Ch. 16 Small Businesses and Franchises

Articles of partnership

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

Buyout price

the amount payable to a partner on his or her dissociation from a partnership, based on the amount distributable to that partner if the firm were wound up on that date, and offset by any damages for wrongful dissociation

Buy-sell agreement

in the context of partnerships, an express agreement made at the time of partnership formation for one or more of the partners to buy out the other or others should the situation warrant

Charging order

in partnership law, an order granted by a court to a judgement creditor that entitles the creditor to attach a partner's interest in the partnership

Dissociation

the severance of the relationship between a partner and a partnership or between a member and a limited liability company

Dissolution

the formal disbanding of a partnership, corporation, or other business entity. For instance, partnerships can be dissolved by act of the partners, by operation of law, or by judicial decree

Entrepreneur

one who initiates and assumes the financial risk of a new business enterprise and undertakes to provide or control its management

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

Franchisee

one receiving a license to use another's trademark, tradename, or copyright in the sale of goods and services

economically dependent on the franchisor’s integrated business system

can operate as an independent businessperson but still obtain the advantages of a regional or national organization

Franchisor

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

Goodwill

Information return

a tax return submitted by a partnership that reports the business's income and losses. The partnership itself does not pay taxes on the income, but each partner's share of the profit (whether distributed or not) is taxed as individual income to that partner

Joint and several liability

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

Joint liability

in partnership law, a doctrine under which a plaintiff must sue all of the partners as a group, but each partner can be held liable for the full amount

Partnership

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

Partnership by estoppel

a partnership imposed by a court when nonpartners have held themselves out to be partners, or have allowed themselves to be held out as partners, and others have detrimentally relied on their misrepresentations

Pass-through entity

a business entity that has no tax liability. The entity's income is passed through to the owners, and they pay taxes on the income

Sole proprietorship

the simplest form of business organization, in which the owner is the business. The owner reports business income on his or her personal income tax return and is legally responsible for all debts and obligations incurred by the business

Winding up

the second of two stages in the termination of a partnership or corporation, in which the firm's assets are collected, liquidated, and distributed, and liabilities are discharged

three major business forms

sole proprietorship, partnership, corporation

“formal” organization options after sole proprietorship

limited liability partnership (LLP), limited partnership (LP), limited liability company (LLC), corporation

obtaining a bank loan is beneficial for a small business because…

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

but…

• bank may place restrictions on future business decisions

• not available for some businesses

• may require personal guaranty contracts, putting the owner’s personal assets at risk

• US Small Business Administration: offers loans with desirable terms

advantages of sole proprietorships

• proprietor owns entire business and receives all profits

• easier and less costly startup

• no gov docs needed to be filed

• pays only personal income taxes

• flexible decision making

disadvantages of sole proprietorships

• unlimited liability

• personal assets at risk

• lack of continuity after death

• limited ability to raise capital

types of franchises

distributorships, chain-style business operations, manufacturing agreements

distributorship

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

chain style business operations

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

generally required to follow standardized or prescribed methods of operation

manufacturing agreement

franchisor transmits to the franchisee the essential ingredients or formula to make a particular product, then market the product how the franchisor wants

Laws governing franchises

• contract law

• sales of products: Article 2 UCC

• Federal Trade Commission (FTC): created Franchise Rule

FTC Franchise Rule

requires franchisors to disclose certain material facts that a prospective franchisee needs in order to make an informed decision concerning the purchase of a franchise

FTC Franchise Rule Requirements

written or electronic disclosures, reasonable basis for any representation, projected earnings figures, actual data, explanation of terms

franchise contract

specifies terms and conditions of franchise and the rights and duties of each party

grounds for franchise termination

franchise agreement states that it must be “for cause”, and defines grounds for termination, usually include notice requirements, franchisee must be given reasonable time, a franchisee’s breach of duty of honesty and fidelity may be enough to allow franchisor to terminate, but sometimes there is opportunity to cure the breach

wrongful termination of franchise

• franchisor owns trademark, hence the business

• if court perceives that a franchisor has arbitrarily terminated a franchise, the franchisee will be provided with a remedy for wrongful termination

partnership law

common law and statutory law

National Conference of Commissioners have drafted uniform laws that have been widely adopted

partners are agent of each other and partnership

partners are bound by fiduciary ties

agency concepts

the imputation of knowledge of and responsibility for acts carried out within the scope of the partnership

partnership law is different from agency law because…

• partners agree to commit funds or other assets, labor, and skills to the business with the understanding that profits and losses will be shared

• each partner has ownership interest in the firm

• agent usually does not have an ownership interest in the business and is not obligated to bear a portion of ordinary business losses

Uniform Partnership Act

governs the operation of partnerships in the absence of express agreement and has done much to reduce controversies in the law relating to partnerships

essential elements of a partnership

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

• also an intent to associate

joint property ownership (partnership)

does not itself create a partnership, the parties intentions are key

tax treatment of partnerships

• pass-through entity

• partnership itself files an information return with the IRS

3 ways to form a partnership

oral, written, or implied by conduct

partnership for a term

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

withdrawing early constitutes as a breach of agreement, and person can be held liable for any losses

if no fixed duration, then it can be dissolved at will at any time w no liability

rights of partners

management, interest in the partnership, compensation, inspection of books, accounting, and property

management rights of partners

• in GP, all partners have equal managing in the partnership

• a majority vote controls decisions on ordinary maters connected with partnership business, unless otherwise specified

duties and liabilities of partners

• fiduciary duties (care and loyalty)

• partner has authority to bind partnership in contract (authority can be limited thru statement of partnership authority)

• personally liable for debts, and other partner’s actions

• joint liability

• joint and several liability

• indemnification when tort happens

wrongful dissociation of a partner

• if it breaches the partnership agreement

• they would be liable to the partnership and to the other partners for damages caused by the dissociation

effects of dissociation on partnership

a partners right to management is terminated, duty of loyalty ends, duty of care continues with respect to events before dissociation, buyout may happen

partnership assets are distributed according to:

1. payment of debts

2. return of capital contributions and distribution of profits to partners

respondeat superior

liability of a principal for acts of its agent