Chapter 36: Sole Proprietorships and Franchises Clarkson  Miller  Cross Chapter 36: Sole Proprietorships and Franchises

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

§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

Sole Proprietorship Major disadvantage: Owner is personally liable for all losses or liabilities incurred by the business enterprise. CASE 36.1 Quality Car & Truck Leasing, Inc. v. Sark (2013).

§2: Franchises 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. 

Franchises Types of Franchises: Distributorship. Chain Style Business Operation. Manufacturing or Processing Arrangement. 

Franchises Laws Governing Franchising. Primarily governed by contract law. UCC Article 2 governs franchises for sale of goods. 

Franchises 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. 

Franchises 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.

Franchises Laws Governing Franchising. State Protection for Franchisees. State law may prohibit termination without “good cause.”

Franchises 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. 

Franchises The Franchise Contract. Quality Control is a legitimate issue for Franchisor because of good will, reputation and trademark value. 

Franchises 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.

§3: Franchise Termination Usually a franchise agreement sets out conditions of termination. Notice Requirements. Reasonable time to ‘wind up’ business. 

Franchise Termination Opportunity to Cure a Breach. Agreement may grant franchisee the opportunity to “cure” an ordinary breach within a period of time to prevent termination.

Franchise Termination Wrongful Termination. Generally termination provisions favor the franchisor who owns the trademark. CASE 36.2 Mac’s Shell Services, Inc. v. Shell Oil Products Co. (2010).

Franchise Termination Importance of Good Faith and Fair Dealing. 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. 

Franchise Termination Importance of Good Faith and Fair Dealing. 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 

Franchise Termination Importance of Good Faith and Fair Dealing. Most courts will not consider the termination ‘wrongful’ if: (2) Reasonable notice of termination was given to the franchisee.