Chapter 29 Business Law

Fred wishes to start a business. Which statement below is correct about obtaining capital for Fred's venture?

A bank that loans money to Fred may require him to personally guarantee the obligation.

Barney intends to start corporation to run a restaurant. Which statement below is correct?

Barney likely will need to get business permits to open his restaurant.

Charley develops an app that allows him to edit and manipulate video in new and innovative ways. Which statement below is correct?

Charley should obtain a copyright or patent to protect his creation.

Ciara is starting a business selling widgets. She is trying to decide what form of business operation she should use. Which statement is correct?

Ciara will report the results of her business on her own personal return

A sole proprietorship's income is taxed as the firm's profits, not as the owner's personal income.

False

For investors, the most important consideration about a small business is favorable tax treatment.

False

Franchises always end if the franchise agreement is breached.

False

In a franchise, a franchisee owns the business and therefore can dictate the rules regarding termination.

False

In most states, a sole proprietorship must file a certificate of proprietorship.

False

In order to protect a trade secret, a business owner should file with the U.S. Patent and Trademark Office.

False

Once a business is begun as a sole proprietorship, it is impossible to change it to a different form.

False

Protecting intellectual property is rarely a concern for small business owners.

False

Gemma wants to start a sandwich shop, using a secret formula for sandwich dressing that she developed in her kitchen. Gemma is concerned that employees of her shop may steal her formula and open up rival sandwich operations. Which statement is correct?

Gemma should require her employees to agree in employment contracts that they will never divulge the formula for the sandwich dressing.

Ciara is starting a business selling widgets. She is trying to decide what form of business operation she should use. Which statement is correct?

If Ciara dies, the business is automatically dissolved.

Joanne would like to protect a trademark she has developed for her business as much as possible under the law. Which statement is correct?

If Joanne registers her trademark with the U.S. Patent and Trademark Office, she should use the symbol

Which of the following is not an advantage of a sole proprietorship?

It provides limited liability.

Leising starts a business as a sole proprietor. A customer slips while entering his store and suffers major injuries. Which statement below is correct about Leising's liability for the customer's damages?

Leising's personal and business assets can be taken to pay the judgment.

Which feature generally is important when a business owner wants to raise outside capital?

Limited liability

Louise intends to start a business selling widgets. Which of the following is NOT a legal requirement in order for Louise to open her business?

Louise must develop an effective advertising campaign

Marie developed a very clever trademark for her new business. Which statement below is correct?

Marie should register her clever trademark with the U.S. Patent and Trademark Office.

Frezer is considering starting a business as a sole proprietor. Which of the following is a disadvantage of sole proprietorships?

Raising capital

Stacy contracts to buy a franchise from Tender Steak house Company. In this contract, as in most franchise contracts, the determination of the territory to be served is made by

Tender Steak House.

Paul owns a doughnut franchise. He receives a notice from the franchisor that he is in violation of the franchise agreement. Which statement is correct?

The franchise agreement may give Paul an opportunity to cure the breach and avoid termination of the franchise.

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

The franchisee

In a sole proprietorship, the owner takes all of the profits.

True

Most franchise agreements provide that termination must be "for cause."

True

Most small businesses begin as sole proprietorships.

True

One of the disadvantages of a sole proprietorship is that the owner is liable for the losses of the business.

True

Starting a sole proprietorship is easier and less costly than starting any other form of business.

True

Termination of a franchise must be done fairly and in good faith.

True

The parties to a franchise agreement may determine what constitutes the grounds for the termination of their relationship.

True

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

Violating state and federal antitrust laws

Wally intends to start a business manufacturing widgets. He would like to use the phrase "Wally's Wonderful Widgets" as a trademark for his product. Which statement is correct?

Wally cannot use the phrase "Wally's Wonderful Widgets" if it is so similar to an existing phrase that confusion might result.

Euro Autos & Trucks, Ltd., licenses Fine Vehicles Corporation, an automobile dealership, to sell its products. This is

a distributorship franchise

Nina wants the exclusive right to sell Oven-Rite Corporation appliances in a certain area. If Oven-Rite agrees, it will likely require Nina to pay

a fee for the franchise license and a percentage of advertising costs and certain administrative expenses.

Pete's Pizza, Inc., grants a franchise to Randy to operate a Pete's Pizza restaurant. Pete's Pizza may charge Randy

a fee for the franchise license and a price for supplies.

Cameron was the owner of a franchise from Luscious Ice Cream, but sales had not met quota for the past three months. Cameron received a notice of termination letter from the franchisor with no set time given for the termination. This means that Cameron has

a reasonable time to conclude the business and return property to the franchisor.

Fred starts up, and assumes the financial risk of, Graphic Ads, a new enterprise. Fred is

a sole proprietor

Jim organized, and owns and operates, Jim's Landscaping Service in the simplest form of business organization. This is

a sole proprietorship

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

agency law

Adam enters into a franchise agreement with Beta Computers, Inc., in which Beta gives Adam territory that includes Clark County. Beta's grant of additional franchises in the same territory to others may violate

an implied covenant of good faith and fair dealing

Jack buys a Kitchens, Inc., franchise, which the franchisor later terminates. In determining whether the termination was proper, a court will generally

balance the rights of both parties

A franchise relationship is governed by

contract law

Rafe is interested in buying a franchise from Sportz Rulez Company. In this transaction, the Federal Trade Commission's Franchise Rule

enables Rafe to weigh the deal's risks and benefits.

Usually, a franchise may be terminated "for cause" if the franchisee

fails to meet the specified sales quota. breaches the franchise agreement. becomes disabled.

Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright in the selling of goods or services is called a

franchise

The Organic Veggie Shop decides to license the use of its trademark to Smithson's grocery store by means of a franchise agreement. In this arrangement, The Organic Veggie Shop is the

franchisor

Gemma wants to start a sandwich shop as a sole proprietor. If she does, and Gemma is the owner of the business, which of the following is true? Gemma

has unlimited liability for all obligations of the business. has a right to receive all of the profits. pays personal income taxes on the business profits.

Nico is interested in buying a franchise from Oz Inc. For Nico to make an informed decision concerning this purchase, Oz must disclose in writing or online

material facts such as the basis of projected earnings figures.

When a franchise agreement contains no set time for winding up a franchisee's business, a franchisee

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

One of the reasons state governments and the federal government have passed statutes to regulate franchises is to

protect prospective franchisees from dishonest franchisors and from franchise termination without good cause.

Legal requirements that typically apply to any new business include

registering the name of the business. obtaining any necessary licenses. obtaining any necessary health or environmental permits.

Pricey Auto Corporation gives notice to Quint that Pricey is terminating their franchise arrangement. Winding up the business requires

returning Pricey's copyright, trademark or any other property.

If a franchise contract grants "territorial rights", the franchisee may

serve a certain geographic area exclusively

Gemma opened a sandwich shop, and was sued when a diner got food poisoning. Now, all of Gemma's assets, including her house, are at risk to pay a judgment against her. This means Gemma began in business as a

sole proprietorship

The simplest form of business organization, in which the owner is the business, is a

sole proprietorship

A franchise agreement between Simple Software Company and Total Game, Inc., is silent on a time for termination of the franchise. Simple may

terminate at a reasonable time, with notice.

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

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

Generally, the termination provisions of franchise contracts are more favorable to the franchisors because

the franchisor owns the trademark and hence the business.

Because a franchisor's termination of a franchise often has adverse consequences for the franchisee, much franchise litigation involves claims of

wrongful termination