General Education Development (GED) Practice Exam

Which of the following terms best describes a situation where an individual enters into an agreement with a company to use the company's business model within a given territory, usually in exchange for a fee?

1. Sole proprietorship

2. Limited liability corporation

3. Franchise

4. Incorporation

The correct answer is: Franchise

A franchise is accurately described as an arrangement in which an individual or entity grants another party the right to operate a business using its brand, products, and business model, typically within a specified territory. This agreement allows the franchisee to leverage the established reputation and operational procedures of the franchisor, providing a framework for the business while also ensuring compliance with the franchisor's standards. In exchange for these benefits, the franchisee usually pays an initial fee and ongoing royalties based on sales. In contrast, a sole proprietorship refers to a business owned and operated by a single individual, without any franchise agreements or brand licensing. Limited liability corporations (LLCs) are a specific type of business structure that provides limited liability to its owners but does not inherently involve the franchising model. Incorporation involves forming a corporation, a separate legal entity, which also does not describe the franchise relationship. Thus, a franchise is the term that encapsulates the agreement to use a company's business model for operation in a defined area.