 When choosing a business entity, entrepreneurs should 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 is 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. © 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. 3

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 Franchise: agreement in which franchisor licenses intellectual property (trademark, trade name or copyright) to franchisee to use in the sale of goods or services.  © 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. 5

 Distributorship.  Chain Style Business Operation.  Manufacturing or Processing Arrangement.  Laws Governing Franchising.  Primarily governed by contract law.  © 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. 6

 Franchise Laws (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.  © 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. 7

 Franchise Laws (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.” © 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. 8

 Franchisee’s type of business entity including capital structure, sales quotas and record keeping.  Business Premises is leased or purchased.  Location of the Franchise.  © 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. 9

 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. © 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. 10

 Agreement may grant franchisee the opportunity to “cure” an ordinary breach within a period of 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? © 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. 11

 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? © 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. 12

 Importance of Good Faith and 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.  © 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. 13

 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. © 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. 14

 Agency Concepts and 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. © 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. 15

 In the absence of a partnership agreement, the Uniform Partnership Act, as adopted by most states, governs the partnership. © 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. 16

 Under the UPA there is a presumption 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. © 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. 17

 However, no presumption of partnership if profits received 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.  © 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. 18

 No presumption if: (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. © 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. 19

 Joint ownership of property— or the sharing of profits from the property-- does not, by itself, create a presumption of a partnership.  However the sharing of profits and losses usually does. © 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. 20

 At common law, a partnership was not a separate legal entity distinct from its owners.  Today, a majority of states recognize the partnership as a separate legal entity for many legal purposes.  © 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. 21

 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: under federal law it is a “pass through” tax entity. © 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. 22

 The Partnership Agreement: can be written or oral, unless the Statute of Frauds requires a written agreement.  Duration of Partnership.  Partnership for a Term.  Partnership at Will. © 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. 23

 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. © 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. 24

 In the absence of a partnership agreement (oral or written) state 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.  © 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. 25

 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. © 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. 26

 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. © 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. 27

 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. © 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. 28

 Fiduciary Duties: p artners are fiduciaries and general agents of one another and the partnership.  CASE 17.3 Meinhard v. Salmon (1928). How did Salmon violate his duty of loyalty to Meinhard? © 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. 29

 Breach and Waiver of Fiduciary Duties.  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 (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. © 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. 31

 Liability of Partners: if partner is sued for partnership debt, partner has right to insist that other partners be sued with her.  Joint Liability: third party must sue ALL partners as a group, but each partner can be held liable for the full amount.  © 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. 32

 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. © 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. 33

 Dissociation occurs when one partner ceases to be associated in the partnership business.  Allows partner to have her interest purchased by the partnership.  Terminates her voting interest in the partnership.  © 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. 34

 Notice.  Triggering Event.  Unanimous Vote.  Court or Arbitrator Order.  Partner’s bankruptcy, assignment of interest, incapacity, or death.  © 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. 35

 Wrongful Dissociation.  Dissociating partner breaches partnership agreement.  Dissociating partner files bankruptcy.  May be liable for costs. © 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. 36

 Effects of Dissociation.  Rights and Duties.  Liability to Third Parties. Partnership bound for two years by acts of outgoing partner, unless proper notice given. © 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. 37

 The termination of a partnership occurs in two stages:  Dissolution (is the legal “death” of the partnership), and  Winding up and Distribution of Assets (collecting and distributing partnership assets). © 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. 38

 Dissolution: by operation of law or judicial decree.  Partners can Agree to Dissolve.  By Operation of Law:  Death of a partner.  Bankruptcy of a partner.  Bankruptcy of partnership.  Illegality. © 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. 39

 Dissolution: (cont’d).  By Judicial Decree:  Insanity.  Incapacity.  Business Impracticality.  Improper Conduct.  Other Circumstances (personal dissension). © 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. 40

 After dissolution, partnership continues to wind up the partnership affairs.  Partners have no authority except:  Complete transactions already begun.  Collect and preserve partnership assets, discharge liabilities, and provide an accounting. © 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. 41

 Partnership obligations are 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. © 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. 42

 If liabilities are greater than assets partners bear losses in proportion in which they shared profits, unless agreed otherwise. © 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. 43

 Partners agree in advance that, in the event of the death of one of the partners or some other event, how remaining partners will buy-out the deceased partners’ interest. © 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. 44