978-1305575080 Chapter 40 Solution Manual

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Chapter 40

TYPES OF BUSINESS ORGANIZATIONS

RESTATEMENTS

The principal forms of business organizations are sole proprietorships, partnerships and corporations. These

forms of doing business have various advantages and disadvantages. Those deciding how to organize their

businesses should consider various issues such as personal liability, management, ease of transferability,

taxation and liquidation.

The specialized forms of business organizations include joint ventures, cooperatives and franchises. Each of

these specialized forms of doing business also has advantages and disadvantages as well as specific

requirements for formation and operation. An unincorporated association is not necessarily a business

organization but two or more people joining together for a common purpose. Those involved in the association

may have individual liability.

The franchise format for business is one in which the franchisor grants the franchise the right to use a trademark,

the FTC, and franchisors can incur liability for activities by franchisees.

STUDENT LEARNING OUTCOMES

LO.1: Explain the advantages and disadvantages of the three principal forms of business organizations.

LO.2: Recognize that the rules of law governing the rights and liabilities of joint ventures are substantially the

same as those that govern partnerships.

LO.3: Evaluate whether a business arrangement is a franchise protected under state or federal law.

LO.4: Explain how the rights of the parties to a franchise agreement are determined by their contract.

LO.5: Explain why freedom from vicarious liability is a reason for franchisors to use the franchise format.

LO.6: Recognize the implications of the misclassifications of employees as franchisee-independent

contractors.

INSTRUCTOR’S INSIGHTS

Break the chapter down into three components – related Learning Outcomes are indicated in ( ):

1. What are the principal forms of business organizations? (LO.1)

Define and discuss individual proprietorships

2. What are the specialized forms of business organizations? (LO.2)

Define and discuss joint ventures

3. What is the franchise business format? (LO.3, LO.4, LO.5, and LO.6)

Define franchise

List the types of franchises

Discuss franchise agreements

CHAPTER OUTLINE

I. What are the Principal Forms of Business Organizations?

A. Emphasize that the choice of form of a business organization has to be custom fitted to the needs of the

particular individuals faced with the choice. No general rules can be used to ensure the correct decision,

B. Individual proprietorships

1. Advantages

a. No organizational fees

b. Decision making – all in one individual

2. Disadvantages

a. Unlimited liability

C. Partnerships, LLPs, and LLCs

1. Advantages

2. Disadvantages

a. Unlimited liability

3. Limited Liability Companies (LLC)/LLPs have now taken over as a popular means of doing business

because they enjoy the advantages without personal liability exposure for members/partners

D. Corporations

1. Advantages

a. Limited liability

2. Disadvantages

a. A corporation is subject to double taxation

b. Organizational fees are imposed

c. Strict reporting requirements exist

d. Emphasize the comparison problem, and to get your students thinking about a real -world

organizational choice, have them consider opening a small business locally (for example, a

pizza business) with three of their classmates. If you ask them for the advantages of the

corporate form, they will list such things as limited liability, transferability of shares, and

II. What are the Specialized Forms of Business Organizations?

A. Joint ventures

1. Two or more persons combine for a single business undertaking

CASE BRIEF: Kurwa v. Kislinger

138 Cal. Rptr. 3d 610 (Cal. App. 2012)

FACTS: The plaintiff, Dr. Kurwa, and the defendant, Dr. Kislinger, formed a joint medical

practice. They agreed to incorporate as a professional medical corporation. In 2003, Dr. Kurwa

was suspended from the practice of medicine and placed on probation for five years by the

California Medical Board. Dr. Kislinger discovered that they had not originally incorporated as a

professional medical corporation, as intended, but instead where a normal for profit corporation.

Dr. Kislinger unilaterally terminated the joint venture and appropriated the joint venture company

without compensating Dr. Kurwa.

ISSUE: Did Dr. Kislinger break his fiduciary duty to Dr. Kurwa, as joint venturers?

REASONING: The court held that even though the practice was formed as a corporation, it was still vested

with the rights and obligations of a joint venture. While Dr. Kurwa may have been precluded

from owning shares in a professional corporation during his suspension, that does not mean Dr.

Kislinger is not required to account to Dr. Kurwa for his interest in the joint venture enterprise or

allow Dr. Kurwa to sell his shares in Trans Valley to an eligible licensed person.

B. Unincorporated associations

1. Nonprofit purpose

CASE BRIEF: Smith & Edwards v. Golden Spike Little League

577 P. 2d 132 (Utah 1978)

FACTS: Golden Spike Little League was an unincorporated association of persons who joined together

to promote a little league baseball team in Ogden, Utah. They sent one of their members to

arrange for credit at Smith & Edwards, a local sporting goods store. After getting credit, various

members went to the store and picked up and signed for different items of baseball equipment

and uniforms, at a total cost of $3,900. When Mr. Smith, the owner, requested payment, the

members arranged a fundraising activity that produced only $149. Smith sued the Golden

Spike Little League as an entity and the members who had picked up and signed for the

equipment individually. The individual defendants denied that they had any personal liability,

contending that only the Golden Spike Little League could be held responsible.

ISSUE: Do the members have individual liability for the equipment?

REASONING: The association could not be held liable because it did not have any legal existence. The

persons who purchased the goods from the seller were personally liable as buyers even though

they had purported to act on behalf of the unincorporated association.

C. Cooperatives

1. Common objectives

III. What is the Franchise Business Format?

A. Franchises are regulated by state law and the FTC

B. Definitions

Franchising is becoming a very popular way of doing business. Most students probably think of

franchising in terms of motor vehicle sales or convenience food operations. Point out different types of

local franchising operations that the students may be unaware of. Students may have also heard of

“fly-by-night” franchising operations, which prey on people’s desires to get rich quickly. Ask the students

C. Nature of relationship

D. The franchise agreement

E. Special protections under federal and state law

1. Bad-faith termination; Automobile Dealers’ Franchise Act

2. Petroleum Marketing Products Act

CASE BRIEF: Giuffre Hyundai, LTD. v. Hyundai Motor America

756 F. 3d 204 (2d Cir. 2014)

FACTS: Giuffre Hyundai contracted with Hyundai Motor America to be an authorized Hyundai

dealer. After a court found that Giuffre had engaged in fraudulent, illegal, and deceptive

practices, including false advertising and strong-arm sales methods, Hyundai terminated the

dealership. Giuffre sued to enjoin termination of the dealership.

ISSUE: Was Giuffre protected by a New York statute that required franchisors to give adequate

notice and an opportunity to cure a breach of the contract agreement?

REASONING: The court stated that a franchisor must have due cause to terminate a franchise agreement.

Due cause exists if there has been a material breach of the agreement and if the breach is not

cured within a reasonable time. In this case, the court found that the illegal practices of the

franchisee created a material and incurable breach.

DISCUSSION POINTS: Students should discuss the importance of a franchise’s reputation.

F. Disclosure

1. Franchise disclosure rule – advance information for franchisees

2. FTC and about 1/3 of the states have accepted the 1993 revised version of the Uniform Franchise

offering circular for disclosure

3. Disclosure statement must include:

a. Business experience of franchisor and brokers

b. Any current and past litigation against franchisor

4. Civil penalties for non-disclosure

G. Vicarious liability claims against the franchisor by third persons

1. Normally, the franchisor is not liable for the acts of a franchisee

CASE BRIEF: D.L.S. v. Maybin

121 P. 3d 1210 (Wash. App. 2005)

FACTS: William Roberts operated a McDonald’s restaurant in Newcastle, Washington, under a franchise

agreement with McDonald’s Corporation. A thriving drug scene existed among employees and

assistant managers at the restaurant. In May of 2000, fifteen-year-old D.L.S. was hired by the

restaurant and within weeks, she was part of the drug scene there, and thereafter she left

home to live with an assistant manager and use drugs. Her father, Clifford Street, and D.L.S.

sued McDonald’s Corp. and Roberts for introducing D.L.S. to drugs and sex. The trial court

dismissed the claims against McDonald’s Corp., and D.L.S. and her father appealed. Mr. Street

testified that “no person in their right mind would believe that McDonald’s did not control what

happened at the individual restaurants.”

ISSUE: Did McDonald’s Corporation either serve as actual principal of Roberts or create apparent

authority over the Newscastle restaurant?

REASONING: The franchise agreement clearly provided that Roberts was not an agent of McDonald’s

Corporation and that McDonald’s had no control over the daily operations of the restaurant.

Thus, McDonald’s has no liability as Roberts’ actual principal. An apparent authority theory was

next considered by the court, to determine if McDonald’s created apparent authority that it

operated the Newcastle restaurant and would ensure a safe working environment for young

workers there. Beyond the general impression created by advertising that McDonald’s

restaurants offer a wholesome environment, no representations or acts of McDonald’s existed

to create an apparent employment relationship between McDonald’s and D.L.S. D.L.S. and her

parents must pursue their claims against the franchisee.

DISCUSSION POINTS: Have the students discuss the D.L.S. v. Maybin case in which the franchisee was liable

for the torts to the minor emanating from the McDonald’s restaurant.

DISCUSSION POINTS: Thinking Things Through

Don’t Finagle the Bagel!

Students may be directed to re-read Section 9 of Chapter 13, regarding fraud. Franchise disclosure acts protect

franchisees against misrepresentations by franchisors. Discuss how limited liability of corporate franchisors is

lost because of material misstatements of fact by dishonest representatives of the franchisors.

2. Actual control

3. Product liability – the franchisor is liable on product liability

H. The franchisee and third persons: the franchisee is liable for his or her own torts and contracts

I. Franchises and employee misclassifications

1. Employee vs. independent contractor

ANSWERS TO QUESTIONS AND CASE PROBLEMS

1. Termination of franchises. Miller and Coors exercise control over the MillerCoors joint venture. From a

common sense standpoint, equal control is a form of control. Even though the formation papers indicated the

2. Unincorporated associations. The neighbors were not partners or joint venturers. They were an association

3. Franchises. Friedman need not call the business opportunities franchises for them to be labeled as such.

4. Franchise disclosure rule. An argument could be made that the outright sale of vending machines does not

amount to a franchise as defined in section 7 of the chapter. However, Wolf and King’s advertisements

referred to buying a business “opportunity.” In fact, the evidence shows that “closers” were promising “very

5. Termination of franchise contracts. The franchisor, Dunkin’ Donuts, breached its implied obligation of good

faith and fair dealing in conducting the audit of the franchisee ’s stores. Evidence suggested that the audits

6. Vicarious liability of franchisor. The court held that Domino’s was not vicariously liable for the conduct of the

franchisee’s employee because it lacked the general control of an employer or principal over relevant

7. Vicarious liability claims against franchisors. Judgment for Taco Bell Corporation. Laurie Henry’s employer,

James Doull, was the franchise owner, not the franchisor, Taco Bell Corporation. She had actual knowledge

8. Unincorporated associations; joint ventures. The Armory Committee was a voluntary unincorporated

association with the nonprofit purpose of running this social function. It was not a joint venture for the chief

reason that the committee did not seek to make a profit. Judgment was for Libby against the committee. The

9. Termination of franchises. Judgment for the dealer. The termination of the dealer because of the dealer’s

affiliation with a competitor, Honda, violated the site control provision of the Illinois Motor Vehicle Franchise

10. Cooperatives. The local cranberry growers formed a sellers ’ cooperative; Goodward is correct in believing

that such an agreement is in restraint of trade. However, such a cooperative does not violate the antitrust

11. The franchisor and third persons. No. The fact that Carfiro was doing acts that would benefit Chicken Delight

12. Termination of franchises. The Wisconsin Fair Dealership Law (WFDL) is similar to most state franchise laws.

It forbids a franchisor to “terminate, cancel, fail to renew or substantially change the competitive

circumstances of a dealership agreement without good cause.” A “dealer” is defined as the grantee of a

dealership and a “dealership agreement” as an agreement that authorizes the grantee to use the grantor’s

trademark and creates a community of interest between the parties in the business of offering, selling or

distributing goods or services. The court recognized that the commercial activity of nonprofits has grown

substantially in recent decades. One of the objectives of dealer protection laws is to prevent franchisors from

13. Debtor-creditor relationship distinguished from joint venture and partnership. It was not a joint venture, but

simply a debtor-creditor relationship. The mere sharing of profits does not make either a partnership or a

14. Franchisors and third parties. Judgment for Realty World. A declaration in a franchise agreement that a

relationship is franchisor/franchisee and not principal/agent is not controlling when in fact there is a holding

out to the public of the franchisee as an agent. However, in this case, the franchisee maintained its individual

15. Franchises: bad-faith termination of auto dealerships. Judgment for Blackwell. The statute requires that a

franchisor act in good faith in terminating or refusing to renew a franchise. Kenworth acted in bad faith when

management system for classroom use.