MILLER CHAPTER 29 SOLE PROPRIETORSHIPSAND FRANCHISES 2015 Cengage

MILLER CHAPTER 29: SOLE PROPRIETORSHIPSAND FRANCHISES © 2015 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.

INTRODUCTION u When choosing a business entity, entrepreneurs should consider: Ease of creation. Owners’ liability. Tax considerations. Need for Capital. © 2015 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

§ 1: SOLE PROPRIETORSHIPS The owner is the business; doing business without creating a separate legal entity is a sole proprietorship. Advantages Disadvantages Owner is in complete control & receives all profits Owner is personally liable for all torts/contracts Flexibility Lacks continuity after death Ease of creation; maintenance Difficult to raise financing © 2015 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. 3

SOLE PROPRIETORSHIP u Major disadvantage: Owner is personally liable for all losses or liabilities incurred by the business enterprise. CASE 29. 1 QUALITY CAR &TRUCK LEASING, INC. V. SARK (2013). © 2015 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. 4

§ 2: FRANCHISES u Franchise: Contract in which Franchisor (owner of trademark, trade name or copyright) licenses Franchisee to use the trade mark, trade name or copyright in the sale of goods or services. © 2015 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. 5

FRANCHISES u Types of Franchises: Distributorship. Chain Style Business Operation. Manufacturing or Processing Arrangement. © 2015 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. 6

FRANCHISES u Laws Governing Franchising. Primarily governed by contract law. UCC Article 2 governs franchises for sale of goods. © 2015 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. 7

FRANCHISES u Laws Governing Franchising. Federal Regulation of Franchises. • Industry-Specific Standards: protect franchisee from unreasonable demands and bad faith termination. • The Franchise Rule: disclosure of material facts for informed decision. © 2015 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. 8

FRANCHISES u Laws Governing Franchising. 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. © 2015 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. 9

FRANCHISES u Laws Governing Franchising. State Protection for Franchisees. • State law may prohibit termination without “good cause. ” © 2015 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. 10

FRANCHISES u The Franchise Contract. Franchisee’s type of business entity including capital structure, sales quotas and record keeping. Business Premises is leased or purchased. Location of the Franchise. © 2015 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. 11

FRANCHISES u The Franchise Contract. Quality Control is a legitimate issue for Franchisor because of good will, reputation and trademark value. © 2015 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. 12

FRANCHISES u The Franchise Contract. 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. © 2015 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. 13

§ 3: FRANCHISE TERMINATION u Usually a franchise agreement sets out conditions of termination. u Notice Requirements. u Reasonable time to ‘wind up’ business. © 2015 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. 14

FRANCHISE TERMINATION u Opportunity to Cure a Breach. Agreement may grant franchisee the opportunity to “cure” an ordinary breach within a period of time to prevent termination. © 2015 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. 15

FRANCHISE TERMINATION u Wrongful Termination. Generally termination provisions favor the franchisor who owns the trademark. CASE 29. 2 MAC’S SHELL SERVICES, INC. V. SHELL OIL PRODUCTS CO. (2010). © 2015 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. 16

FRANCHISE TERMINATION u Importance Dealing. of Good Faith and Fair Courts usually try to balance rights of both parties. If franchisor arbitrarily or unfairly terminates a franchise, franchisee may be able to sue for wrongful termination. © 2015 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. 17

FRANCHISE TERMINATION u Importance Dealing. of Good Faith and Fair Most courts will not consider the termination ‘wrongful’ if: • (1) Franchisor’s decision to terminate was made in the normal course of business operations, and © 2015 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. 18

FRANCHISE TERMINATION u Importance Dealing. of Good Faith and Fair Most courts will not consider the termination ‘wrongful’ if: • (2) Reasonable notice of termination was given to the franchisee. © 2015 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. 19