When choosing a business entity, entrepreneurs should consider: Ease of creation. Owners’ liability. Tax considerations. Need for Capital. ©

When choosing a business When choosing a business entity, entrepreneurs should entity, entrepreneurs should consider:consider:Ease of creation.Owners’ liability.Tax considerations.Need for Capital.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2

The owner The owner isis the business. the business.Anyone who does business without

creating a separate business organization has a sole proprietorship.

Major disadvantage is the owner is personally liable for all losses or liabilities incurred by the business enterprise.



Franchise: agreement in which Franchise: agreement in which franchisor licenses intellectual franchisor licenses intellectual property (trademark, trade property (trademark, trade name or copyright) to name or copyright) to franchisee to use in the sale of franchisee to use in the sale of goods or services. goods or services.


Distributorship.Distributorship. Chain Style Business Chain Style Business

Operation.Operation. Manufacturing or Processing Manufacturing or Processing

Arrangement.Arrangement. Laws Governing Franchising.Laws Governing Franchising.

Primarily governed by contract law.


Franchise Laws Franchise Laws (cont’d):(cont’d):UCC Article 2 governs franchises

for sale of goods. Federal Regulation of Franchises.

Industry-Specific Standards: protect franchisee from unreasonable demands and bad faith termination.

The FTC Franchise Rule: disclosures.


Franchise Laws Franchise Laws (cont’d):(cont’d):State Protection for Franchisees.

Protection from unfair trade practices and bad faith terminations.

Disclosure documentation (Franchise Disclosure Document), including costs of operation, recurring expenses, profits earned, and substantiating of these figures.

State law may prohibit termination without “good cause.”


Franchisee’s type of business entity including capital structure, sales quotas and record keeping.

Business Premises is leased or purchased.

Location of the Franchise.


Quality Control is a legitimate issue for Franchisor because of good will, reputation and trademark value. Courts will not question Franchisor’s strict supervision but Franchisor may be liable for torts of agents.

Pricing Arrangements: franchisor cannot set prices of goods sold.


Agreement may grant franchisee Agreement may grant franchisee the opportunity to “cure” an the opportunity to “cure” an ordinary breach within a period of ordinary breach within a period of time to prevent termination.time to prevent termination.CASE 17.1 LJL Transportation, Inc. v. Pilot Air Freight Corp. (2009). Should the franchisee have been given an opportunity to cure the breach?


Wrongful Termination.Wrongful Termination.CASE 17.2 Mac’s Shell Services, Inc. v. Shell Oil Products Co. (2010). Why were the franchisees required to legally sever their relationships with Shell Oil before they could recover?


Importance of Good Faith and Importance of Good Faith and Fair Dealing.Fair Dealing.Courts usually try to balance the

rights of both parties. If franchisor arbitrarily or unfairly terminates a franchise, the franchisee will be provided with a remedy for wrongful termination.


Good Faith (cont’d). Good Faith (cont’d). If franchisor’s decision to

terminate was made in the normal course of the franchisor’s business operations, and reasonable notice of termination was given to the franchisee, most courts will not consider the termination wrongful.


Agency Concepts and Agency Concepts and Partnership Law:Partnership Law:Partnerships are governed both

by common law and by statutory laws.

Each partner is deemed to be an agent and fiduciary of the other.

There may be imputation of liability.


In the In the absenceabsence of a of a partnership agreement, the partnership agreement, the Uniform Partnership Act, as Uniform Partnership Act, as adopted by most states, adopted by most states, governs the partnership.governs the partnership.


Under the UPA there is a Under the UPA there is a presumption presumption of a partnership if:of a partnership if: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.


However, However, no presumption no presumption of of partnership if profits received partnership if profits received as payment for:as payment for:1. A debt by installments or interest

on a loan. 2. Wages of an employee or for the

services of an independent contractor.


No presumption No presumption if: if: (cont’d):(cont’d):3. Rent to a landlord. 4. An annuity to a surviving spouse or

representative of a deceased partner.

5. A sale of the goodwill (the valuable reputation of a business viewed as an intangible asset) of a business or property.


Joint ownership of property—Joint ownership of property—or the sharing of profits from or the sharing of profits from the property-- does not, by the property-- does not, by itself, create a presumption of itself, create a presumption of a partnership.a partnership.However the sharing of profits

and losses usually does.


At common law, a partnership At common law, a partnership was not a separate legal was not a separate legal entity distinct from its owners. entity distinct from its owners. Today, a majority of states

recognize the partnership as a separate legal entity for many legal purposes.


To sue and be sued.To have judgments collected

against it’s assets, and individual partners’ assets.

To own and convey partnership property.

Tax Treatment: Tax Treatment: under federal under federal law it is a “pass through” tax law it is a “pass through” tax entity.entity.


The Partnership Agreement: The Partnership Agreement: can be written or oral, unless can be written or oral, unless the Statute of Frauds requires a the Statute of Frauds requires a written agreement. written agreement.

Duration of Partnership.Duration of Partnership.Partnership for a Term. Partnership at Will.


Partnership by Estoppel:Partnership by Estoppel:Occurs when a person who is not a

partner holds himself out to third parties and the third party relies to her detriment.

In this case the “nonpartner” is considered an agent whose acts are binding on the partnership.


In the absence of a partnership In the absence of a partnership agreement (oral or written) state agreement (oral or written) state statutes govern partner rights: statutes govern partner rights: Management: equal, each one vote,

majority wins; need unanimous consent for some actions.

Interest in the Partnership: equal profits, losses shared as profits shared.


Compensation: none.Inspection of the Books: always

and also by rep. of deceased partner.

Accounting: when other partner(s) committing fraud, embezzlement, wrongful exclusion, or anytime it is just and reasonable.


Property Rights. Property acquired by the partnership remains partnership property. An individual partner has no right to sell, mortgage, or transfer partnership property. However, creditor of individual partner can

petition a court for a charging order to attach to individual partner’s property interest.


Property Rights (continued). Each partner can: Use or possess property on behalf of the partnership.

Assign her right to her share of the profits to another to satisfy individual debt.


Fiduciary Duties: Fiduciary Duties: ppartners are artners are fiduciaries and general agents fiduciaries and general agents of one another and the of one another and the partnership. partnership. CASE 17.3 Meinhard v. Salmon (1928). How did Salmon violate his duty of loyalty to Meinhard?


Breach and Waiver of Fiduciary Duties.

Authority of Partners.Authority of Partners.UPA affirms general principles of

agency law.Partner may be able to subject

partnership to tort liability.Partner has apparent authority when

carrying out partnership business. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30

Authority of Partners Authority of Partners (cont’d).(cont’d).Scope of Implied Powers.Authorized versus Unauthorized

Actions. If partner acts within scope of authority, partnership is bound. Partners generally do not have authority to make charitable contributions.


Liability of Partners: Liability of Partners: if partner if partner is sued for partnership debt, is sued for partnership debt, partner has right to insist that partner has right to insist that other partners be sued with other partners be sued with her.her.Joint Liability: third party must sue

ALL partners as a group, but each partner can be held liable for the full amount.


Liability of Partners (cont’d). Liability of Partners (cont’d). Joint and Several Liability: third party

can sue either one or all partners. 3rd party may collect against personal assets of all partners.

Liability of Incoming Partners: new admitted partner has no personal liability for existing partnership debts and obligations.


Dissociation occurs when one Dissociation occurs when one partner ceases to be associated partner ceases to be associated in the partnership business.in the partnership business.Allows partner to have her interest

purchased by the partnership.Terminates her voting interest in

the partnership.


Notice.Notice. Triggering Event.Triggering Event. Unanimous Vote.Unanimous Vote. Court or Arbitrator Order.Court or Arbitrator Order. Partner’s bankruptcy, Partner’s bankruptcy,

assignment of interest, assignment of interest, incapacity, or death. incapacity, or death.


Wrongful DissociationWrongful Dissociation..Dissociating partner breaches

partnership agreement.Dissociating partner files

bankruptcy.May be liable for costs.


Effects of DissociationEffects of Dissociation..Rights and Duties.Liability to Third Parties.

Partnership bound for two years by acts of outgoing partner, unless proper notice given.


The termination of a The termination of a partnership occurs in two partnership occurs in two stages:stages:Dissolution (is the legal “death”

of the partnership), andWinding up and Distribution of

Assets (collecting and distributing partnership assets).


Dissolution: Dissolution: by operation of law by operation of law or judicial decree. or judicial decree. Partners can Agree to Dissolve.By Operation of Law:

Death of a partner. Bankruptcy of a partner. Bankruptcy of partnership. Illegality.


Dissolution: (cont’d).Dissolution: (cont’d).By Judicial Decree:

Insanity. Incapacity. Business Impracticality. Improper Conduct. Other Circumstances (personal dissension).


After dissolution, partnership After dissolution, partnership continues to wind up the continues to wind up the partnership affairs. partnership affairs.

Partners have no authority Partners have no authority except:except: Complete transactions already begun. Collect and preserve partnership

assets, discharge liabilities, and provide an accounting.


Partnership obligations are Partnership obligations are paid in the following order: paid in the following order: 1. Payment of debts, including

those owed to partner and nonpartner creditors.

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


If liabilities are greater than If liabilities are greater than assets partners bear losses in assets partners bear losses in proportion in which they proportion in which they shared profits, unless agreed shared profits, unless agreed otherwise.otherwise.


Partners agree in advance Partners agree in advance that, in the event of the death that, in the event of the death of one of the partners or of one of the partners or some other event, how some other event, how remaining partners will buy-remaining partners will buy-out the deceased partners’ out the deceased partners’ interest.interest.


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When choosing a business entity, entrepreneurs should consider: Ease of creation. Owners’ liability. Tax considerations. Need for Capital. ©