Test March 13 2013 Multiple Choice True False Chapter 17 Sole Proprietorships and Franchises Considerations for entrepreneurs o Ease of creation o Owner s Liability unlimited to you o Tax considerations Schedule C o Need for capital o Over 2 3 of US business are sole proprietorships Sole Proprietorships o Owner is the business o Ex Pizza shop dipping out of the revenues o Does business without creating a separate business organization o Advantages Owner is in complete control and receives all profits Flexibility Ease of creation and maintenance Pays only personal income taxes o Disadvantages Owner is personally liable for all torts and contracts Lacks continuity after death Difficult to raise financing Franchises Agreement so that Franchisor licenses Franchisee to use trademark trade name or copyright in the sale of goods and services o Continuity from one location to the next o Ex Franchise gas school Hamburger U o Types of Franchises Often exclusive territory Ex Beer or car dealers Distributorship Manufacturer licenses a dealer to sell its product Chain Style Business Operation Franchise operates under trade name and is a member of a select group of dealers that engage in the business Required to follow standardized or prescribed methods of operation Standards of performance Ex McDonalds H R Block etc Manufacturing or Processing Arrangement Franchisor transmits to the franchisee the essential ingredients or formula to make a particular product Ex Coca cola o Laws Governing Franchising Governed by contract law Federal Regulation of Franchises Industry Specific Standards Protect from unreasonable demands and bad faith termination FTC 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 o Potentials can weigh risks and benefits of an investment o Franchisors are required to explain termination cancellation and renewal provisions of the franchisee contract to potential franchisees before the agreement is signed State Protection for Franchisees Franchise disclosure documents Official registration o Franchise Contract Specifies terms and conditions Capital structure sales quotas record keeping quality control pricing arrangements Payment for the Franchise Initial fee Various products that the franchisee purchases from or through the franchisor Percentage of sales or volume of business Franchisor determines territory Implied covenant of good faith and fair dealing Business premises Leased vs purchased Fixtures Location Business Organization Particular structure or form Control over training Quality Control standards Periodic inspections Pricing Arrangements Day to day operation left up to franchisee with certain May require purchases from franchisor Franchisor CANNOT set prices of resell of goods o Violation of state federal antitrust laws o Can suggest prices o Termination Relationship starts with a trial period to make sure that both sides are on board Must be for cause Death or disability of franchisee Insolvency of franchisee Breach of franchise agreement Failure to meet specified sales quotas Notice must be given reasonable time implied Cure ordinary breach Given some time to fix breach Wrongful termination Franchisee gets fucked over by the franchisor on termination after putting a lot of time and money into their individual franchise Importance of Good Faith and Fair Dealing Courts balance the rights of both parties Partnerships Two or more persons or corporations agree to carry on business for profit as co owners equally Sharing of profit and losses Joint ownership of business Equal right to be involved in the management of the business o Agency Concepts and Partnership Law Governed by both common law and statutory laws Each partner deems an agent and fiduciary of the other Partnerships file 1065 Information return Imputation of liability o Uniform Partnership Act Absence of partnership agreement governs partnership o No presumption of partnership if profits received as payment for Debt by installments or interest on a loan Wages of an employee for an independent contractor Rent Annuity of a spouse Joint Property Ownership and Partnership Status o Sharing of profits and losses Entity vs Aggregate o Partnership Not a separate legal entity distinct from owners o Judgments collected against assets and partner s assets Partnership Formation o Partnership Agreement can be written or oral unless Statute of Frauds requires a written agreement o Estoppel Occurs when a person who is not a partner holds himself out to third parties and the third party relies to her detriment Non partner is considered an agent whose acts are binding on the partnership Partnership Operation o Right of Partners Management Equal Interest Shared Compensation None Transparency of books and accounting Right to get sued if one embezzles even if they don t know Property rights Creditors can say each has an individual position can sure each other Always be careful what partner is doing o Duties and Liabilities of Partners Fiduciary Beach and Waiver Authority of Partners Scope of implied powers Authorized vs Unauthorized Liability o Disassociation of a Partner Joint liability Third party must sue all partners as a group Terminate the right to vote Allowed to have interest purchased by partnership Events that cause disassociation Notice Triggering Event Unanimous Vote Court or Arbitrator Order Partner bankruptcy assignment of interest incapacity or death Must get event in writing Wrongful dissociation o Partnership Termination Dissolution Legal death by operation of law or judicial decree Agree to dissolve Operation of Law Death of a partner bankruptcy of partnership bankruptcy of partner illegality Judicial Degree Insanity Incapacity business impracticability improper conduct personal dissension partners do not get along Winding up and Distribution of Assets Collecting and distribution partnership assets Partners have no authority except o Complete transactions already begun Partners contribution SEE PPT If Liabilities Assets partners bear losses in proportion to which they shared profits o Partnership Buy Sell Agreement Partners agree in advance that in the event of death of one partner the other must buy out their portion Chapter 18 Limited Liability Companies and Limited Partnerships Limited Liability Company LLC Hybrid form that combines limited liability aspects of the