Small Businesses and Franchises PDF

The LEGAL ENVIRONMEN of BUSINESS T...

The LEGAL ENVIRONMEN of BUSINESS T TEXT AND CASES Tenth Edition CROSS MILLER  CHAPTER 16: SMALL BUSINESSES AND FRANCHISES © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Introduction  Entrepreneur – a person who initiates & assumes the risks of creating a new business enterprise.  Ex: Andrew Carnegie, Steve Jobs, Henry Ford, Oprah Winfrey, Ray Kroc 15 characteristics of effective e ntrepreneurs  §1: Sole Proprietorships Sole Proprietorship – a business owned by only 1 person. The owner is the business; owner assumes unlimited liability. Unlimited liability – owner personally assumes all liability for debts. Limited liability – owner risks only that amount of money invested in the business.  **Adv/Disadv of sole proprietorship** Advantages Disadvantages 1. Complete 1. Unlimited liability Control 2. Keep all profits 2. Difficult financing 3. Easy to Create 3. Time Consuming 4. Tax 4. No help advantages §2: Partnerships Partnership – 2 or more people carrying on a business for a profit with joint control & a share in profits. General Agency Powers – all partners are responsible for & bound by acts carried out by other partners within the normal scope of business.  Partnerships Pass-through entity - a partnership is taxed on profits as “personal income” just as if they were a sole proprietorship. Fiduciary Duties – the partners owe a duty of care and loyalty to each other to refrain from grossly negligent or reckless conduct, intentional misconduct or knowingly violating the law.  Partnerships Joint & Several Liability – a third party can sue all partners as a group, or each partner can be held liable for the full amount, even if they did not know about it or participate in it. Many states have abolished or modified this concept.  Partnerships Dissociation - Occurs when one partner ceases to be involved in the partnership business. Dissolution – the legal death of the business. Dissolving the business. Buy-Sell Agreements - Contract that determines in advance of an ‘event’, how remaining partners will buy-out partners’ interest.  Adv/disadv of partnership Advantages Disadvantages Easy to Create Unlimited liability Tax Advantages Conflict Pool of knowledge Share profits Access to financing Lack of continuity  §3: Franchises Franchise – a contract in which owner of trademark, trade name or copyright licenses someone to use the trademark, trade name or copyright in the sale of goods or services for a fee. Why own a franchise? Why not? Types of franchise Chain style business – a franchise operates under a trade name and is required to follow standardized methods of operations. Ex: Fast food  McDonald’s Franchise Total Investment: $4-5,000,000 Franchising Website: McDonald's Franchising Franchise fee: $45,000 (Renewal fee is $45,000) Ongoing royalty fee: 12.5% Service Fee: 4.0% Term of agreement: 20 years, renewable In-House Financing: No Liquid Assets (Net Worth) Required: $500,000 unborrowed. Number of Employees Required: ~50 (varies based on store hours) Absentee Ownership: NOT Allowed Types of franchise Manufacturing arrangement – a processing-plant type of business where the franchisor transmits the essential ingredients to make a particular product to a facility who then markets the product. Ex: soft drinks Types of Franchise Distributorship – a manufacturer licenses a dealer to sell its product, often in an exclusive geographic territory. Ex: automobile dealership or beer distributors