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Exam 5: How to Form a Business

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Question 71

Multiple Choice

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A merger involving a software producer and a clothing manufacturer is an example of a:

A) vertical merger.
B) horizontal merger.
C) linear merger.
D) conglomerate merger.

E) A) and B)
F) B) and C)

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Question 72

True/False

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Leanne, a franchisee, runs a chain of small restaurants with a well-known name. Due to her hard work and people skills, her locations are doing quite well. She has noticed that several other franchisees in the same franchise system have let their restaurants deteriorate, especially in terms of lack of upgrades. Leanne should be concerned about this trend, since it eventually could affect her own business.

A) True
B) False

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Question 73

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The three major forms of business ownership in the U.S. are sole proprietorships, partnerships, and corporations.

A nonprofit corporation does not seek personal profit for its owners.

The income generated by S corporations:

Many franchisors have rules that prohibit franchisees from sponsoring their own websites.

Mini-Case For as long as she could remember, Jenna Raiter's passion was cars. As a teenager, she spent hours with her dad tinkering with the family car, learning to change the oil and making minor repairs. She got a job at a local garage while still in high school. A few years after graduating from high school and completing the auto mechanics degree at a local community college, Jenna decided she wanted to be her own boss. She quit her job, borrowed some money from her dad, and began her own repair shop, the AutoMotion Garage. Jenna's hard work gradually attracted a loyal clientele of satisfied customers. Her success has her thinking about opening garages in two other locations, but she lacks the financial resources needed for expansion. Furthermore, the success of her business is forcing Jenna to spend more time managing the business and less time doing the actual technical work she still enjoys. She wants to find business partners who can help her with management and provide additional financial resources. She has approached a couple of friends she met in high school: Al Ternator and Lew Banfilter, to see if they would like to join the business. -Al also suggested another way Jenna could finance her expansion. He described setting up a chain of AutoMotion Garages by selling the rights to use AutoMotion's name, business model, garage design and service ideas to others who would like to own a similar shop. These individuals would pay AutoMotion an initial fee and monthly royalties based on earnings. Al is suggesting that Jenna set up a:

To many businesspeople, one of the major attractions of a sole proprietorship is:

It is said that corporations have perpetual life.

Which of the following is not a disclosure that should be part of a partnership agreement?

Emma Pebble and Chase Stone formed a partnership in a landscape business. Under their arrangement, Emma actively manages the company and assumes unlimited liability for the firm's debts. Chase has invested several thousand dollars of his money with plans to share in the profits, but does not actively make management decisions, nor will he assume liability beyond his initial investment. Emma and Chase participate in a limited partnership.

The most popular businesses for franchising are restaurants.

Any debts or damages incurred by a firm organized as a sole proprietorship are:

Maya plans to open a shop specializing in foods and cultural items from the Middle East. She wants to be the firm's only general partner, but she is trying to get several friends to participate as limited partners. Apparently Maya wants to:

Ted and Mark are partners in a dry cleaning business. They would like their brother Todd to join them. Unfortunately, partnership law states that only two partners can participate in a partnership.

Kristen and her brothers and sisters decided to form a partnership that specializes in home design of all types. One of their goals is to maintain the loving relationship they currently enjoy, so they are following the Model Business Corporation Act recommendations as they write the partnership agreement. Which of the following is an accurate recommendation of the Act?

Joshua wants to run his own business. A friend suggested that an inexpensive way to get started is to buy a franchise, where he will have the freedom to run it exactly as he sees fit. As a recent student of business, you concur with this advice.

A franchise agreement is an arrangement where a franchisor sells the rights to a business name and the right to sell a product or service within a given territory to a franchisee.

A ___________ is a form of business that is owned, and usually managed, by one person.

Although franchise arrangements are a good source of income for the franchisee, these businesses do not contribute significantly toward job creation.