.
10. Dissociation normally entitles the partner to buy his or her interest from the
partnership.
11. On a partner’s dissociation, the partner’s duty of loyalty ends.
12. After a partner dissociates from a continuing partnership, the partnership is no
longer bound by the acts of the dissociated partner, even on a theory of
apparent authority.
13. On dissolution, the creditors of the partnership, but not the creditors of the
individual partners, can make claims on the partnership’s assets.
14. A franchisee is generally legally independent of the franchisor.
15. No state requires franchisors to provide presale disclosures to prospective
franchisees.
16. A franchisee ordinarily does not pay a fee for a franchise license (the privilege
of being granted a franchise).
17. The franchisor may require that the business use a particular organizational
form and capital structure.
18. The franchise agreement is not likely to set out standards such as sales quotas
and record-keeping requirements.
19. The duration of a franchise is a matter determined by federal or state statutes.
20. If a franchisor’s decision to terminate a franchise is made in the normal course
of business and reasonable notice is given, it is less likely that the termination
will be considered wrongful.
MULTIPLE CHOICE QUESTIONS
1. Kari is the sole proprietor of Living Earth Garden Shop. As a sole proprietor, on
the business’s profits, Kari pays
a. no income taxes.
b. only personal income taxes.
c. only business income taxes.
d. both personal and business income taxes.
2. Silvano owns Textbooks Plus, a sole proprietorship that sells textbooks and
other school supplies. When Silvano dies, Textbooks Plus will automatically
a. dissolve.
b. pass to Silvano’s heirs.
c. pass to the state.
d. be offered for sale to its creditors and competitors.
3. Noah and Orin do business as Personnel Providers, an employment agency. In
most states, for purposes of suing and being sued, Personnel Providers, which
is a partnership, would be treated as
a. an aggregate of the individual partners.
b. a natural person.
c. an entity.
d. a non-existent party.
4. Luke and Maya form Northwest Air Express, a general partnership. The
essential elements of this partnership do not include
a. a sharing of profits and losses.
b. a joint ownership of the business.
c. an equal right to management in the business.
d. goodwill.
5. Bayside Marina Company and Canoes & Kayaks Inc., share officers, directors,
employees, property, and equipment. In reliance on Bayside Marina’s
reputation, Delivery Transport Inc. contracts to perform services for Canoes &
Kayaks, but the firm does not pay. In terms of liability to Delivery Transport, a
court is most likely to treat Bayside Marina and Canoes & Kayaks as
a. a pass-through entity.
b. a natural person.
c. a tax-paying entity.
d. a partnership by estoppel.
6. Sable and Rex agree while talking on the phone to form a partnership—The
Home Source—to deal in transfers of real property. To be enforceable, their
agreement must
a. be filed in the appropriate state office.
b. be in writing.
c. involve the exchange of valid consideration.
d. not involve a third party.
7. Pualani and Quentin do business as partners in Rio Vista Builders, a residential
construction firm. For federal income tax purposes, Rio Vista would be treated
as
a. a pass-through entity.
b. a natural person.
c. a tax-paying entity.
d. a partnership by estoppel.
8. Sweet Selections is a general partnership that sells candy, cards and flowers.
Sweet Selections has ten partners. Jill and Amy each have a 25 percent
interest in the partnership. All the other members have a 10 percent interest.
To pass a management decision
a. a majority of the partners must agree to the decision.
b. both Jill and Amy must agree to the decision.
c. Jill or Amy must agree to the decision.
d. 30 percent of the partners must agree to the decision.
9. Corbin, a partner in Dentists & Orthodontists Clinic, applies for a loan with
Evermore Bank allegedly on Doctors’ behalf but without the authorization of the
other partners. Evermore knows that Corbin is not authorized to take out the
loan. If Corbin defaults on the loan, liability for its unpaid amount will be
imposed on
a. Corbin and Doctors, jointly.
b. Corbin only.
c. Doctors only.
d. Evermore only.
10. Oliana is a partner in Pacific Traders. In the majority of states, with respect to
any partnership obligations that Oliana does not participate in, know about, or
ratify, Oliana would be liable for
a. none of the obligations.
b. all of the obligations, jointly and severally.
c. all of the obligations, jointly but not severally.
d. only the contractual obligations.
11. Bryn, Cornell, and Duke are general partners in Equity Lending, a consumer
credit, mortgage, and investment firm. Bryn’s dissociation from the firm results
in
a. the automatic termination of the firm’s legal existence.
b. the partnership’s buyout of Bryn’s interest in the firm.
c. the immediate maturity of all partnership debts.
d. Bryn’s purchase of her interest in the partnership from the firm.
12. Edgar, Jon, and Phoebe do business as Reliable Movers. Phoebe develops a
debilitating illness and can no longer work. Phoebe
a. may dissociate from the partnership.
b. may not dissociate from the partnership without the other partners’
consent.
c. must dissociate from the partnership.
d. may terminate the partnership.
13. Paradise Footwear buys a franchise from Quadrangle 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. Article 2 of the Uniform Commercial Code.
14. Ralph is interested in buying a franchise from Sparkle Beverages Inc. For
Ralph to make an informed decision concerning this purchase, Sparkle
Beverages 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.
15. Eudora is interested in buying a franchise from First Home Realty Company. In
this transaction, the Federal Trade Commission’s Franchise Rule
a. does not apply.
b. enables Eudora to weigh the deal’s risks and benefits.
c. enables First Home to weigh the deal’s risks and benefits.
d. prohibits certain types of anticompetitive agreements.
Fact Pattern 17-1 (Questions 16–17 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.
16. Refer to Fact Pattern 17-1. To potential investors, Jumbo Juice must provide
a. actual earnings figures.
b. hypothetical earnings figures.
c. projected earnings figures.
d. none of the choices.
17. Refer to Fact Pattern 17-1. 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.
18. FreezE Yogurt Corporation provides its prospective franchisees with projected
earnings figures based on actual data. FreezE Yogurt 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.
19. Sasha contracts to buy a franchise from TrustMe Financial Consultants Inc.
The contract is silent on the issue of territorial rights. When TrustMe allows a
competing franchise to be established near Sasha’s office, she 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.
20. Fletcher buys a Great Big Burgers, Inc., franchise. Great Big Burgers requires
that its franchisees buy its products exclusively for every phase of their op-
erations. Because Fletcher 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. Great Big Burgers’s marketing image.
CHAPTER 17: SMALL BUSINESS ORGANIZATIONS 11
ESSAY QUESTIONS
1. Rini, the owner of Simply Sushi, is a sole proprietor. What are the chief
characteristics, advantages, and disadvantages of this form of business
organization? Rini 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?
2. 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?
