An introduction to the fundamentals of dynamic business law and business ethics chap020

Sole Proprietorship• Definition: Unincorporated business owned by one person • Owner has total control • Owner has unlimited liability • Profits taxed directly as income to sole propri

Chapter 20

Forms of Business Organization

Chapter 20 Ethical Dilemma

As this chapter indicates, a corporation is a legal construct with an

identity separate and apart from its owner(s) The primary legal

advantage to converting one’s business from an unincorporated

enterprise to the corporate form is the ability to avoid personal liability

for the business’s financial obligations Since the corporation is

distinguishable from its owner, the owner’s personal assets cannot be

seized to satisfy business indebtedness This effectively means that

an owner can “crash and burn” a corporation financially, bankrupt the

business, and walk away from the “flaming wreckage” of the

corporation without personal obligation for business debts.

Is it ethical for an owner to use the corporate entity to avoid personal

obligation for business debts?

Chapter 20 Case Hypothetical

Allison Seizer has a very wealthy father, entrepreneur Warren Seizer of “Chimichonga Chime” restaurant fame,

although her family pedigree was not what attracted Blake Patterson to his girlfriend of three years; instead, it was

“love at first sight.” Blake proposes to Allison, and the two are married with the blessing of Warren Seizer.

Warren wants the best for his daughter and son-in-law, so he offers a “Chimichonga Chime” franchise to Blake, with a prime location in the center of the Elmwood business district After one year, it is clear that the newest “Chimichonga

Chime” is and will be a tremendous business success In fact, sales, revenue and profit goals for the restaurant are

shattered in its first year of operation, and Blake would like to think that his “hands-on” ownership and operation of the restaurant was an important part of the store’s success.

Unfortunately, the couple’s relationship has suffered over the year, and the term “irreconcilable differences” creeps into marriage conversations Blake asks for his freedom, and Allison obliges Wedding bells have been replaced by

divorce attorneys.

Warren Seizer is furious He is firmly convinced that Blake Patterson is to blame for the marriage’s dissolution,

because there is no conceivable way (at least in his mind) that his “darling angel,” his “precious daughter,” could be

responsible for the divorce The creative genius behind “Chimichonga Chime” plots justice for his daughter and

himself, although some may call it revenge.

On September 1, Warren Seizer personally delivers a Notice of Termination of Franchise to Blake Patterson The

document states that Patterson’s franchise agreement has been terminated for cause, and that he must either close

the restaurant, or cease and desist from using the name “Chimichonga Chime,” advertising the franchise chime logo,

and selling all franchise-related products, within 30 days.

Major Forms of Business

Organizations

• Sole Proprietorship

• General Partnership

• Limited Partnership

• Corporation

Sole Proprietorship

• Definition: Unincorporated business owned

by one person

• Owner has total control

• Owner has unlimited liability

• Profits taxed directly as income to sole

proprietor

Advantages and Disadvantages of Sole

Proprietorship

• Advantages

-Ease of creation (“start-up”)

-Owner has total managerial control

-Owner retains profits

• Disadvantages

-Personal liability for all business debts/obligations/

losses

-Funding limited to personal funds and loans

General Partnership

• Definition: Unincorporated business owned

and operated by two or more persons

• Each partner has equal control of business

• Each partner has unlimited, personal liability for

business debts/obligations/losses

• Profits taxed as income to partners

Advantages and Disadvantages of

Partnership

• Advantages

-Ease of creation (“start-up”)

-Partnership income is partner income

-Business losses qualify for tax deduction

• Disadvantages

-Personal liability for all business debts/obligations/

losses, including those incurred by other partners

on behalf of partnership

Limited Partnership

• Definition: Unincorporated business with at least one

general partner, and one limited partner

• General partner in limited partnership has

managerial/operational control over business

• Limited partner’s liability limited to extent of his/her

capital contributions

• Limited partner has no managerial/operational control

over business

• Definition: State-sanctioned business with legal

identity separate and apart from its owners

(shareholders)

• Owners’ (shareholders’) liability limited to

amount of investment in corporation

• Profits taxed as income to corporation, plus

income to owners/shareholders

(“double-taxation”)

• “S” Corporation can avoid double-taxation

Advantages and Disadvantages of

Corporation

• Advantages

-Limited liability for shareholders

-Ease of raising capital by issuing (selling)

stock

-Profits taxed as income to shareholders (not

partners)

• Disadvantages

-“Double-taxation”

-Formalities required in establishing and

“S” Corporation

• Definition: Business organization formed under

federal tax law that is considered corporation,

yet taxed like a partnership

• Formed under federal law

• No more than one hundred shareholders

• Shareholders must report income on their

personal income tax forms

Limited Liability Company (LLC)

• Definition: Business organization with limited liability of

a corporation, yet taxed like partnership

• Formed under state law

• Owners of LLC (“members”) pay personal income taxes

on shares they report

• No limitation on number of owners permitted in LLC

Specialized Forms of Business

Organizations

• Cooperative—Organization formed by individuals to

market products

• Joint stock company—Partnership agreement in which company members hold transferable shares, while all

company goods are held in names of partners

• Business Trust—Business organization governed by

group of trustees, who operate trust for beneficiaries

Specialized Forms of Business

Organizations (Continued)

• Syndicate—Investment group that forms for

purpose of financing specific large project

• Joint Venture—Relationship between two or

more persons/corporations created for specific

business undertaking

• Franchise—Agreement between “franchisor”

(owner of trade name/trademark) and

“franchisee” (person who, by specific terms of

agreement, sells goods/services under trade

Advantages and Disadvantages of

Franchise (To Franchisee)

• Advantages

-Assistance from franchisor in starting franchise

-Trade name/trademark recognition

-Franchisor advertising

• Disadvantages

-Must meet contractual requirements, or possibly

lose franchise

-Little/no creative control over business

Advantages and Disadvantages of

Franchise (To Franchisor)

• Advantages

-Low risk in starting franchise

-Increased income from franchises

• Disadvantages

-Little control (except contractually) over

individual franchise

-Can become liable for franchise, if franchisor

Types of Franchises

• “Chain-Style” Business Operation

-Franchisor helps franchisee establish a business

(using franchisor’s business name, and

franchisor’s standard “methods and practices”)

• Distributorship

-Franchisor licenses franchisee to sell franchisor’s

product in specific area

• Manufacturing Arrangement

-Franchisor provides franchisee with technical

knowledge to manufacture franchisor’s product

Top Ten Global Franchises (2011)

• Subway

• McDonald’s

• KFC

• 7-Eleven

• Burger King

• Snap-On Tools

• Pizza Hut

• Wyndham Hotel Group

• ServiceMaster

• Choice Hotels