Chapter 16:Small Business Organizationd

Business entity selection factors

Ease of creation, owner liability, tax treatment, and capital needs.

Sole proprietorship

Business owned and operated by one person without a separate legal entity.

Owner liability (SP)

Owner personally liable for all business debts and losses.

Partnership

Agreement between two or more persons to carry on a business for profit as co-owners.

Articles of Partnership

Partnership agreement; may be oral or written unless statute requires writing.

Uniform Partnership Act (UPA)

Default state law that governs partnerships without a written agreement.

Essential elements of a partnership

Sharing profits/losses, joint ownership, equal management rights.

No partnership if profits from

Debt payments, wages, rent, annuities, or sale of goodwill.

Entity vs aggregate theory

Modern view treats partnership as a separate legal entity that can sue, own property, and be sued.

Pass-through taxation

Partnership income passes to partners who report it on individual returns.

Partnership for a term

Partnership lasting for a specified period.

Partnership at will

Partnership with no fixed duration; may be ended any time.

Partner management rights

Each partner has one vote; majority rules unless unanimous consent required.

Partner profit sharing

Unless agreed otherwise, profits and losses are shared equally.

Inspection of books

Each partner has right to full and complete information about business affairs.

Partnership property rights

Property belongs to the partnership; partners can’t use it for personal debts.

Fiduciary duty

Duty of care and duty of loyalty owed among partners.

Duty of care

Avoid gross negligence, reckless conduct, intentional misconduct, or law violation.

Duty of loyalty

Act in best interest of the partnership.

Breach of fiduciary duty

Cannot be waived; must disclose conflicts of interest.

Authority of partners

Each partner is an agent and can bind the partnership in ordinary business.

Apparent authority

Partner appears to have authority; can bind partnership to third parties.

Statement of partnership authority

Filed document to limit partner authority with the state.

Partner liability

Partners personally liable for partnership debts.

Joint liability

All partners must be sued together for a partnership obligation.

Joint and several liability

Third party may sue one or all partners for the entire debt.

Right to indemnification

Partner who caused loss must reimburse other partners.

Dissociation

When a partner ceases association with the partnership.

Causes of dissociation

Notice, triggering event, vote, court order, bankruptcy, incapacity, death.

Wrongful dissociation

Leaving without the right to do so; liable for damages.

Effects of dissociation

Loss of management rights; possible buyout of partner’s interest.

Apparent authority after dissociation

Outgoing partner may bind firm for two years unless notice given.

Partnership termination

Occurs in two stages: dissolution and winding up.

Dissolution

Legal end of partnership by agreement, law, or court decree.

Winding up

Process of collecting assets, paying debts, and distributing remaining funds.

Creditors’ priority

Debts paid first to outside and partner-creditors, then capital contributions, then profits.

Loss allocation

If liabilities > assets, partners share losses in same ratio as profits.

Franchise

Agreement where franchisor licenses franchisee to use trademark and business system.

Franchisor

Owner of the trademark, trade name, or copyright.

Franchisee

Person or business licensed to operate under franchisor’s brand.

Distributorship

Franchisee sells manufacturer’s product in exclusive territory.

Chain-style franchise

Franchise operates under franchisor’s name with uniform standards and appearance.

Manufacturing or processing franchise

Franchisor provides ingredients or formula for product assembly.

Industry-specific franchise standards

Federal rules protecting franchisees from unfair franchisor demands.

Franchise Rule (FTC)

Requires disclosure of material facts for informed franchise decisions.

State franchise laws

Protect against unfair trade practices and require financial disclosure.

Franchise contract

Defines rights, duties, and terms between franchisor and franchisee.

Franchise fees

Initial lump-sum plus ongoing royalties or percentage of sales.

Territorial rights

Contract clause granting exclusive or limited sales area to franchisee.

Quality control

Franchisor’s right to set standards to protect goodwill and trademark.

Pricing arrangements

Franchisor may suggest retail prices but cannot mandate them.

Franchise termination

Grounds and procedures for ending franchise relationship.

Notice requirement

Franchisee must receive reasonable time to wind up business.

Opportunity to cure

Franchisee may fix a breach before termination becomes final.

Good faith and fair dealing

Both parties must act fairly; wrongful termination can lead to liability.

Wrongful termination

Not wrongful if done in normal course of business with reasonable notice.