Chapter 17: Sole Proprietorships, Franchises, and Partnerships

Sole Proprietorships

The owner is the business. Sue owner – not the company.

Case 16.1 Garden City Boxing Club, Inc. v. Dominquez (2006).

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ADVANTAGES DISADVANTAGES

Owner is in complete control & receives all profits

Owner is personally liable for all torts/contracts

Flexibility Terminates at death

No legal creation papers Difficult to raise financing

Sole Proprietorships

• Major disadvantage:• Owner is personally liable for all losses or liabilities incurred by the

business enterprise. • CASE 17.1 Quality Car & Truck Leasing, Inc. v. Sark (2013). What

would you have done to avoid this dispute?

Franchise• 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• 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.

• The initial investment to begin operation ranges from $928,000 to $1,883,250 for a Krispy Kreme Factory Store.

• McDonalds - Generally, we require a minimum of $750,000 of non-borrowed personal resources to consider you for a franchise.

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Examples of Franchises:

1. Chain Style - Most fast-food franchises use this form.– McDonalds, Pizza Hut

2. Manufacturing/Processing Arrangement –The franchisor provides a secret formula or process to the franchisee - Coke

3. Distributorship - The franchisor manufactures a product and licenses a retail franchisee to distribute the product to the public. EX: Ford Motor Company manufactures automobiles and franchises independently owned dealers to sell them to the public.

Laws Governing Franchises

Governed by the 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.

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The Burger King Corporation (BKC) would not allow franchisees to have it their way. Instead, BKC forced them to sell the double-cheeseburger (DCB) and the Buck Double for no more than $1.00.

Franchisees Plaintiffs alleged that, because this price was below their cost, they were losing money on every double cheeseburger they sold.

Ct:

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• John Rudzewicz and Brian MacShara decided to open a Burger King franchise together.

• Rudzewicz and MacShara applied jointly to Burger King's district office in Michigan. The application was forwarded to Burger King's office in Miami, Florida. The franchise was in Michigan.

• MacShara attended the management courses at Burger King University in Miami.

• The partners purchased $165,000 in restaurant equipment from Davmor Industries, a Burger King corporate division located in Miami.

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• Under the franchise agreement, Rudzewicz and MacShara sent their franchise fees to Burger King's Florida headquarters in Miami.

• Due to an economic downturn, the defendants were unable to make their monthly payments.

• Burger King brought a diversity action against the Defendants in the United States District Court for the Southern District of Florida.

• Court issue - Does the Defendant have minimum contacts so that they have to go all the way to Florida for lawsuit??????

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• In this case, no physical ties to Florida can be attributed to Rudzewicz other than MacShara's brief training course in Miami. Rudzewicz did not maintain offices in Florida and, for all that appears from the record, has never even visited there.

• Because Rudzewicz established a substantial and continuing relationship with Burger King's Miami headquarters

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Partnerships

• Example, Frank and Don want to launch a business called F & D Partnership. Frank is the brain behind the inventory but Don has the marketing knowledge.

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Creating a Partnership

• A general partnership does not require a formal written agreement or filing anything with the state.

• You can verbally agree to start a venture with another and create a general partnership, with all of its liability problems

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Partnerships

• Tax Treatment.• Under federal (and most state) tax laws, a partnership is treated as

a “pass through” entity, with profits, losses, and taxes attributed on a pro-rata basis to the partners.

When Does a Partnership Exist?

There is a presumption of a partnership if:1. Share profits or losses

2. Both manage of the business.

3. Hold out as a partnership – partnership by estoppel

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Partnerships

• Essential Elements.

• Partnership presumed under UPA if:• 1. Sharing of profits or losses. • 2. Joint ownership of the business.• 3. Equal right to be involved in the management of the

business.

Partnership by Estoppel

Under the law a partnership exists if: Occurs when a person (who is not a partner) holds himself out to

third parties and the third party relies to her detriment.

Why does it matter??

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Partnerships

• Formation.

• 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. • The “nonpartner” is an agent whose acts are binding on the partnership.

Case in point

CWC case

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• Four physicians had a common office arrangement with a shared waiting area, support staff, and accounting.

• Each doctor had his own patients, practice methods, and set hours, and was not otherwise accountable to the others.

• When one doctor was sued by a client for professional misconduct, all four were named defendants in the lawsuit as PARTNERS.

• Court: partners because of their office setup and common support staff. The court allowed the plaintiff to proceed with the lawsuit against all four — as a general partnership, with each jointly and severally liable for the plaintiff's losses.

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Pros and Cons of Partnership

ADVANTAGES DISADVANTAGES

Easy to create and maintain-nothing formal

Partners are jointly and severally liable for all torts/contracts

Flexible, informal Dissolved upon death

Partners share profits and losses equally

Difficult to raise financing

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Rights of Partners

Property Rights. Property acquired by the partnership remains partnership property.

Can a partner sell, mortgage, or transfer partnership property?

Can a partner sell partner’s interest in partnership?

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LIABILITY

• Each partner is deemed to be an agent of the other.

• What does that mean:

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Partnerships

• Duties and Liabilities of Partners.

• Liability of Partners. • Joint and Severally Liable: third party must sue ALL partners as a group,

but each partner can be held liable for the full amount.

Liability of Partners• With a partner in a general partnership, you assume all the risk that the partner will cause a lawsuit.

• The dreaded joint and severally liability then applies — if one of your partners gets into trouble, you can be personally liable for the entire amount, even if you were neither involved in the alleged incident, nor aware of it.

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Liability of Partners• Joint and Severally Liability –If one person in a partner

can’t pay the judgment, the others have to pay

• Partner may commit malpractice, get into a car accident while on partnership business, defraud someone through the business, sexually harass an employee, or wrongfully fire an employee.

• A plaintiff who successfully sues the partnership can collect the full judgment from any one partner.

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TN LAW

• All partners are individually liable, jointly and severally, for the partnership debts. Tenn.Code Ann. § 61-1-114

• Thus, when money is lent to a partnership, each partner becomes a primary obligor, even when one or more of the partners have guaranteed the debt individually. Dominion Bank v. Crane, 843 S.W.2d 14, 19 (Tenn.Ct.App.1992).

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Tennessee -

•Tennessee - do not need a written formal agreement to form a partnership

•However, if an written agreement exists, what controls the relationship between the partners and partnership.

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New Partners

• Liability of Incoming Partner –Smartclub Partnership admits John as new partner and he invests $100k. Smartclub owes $600k at the John joins.

• What if Smartclub accumulates more debt after John.

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• EX: Frank opens Triples American Grill, a sports bar. Frank enlists Joe and they open a bank account in the name of the bar, each signing the account signature cards as “owner.” Joe was often at the bar and had free access to its office. Joe told others that he was “an owner” and “a partner.” Frank told Steve Mager, the president of Cheesecake Factory, Inc., that Joe was a partner of Triples. On this basis, Cheesecake sold cakes to Triples on credit. Cheesecake filed a lawsuit against Triples, Frank and Joe asking for $20000 owed. Triples is broke. Joe argues he is not an owner.

• What legal entity is this?• Who can be held liable? Why

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