Under 16 Code Fed. Regs. 436.1(h): Franchise means any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:
The question here is whether or not your partnership agreement is in fact a franchise agreement. Because if it is, then you could be in some very hot water with both the state and federal government. A partnership is not a franchise -- but without reviewing your LLC operating agreement, it's difficult to be able to conclude that you have not created a franchise with your investor.
Thank you for your prompt reply. We are not promoting the partnership as a franchise, merely as a single store owned by a separate LLC of which 51% is owned by my LLC and the other 49% by another individual or legal entity. Since my original LLC owns the trademark I have the authority to use it in commerce. I can't see where this would create a franchisor/franchisee relationship requiring compliance with franchise law (we do not charge a franchise fee as it is not a franchise).
Just wanted to make sure that the arrangement best protects my original LLC, and that there is not a better way that I am overlooking.
Good thoughts, and thank you for them. The first retail store is run mostly by the partner but we are not passive either. The arrangement with the second store would have his nephew (who currently is one of our employees at the first store) serve as manager of the second store. This investor has nothing to do with the first store other than his nephew being an employee. We will not be running the second store either, however we will still own 51% and will not be passive with this store either.
If I understand your post above, then this arrangement seems to not subject us to SEC Reg D. Obviously, the best case scenario is for my own LLC to open retail stores without a third party.
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