Business Organization and ADR
Tracey A. Duggan
FIN/540
July 2, 2012
Donald Frey

Business Organization and ADR

Choosing to start a business requires making major decisions and determining what form of

business to undertake may be the decision of one person or several people. After the decision

has been made on what type of business to start, it will be important to put in place an alternative

resolution dispute process to have solve disputes that may face the company. The vendors that

have been contracted have a clause for venue for litigation and in the event of litigation a

decision needs to be made where the venue will be.

Tracey has always been interested in opening a Papa Johns since she was the General

Manager ten years ago. After moving back to Baltimore, Maryland she had enough saved to

begin the process of purchasing a Papa Johns’ franchise. “Because franchisors are usually larger

than franchisees and have more resources, they often have the upper hand in franchise

relationships. However, federal and state laws have been established to protect the franchisee.

Thus, contract law, and the Uniform Commercial Code in particular apply. If the terms of the

contact are not met, either side can sue for breach of contract” ((Kubasek, Browne, Herron,

Giampetro-Meyer, Barkacs, Dhooge, & Wiliamson, 2012, p. 785). There are several advantages

to owning a franchise. The most important advantage of owning a Papa John’s franchise is

the low failure rate. Because Papa Johns was established in 1985, they have a long success rate.

Another advantage in owning a franchise is the help with the start up. “When you buy a

franchise, you get all the equipment, supplies, and instruction or training needed to start

the business. You may also receive ongoing training and help with management and marketing”

(Ward, n.d., para. 4). A third advantage is the buying power. Because the company has been

established and Papa Johns has its own distributor, Tracey will purchase the supplies from the

distributor at the same costs of other Papa John corporations and franchises. Papa Johns is an

established business and is well known throughout the country so there is anticipation of a new

store opening in an area where people are unable to have access to now providing built-in

customers. Owning a Papa Johns’ franchise is advantageous in regards to the support that is

provided by corporate. The owner of Papa Johns, John Schnatter, is well aware that the

franchises have a direct impact on his success and is willing to provide assistance, support, and

training to these stores.

Owning a franchise comes with its disadvantages too. A major disadvantage is that there is

a specific way of operation. A franchisor has the control over how daily operations are done and

this could include how marketing posters are hung in the windows, how the soda cooler is filled,

and how and where the boxes are setup in the store. If you have a franchisor who is controlling

it may be very difficult to conform. Another disadvantage is a percentage of Tracey’s profits

have to be paid to the franchisor. Buying a Papa Johns’ franchise is extremely expensive and

just because you are investing in a franchise that is well known there is no guarantee the business

will be successful.

A franchise can be purchased under three different business forms: sole proprietorship,

limited liability company (LLC), or a corporation. Tracey’s decided to purchase the franchise as

a LLC. A LLC limits the personal liability of Tracey; it is limited to the amount she contributed

to the start-up of the franchise. An LLC allows the addition of partners in the future. In the LLC

Tracey has a simple taxation system. Tracey will be allowed to register profits and losses on her

personal statement avoiding have to complete a separate tax statement for the business. Tracey

chose not to purchase the franchise as a sole proprietorship because in the event that the business

is not successful she does not want to become personally responsible for the debts and have her

personal assets at risk. A sole proprietorship is easier to organize and less expensive but the

protection of her personal assets were the determining factor in choosing to operate as an LLC.

The third type of business form that a franchisee can operate under is a corporation. Tracey

choose not to give up the privilege of basic ownership. Setting up as an S corporation is more

difficult than she wants to get with her business. “The LLC offers its owners the same limited

liability for business debts as that offered by the corporation. But unlike the corporation, the

LLC is not required to allocate profits and losses in proportion to ownership interests; nor is it

required to hold an annual meeting and draft meeting minutes, so record keeping is simpler and

more flexible” ((Kubasek, Browne, Herron, Giampetro-Meyer, Barkacs, Dhooge, & Wiliamson,

2012, p. 776).

When starting her business, Tracey decided that she wanted to have an alternative dispute

resolution (ADR) in place. Tracey’s preferred resolution is mediation. Mediation is a cost-

effective approach reducing the risk of litigation and assist in reaching a collaborative agreement.

In mediation all parties are involved in the resolution process providing a more creative solution

and increasing employee morale. Tracey has decided to sign the Universal Agreement to

Mediate (UAM) with the U.S. Equal Employee Opportunity Commission (EEOC). “A UAM is

an agreement between EEOC and an employer to mediate all eligible charges filed against the

employer, prior to an agency investigation or litigation” (U.S. Equal Employee Opportunity

Commission, n.d., para. 1). Mediation unlike litigation or arbitration there is a high level of

autonomy. “There are many reasons one can point to in order to explain how over the last

several years arbitration has become less and less favored as a dispute resolution mechanism in

the franchise arena. One of the main reasons that the arbitrations bubble has burst is due to lack

of a valid and fair appeals process” (McKenzie, 2011, para. 1). The increased use of panels in

arbitration is making it more expensive and less efficient. Negotiation has not been proven to be

successful and is not a preferred method in a business setting. Other ADR processes such as

Med-arb, summary jury trials, minitrials, early neutral case evaluation, private trials, and court

annexed ADR are not used as frequently and owning a franchise that is a has a high profile name

it is best to use a process that has proven to be successful.

Owning a Papa Johns’ franchise, Tracey is required to purchase her supplies from the Papa

Johns’ International. She purchases everything required for the operations of the business

through the commissary. “Papa John’s having set quality standards for all products used in its

restaurants, required all of its franchises to purchase dough and spices from the commissary.

What is more, virtually all of the franchises, although they were not required to do so, purchased

their other supplies from the commissary as well, taking advantage of the lower prices offered”

(Papa John’s International, Inc., n.d., para. 16). If litigation was to occur, it would be between

Tracey and Papa Johns’ International. If Tracey would file a suit it would be in Maryland Circuit

Court. The Circuit Court has full common law and equity posers in civil cases as well as

additional powers and jurisdiction conferred by the Constitution and Maryland State law

(Maryland Circuit Courts, 2012). This venue would allow Tracey to bring forth a civil case if

need be. It may be in the franchise agreement that litigation has to take place in their place of

choice. If Tracey has a choice, it would be in Maryland because it would be less expensive,

provide more value, and she is familiar with Maryland’s judiciary system

Once a determination is made on what form of business you want to operate it enables other

decisions to be made in regards to ADR and venues for litigation. There are many choices to

choose from when choosing a form of business and choosing ADR processes but weighing the

advantages and disadvantages of each will enable Tracey to make the best decisions for her

business.

References
Kubasek, N. K., Browne, M. N., Herron, D. J., Giampetro-Meyer, A., Barkacs, L. L., Dhooge,

L. J., & Williamson, C. (2012). Dynamic business law (2nd ed.). New York, NY:

McGraw-Hill/Irwin.

Maryland Circuit Courts. (n.d.). Retrieved from

http://www.msa.md.gov/msa/mdmanual/31cc/html/ccf.html

McKenzie, R. (2011). Vacating an Arbitration Award. Retrieved from

http://www.marylandlawblogger.com/2011/08/vacating-an-arbitration-award/

Papa John's International, Inc.. (n.d.). Retrieved from http://www.answers.com/topic/papa-john-

s-int-l-inc

U.S. Equal Employee Opportunity Commission. (n.d.). Questions and Answers. Retrieved from

http://www.eeoc.gov/eeoc/mediation/uam.cfm
Ward, S. (n.d.). Should You Buy A Franchise?. Retrieved from http://sbinfocanada.about.com/od/franchiseinfo/a/buyfranchise.htm