Sole Proprietorships and Franchises

Flashcards about sole proprietorships and franchises.

Who is an entrepreneur?

A person who initiates and assumes the financial risk of a new enterprise.

Name four different business forms.

Sole proprietorship, partnership, corporation, and limited liability company.

What are some factors used in determining business form?

Ease of creation, owners’ liability, tax considerations, and ability to raise capital.

What measures should companies with trade secrets take?

Consider non-disclosure agreements, and potentially non-compete agreements, with their employees.

What are benefits and drawbacks of obtaining a bank loan for a small business?

The owner retains full ownership and control, but the bank may place certain restrictions and require a personal guarantee.

What do the Small Business Administration and many states offer to small businesses?

Grants or loans.

What percentage of American businesses are sole proprietorships?

Over 2/3.

What percentage of sole proprietorships have revenues of less than $1 million per year?

99%.

What are advantages of a sole proprietorship?

The sole proprietor keeps all profits, is free to make any decision, and only pays personal income taxes on the profits.

What are disadvantages of a sole proprietorship?

The sole proprietor bears all risks, is liable for all obligations, the business ceases to exist upon death, and there is a limited ability to raise capital.

Define a franchise.

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

What does a franchise allow an independent businessperson to obtain?

The advantages of a larger organization.

Define franchisor:

Seller of franchise

Define franchisee:

Buyer of franchise

Name three types of franchises:

Distributorship, chain-style business operation, and manufacturing or processing-plant arrangement.

Briefly describe a distributorship franchise.

A manufacturing concern licenses a dealer to sell its product, often covering an exclusive territory.

Briefly describe a chain-style business operation franchise.

A franchisee operates under a franchisor’s trade name and is identified as a member of a select group of dealers.

Briefly describe a manufacturing or processing-plant arrangement franchise.

A franchisor provides the franchisee with the essential ingredients or formula to make a product.

What primarily governs franchises?

Contract law.

What is the Franchise Rule of the FTC?

Franchisors must disclose certain material facts that a prospective franchisee needs to make an informed decision.

What do state laws governing franchising often ensure?

That franchisors must disclose certain material facts including actual costs of operation, recurring expenses, or estimated profits.

What are some examples of terms that may be in a franchise contract?

Payment for the franchise, business premises, location, organization, quality control and pricing arrangements.

What payments is a franchisee usually responsible for?

A lump-sum price for the franchise license and a percentage of advertising administrative expenses.

How do franchise agreements usually specify which territory is exclusive or non-exclusive?

The franchisor usually determines the territory to be served, and the franchise agreement will usually specify whether the territory is exclusive or non-exclusive to the franchisee

Who might a franchisor want to train?

Franchisee’s employees

Why do franchisors set standards that must be met by franchisees?

In order to protect the name and reputation of the franchise

What can't a franchisor do regarding pricing?

Set prices at which the franchisee will resell the goods because doing so would violate antitrust laws

What is the duration of a franchise?

A matter to be determined by the parties

What are some examples of reasons termination must be 'for cause'?

The death or disability of the franchisee, insolvency of the franchisee, breach of the franchise agreement, or failure to meet specified sales quotas

What is typically required before termination?

Notice

What might a franchisee have the opportunity to do to avoid termination?

Cure a breach within a certain time

What do termination provisions in franchise agreements usually favor?

The franchisor

What do statutory law and case law emphasize in terminating a franchise relationship?

The importance of good faith and fair dealing

What happens if a court perceives that a franchisor has arbitrarily or unfairly terminated a franchise?

The franchisee will be provided with a remedy for wrongful termination.

Will a court usually find termination wrongful if decision to terminate was made in normal course of the franchisor’s business operations and reasonable notice was given?

No