Chapter 6

Which of the following statements is true of a franchisor-franchisee relationship?

A franchisor limits the franchisee's territory from expanding into other areas. Rationale: Correct. Franchise agreements usually limit the franchisee's territory and require franchisor approval before expanding into other areas. See 6-6: Franchising: Proven Methods for a PriceFranchising: Proven Methods for a Price

The owners of limited liability companies (LLCs) are called members because:

LLCs are neither corporations nor partnerships. Rationale: Correct. The owners of limited liability companies (LLCs) are called members rather than stockholders or partners because LLCs are neither corporations nor partnerships. See 6-5: The Limited Liability Company: The New Kid on the BlockThe Limited Liability Company: The New Kid on the Block

Which of the following is a disadvantage associated with sole proprietorships?

Raising money to finance growth can be tough for business owners. Rationale: Correct. Raising money to finance growth can be tough for sole proprietors. With only one owner responsible for a sole proprietorship's debts, banks and other financial institutions are often reluctant to lend it money. See 6-2: Advantages and Disadvantages of Sole ProprietorshipsAdvantages and Disadvantages of Sole Proprietorships

Franchising is used by companies to move into foreign markets.

True. Rationale: Correct. One of the biggest trends in franchising for the past several years has been an expansion into foreign markets. See 6-6: Franchising: Proven Methods for a PriceFranchising: Proven Methods for a Price

A _____ is a type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it.

distributorship. Rationale: Correct. A distributorship is a type of franchising arrangement in which the franchisor makes a product and licenses the franchisee to sell it. See 6-6: Franchising: Proven Methods for a PriceFranchising: Proven Methods for a Price

John and Lena sign a contract with the owner of Little Fairy, a well-known preschool chain, to start a preschool in their city. They take permission from the owner to use the name and products of Little Fairy. They also furnish their preschool in Little Fairy's trademark style. In this scenario, John and Lena are starting a _____.

franchise. Rationale: Correct. In the given scenario, John and Lena are starting a franchise. A franchise is a licensing arrangement under which a franchisor allows franchisees to use its name, trademark, products, business methods, and other property in exchange for monetary payments and other considerations. See 6-6: Franchising: Proven Methods for a PriceFranchising: Proven Methods for a Price

Yadira works for an organization whose earnings are exempt from federal and state income taxes. The organization is barred from funding any political campaign. Given this information, Yadira most likely works for a(n):

not-for-profit corporation. Rationale: Correct. Given the information, Yadira most likely works for a not-for-profit corporation. In a not-for-profit corporation, earnings are exempt from federal and state income taxes. A not-for-profit corporation cannot contribute funds to a political campaign. See 6-4: Corporations: The Advantages and Disadvantages of Being an Artificial PersonCorporations: The Advantages and Disadvantages of Being an Artificial Person

Francois is the sole owner of a photo studio and handles most of the work himself. All earnings from the studio become Francois's income. Given this information, Francois:

only pays taxes on his income as the owner. Rationale: Correct. Given the information, Francois only pays taxes on his income as the owner of the photo studio. No taxes are levied directly on the earnings of sole proprietorships as a business. Instead, the earnings are taxed only as income of the proprietor. See 6-2: Advantages and Disadvantages of Sole ProprietorshipsAdvantages and Disadvantages of Sole Proprietorships

Tasmeen owns a retail business along with four other people. Like the other owners, Tasmeen is not personally responsible for the debts of the company. Her personal assets are thus protected in case the company incurs losses. Given this information, it can be assumed that Tasmeen _____.

owns a corporation. Rationale: Correct. Given the information, it can be assumed that Tasmeen owns a corporation. A corporation is a form of business ownership in which the business is considered a legal entity that is separate and distinct from its owners. The owners of a corporation have limited liability—meaning they aren't personally responsible for the debts and obligations of their company. See 6-1: Business Ownership Options: The Big FourBusiness Ownership Options: The Big Four

A(n) _____ is a corporation that has limited number of owners that operates under simpler, less formal rules than a C corporation.

statutory close corporation. Rationale: Correct. A statutory close corporation is a corporation with a limited number of owners that operates under simpler, less formal rules than a C corporation. See 6-4: Corporations: The Advantages and Disadvantages of Being an Artificial PersonCorporations: The Advantages and Disadvantages of Being an Artificial Person