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BLTS-10e Practice Quiz

CHAPTER 26:

Sole Proprietorships and Private Franchises

1. The simplest form of business is:

a. a partnership.

b. a joint venture.

c. a sole proprietorship.

d. a corporation.

ANS:

a. Incorrect. A partnership, because it involves more people, is more complex than a sole proprietorship.

b. Incorrect. A joint venture is not the simplest form of business.

c. Correct. A sole proprietorship, or a business owned by one person, is the simplest form of business.

d. Incorrect. A corporation is a rather complex form of business.

2. The major disadvantage of a sole proprietorship is:

a. the proprietor is taxed as a limited liability corporation.

b. the proprietor receives all profits.

c. the proprietor undertakes limited liabilities.

d. the proprietor bears the burden of all losses.

ANS:

a. Incorrect. This is not how a proprietor is taxed.

b. Incorrect. This is an advantage, not a disadvantage.

c. Incorrect. The proprietor assumes full responsibility for liabilities incurred by the proprietorship.

d. Correct. This is a major disadvantage of a proprietorship.

3. A local Taco Bell restaurant is an example of which kind of franchise?

a. A manufacturing arrangement franchise.

b. A chain-style business operation.

c. A distributorship franchise.

d. A processing-plant arrangement.

ANS:

a. Incorrect. The restaurant would not be an example of a manufacturing arrangement.

b. Correct. A Taco Bell, Burger King, or McDonald’s would be an example of a chain-style business operation.

c. Incorrect. The restaurant would not be an example of a distributorship franchise.

d. Incorrect. A Taco Bell would not be an example of a processing-plant arrangement.

4. Which type of law PRIMARILY governs franchises?

a. Contract law.

b. Federal Trade Commission (FTC) regulations.

c. State statutes.

d. State regulations.

ANS:

a. Correct. Because a franchise is a contractual relationship, contract law is the main law governing franchises.

b. Incorrect. Although some FTC regulations apply to franchises, this is not the law that primarily governs franchises.

c. Incorrect. Although state statutes regulate franchises and franchise arrangements, this is not the law that primarily governs franchises.

d. Incorrect. State regulations may apply to franchises, but this is not the law that primarily governs franchises.

5. Who typically controls the day-to-day operations of a franchise?

a. The management of the franchisor.

b. The employees of the franchisor.

c. The franchisee.

d. The shareholders of the franchisor.

ANS:

a. Incorrect. The franchisee typically controls day-to-day operations.

b. Incorrect. The employees of the franchisor do not control day-to-day operations of a franchise.

c. Correct. The franchisee typically controls these operations.

d. Incorrect. Shareholders do not have control over the daily management of any corporation.

6. A significant issue raised by Internet commerce with respect to franchising has to do with which aspect of traditional franchising arrangements?

a. Exclusive territorial rights.

b. Business organization.

c. Quality control.

d. Payment for the franchise.

ANS:

a. Correct. A franchisor’s online sales of a franchised product may render exclusive territorial rights of franchisees meaningless.

b. Incorrect. Internet commerce does not necessarily affect the business organization of a franchise.

c. Incorrect. Internet commerce does not necessarily affect quality control issues.

d. Incorrect. Internet commerce does not necessarily affect payments for franchises.

7. If a franchisor exercises too much control over the operations of its franchisee, it may incur liability under:

a. the theory of res ipsa loquitur.

b. the theory of certiorari.

c. criminal law.

d. agency law.

ANS:

a. Incorrect. The franchisor may incur liability under agency law but not under the tort theory of res ipsa loquitur.

b. Incorrect. There is no such “theory.”

c. Incorrect. The franchisor may incur liability under agency law but not under criminal law.

d. Correct. The franchisor may incur liability under agency law.

8. If no set time is given in a franchise agreement for winding up a franchisee’s business, a franchisee:

a. must wind up the business within seven working days.

b. must wind up the business by whatever date the franchisor decides--whether that be one day, ten days, or three months later.

c. must be given a reasonable time to wind up the business.

d. does not need to wind up the business at all.

ANS:

a. Incorrect. There is no seven-day requirement for winding up the business.

b. Incorrect. The franchisor must give the franchisee a reasonable time within which to wind up the business.

c. Correct. A franchisee has a “reasonable” time within which to wind up if nothing is specified in the agreement.

d. Incorrect. If a franchise terminates, a franchisee must wind up the business.

9. If a court determines that a franchisor has arbitrarily or unfairly terminated a franchise:

a. the franchisee will be provided with a remedy for wrongful termination.

b. the matter will automatically be submitted to arbitration.

c. the franchisor will be subject to a penalty of $10,000 regardless of the circumstances.

d. the franchisor will automatically be enjoined from terminating the franchise for a period of five years.

ANS:

a. Correct. In this situation, the franchisee will be entitled to a remedy for wrongful termination.

b. Incorrect. The matter will not be automatically submitted to arbitration.

c. Incorrect. Although the franchisee will be provided with a remedy in these circumstances, the franchisor will not be subject to a penalty of $10,000 regardless of the circumstances

d. Incorrect. Although the franchisee will be provided with a remedy in these circumstances, the franchisor will not be automatically enjoined from terminating the franchise for a period of five years.

10. What legal issue must franchisors and franchisees avoid when making pricing arrangements?

a. Defaming other franchises.

b. Violating the Statute of Frauds.

c. Committing a white-collar crime.

d. Violating state and federal antitrust laws.

ANS:

a. Incorrect. It is advisable that franchisors and franchisees avoid defaming other franchises, but this is not a particular issue raised by pricing arrangements.

b. Incorrect. The franchise agreement must, like all contracts, comply with the Statute of Frauds, but this is not a particular issue raised by pricing arrangements.

c. Incorrect. Businesspersons should always avoid committing crimes, but this is not a particular issue raised by pricing arrangements.

d. Correct. A franchisor can require franchisees to purchase supplies from it, however, requiring a franchisee to purchase exclusively from the franchisor may violate federal antitrust laws (See Chapter 32).

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