Chapter 35 Franchises and Special Business Forms

2  What are the essential characteristics of each of the following business forms: joint venture, joint stock company, syndicates, business trusts and cooperatives?  What is a franchise? What are the most common types of franchises?  What laws govern franchising relationship?  What terms and conditions are typically included in a franchise agreement?  When might franchisors be liable under agency laws?  What are the essential characteristics of each of the following business forms: joint venture, joint stock company, syndicates, business trusts and cooperatives?  What is a franchise? What are the most common types of franchises?  What laws govern franchising relationship?  What terms and conditions are typically included in a franchise agreement?  When might franchisors be liable under agency laws? Learning Objectives

3 Franchises  Franchisor (Owner of trademark, trade name or copyright) licenses Franchisee the right to use the trade mark, trade name or copyright in the sale of goods or services.  Types: Distributorship. Chain Style Business Operation. Manufacturing or Processing Arrangement.  Franchisor (Owner of trademark, trade name or copyright) licenses Franchisee the right to use the trade mark, trade name or copyright in the sale of goods or services.  Types: Distributorship. Chain Style Business Operation. Manufacturing or Processing Arrangement.

4 Franchises  Laws Governing Franchising Governed by commercial sales and contract law. If franchise is primarily for the sale of goods, UCC Article 2 governs. State and federal laws regulate franchising to protect franchisee.  The Franchise Contract The contract states parties’ rights and duties and can include an exclusive “territory” to market goods/services.  Laws Governing Franchising Governed by commercial sales and contract law. If franchise is primarily for the sale of goods, UCC Article 2 governs. State and federal laws regulate franchising to protect franchisee.  The Franchise Contract The contract states parties’ rights and duties and can include an exclusive “territory” to market goods/services.

5 Franchises  Franchise Contract Franchise contract can specify Franchisee’s type of business entity including capital structure, sales quotas and record keeping. 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.  Franchise Contract Franchise contract can specify Franchisee’s type of business entity including capital structure, sales quotas and record keeping. 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.

6  Termination of the Franchise Determined by contractual terms Termination is usually “for cause.” Notice of termination is usually required Remember: Franchisor owns the trademark (which is usually the business and good will) Governed by federal and state laws  Termination of the Franchise Determined by contractual terms Termination is usually “for cause.” Notice of termination is usually required Remember: Franchisor owns the trademark (which is usually the business and good will) Governed by federal and state laws Franchises

7 Special Business Forms  Joint Venture: two or more entities combine efforts or property for a single transaction or project.  Unless agreed otherwise, JV’s share profits and losses equally.  Common in international transactions when U.S. companies wish to expand overseas.  Joint Venture: two or more entities combine efforts or property for a single transaction or project.  Unless agreed otherwise, JV’s share profits and losses equally.  Common in international transactions when U.S. companies wish to expand overseas.

8 JV Characteristics  Resembles a partnership and is taxed like a partnership. However, a JV is limited in time and scope, whereas a partnership is an ongoing business. Other differences: JV members has less implied and apparent authority than partners. Death of JV member does not terminate JV.  JV members can specify duration. If not, then JV terminates when purpose is accomplished.  Resembles a partnership and is taxed like a partnership. However, a JV is limited in time and scope, whereas a partnership is an ongoing business. Other differences: JV members has less implied and apparent authority than partners. Death of JV member does not terminate JV.  JV members can specify duration. If not, then JV terminates when purpose is accomplished.

9 JV Rights and Liabilities  JV members owe a fiduciary duty to each other (loyalty, no conflicts of interest).  JV members have equal right to manage the business.  JV members owe a fiduciary duty to each other (loyalty, no conflicts of interest).  JV members have equal right to manage the business.

10 Other Entities  Syndicate (Investment Group): group of individuals getting together to finance a particular project.  Joint Stock Company is a hybrid of partnership and corporation: (1) ownership represented by shares of stock; (2)managed by directors and officers of the company; and (3) can have a perpetual existence.  Syndicate (Investment Group): group of individuals getting together to finance a particular project.  Joint Stock Company is a hybrid of partnership and corporation: (1) ownership represented by shares of stock; (2)managed by directors and officers of the company; and (3) can have a perpetual existence.

11 Other Entities  Business Trust is created by a written agreement setting forth the interests of the beneficiaries and obligations and powers of trustees. Legal ownership and management of property remains with trustees and profits distributed to the beneficiaries.  Cooperative is an association organized to provide a not-for-profit service to members.  Business Trust is created by a written agreement setting forth the interests of the beneficiaries and obligations and powers of trustees. Legal ownership and management of property remains with trustees and profits distributed to the beneficiaries.  Cooperative is an association organized to provide a not-for-profit service to members.