1
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 does not own the entire business.
B2. In choosing a form of business organization for a new enterprise, important
factors include the ability to raise capital.
B3. The franchise is not strictly speaking a business organizational form.
B4. A sole proprietor is free to make any decision he or she wishes concerning the
business.
2 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B5. Any lawsuit against the business or its employees does not lead to unlimited
personal liability for the owner of a sole proprietorship.
B6. A franchisee is generally legally independent of the franchisor.
B7. A franchisee is generally economically independent of the franchisor’s
integrated business system.
B8. In a manufacturing arrangement, a franchisor transmits to a franchisee the
essential ingredients or formula to make a particular product.
B9. The laws governing franchising are primarily designed to protect franchisors
from dishonest franchisees.
B10. No state requires franchisors to provide presale disclosures to prospective
franchisees.
B11. Some states require that a franchisor submit advertising aimed at prospective
franchisees to the state for approval.
CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES 3
B12. Some states require the termination of a franchise when there is no “good
cause” for it to continue.
B13. If a franchisee is induced to enter into a franchise contract by the franchisor’s
fraudulent misrepresentation, the franchisor may be liable for damages.
B14. A franchisee ordinarily does not pay a fee for a franchise license (the privilege
of being granted a franchise).
B15. The franchisor may require that the business use a particular organizational
form and capital structure.
B16. The franchise agreement is not likely to set out standards such as sales quotas
and record-keeping requirements.
B17. The duration of a franchise is a matter determined by federal or state statutes.
B18. A franchisor can suggest retail prices for the goods that a franchisee sells but
cannot mandate them.
B19. When a franchise agreement contains a notice-and-cure provision, a
franchisee’s breach of the duty of honesty and fidelity is not enough to allow
the franchisor to terminate the franchise.
4 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B20. 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
B1. 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.
B2. 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.
B3. Haute Dogs, Inc., sells a franchise to Ilene’s Cuisine, a lunch truck. Ilene’s
Cuisine is
a. a franchisee.
b. a franchisor.
c. an agent.
d. a principal.
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B4. Cookie Shops, Inc., sells a franchise to Donuts & Desserts, a mall food-court
vendor. Cookie Shops is
a. a franchisee.
b. a franchisor.
c. an agent.
d. a principal.
B5. 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.
B6. Instead of setting up a business to market her own products, Rita considers
entering into a distributorship franchise with Sports Equipment 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.
B7. Sauces n’ Syrups, Inc., and Thad’s Sweet & Spicy Bottling Plant 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.
6 TEST BANK B—UNIT EIGHT: BUSINESS ORGANIZATIONS
B8. 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.
B9. 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 36-1 (Questions B10–B11 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.
B10. Refer to Fact Pattern 36-1. To potential investors, Jumbo Juice must provide
a. actual earnings figures.
b. hypothetical earnings figures.
c. projected earnings figures.
d. none of the choices.
B11. Refer to Fact Pattern 36-1. Jumbo Juice makes earnings claims to potential
investors. For those claims, the franchisor
CHAPTER 36: SOLE PROPRIETORSHIPS AND FRANCHISES 7
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.
B12. Level Fencing Company wants to present information in “disclosure documents” via
the Internet to prospective franchisees. Among other legal requirements with which
Level Fencing 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 Level Fencing to verify users’ authenticity.
d. register with the Federal Trade Commission via Level Fencing’s Web site.
B13. 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.
B14. 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.
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B15. George buys from Haul-U Corporation the exclusive right to use the Haul-U
trademark and sell and lease Haul-U-brand products in a certain area. Their
franchise agreement requires George to pay certain administrative expenses.
Their agreement may also require George to pay a percentage of the
franchisor’s
a. advertising costs.
b. personal expenses.
c. retirement income.
d. none of the choices.
B16. Rooster Red LLC grants a franchise to Qiana to open and operate a Rooster
Red restaurant. Rooster Red will likely charge Qiana
a. an initial fee or lump sum price for the franchise license.
b. a percentage of Qiana’s weekly payroll expense.
c. an amount of Qiana’s monthly overhead savings, if any.
d. none of the choices.
B17. Shop n’ Pay Convenience Stores, Inc., is a franchisor. Tonya operates a Shop
n’ Pay franchise. Ulysses is one of Tonya’s employees. As a franchisor, if Shop
n’ Pay 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. Shop n’ Pay only.
c. Shop n’ Pay and Tonya, but not Ulysses.
d. Shop n’ Pay, Tonya, or Ulysses.
B18. 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
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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.
B19. Mix n’ Match Clothing Corporation gives notice to Neely that Mix n’ Match is
terminating their franchise arrangement. Winding up the business requires
a. a new franchise agreement.
b. nothing more than closing immediately.
c. Neely’s death, disability, or insolvency.
d. the return of Mix n’ Match’s property.
B20. A franchise agreement between Grid Tools Company and Hometown
Hardware, Inc., is silent on a time for termination of the franchise. Grid Tools
may
a. never terminate.
b. terminate at any time.
c. terminate on reasonable notice.
d. terminate on three days notice.
ESSAY QUESTIONS
B1. 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?
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B2. 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?