BLAW 3391 TTU Exam 2 Questions And
Answers (Verified And Updated)
Sole Proprietorship
Simplest business form; owner is the business. Owner reports business income on personal income
tax return and is legally responsible for all debts and obligations incurred by the business. 2/3 of all
U.S. businesses are formed in this way.
Sole Proprietorship Advantages
•Owner receives all profits; pays only personal taxes
•Easy to create; less costly
•Flexible decision making
Sole Proprietorship Disadvantages
•Owner responsible for any business losses; personal assets at risk
•Hard to raise capital; lack of continuity
Franchises
Where the owner of some form of intellectual property licenses others to use it in the selling of goods
or services; the two are generally legally independent of one another, though economically
dependent
Franchisee
The purchaser of the franchise
Franchisor
Seller of the franchise
Distributorship
Type of franchise
•Manufacturer licenses a dealer to sell
•Exclusive territories
Chain-style Business Operation
Type of franchise
•Franchisee operates under the franchisor's trade name
•Standardized methods of operation
Manufacturing or Processing-Plant Arrangement
Type of franchise
•Franchisor transmits to franchisee ingredients/formulas to make product
Laws Governing Franchising
Governed by contract law (UCC)
State Laws for Franchising
,-Vary from state to state, but intended again to protect franchisees from unfair practices/bad faith
terminations
-Franchise Disclosure Document
Industry specific standards (automobile)
Protection of franchisees from unreasonable demands & bad faith terminations
FTC's Franchise Rule
Franchisors must disclose materials facts important to franchisee decision making
Franchise
Practicing and using another's perfected business concept
Franchise Contract
•Specifies terms and conditions; rights and duties of each
•Importance of "good faith & fair dealing"
•Payment for the franchise (initial fee, products, % of costs, % of sales)
•Business Premises (who supplies equipment/furnishings)
•Location (territory) - often exclusive
•Quality control by franchisor (to protect integrity of brand)
•Means of control
•Degree of control; too much may lead to liability
•Pricing arrangements
Grounds for Termination
Typically "for cause"
•Notice Requirements (reasonable time)
•Opportunity to Cure a Breach (to avoid termination)
Wrongful Termination
Most of the litigation
Franchise Termination
Importance of good faith and fair dealing
Agency Concepts and Partnership Law
-Each is an agent of the other partners and of the partnership
-Common law agency concepts apply
Uniform Partnership Act (UPA)
-Applies in the absence of an express agreement
-Most states have adopted
Partnership
-An agreement by two or more persons to carry on, as co-owners, a business for profit.
-Corporation can be a partner
-Intent and Consent are key elements
, Essential Elements of a Partnership
1. A sharing of profits and losses.
2. A joint ownership of the business.
3. An equal right to be involved in the management of the business.
Entity vs. Aggregate
-Historically partnership was not an independent entity, so could not bring or answer a suit on its own
-Now, under UPA, it is considered such
Tax Treatment of Partnerships
-A pass-through entity, NOT a taxpaying entity
-Partnership itself does have to file an information return with the IRS
Pass-Through Entity
Business entity that has no tax liability; income passes through to the owners, who then pay personal
income tax.
Partnership Agreement
-Oral, Written, implied
-Statute of Frauds
-Articles of Partnership {written agreement setting forth each partner's rights and obligations}
Partnership by Estoppel
-When third party has reasonably and detrimentally relied on a representation that a non-partner was
a partner
-A court may impose liability but not partnership rights
-Or, when a non-partner is held out to be a partner, then a court will consider as agent, whose actions
are binding on partnership
Management Rights
•One vote, regardless of proportion of interest
•Delegation of daily management duties
•Majority rules for most decisions (not for ones that change the partnership)
Interest Partnership
Agreement should apportion profits (or UPA rules = equal shares)
Compensation
•Mere distribution of profits according to share
•Managing partner/salary
Inspections of Books
Duty to provide info, preserve it, produce it
Rights of Partners
Answers (Verified And Updated)
Sole Proprietorship
Simplest business form; owner is the business. Owner reports business income on personal income
tax return and is legally responsible for all debts and obligations incurred by the business. 2/3 of all
U.S. businesses are formed in this way.
Sole Proprietorship Advantages
•Owner receives all profits; pays only personal taxes
•Easy to create; less costly
•Flexible decision making
Sole Proprietorship Disadvantages
•Owner responsible for any business losses; personal assets at risk
•Hard to raise capital; lack of continuity
Franchises
Where the owner of some form of intellectual property licenses others to use it in the selling of goods
or services; the two are generally legally independent of one another, though economically
dependent
Franchisee
The purchaser of the franchise
Franchisor
Seller of the franchise
Distributorship
Type of franchise
•Manufacturer licenses a dealer to sell
•Exclusive territories
Chain-style Business Operation
Type of franchise
•Franchisee operates under the franchisor's trade name
•Standardized methods of operation
Manufacturing or Processing-Plant Arrangement
Type of franchise
•Franchisor transmits to franchisee ingredients/formulas to make product
Laws Governing Franchising
Governed by contract law (UCC)
State Laws for Franchising
,-Vary from state to state, but intended again to protect franchisees from unfair practices/bad faith
terminations
-Franchise Disclosure Document
Industry specific standards (automobile)
Protection of franchisees from unreasonable demands & bad faith terminations
FTC's Franchise Rule
Franchisors must disclose materials facts important to franchisee decision making
Franchise
Practicing and using another's perfected business concept
Franchise Contract
•Specifies terms and conditions; rights and duties of each
•Importance of "good faith & fair dealing"
•Payment for the franchise (initial fee, products, % of costs, % of sales)
•Business Premises (who supplies equipment/furnishings)
•Location (territory) - often exclusive
•Quality control by franchisor (to protect integrity of brand)
•Means of control
•Degree of control; too much may lead to liability
•Pricing arrangements
Grounds for Termination
Typically "for cause"
•Notice Requirements (reasonable time)
•Opportunity to Cure a Breach (to avoid termination)
Wrongful Termination
Most of the litigation
Franchise Termination
Importance of good faith and fair dealing
Agency Concepts and Partnership Law
-Each is an agent of the other partners and of the partnership
-Common law agency concepts apply
Uniform Partnership Act (UPA)
-Applies in the absence of an express agreement
-Most states have adopted
Partnership
-An agreement by two or more persons to carry on, as co-owners, a business for profit.
-Corporation can be a partner
-Intent and Consent are key elements
, Essential Elements of a Partnership
1. A sharing of profits and losses.
2. A joint ownership of the business.
3. An equal right to be involved in the management of the business.
Entity vs. Aggregate
-Historically partnership was not an independent entity, so could not bring or answer a suit on its own
-Now, under UPA, it is considered such
Tax Treatment of Partnerships
-A pass-through entity, NOT a taxpaying entity
-Partnership itself does have to file an information return with the IRS
Pass-Through Entity
Business entity that has no tax liability; income passes through to the owners, who then pay personal
income tax.
Partnership Agreement
-Oral, Written, implied
-Statute of Frauds
-Articles of Partnership {written agreement setting forth each partner's rights and obligations}
Partnership by Estoppel
-When third party has reasonably and detrimentally relied on a representation that a non-partner was
a partner
-A court may impose liability but not partnership rights
-Or, when a non-partner is held out to be a partner, then a court will consider as agent, whose actions
are binding on partnership
Management Rights
•One vote, regardless of proportion of interest
•Delegation of daily management duties
•Majority rules for most decisions (not for ones that change the partnership)
Interest Partnership
Agreement should apportion profits (or UPA rules = equal shares)
Compensation
•Mere distribution of profits according to share
•Managing partner/salary
Inspections of Books
Duty to provide info, preserve it, produce it
Rights of Partners
