Chapter 17a The Term Also Two Years refer Fact Pattern

1. The simplest form of business is a sole proprietorship.

1. A franchise contract may use only one type of business organization—

the sole proprietorship.

1. A franchise is a contractual arrangement.

1. A sole proprietorship lacks continuity on the death of the proprietor.

1. In a sole proprietorship, the proprietor shares the burden of any losses

or liabilities incurred by the business enterprise with the government.

1. Laws governing franchising are designed in part to prevent franchisors

from terminating franchises without good cause.

1. Some states require franchisors to provide presale disclosures to pro–

spective franchisees.

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

franchise.

1. A franchisor can require a franchisee to purchase certain supplies from

the franchisor at an established price.

1. The duration of a franchise is a matter to be determined between the

parties.

1. Normally, a franchisee receives a windfall on the termination of a

franchise.

1. Good faith and fair dealing are not important in terminating a franchise

relationship.

1. Withdrawal from a partnership for a term prematurely does not consti-

tute a breach of the partnership agreement.

1. In a general partnership, all partners have equal rights in managing the

partnership.

1. A partner owes to the partnership and the other partners a duty of

loyalty.

1. A partner who pursues his or her own interests automatically violates

the partner’s fiduciary duties to the partnership.

1. In a general partnership, the partners are personally liable for the debts

of the partnership.

1. A partner always has the power and the right to dissociate from the

partnership.

1. On a partner’s dissociation, his or her duty of loyalty to the partnership

ends.

1. Any event that makes its unlawful for a partnership to continue its

business will result in dissolution.

1. 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.

1. 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.

1. 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.

1. 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.

1. 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 prod–

ucts. This is

a. a chain-style franchise.

b. a distributorship franchise.

c. a manufacturing franchise.

d. no franchise.

1. 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.

1. 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.

1. 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.

1. 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.

1. 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 pru–

dent 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.

1. Inger is a franchisee of Honey Bear Restaurants, LLC Their contract

gives Honey Bear the right to control virtually all aspects of Inger’s op–

eration, 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.

1. Noah and Orin do business as Personnel Partners. In most states, for

purposes of suing and being sued, Personnel Partners would be treated

as

a. an aggregate of the individual partners.

b. a natural person.

c. an entity.

d. a non-existent party.

1. Desi starts up eSites, an Internet service, and leases office space in a

building owned by Fred. The lease requires Desi to pay Fred a base

rental of $1,250, plus 10 percent of eSites’ profits, each month. The

term is two years. Desi hires Gwen to work at eSites’ tech support

desk at an hourly wage of $12.50, plus a commission of 10 percent of

the profits. The term is also two years.Refer to Fact Pattern 17-1A.

Desi and Fred are

a. not partners, because Fred does not have an ownership interest

or management rights in eSites.

b. not partners, because the lease includes a “base rental.”

c. not partners, because the rent includes only 10 percent of the

profits.

d. partners in a partnership for two years.

1. Desi starts up eSites, an Internet service, and leases office space in a

building owned by Fred. The lease requires Desi to pay Fred a base

rental of $1,250, plus 10 percent of eSites’ profits, each month. The

term is two years. Desi hires Gwen to work at eSites’ tech support

desk at an hourly wage of $12.50, plus a commission of 10 percent of

the profits. The term is also two years.Refer to Fact Pattern 17-1A.

Desi and Gwen are

a. not partners, because Gwen does not have an ownership interest

or management rights in eSites.

b. not partners, because the pay includes an hourly wage.

c. not partners, because the pay includes only 10 percent of the

profits.

d. partners in a partnership for two years.

1. Savannah and Rex agree while talking on the phone to form a partner–

ship to deal in sales of natural gas. Their partnership agreement is le–

gally binding

a. only if a copy of the agreement is filed in the appropriate state

office.

b. only if the agreement is reduced to writing.

c. only if the parties exchange valid consideration.

d. without more.

1. Corbin, a partner in Doctors Medical Clinic, applies for a loan with

Evermore Bank allegedly on Doctors’ behalf but without the authoriza–

tion of the other partners. Evermore knows that Corbin is not

authorized to take out the loan. Corbin defaults on the loan. Liability for

its unpaid amount is imposed on

a. Corbin and Doctors, jointly.

b. Corbin only.

c. Doctors only.

d. Evermore only.

1. Luann and Mace are partners in Networx, a computer peripherals firm.

Refer to Fact Pattern 17-2A. Luann signs a contract with Oleo Chips, a retail

component supplier, apparently on Networx’s behalf. The contract is

binding on

a. Luann, Mace, and Networx.

b. Luann only.

c. Networx only.

d. Oleo only.

1. Luann and Mace are partners in Networx, a computer peripherals firm.

Refer to Fact Pattern 17-2A. Mace dissociates from Networx. Luann signs a

contract with Physik Drives, a wholesale component supplier, apparently

on Networx’s behalf. Physik does not know of Mace’s dissociation. The

contract is binding on

a. Luann, Mace, and Networx.

b. Luann only.

c. Networx only.

d. Physik only.

1. Hud and Iggy form Jerry-Bilt Construction to enter into a contract to

build one bridge. Under their partnership agreement, Jerry–Bilt is to

dissolve when the bridge is built. Iggy signs a contract for the firm to

build a second bridge. Jerry-Bilt

a. dissolves as soon as the first bridge is built.

b. dissolves as soon as the second bridge is built.

c. dissolves immediately on Iggy’s signing of the second contract.

d. does not dissolve.

1. Jim and Kyle are partners in J&K Sales, which exports technical equip-

ment under a three-year partnership agreement. The U.S. government

declares that the equipment can no longer be exported. J&K

a. dissolves as soon as the stated term expires.

b. dissolves as soon as the partners agree to dissolve it.

c. dissolves immediately unless the partners change its business.

d. does not dissolve.

1. Evermore Sports Club and Infinite Fitness Corporation enter into a

franchise agreement that provides for its termination at any time for

“cause.” Evermore fails to meet Infinite’s membership sales quota. Is

this “cause” for termination? Explain.

1. Sally and Tom decide to go into business, selling discounted

merchandise through their Web site “e–Buy.” They sign a partnership

agreement that requires Sally to contribute $12,000 and Tom to

contribute $8,000 in capital to start the firm. The agreement also states

that only Sally will have the authority to bind the partnership in deals

with third parties, but the agreement says nothing about the

management of the firm or a division of profits. Without Sally’s

knowledge, Tom tells United Computer Products, Inc., that he

represents the firm and signs a contract with United to buy hard drives

for resale on e-Buy. In the first year, e-Buy makes a profit of $50,000.

What are the partners’ rights with respect to the management of the

firm? Is the partnership bound to the contract with United? Do the

partners split the first year’s profits? If so, how much is each entitled

to?

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