Ch. 36 Sole Proprietorships and Franchises Flashcards
Define entrepreneur.
- One who initiates and assumes the financial risk of a new business enterprise
- AND undertakes to provide or control its management
In selecting an organizational form, an entrepreneur will most likely consider what four factors?
(1) ease of creation
(2) liability of the owners
(3) tax considerations
(4) ability to raise capital
What is the primary motive of an entrepreneur?
To make profits
What are three major business forms that entrepreneurs have traditionally used?
- Sole proprietorship
- Partnership
- Corporation
Strictly speaking, is a franchise a business organizational form?
NO
What is the simplest form of business?
- Sole proprietorship
What is a major advantage of the sole proprietorship?
- Proprietor owns entire business and receives all the profits (b/c he assumes all the risk)
Generally, do any documents need to be filed with the government to start a sole proprietorship?
NO
What taxes does a sole proprietor pay?
- Only personal income taxes (including SS and Medicare taxes) on the business profits, which are reported as personal income on the proprietor’s personal income tax return
What is the major disadvantage of the sole proprietorship?
- Proprietor alone bears the burden of any losses or liabilities incurred by the business enterprise (unlimited liability)
What was the key issue in the Quality Car & Truck Leasing v. Sark case?
- Issue: Personal liability of the owner of a sole proprietorship
- Decision: “The Sarks are clearly judgment debtors to Quality Leasing and the judgment has not been satisfied.” Quality Leasing is entitled to judgement as a matter of law.
In a sole proprietorship, can creditors pursue the owner’s personal assets to satisfy any business debts?
YES
When the owner of a sole proprietorship dies, what happens to the business?
- Business auto dissolves
What is a franchise?
- An arrangement in which the owner of intellectual property (e.g. trademark, trade name, copyright) licenses others to use it in the selling of goods or services
Define franchisee.
- Purchaser of a franchise
- Generally legally independent of franchisor
- Economically dependent on franchisor’s integrated business system
Define franchisor.
- Seller of the franchise
Give an example of a well-known franchise.
- McDonald’s
- 7-Eleven
- Holiday Inn
Franchises generally fall into what three classifications?
(1) Distributorships
(2) Chain-style business operations
(3) Manufacturing arrangements
In a distributorship, _________ licenses a ________ to sell its product.
- Manufacturer (Franchisor)
- Dealer (Franchisee)
Give an example of a common type of distributorship.
- Automobile dealerships
- Beer distributorships
Explain the operations of a chain-style business operation.
- Franchise operates under a franchisor’s trade name and is identified as a member of a select group of dealers that engage in the franchisor’s business
- Franchisee is generally required to follow standardized methods of operation and maintain certain standards of performance
Give an example of a chain-style operation.
- McDonald’s
- Century 21, a real estate brokerage firm
- H&R Block, tax preparing service firm
What happens in a manufacturing arrangement (or processing plant arrangement)?
- Franchisor transmits to the franchisee the essential ingredients or formula to make a particular product
- Franchisee then markets the product either at wholesale or at retail in accordance with franchisor standards
Give an example of a manufacturing arrangement.
- Pepsi-Cola
- Other soft drink bottling companies
