LAW 2810 - Chapter 16: Small Businesses and Franchises

Practice flashcards covering key concepts related to small businesses and franchises from Chapter 16.

Entrepreneur

One who initiates and assumes the financial risk of a new business enterprise and undertakes to provide or control its management.

Sole Proprietorship

The simplest form of business organization in which the owner is the business and is legally responsible for all debts and obligations incurred.

Legal requirements for any business

1. Business name registration
2. Occupational licensing
3. State tax registration
4. Health and environmental permits
5. Zoning and building codes
6. Import / export regulations

Advantages of a Sole Proprietorship

1. The proprietor owns the entire business and receives all of the profits (because she or he assumes all of the risk).

2. Starting a sole proprietorship is easier and less costly than starting any other kind of business because few legal formalities are required.

3. A sole proprietorship offers more flexibility than does a partnership or a corporation.

Disadvantages of a Sole Proprietorship

• Personal asset risk

• Lacks continuity after the death of the proprietor

• The proprietor is limited to his or her personal funds and any loans that they can secure for the business

Taxes, and the Sole Proprietorship

• A sole proprietor pays only personal income taxes on the business’s profits.

• The profits are reported as personal income on the proprietor’s personal income tax
return.

• Sole proprietors are allowed to establish retirement accounts that are tax-
exempt until the funds are withdrawn.

Partnership

An agreement (expressed, or implied) by two or more persons to carry on, as co-owners, a business for profit. Characterized by joint control over operations, and the rights to share in its profits.

Three essential elements of a partnership?

1. A sharing of profits or losses
2. A joint ownership of the business
3. An equal right to be involved in the management of the business

Similarities between Partnerships and Agencies?

When two or more persons agree to do business as partners, each partner is deemed to be the agent of the other. Each partner is bound by FIDUCIARY TIES, similar to in an agency, meaning they both must act in the best interest of one another.

Partnerships are “Pass-Through Entities.” What does this mean?

A business entity that has no tax liability. A partnership itself, is only responsible for filing an information return with the IRS.

Information Return

A tax return submitted by a partnership that reports the business’s income and losses

Articles of partnership

A written agreement that sets forth each
partner’s rights and obligations with respect to the partnership.

Partnership for a term

A partnership agreement that specifies the duration of the partnership by
stating that it will continue until a designated date or until the completion of a
particular project

Uniform Partnership Act (UPA)

Governs the operation of partnerships in the absence of express agreement

Rights of Partners

• Management
• Interest in the partnership
• Compensation
• Inspection of books
• Accounting
• Property

Duties and Liabilities of Partners

The Duty of Care
The Duty of Loyalty

The Duty of Care:

Under the U P A, a partner’s duty of care is limited to refraining from “grossly
negligent or reckless conduct, intentional misconduct, or a knowing violation of the
law”
• A partner is not liable to the partnership for, Simple negligence, or for Honest errors in judgment in conducting partnership business

The Duty of Loyalty:

Requires a partner to account to the partnership for “any property,
profit, or benefit” derived by the partner in the conduct of the partnership’s business
or from the use of its property
- This duty can be breached by:
• Self-dealing
• Misusing partnership property
• Disclosing trade secrets
• Usurping a partnership business opportunity

Significant disadvantage of the

Franchise

Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark in the selling of goods or services.

Joint Liability

A doctrine in which a plaintiff must sue all of the partners as a group, but each partner can be held liable for the full amount.

Limited Liability Company (LLC)

A type of business organization that provides limited liability to its owners with fewer restrictions than a corporation.

Agency Law

The area of law that governs the relationship between a principal and an agent.

Uniform Partnership Act (UPA)

A statute that provides default rules for partnerships in the absence of a partnership agreement.

Fiduciary Duty

An obligation of one party to act in the best interest of another party, particularly in partnerships.

Distributorship

A type of franchise where a manufacturer licenses a dealer to sell its products, often in an exclusive territory.