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Interactive Quiz for ALT-12e, Chapter 36

Chapter 36 Sole Proprietorships and Franchises
1.

One of the major advantages of a sole proprietorship is that:

a. the proprietor receives dividends.
b. the proprietor receives all the profits.
c. the proprietor assumes very limited risk.
d. the proprietor is taxed as a corporation.

Answers:
a. Incorrect. Proprietors do not receive dividends from their business.
b. Correct. If the sole proprietorship makes any profits, they all flow to the
proprietor.
c. Incorrect. The proprietor assumes full risk for the venture.
d. Incorrect. The proprietor is taxed as an individual, not as a corporation.
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.

Answers:
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.

Answers:
a. Incorrect. The restaurant would not be an example of a manufacturing
arrangement.
b. Correct. A Taco Bell, Burger King, or McDonalds would be an example
of a chain-style business operation.

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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.

Answers:
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.

With respect to payment for a franchise, the franchisee normally:

a. pays an initial fee or a lump-sum price for the franchise license.
b. arranges with the franchisor to do business for a one-year period
before making any payments for the franchise.
c. pays no initial fee but arranges to pay royalties on the income from the
franchise operation.
d. is not liable to pay the franchisor until profits are being realized.

Answers:
a. Correct. This is usually required by the franchisor.
b. Incorrect. This is rarely done.
c. Incorrect. Normally, a franchisee pays an initial fee or lump-sum price
for the franchise.
d. Incorrect. Normally, a franchisee pays an initial fee or lump-sum price
for the franchise.
6.

Generally speaking, how do parties to a franchise contract determine

which territory is to be served by the franchisee?
a. The franchisee decides.
b. The franchisor decides.
c. The state secretary of commerce decides.
d. A mediator decides.

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Answers:
a. Incorrect. Typically, the franchisee does not decide.
b. Correct. Typically, it is the franchisor who makes this decision.
c. Incorrect. A state official does not make this decisionit is a private
matter.
d. Incorrect. Typically, a mediator does not make this decision.
7.

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.

Answers:
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.
8.

If a franchisor requires a franchisee to purchase all of its supplies and

materials exclusively from the franchisor, what legal problem could arise?
a. A consideration problem.
b. A capacity problem.
c. An antitrust problem.
d. An employment discrimination problem.

Answers:
a. Incorrect. The legal issue of consideration would not be involved in this
situation.
b. Incorrect. This contract would not raise capacity problems, but instead,
antitrust problems.
c. Correct. This kind of contract could violate antitrust laws.
d. Incorrect. This kind of contract would not raise an employment
discrimination problem.
9.

If no set time is given in a franchise agreement for winding up a

franchisees 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.

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d. does not need to wind up the business at all.
Answers:
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.
10.

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.

Answers:
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.