ch 16 small businesses and franchises

what is one of the first decisions an entrepreneur must make?

which form of business organization will be most appropriate for the new endeavor

what are 4 factors that an entrepreneur will consider when selecting an organizational form?

1. ease of creation

2. liability of the owners

3. tax considerations

4. the ability to raise capital

what is the primary motive of an entreprenuer?

to make profits

what are the three major business forms?

1. sole proprietorship

2. partnership

3. corporation

what business form do most small businesses begin with?

sole proprietorships

what are some disadvantages of sole proprietorship?

unlimited personal liability and difficulty raising capital

what are the more formal organizations that a small business owner might establish in order to diminish disadvantages?

limited partnership (LP)

limited liability partnership (LLP)

limited liability company (LLC)

corporation

why is obtaining a bank loan beneficial for small businesses?

it allows the owner to retain full ownership and control of the business

what is sole proprietorship?

the simplest form of business organization, in which the owner is the business

T or F: more than two-thirds of all U.S. businesses are sole proprietorships

TRUE

what are two advantages to sole proprietorships?

the proprietor owns the entire business and receives all profits

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

what kind of taxes does a sole proprietor pay?

only personal income taxes on the business’s profits

how is a sole proprietorship more flexible than a partnership or a corporation?

the sole proprietor is free to make any decision she or he wishes concerning the business

the sole proprietor can sell or transfer all or part of the business to another party at any time without seeking approval from anyone else

what is the major disadvantage of sole proprietorship?

the proprietor alone bears the burden of any losses or liabilities incurred by the business enterprise

“unlimited liability”

T or F: creditors can NOT pursue the owner’s personal assets to satisfy any business debts

FALSE

creditors CAN pursue the owner’s personal assets to satisfy any business debts

what are two other disadvantages of sole proprietorship?

when the proprietor dies, the business dies

in raising capital, the proprietor is limited to his or her personal funds and any loans that he or she can obtain for the business

how does a partnership arise?

from an agreement, express or implied, between two or more persons to carry on a business for a profit

what are partnerships governed by?

common law concepts (in particular, those relating to agency)

statutory law

how is a partnership similar to an agency relationship?

each partner is deemed to be the agent of the other partners and of the partnership

concepts of agency law apply

partners — like agents — are bound by fiduciary ties, meaning they are required to act primarily in the best interests of one another

what is the one important way that partnership law differs from agency law?

each partner in a partnership has an ownership interest in the firm

(in a non partnership agency relationship, the agent usually does not have an ownership interest in the business)

what does the Uniform Partnership Act (UPA) do?

it governs the operation of partnerships in the absence of express agreement

what is the definition of a partnership?

an agreement by two or more persons to carry on, as co-owners, a business for profit

what is a key element of a partnership?

the intent to associate

one cannot join a partnership unless all other partners consent

what are the three elements that courts look at to determine whether a partnership exists?

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

how does modern law treat a partnership?

as an aggregate (collection) of the individual partners rather than a separate legal entity in one situation (for federal and tax purposes)

what is a pass-through entity?

a business entity that has no tax liability

what is a partnership only responsible for in terms of taxes?

filing an information return with the Internal Revenue Service (IRS)

(the partnership itself does not pay taxes on the income)

what is information return?

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

what kind of terms does a partnership agreement (articles of partnership) contain?

can include almost any terms that the parties wish, unless they are illegal or contrary to public policy

what are the articles of partnership?

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

what are the rights and duties of partners largely governed by?

the specific terms of their partnership agreement

when is a partnership called a ‘partnership for a term’?

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

what happens when a partner withdraws from the partnership for a term prematurely?

it constitutes a breach of the agreement, and the responsible partner can be held liable for any resulting losses

when is a partnership called a ‘partnership at will’?

if no fixed duration if specified

can be dissolved at any time without liability

what are some of the rights of partners in a partnership?

management

interest in the partnership

compensation

inspection of books

accounting

property

what is a decision that requires the unanimous consent of the partners?

decisions that significantly change the nature of the partnership or that are outside the ordinary course of the partnership business

what form do the partner’s income from the partnership take?

a distribution of profits according to the partner’s share in the business

where must the partnership books be kept?

at the firm’s principal business office (unless the partners agree otherwise)

what is required to determine the value of each partner’s share in the partnership?

an accounting of partnership assets or profits

what are the duties and liabilities derived from?

agency law

what are the fiduciary duties that a partner owes to the partnership and to the other partners?

duty of care

duty of loyalty

what is a partner not liable to the partnership for?

simple negligence

honest errors in judgement in conducting partnership business

how can the duty of loyalty be breached?

self-dealing

misusing partnership property

disclosing trade secrets

usurping a partnership business opportunity

what must each partner consistently act in fulfilling fiduciary duties?

the obligation of good faith and fair dealing

what cannot be waived or eliminated in a partnership agreement?

a partner’s fiduciary duties

specific acts that violate a fiduciary duty, however, can be specified in the partnership agreement

what kind of general principles of agency law does the UPA affirm?

those that pertain to a partner’s authority to bind a partnership in contract

how might a partner subject the partnership to tort liability under agency principles?

when a partner is carrying on partnership business with third parties in the usual way, apparent authority exists, and both the partner and the firm share liability

what is one significant disadvantage associated with general partnerships?

the partners are personally liable for the debts of the partnership

T or F: in general partnerships, the liability is limited

FALSE

liability is unlimited because the acts of one partner in the ordinary course of business subject the other partners to personal liability

what is 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

what is joint and several liability?

a doctrine under which a plaintiff may sue all of the partners together (jointly) or one or more of the partners separately (or severally)

what happens if a plaintiff is successful in a suit against a partner or partners?

he or she may collect on the judgement only against the assets of those partners named as defendants

what is a partner newly admitted to an existing partnership not personally liable for?

any partnership obligations incurred before the person became a partner

what is a franchise?

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

who is a franchisee?

one receiving a license to use another’s (the franchisor’s) trademark, trade name, or copyright in the sale of goods and services

who is the franchisor?

one licensing another (the franchisee) to use the owner’s trademark, trade name, or copyright in the selling of goods and services

T or F: a franchisee is generally legally dependent on the franchisor

FALSE

the franchisee is generally legally independent of the franchisor

they are economically dependent of the franchisor, however

why has franchising become so popular?

it allows businesses to expand their operations internationally without violating the legal restrictions that many nations impose on foreign ownership of businesses

what are the 3 general classifications of franchises?

1. distributorships

2. chain-style business operations

3. manufacturing arrangements

what happens in a distributorship?

a manufacturer (the franchisor) licenses a dealer (the franchisee) to sell its product

• often covers exclusive territory

what are examples of a distributorship?

automobile dealerships

beer distributorships

what happens in a chain-style business operation?

a franchise operates under a franchisor’s trade name and is identified as a member of a select group of dealers that engage in the franchisor’s business

where are chain-style business operations commin in?

the fast-food industry

service-related businesses like real estate brokerage firms and tax-preparing services

what happens in a manufacturing (processing-plan) agreement?

the franchisor transmits to the franchisee the essential ingredients or formula to make a particular product

the franchisee then markets the product either at wholesale or at retail in accordance with the franchisor’s standards

what is an example of a manufacturing arrangement?

soft-drink bottling companies

why is a franchise relationship governed by contract law?

because it is primarily a contractual relationship

what are the laws that have been enacted by federal and state governments for franchising designed to do?

protect prospective franchisees from dishonest franchisors

prevent franchisors from terminating franchises without good cause

what is the franchise relationship defined by?

the contract between the franchisor and the franchisee

what does the franchise contract do?

specifies the terms and conditions of the franchise

spells out the rights and duties of the franchisor and the franchisee

T or F: the franchisee ordinarily pays an initial fee or lump-sum price for the franchise license

TRUE