Sole Proprietorships
Jordan owns an unincorporated repair shop and hires four employees. Which fact determines whether the shop is a sole proprietorship?
A. Jordan pays employees from a business account.
B. Jordan is the only owner of the business.
C. The shop employs fewer than five people.
D. The shop serves customers in only one location.
B. Jordan is the only owner of the business.
A sole proprietor becomes ill, and business appointments stop because only the owner knows how to perform the service. Which disadvantage is most evident?
A. Franchise restrictions prevent the owner from choosing a schedule.
B. Hiring employees automatically divides ownership.
C. The business must distribute profits among shareholders.
D. Business continuity depends heavily on the owner's ability to work.
D. Business continuity depends heavily on the owner's ability to work.
An owner wants help with daily operations but also wants to retain all ownership and decision-making authority. Which choice most directly meets both goals?
A. Give an investor a controlling ownership interest.
B. Create a general partnership with equal decision-making rights.
C. Divide ownership equally among three workers.
D. Hire an employee rather than add a co-owner.
D. Hire an employee rather than add a co-owner.
Which restaurant franchise reported more than $139 billion in worldwide sales across its restaurants in 2025?
A. Subway
B. McDonald’s
C. Burger King
D. Dunkin’
B. McDonald’s
A fictional franchise has $50,000 in monthly sales and pays a royalty of 6% of sales. What is the royalty?
A. $300
B. $8,333.33
C. $3,000
D. $47,000
C. $3,000
A sole proprietor invests $8,000. The business later owes $20,000 that it cannot repay. What does unlimited liability mean in this situation?
A. The owner's personal responsibility may extend beyond the $8,000 investment.
B. The owner owes only $8,000 because that was the initial investment.
C. Creditors must divide the debt equally among the employees.
D. The remaining debt becomes a loss borne only by the customers.
A. The owner's personal responsibility may extend beyond the $8,000 investment.
Elena keeps business funds in a separate bank account. She says this gives her sole proprietorship limited liability. Which response is most accurate?
A. Limited liability begins as soon as business revenue exceeds personal income.
B. Business debts become the bank's responsibility when funds enter the account.
C. A separate account changes her business automatically into a corporation.
D. Separating records is useful, but a separate account does not change her legal structure.
D. Separating records is useful, but a separate account does not change her legal structure.
A partnership agreement gives Avery 70% and Blake 30% of profit. The business earns $18,000 in revenue and has $10,000 in total expenses. What is Blake's profit
share?
A. $5,400
B. $3,000
C. $2,400
D. $5,600
C. $2,400
A fictional franchise earns $32,000 in sales, incurs $25,000 in other expenses, and pays a royalty of 5% of sales. What is profit before taxes?
A. $7,000
B. $6,650
C. $1,600
D. $5,400
D. $5,400
. An entrepreneur values creating original products and making quick changes more than using a recognized brand. Which conclusion best follows?
A. A partnership guarantees that no other owner can influence product decisions.
B. An independent business may better fit these priorities, although the owner must build a customer
base and consider liability.
C. A sole proprietorship removes financial risk when its products are original.
D. A franchise is always preferable because its rules maximize creative freedom.
B. An independent business may better fit these priorities, although the owner must build a customer
base and consider liability.
5. A sole proprietor has $9,500 in monthly revenue and $6,700 in total business expenses. What is profit before taxes?
A. $2,800
B. $9,500
C. $16,200
D. $6,700
A. $2,800
6. A student argues that sole proprietors do not pay taxes because their businesses do not pay a separate corporate income tax. What is the flaw in this argument?
A. Taxes apply to a sole proprietorship only after it hires employees.
B. Business profit generally appears on the owner's individual tax return, and applicable taxes may still
be due.
C. Every sole proprietor must pay corporate income tax as well as individual income tax.
D. Tax treatment depends only on whether the owner uses a separate bank account.
B. Business profit generally appears on the owner's individual tax return, and applicable taxes may still
be due.
Nia contributes money to a new business, while Omar contributes equipment and technical skills. They share ownership. Which statement best explains a potential
advantage?
A. Different contributions automatically give both owners limited liability.
B. Equipment contributions remove the need for an agreement about responsibilities.
C. They can pool resources and combine skills that neither owner provides alone.
D. Shared ownership guarantees that the business will earn a profit.
C. They can pool resources and combine skills that neither owner provides alone.
Why might an entrepreneur choose a franchise despite ongoing fees?
A. Fees give the franchisee ownership of every location in the chain.
B. Access to branding, training, and an established system may be worth the cost and reduced
independence.
C. The franchisee receives complete freedom to ignore product standards.
D. Using a brand transfers every operating loss to the franchisor.
B. Access to branding, training, and an established system may be worth the cost and reduced
A company licenses its brand and operating system. A local owner pays fees and runs a location under that agreement. Which identification is correct?
A. The company is the franchisor, and the local operator is the franchisee.
B. Both are sole proprietors of the same unincorporated business.
C. Both automatically become general partners because they use the same name.
D. The local operator is the franchisor, and the company is the franchisee.
A. The company is the franchisor, and the local operator is the franchisee.
A sole proprietor wants to change prices quickly when demand falls. Which advantage of this structure is most relevant?
A. The owner can act without obtaining approval from co-owners.
B. The owner can finance every price change by selling shares.
C. The owner can avoid the effect of lower demand on revenue.
D. The owner can transfer responsibility for losses to employees.
A. The owner can act without obtaining approval from co-owners.
A sole proprietor is skilled at production but struggles with bookkeeping. Which response addresses the weakness while preserving sole ownership?
A. Record all cash received as profit so bookkeeping is unnecessary.
B. Use a franchise brand to transfer ownership of all debts to the franchisor.
C. Hire a bookkeeper and include the cost in business expenses.
D. Give a bookkeeper half the ownership and continue calling the business a sole proprietorship.
C. Hire a bookkeeper and include the cost in business expenses.
Two general partners disagree about expansion. Which provision would most directly help them handle this problem?
A. A requirement that each partner use a separate personal checking account.
B. A decision-making and dispute-resolution procedure in their partnership agreement.
C. A rule defining all incoming revenue as distributable profit.
D. A statement identifying the logo's color but not the partners' authority.
B. A decision-making and dispute-resolution procedure in their partnership agreement.
A franchise's contract charges a 4% royalty on sales. It has $20,000 in sales and $20,000 in other expenses. What follows under this contract?
A. It owes an $800 royalty and has an $800 loss before taxes.
B. It owes no royalty because profit before the royalty is zero.
C. It owes a $4,000 royalty and has a $4,000 loss.
D. It earns $800 because the franchisor must cover the fee.
A. It owes an $800 royalty and has an $800 loss before taxes.
A franchise contract requires approved ingredients. The operator finds cheaper ingredients from another supplier. Which response best reflects the franchise
relationship?
A. Switch immediately because owning the location overrides every contract restriction.
B. Evaluate the contract's supplier rules and obtain required approval before switching.
C. Transfer ingredient costs to employees because they prepare the food.
D. Stop paying royalties so the supplier rule no longer applies.
B. Evaluate the contract's supplier rules and obtain required approval before switching.
A graphic designer needs more funding but wants to remain a sole proprietor. Which plan fits that goal?
A. Make a new investor a co-owner while remaining the only owner.
B. Sell ownership to a partner and classify the partner as an employee.
C. Use personal savings or apply for a business loan without adding owners.
D. Sell shares of stock to investors while retaining sole-proprietor status.
C. Use personal savings or apply for a business loan without adding owners.
Which entrepreneur's priorities most strongly favor a sole proprietorship?
A. An individual whose top priority is shielding personal assets through the ownership structure.
B. An operator whose top priority is using an established brand under its contractual rules.
C. An individual starting a low-cost venture who values direct control and accepts personal liability.
D. Several investors seeking shared ownership and a formal division of profits.
C. An individual starting a low-cost venture who values direct control and accepts personal liability.
An investor wants to contribute funds without taking the main management role. A general partner will manage the business. Which structure most closely matches this arrangement?
A. A sole proprietorship in which both people are co-owners.
B. A general partnership that automatically limits every partner's liability.
C. A franchise agreement that makes the investor the franchisor.
D. An ordinary limited partnership with a general partner and a limited partner.
D. An ordinary limited partnership with a general partner and a limited partner.
An independent shop earns $40,000 in sales with $31,000 in total expenses. A franchise earns $46,000 with $34,000 in other expenses and a 6% royalty on sales. Which comparison is correct?
A. The franchise earns $9,000, exactly matching the independent shop.
B. The franchise earns $12,000, which is $3,000 more than the independent shop.
C. The franchise earns $2,760, which is $6,240 less than the independent shop.
D. The franchise earns $9,240, which is $240 more than the independent shop.
D. The franchise earns $9,240, which is $240 more than the independent shop.
Why is brand recognition insufficient evidence that a franchise will be profitable?
A. Demand, operating expenses, fees, and local conditions still affect profit.
B. Every recognized brand requires the same royalty and startup costs.
C. Brand recognition converts revenue automatically into personal savings.
D. An established brand prevents the franchisee from receiving sales revenue.
A. Demand, operating expenses, fees, and local conditions still affect profit.