Business Law CH36: Small Businesses and Franchises
Introduction to Business Organizational Forms
Factors in Selecting a Business Form
Ease of creation
Liability of owners
Tax considerations
Ability to raise capital
Major Business Forms Traditionally Used
Sole Proprietorship: Ch 36
Partnership: Ch37
Corporation: Ch39
Franchise model
General Considerations for Small Businesses
Common Business Structures
Most small businesses begin as sole proprietorships.
As businesses grow, owners look for formal organizations to limit liability and raise capital:
Limited Partnership (LP)
Limited Liability Partnership (LLP)
Limited Liability Company (LLC)
Corporation
Legal Requirements for Business Forms
Must meet various legal requirements:
Business name registration
Occupational licensing
State tax registration
Health and environmental permits
Zoning and building codes
Import/export regulations
Compliance with workplace laws if the business has employees.
Intellectual Property Protection
Definition: Property resulting from intellectual, creative processes
Protecting intellectual property is important for business success.
Intellectual property includes:
Trademarks: Must ensure the business name does not infringe on existing trademarks.
Trademarks must be distinctive and unique and cannot be identical or similar enough to cause confusion.
Registration options:
State or federal registration (federal registration offers more protection via the U.S. Patent and Trademark Office).
Rights under federal registration allow usage of the symbol ®. Non-registered use the symbol ™.
Once established, trademarks can renew for continued exclusive use.
Trade Secrets
Defined as information or a process providing a competitive advantage.
Protection doesn’t require registration or filing.
Practical considerations: must share with key employees and take steps to protect this information.
Obtaining Loans for Small Businesses
Raising capital is essential for growth:
Traditional sources include:
Banks
U.S. Small Business Administration (SBA)
State small-business grants
Friends and family, private equity
Sole Proprietorships
Definition and Characteristics
Simplest form of business organization, owner is the business
Owner reports business income on their personal tax return.
Legally responsible for all business debts and obligations.
Over two-thirds of U.S. businesses are sole proprietorships, predominantly small.
99% of sole proprietorships earn less than $1 million.
Advantages of Sole Proprietorships
Entire ownership and profit retention.
Lower startup costs and fewer legal formalities.
Only personal income taxes on business profits.
Greater flexibility in business decisions and operations.
Disadvantages of Sole Proprietorships
Unlimited personal liability for business debts.
Personal assets can be pursued by creditors.
Lack of continuity — business dissolves upon death.
Limited ability to raise capital due to personal liability.
Franchises
Franchise Definition
Arrangement where a trademark, trade name, or copyright owner (franchisor) licenses another (franchisee) to use their brand in selling goods/services.
Franchisees are legally independent yet economically dependent on the franchisor’s system.
Popular for international business expansion due to legal restrictions on foreign ownership.
Types of Franchises
Distributorship: Manufacturer licenses dealer to sell its products, often with an exclusive territory. (e.g., Only Ford dealership in NOLA)
Chain-Style Business Operation: Franchise operates under the franchisor's name with prescribed operational methods and standard performance maintained. (e.g., McDonald’s)
Manufacturing Arrangement: Franchisor provides essential ingredients/process for a product to the franchisee for marketing. (e.g., Coke: sends syrup and then they bottle it and distribute it)
Franchise Governing Laws
Governed primarily by contract law and supported by federal/state regulations to protect franchisees from dishonest franchisors and termination without valid cause.
Federal Trade Commission (FTC) Franchise Rule: Mandates disclosure of critical information to potential franchisees, such as earnings projections and termination conditions.
State Regulation of Franchising
Submit advertising aimed at prospective franchisees for state approval
Franchise Disclosure Document (FDD): Must be registered with a state official to disclose specific information
Termination without good cause
Franchise Contract Details
Defines terms, rights, and duties of parties involved.
Financial obligations include initial fees and ongoing percentage of sales.
Specifies business operation details such as lease vs. purchase responsibilities and quality control standards, territory rights, supplying equipment, pricing arrangements
franchise cannot set prices for the franchisee’s distribution of goods, otherwise antitrust violation; but they can provide price range suggestions
Termination of Franchise Agreements
Grounds typically specified in the franchise contract:
For cause termination, such as death, insolvency, breach, or lack of sales.
Notice and opportunity to cure (fix the problem) breaches usually required
Can terminate alone due to breach of honesty and fidelity
Federal and state laws protect against wrongful termination, emphasizing good faith and fair dealing during franchise relationships.
S&P Brake Supply v. Daimler Trucks, p. 674
S&P franchisee for the truck in Yellowstone, Montana. Agreement with the franchiser to sell a certain amount of trucks. they had poor performance for sales. When they did not meet the quota, their franchise contract was terminated. Daimler won. then it was appealed about wether or not they had the right to terminate the franchise agreement based on the alleged poor sales performance, raising questions about the enforceability of sales quotas and the obligations of both parties under the franchise contract. The Supreme Court ultimately upheld Daimler's decision, citing that the franchise agreement clearly outlined the sales expectations and consequences for failing to meet those standards.