Business Law Chapter 2

Chain-style franchises are common in manufacturing.

False

Franchises account for a small percentage of this country's retail sales.

False

Generally, the termination provisions of contracts are more favorable to the franchisee than to the franchisor.

False

The sole proprietor has limited liability, or legal responsibility, for all obligations that arise in doing business.

False

Typically, state law determines the duration of a franchise.

False

Any arrangement in which the owner of intellectual property, such as a trademark, a trade name or a copyright, licenses others to use it in the selling of goods and services.

Franchise

One receiving a license to use another's (the franchisor's) trademark, trade name, or copyright in the sale of goods and services.

Franchisee

One licensing another (the franchisee) to use the owner's trademark, trade name, or copyright in the selling of goods or services.

Franchisor

What are the two requirements that state statutes and case law governing franchises tend to emphasize the most?

Good faith and fair dealing

When deciding which form of business organization to adopt a person will likely consider all of the following except: a. his need for start-up capital b. publicity and public relations c. the various types of liability to which owners are subject d. tax issues

b. publicity and public relations

Starting a new business as a partnership rather than as a sole proprietorship will allow a person to avoid:

bearing the burden of all losses and liabilities

Which of the following is not a classification of a franchise? a. Vertically integrated b. Distributorship c. Chain-style business operation d. Manufacturing arrangement

a. Vertically integrated

The Factors an Entrepreneur Must consider When Selecting an Organizational Form: a. ____ of creation b. the ____ of the owners c. ____ considerations d. the ability to raise ____

a. ease b. liability c. tax d. capital

To determine whether a franchisor has acted in good faith when terminating a franchise agreement, what do the courts attempt to do?

Attempt to balance the rights of both parties.

What best describes an entrepreneur? a. A person who knows how to evaluate which stocks to purchase. b. Someone who can expertly manage other people's investments. c. Someone who initiates and assumes the financial risk of a new business enterprise.

C. Someone who initiates and assumes the financial risk of a new business enterprise.

A ____ is not one of the three major forms of business.

Cooperative

What is the most common termination statement in a typical franchise agreement?

That the franchise can be terminated "for cause" with grounds for termination.

Another disadvantage is that the proprietor's ability to raise capital is limited to personal funds and the funds of those who are willing to make loans.

True

Even when a contract contains a notice-and-cure provision, a franchisee's breach of the duty of honesty and fidelity may be enough to allow the franchisor to terminate the franchise.

True

In a chain-style business operation, a franchise operates under a franchisor's trade name.

True

Many states require a franchisor to register a disclosure document known as the Franchise Disclosure Document (FDD).

True

Termination provisions of the franchise contracts may mean that the franchisee, who normally invests substantial time and financial resources in making the franchise operation successful, receives little or nothing for the business on termination.

True

The franchise relationship is defined by a contract between the franchisor and the franchisee.

True

To prevent arbitrary or bad faith terminations, state law may prohibit termination without "good cause" or require that certain procedures be followed in terminating a franchising relationship.

True

Disclosure Requirements for Franchisor Under the FTS's Franchise Rule: a. Written or electronically recorded disclosures treating the range of goods and services included in the value and estimated ____ of the franchise. b. To prevent deception, all representations made to prospective franchisees must have a ____ basis at the time they are made. c. If a franchisor provides projected earning, the franchisor must indicate whether they are based on ____ data or hypothetical examples. d. If actual data are used to make earnings projections, the franchisor must disclose the ____, and percentage of its existing franchises that have achieved this result. e. Franchisors must ____ termination, cancellation, and renewal provisions of the franchise contract.

a. profitiability b. reasonable c. actual d. number e. explain

Federal and state laws attempt to protect franchisees from the ____ and unfair termination of their franchises.

arbitrary

For a sole proprietorship, creditors can pursue the owner's personal ____ to satisfy any business debts.

assets

What are two examples of distributor-type franchising arrangements?

automobile dealership and beer distributorship

Which of the following issues is NOT typically addressed in a franchise contract? a. whether the premises must be leased or purchased outright. b. determination of the territory to be served. c. names of prospective temporary employees. d. a particular organizational form to be used.

c. names of prospective temporary employees

Bonni wants to go into business for herself and knows she can start a corporation over the internet. Instead, she chooses to invest in a new, local Taco Bell restaurant, which is an example of ____

chain-style business operation franchise

The sole proprietorship also has the disadvantage of lacking ____ after the death of the proprietor.

continuity

Most franchise relationships are governed primarily by

contract law

Starting a sole proprietorship normally is easier and less ____ than starting any other kind of business

costly

When a franchisor's decision to terminate a franchise was made in the normal course of the franchisor's business operations, however, that weighs ____ of the franchisor.

in favor

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

Under a distributorship franchise the owner will

license distributors to sell the owner's products

A sole proprietor pays only personal income taxes (including Social Security and Medicare taxes) on the business's ____, which are reported as personal income.

profits

One of the reasons state governments and the federal government have passed statues regulating franchises is to:

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

The main advantage of being the sole owner of a business is that the owner

receives all the profits

A ____ is the simplest form of business.

sole proprietorship

Most franchise litigation involves claims for wrongful ____

termination