CH 36: Small businesses and franchises

What are the four primary considerations when choosing a business form?

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

What is a sole proprietorship, and what are its key characteristics?

A sole proprietorship is an individual doing business without forming a separate legal entity, popular for its ease of setup but has unlimited personal liability.

What are some advantages of operating as a sole proprietor?

Advantages include tax simplicity and direct control over business decisions.

What are the disadvantages of a sole proprietorship?

The main disadvantage is unlimited personal liability for business debts and obligations.

Define what a franchise is and explain its core concept.

A franchise is an arrangement where the owner of intellectual property licenses others to use it in selling goods or services.

What are the three main types of franchise models?

Distributorship, chain-style business operations, and manufacturing arrangements.

Give an example of a distributorship franchise.

Automobile dealerships or beer distributorships.

How does a chain-style business operation franchise work?

The franchisee operates under the franchisor's trade name and is part of a select group of dealers, like fast food chains.

What is unique about a manufacturing arrangement franchise?

The franchisor provides the essential ingredients or formula to make a product, such as Coca-Cola or soft drink bottlers.

What legal framework governs franchise agreements for goods?

The Uniform Commercial Code (UCC) governs franchise agreements related to goods.

What is the role of the Federal Trade Commission (FTC) in franchise regulation?

The FTC regulates franchises through the Franchise Rule, requiring franchisors to provide material disclosures to prospective franchisees.

What are some key elements of a franchise contract?

Payment, business premises, location, business organization, sales quotas, quality control, and pricing.

What are the conditions under which a franchise can be terminated?

Termination can occur for cause with notice, at the end of the term, or due to wrongful termination.

What is the doctrine of good faith and fair dealing in franchise termination?

Both parties must act honestly and fairly, and termination must not be in bad faith.

How does the Franchise Rule protect potential franchisees?

The Franchise Rule requires franchisors to disclose important information to help prospective franchisees make informed decisions.