CHAPTER 17Sole Proprietorships, Franchises & PartnershipsI. Sole Proprietorshipsa. Owner = Businessb. Advantagesi. Owner receives all profitsii. Uncomplicated to formiii. Increased flexibilityc. Disadvantagesi. Owner incurs all losses/liabilities ii. Creditors can pursue owner’s personal assetsiii. Business dissolves when owner diesiv. Owner is personally liable for legal obligations of the businessd. Business profits are reported on proprietor’s personal income tax returnII. Franchisesa. Arrangement in which owner of a trademark, trade name or copyright (franchisor), licenses another (franchisee) to use the intellectual property b. Franchisee is:i. Legally independentii. Economically dependentc. Types of Franchises:i. Distributorship: manufacturer licenses a dealer to sell its productii. Chain Style business: a franchise operates under a franchisor’s trade name, generally required to follow standardized or prescribedmethods of operationiii. Manufacturing Arrangement: franchisor transmits to the franchiseethe essential ingredients or formula to make a particular productd. Franchise relationships are contractual, so contract law often governse. Most laws/regulations (state or federal) that are franchise specific are designed to protect the franchisee f. Federal Trade Commission’s Franchise Rule: requires franchisors to disclose certain material facts that a prospective franchisee needs in order to make an informed decision concerning the purchase of a franchise; includes:i. Written disclosures concerning range of goods and services included and the value and estimated profitability of franchiseii. Reasonable basis for any representationsiii. Projected earnings figuresiv. Actual data on which sales or earnings projections are basedv. Explanation of termsg. Franchise relationships are contractual; terms often address:i. Payment for franchise licenseii. Premises/locationiii. Organizational form/capital structureiv. Quality controlv. Pricing arrangementsh. Franchise Termination: parties set out parameters in franchise contracti. ‘For Cause’ii. Notice of termination must be giveniii. Opportunity to cureiv. Franchisor must act in good faith (See, Holiday Inn v. HAI)III. Partnershipsa. Relationship, express or implied, between two or more persons who join to carry on trade or businessi. Partners are co-ownersii. Partners share profits AND lossesiii. Partners have equal right to be involved in managementb. Partners are agents of one another: they act on behalf and instead of one another and have a duty of care and loyalty to one anotherc. Uniform Partnership Act: body of law governing the operation of partnerships in the absence of an express agreement between the partnersi. Defines partnership as: an association of two or more person to carry on as co-owners a business for profitii. All partners must intend to be partnersiii. A partner joins only with the consent of other partner(s)d. Legal treatment of partnershipi. Typically treated as an entity rather than as a collection of individuals; EXCEPTii. Treated as aggregate of individuals for tax purposes; pass-through entitye. Partnership Formation: agreements to form can be oral, written or implied by conductf. Articles of Partnership: the actual partnership agreement; can include mostany terms partners choose, and generally includes:i. Basic structureii. Capital contributionsiii. Sharing of profits and lossesiv. Management and controlv. Accounting and partnership recordsvi. Dissociation and dissolutionvii. Arbitrationg. Partnership durationi. Partnership for a term: continues until a designated date or the completion of a particular project; premature withdrawal from a partnership can be the basis for a lawsuit by the remaining partnersii. Partnership at will: no fixed duration is specified and partnership can dissolve at any timeh. Rights of partners (unless partners agree otherwise)i. All partners have equal rights in managementii. All partners have one vote in management mattersiii. Majority rule governs; EXCEPT in the following situations, where unanimous consent is required1. Alter essential nature of the firm’s business2. Change capital structure of partnership3. Amend terms of partnership agreement4. Add a new partner5. Engage in new business6. Issues involving creditors7. Dispose of partnership’s goodwill8. Submit partnership claims to arbitration9. Do something making further conduct of the partnership impossibleiv. Each partner is entitled to the proportion of the business profits andlosses specified in the agreement (if not specified, profits and losses are shared equally)v. Compensation from partnership comes from distribution of profits according to partner’s share in the businessvi. Books and records must be accessible to all partnersvii. Can ask for an accounting of assets to determine the value of each partner’s sharei. Duties and Liabilities: each partner is an agent of every other partner and the partnership itselfi. Fiduciary duties: the duty of care and the duty of loyalty (may not self deal, misuse partnership property, disclose trade secrets or usurp partnership business opportunity)ii. Partner can subject the partnership to tort liability if acting within the scope and bound of his her authority as a partneriii. Partners are personally liable for partnership debts1. Joint Liability: each partner can be held liable for the full amount of damages even if partnership is sued as a group2. Several Liability: only liable for that partner’s proportionate damages3. Joint and Several Liability: it is up to the defendants to sort out their respective portions of liability4. Indemnification: a partner committing a tort can be required to pay back the partnership for any damages the partnership pays as a result of the partner’s tortious actsj. Dissociation: when a partner leaves the partnershipi. The leaving partner’s interest usually bought by partnership at the buyout price (amount that would have been distributed if partnership had been wound up on date of dissociation, offset against any amounts owed to partnership)ii. A partner can dissociate by:1. Partner’s voluntary withdrawal2. Occurrence of some event specified in partnership agreement3. Unanimous vote of other partners under certain circumstances4. Court order5. Partner’s declaration of bankruptcyiii. Dissociation can breach partnership agreement, allowing other partners to sue for damagesiv. Liability of dissociating partner to