1. © 2004 West Legal Studies in Business A Division of Thomson Learning 1 Chapter 35 Sole Proprietorships and Franchises Chapter 35 Sole Proprietorships and Franchises

2. © 2004 West Legal Studies in Business A Division of Thomson Learning 2 Introduction Entrepreneurs wishing to start a new business must be aware of advantages and disadvantages of various business entities for their endeavor. Consider:  Ease of creation.  Owners’ liability.  Tax considerations.  Need for Capital. Entrepreneurs wishing to start a new business must be aware of advantages and disadvantages of various business entities for their endeavor. Consider:  Ease of creation.  Owners’ liability.  Tax considerations.  Need for Capital.

3. © 2004 West Legal Studies in Business A Division of Thomson Learning 3 AdvantagesDisadvantages Owner is in complete control & receives all profits Owner is personally liable for all torts/contracts FlexibilityLacks continuity after death Ease of creation; maintenanceDifficult to raise financing § 1: Sole Proprietorships The owner is the business; anyone who does business without creating a separate business organization has a sole proprietorship.

4. © 2004 West Legal Studies in Business A Division of Thomson Learning 4 § 2: Franchises Franchise: agreement so that 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. Types of Franchises:  Distributorship.  Chain Style Business Operation.  Manufacturing or Processing Arrangement. Franchise: agreement so that 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. Types of Franchises:  Distributorship.  Chain Style Business Operation.  Manufacturing or Processing Arrangement.

5. © 2004 West Legal Studies in Business A Division of Thomson Learning 5 Laws Governing Franchises 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 contract states parties’ rights and duties and can include an exclusive “territory” to market goods/services. Case 35.1: Bixby’s Food Systems v. McKay (2002). 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 contract states parties’ rights and duties and can include an exclusive “territory” to market goods/services. Case 35.1: Bixby’s Food Systems v. McKay (2002).

6. © 2004 West Legal Studies in Business A Division of Thomson Learning 6 Franchise Contract The Franchise Contract can include:  Franchisee’s type of business entity including capital structure, sales quotas and record keeping.  Location of the Franchise  Premises is leased or purchased. 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. Case 35.2: Miller v. D.F.Zee’s Inc. (1998). The Franchise Contract can include:  Franchisee’s type of business entity including capital structure, sales quotas and record keeping.  Location of the Franchise  Premises is leased or purchased. 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. Case 35.2: Miller v. D.F.Zee’s Inc. (1998).

7. © 2004 West Legal Studies in Business A Division of Thomson Learning 7 Termination of the Franchise Duration of the franchise is a matter determined by contract of the parties. Provides Remedies for Default and Breach. Wrongful Termination. Good Faith and Fair Dealing.  Case 35.3: General Motors Corp. v Monte Zinn Chevrolet Co. (2000). Duration of the franchise is a matter determined by contract of the parties. Provides Remedies for Default and Breach. Wrongful Termination. Good Faith and Fair Dealing.  Case 35.3: General Motors Corp. v Monte Zinn Chevrolet Co. (2000).

8. © 2004 West Legal Studies in Business A Division of Thomson Learning 8 Law on the Web U.S. Small Business Administration online. U.S. Small Business Administration online Federal Trade Commission and state regulations regarding franchising. Federal Trade Commission and state regulations regarding franchising Franchising.org. Franchising.org Legal Research Exercises on the Web. Legal Research Exercises on the Web U.S. Small Business Administration online. U.S. Small Business Administration online Federal Trade Commission and state regulations regarding franchising. Federal Trade Commission and state regulations regarding franchising Franchising.org. Franchising.org Legal Research Exercises on the Web. Legal Research Exercises on the Web