MGMT 254 Chapter 38/40: Business Organizations

Advantages of individual proprietorships

no organizational fees, owner controls all decisions and receives all profits, net earnings taxed as personal income

Disadvantages of individual proprietorships

unlimited personal liability for all the debts of the business, authority terminates on owner’s death and business is subject to disintegration

Advantages of partnerships, LLPs, and LLCs

allows individuals to pool resources and conduct business without the requirements for formal structure

Disadvantages of partnerships, LLPs, and LLCs

unlimited personal liability for partners, uncertain duration since dissolved by the death of a partner, LLC remedies unlimited personal liability, LLP shields innocent partners from personal liability beyond their investment

Advantages of corporations

investor risk limited to capital investment, ability to raise large amounts of capital, seperate legal entity with perpetual life

Disadvantanges of corporations

double taxation, much more costly to set up and maintain than other business forms, annual reports must be filed

Joint ventures

relationships to share profits and losses equally for a single business undertaking, generally subject to partnership laws, will last for time specified or until end of project or at the will of any participant, fault of one venturer will be imputed to the others

Unincorporated associations

combination of 2 or more persons for the furtherance of a common purpose, governed by ordinary contract law with no legal existence apart from the members, members are not liable for debts of the association by the mere fact of membership

Incorporated cooperatives

statutes generally provide excess payments over cost are refunded to members based on amount of business

Antitrust law exemption (cooperatives)

seller’s cooperative is a violation of antitrust laws; selling activites of farmers are exempt if cooperatives do not conspire to fix prices

Definition of franchises

the franchisor is the party granting the franchise and the franchisee is the person whom the franchise is granted

Three types of franchises

manufacturing, service, and distribution

The franchise agreement

-       Rights between the franchisor and franchisee are determined by the franchise agreement

-       Includes franchisee’s rights to use trademarks, trade name, trade dress, and trade secrets of the franchisor

-       Deals with terms for payment of various fees and compliance requirements for quality control

-       Duration of franchise is a critical element, and generally, specific reasons for termination are included

-       Frequently contain an arbitration provision under which a neutral party makes a final and binding determination of whether there has been a breach of contract sufficient to justify cancellation

Special protections under federal and state law

holders of automobile franchises are protected from bad-faith termination of their dealerships; if franchisor makes unreasonable demands and terminates the agreement, liable for damages to franchisee 

Federal law (franchises)

FTC Franchise Rule requires prospective franchisee be given a franchise disclosure document 14 days before signing agreement or making any payment

State law (franchises)

some states follow federal law; others have their own franchising laws; these states seek to protect citizens from fraud and provide recourse for violations

Vicarious liability claims against franchisors

franchisor not liable to third persons dealing with franchisees (may be liable based on apparent or actual authority), franchisor may also insulate themselves from liability by requiring franchisees to take steps to maintain their individual business identities 

Franchises and employee misclassifications

Franchise agreements typically provide that no employment relationship is created, whether an employment relationship actually exists is determined by context, not the agreement