BL - 003 Pretest

A form of business that functions independently of its owner(s) but is treated as a person with legal rights, duties, and powers is called a(n)

• entrepreneur.

• general partnership.

• sole proprietorship.

• corporation.

Answer explanation

Corporation. As a business, a corporation functions independently of its owners but is treated as a person with legal rights, duties, and powers. Because the corporation is considered separate from its owners, the owners are not liable for the company’s actions, and their personal property cannot be taken to pay outstanding debts. A sole proprietorship is a form of business ownership in which the business is owned by one person, and the owner assumes all the profits and risks from the business. A partnership is a form of business ownership in which the business is owned by two or more persons and each person is liable for the others’ business activities. An entrepreneur, often a sole proprietor, is one who assumes risk for a business enterprise.

Joan borrowed $10,000 from a relative to start her own business. Assuming she takes all responsibility for the company’s financial risks, the company is most likely a

• sole proprietorship.

• partnership.

• limited partnership.

• corporation.

Answer explanation

Sole proprietorship. A sole proprietorship is owned and operated by one individual. Although Joan obtained a loan, she is still the sole owner/operator. A partnership is owned and operated by two or more persons. A limited partnership exists when some (but not all) partners have limited legal liability for the business. A corporation is a form of business ownership in which the business is owned by stockholders who have purchased shares of stock.

A business that is owned by two or more people who share the risk of loss and the chance for profit is known as a

• partnership.

• corporation.

• franchise.

• sole proprietorship.

Answer explanation

Partnership. Partnerships are owned by two or more people who share the risk of loss and the chance for profit by combining their capital, experience, and abilities. Sole proprietorships are businesses that are owned by one person. A corporation is a form of business ownership that is owned by stockholders who have purchased units or shares of the company. A franchise is a contractual agreement between a parent company and a franchisee to distribute goods and services. Since franchises can be sole proprietorships, partnerships, or corporations, more information would be needed in this question for franchise to be the correct response.

The business agreement under which a business distributes the goods or services of a parent company is called a

• franchise.

• sole proprietorship.

• corporation.

• partnership.

Answer explanation

Franchise. Many of today’s businesses are operated under a franchise. They may be owned individually by a sole proprietor, by two or more persons as a partnership, or by a corporation, but the method of operation must comply with the franchise agreement.

Which of the following is a characteristic of a business-format franchise:

• Products are bought directly from the supplier.

• The name of the business is chosen by the franchisee.

• It is the least popular franchise arrangement.

•   Continuous assistance is provided by the franchisor.

Answer explanation

Continuous assistance is provided by the franchisor. A business-format franchise is a more complex and more popular type of franchise arrangement than the product trade-name franchise. It involves a close, continuous working relationship between the franchisor and the franchisee. Examples of the business-format franchise are McDonald’s, Holiday Inn, and Jiffy Lube. Products and other materials usually must be purchased from the franchisor’s list of approved vendors. The franchisee must operate under the trade name of the franchisor.

What type of business is owned by stockholders who share the business’s profits?

• Sole proprietorship

• Cooperative

• Corporation

• Partnership

Answer explanation

Corporation. A corporation is an artificial entity with legal status owned by stockholders who have purchased stock. Sole proprietorships are owned by one person who receives all the profits. Partnerships are owned by two or more people who share the profits. A cooperative is owned and operated by its users/owners, and it is designed to supply goods and services to its members, not necessarily to make a profit.

A type of business ownership in which one or more of the owners does not have full liability is called a

• limited partnership.

• general partnership.

• service organization.

• sole proprietorship.

Answer explanation

Limited partnership. In a limited partnership, one or more partners has limited liability in terms of the amount of financial responsibility or the amount of involvement in the business. A sole proprietorship is owned by one person, and the owner has unlimited liability. A service organization is a provider of intangible products, not a type of business ownership. In a general partnership, all partners are liable for the debts or losses of the business.

To sell sweatshirts, jackets, and T-shirts imprinted with ABC University’s logo, the Collegiate Sportswear Company pays royalties to the university. What type of business ownership does this situation exemplify?

• Business-format franchise

• Multi-level marketing

• General partnership

• Licensing agreement

Answer explanation

Licensing agreement. A licensing agreement is a business structure that requires the authorization or permission from an owner to another entity to use trademarked (e.g., logo, name), copyrighted, or patented material for a specific activity, during a specific time period, for the profit of both parties. In the example, the sportswear company pays the university to use its logo, so the business arrangement involves a licensing agreement. A business-format franchise is a franchise arrangement in which the franchisee must operate under the trade name of the parent company that provides continuous assistance in setting up and operating the business. Multi-level marketing refers to a business, usually well-known, that pays commissions on sales earned to people at two or more levels. The sales representatives usually work independently of the company. A general partnership is a form of business ownership in which two or more individuals own the business, and each partner shares responsibility for the business’s liabilities.

Mr. Brown has inherited a small sum of money, and he wants to become a business owner. However, he has a full-time job that he plans to keep and very little time to operate his own business. What type of ownership should he consider?

• Franchise

• Corporation

• General partnership

• Sole proprietorship

Answer explanation

Corporation. A corporation is owned by stockholders who have purchased stock. By investing in a corporation, Mr. Brown will be one of the owners who will share in the profits of the business but will not be responsible for the day-to-day operations. A general partnership is an agreement in which all partners are liable for a business’s losses. A sole proprietorship is a form of business ownership in which the business is owned by one person. A franchise is a contractual agreement between a parent company and a franchisee to distribute goods or services.

Which of the following is a benefit of the business-format franchise arrangement:

• Strict operating hours

• Reduced risk of failure

• Uniform store appearance

• Limited number of vendors

Answer explanation

Reduced risk of failure. The business-format franchise arrangement requires a close and continuous working relationship between the franchisor and the franchisee. Franchisors often provide training, financial guidance, and supply chains. Franchisees benefit from the franchisor’s national advertising programs since they operate under the trade name. This type of assistance reduces the franchisee’s risk of business failure. Disadvantages of the business-format franchise include strict operating hours, limited number of vendors, and uniform store appearance.