LAW 3800 Ch 21 SB + HW
Two corporations both carry on a number of businesses both directly and through various subsidiaries. Each has a subsidiary, Speedy Truck Rental [not a real company] and We-Haul [not a real company] in the same line of business. The two corporate groups have determined that Speedy Truck Rental and We-Haul should be merged because there are competitive advantages in joining forces rather than carrying on independently. They want to merge by creating a partnership. To create the partnership, Speedy Truck and We-Haul would enter into a partnership agreement that identifies the assets and liabilities each will contribute and sets out the way profits and losses will be shared and how the partnership business will be governed. Because each of the corporate groups in our scenario would want to take part in the management of the partnership, a general partnership would probably be used. Recall that the definition of a partnership has four distinct parts. Walk through the four different steps of the definition of a partnership, and determine whether the business relationship described in the case above would qualify as a partnership under the Uniform Partnership Act (UPA).
(Q1) According to UPA Section 6, a partnership is ___. (A1) an association of two or more persons to carry on as co-owners of a business for profit (Q2) What does "association" mean in the definition of a partnership? (A2) The partnership is a voluntary and consensual relationship. (Q3) Do the individuals discussed in the case qualify as forming an "association?" (A3) No, the relationship was not consensual. (Q4) A partnership requires "two or more persons." Does the situation involved in the case involve "two or more persons?" (A4) Yes, the partnership involves two different partnerships. (Q5) Does the situation in the case involve a business being carried on for profit? (A5) Yes, the trucking companies wish to gain competitive advantage. (Q6) What does it mean when we say the partners must be co-owners? (A6) They must share its profits or losses as well as share in the management of the business. (Q7) Does the situation described meet all four elements of the definition of a partnership? In other words, based on this information, could the two corporations form a partnership? (A7) Yes
After graduation, four college fraternity brothers decide they want to form a business together. They want to open a sports bar on some property that recently was put up for sale adjacent to the local stadium. The fraternity brothers are not yet sure whether they want to make equal investments and have equal control over the partnership. However, each brother is able to invest a maximum of $20,000. The fraternity brothers are open to considering any of the different forms of business organization frameworks available to them.
(Q1) Because there are multiple people interested in creating a business organization, the fraternity brothers cannot form which of the following? (A1) sole proprietorship (Q2) Suppose the fraternity brothers are considering forming a partnership. What would be one major disadvantage of this option? (A2) As partners they would be personally liable for the firm's debts. (Q3) Suppose that the fraternity brothers decide they indeed want to form a partnership. If all the partners agree that they want to share the management responsibilities and profits equally and accept equal personal liability, they should form a ___________________. (A3) general partnership (Q4) Suppose that instead of a partnership, the brothers decide to consider a corporation. Which of the following is an advantage of a corporation that they might find tempting? (A4) It is easy to raise capital by issuing stock. (Q5) What is one major disadvantage of a corporation that the fraternity brothers might face should they decide to incorporate? (A5) Corporate income is taxed twice. (Q6) Suppose the fraternity brothers want to combine the tax advantages and management flexibility of a partnership with the limited liability of a corporation. What type of business organization should they form? (A6) Limited liability company (Q7) Ultimately, the fraternity brothers decide to form a limited liability company (LLC). Under this form of business organization, what is the magnitude of liability each partner would face? (A7) $20,000
Which of the following is not a duty of partners to one another?
The beneficiary duty to the other partners
Which of the following is not a consequence of a corporation's status as a separate legal entity?
The corporation cannot be held liable for its debts.
Which of the following is not a recognized advantage to the franchisee of starting a franchise?
The franchisee's lack of creative control over the business
Identify a difference between partnerships and joint ventures in the eyes of the law.
The members of a joint venture have less authority than general partners.
Which of the following events does not result in the dissolution of a limited liability company (LLC) under the Uniform Limited Liability Company Act (ULLCA)?
The passage of 30 consecutive days during which the company has no members
Which of the following is not typically included in a limited liability company's (LLC's) articles of organization?
The work experience of the shareholders
Which of the following is not a recognized advantage of a corporation?
Formalities required in establishing the corporation
Identify a recognized disadvantage of a sole proprietorship.
Funding is limited to personal funds and loans.
Which of the following is not a recognized advantage of a sole proprietorship?
Funding is unlimited as stock can be issued to address capital needs.
Which of the following is a recognized disadvantage to the franchisor of starting a franchise?
Has little control over the franchise
Identify a recognized disadvantage to the franchisee of starting a franchise.
Has little to no creative control over the business
Which of the following is an accurate statement about limited liability partnerships (LLPs)?
In an LLP, the partners' liability for any partner's malpractice is limited to the extent of the partnership's assets.
Identify a recognized disadvantage of a partnership.
In most cases, each partner has personal liability for the business losses of another partner.
Identify a recognized advantage to the franchisor of starting a franchise.
Increased income from the franchise
Which of the following is not a recognized advantage of a partnership?
Individual partners have immunity from personal liability for all business losses.
Which of the following is not a key reason for the rapid acceptance of limited liability companies (LLCs)?
LLCs require profits and losses to be allocated in proportion to ownership interests.
What is one of the fears the plaintiff has regarding Miss Smithers (the defendant) leaving the partnership?
Plaintiff gets stuck with debt.
A(n) ___ corporation is a business organization formed under federal tax law that is considered a corporation yet is taxed like a partnership as long as it follows certain regulations.
S
Specialized forms of business organization include all but which of the following?
S partnerships
Which of the following has a franchise rule requiring franchisors to present prospective franchisees with material facts necessary for the franchisees to make an informed decision about entering a franchise relationship?
The Federal Trade Commission (FTC)
___ defines the ___ of a partnership as the change in the relation of the partners caused by any partner's ceasing to be associated with the carrying on of the business.
The Uniform Partnership Act (UPA); dissolution
Which of the following is an incorrect statement about a franchise agreement?
The agreement requires the franchisor to establish the price at which the franchisee must sell the goods.
What fraction of the value of the organization should the defendant receive once the partnership is dissolved?
Two-thirds
Which of the following is true about termination of franchises?
When determining whether a franchise was wrongfully terminated, the courts usually rely heavily on the written franchise agreement.
Ms. Smithers is upset because she is not prospering in the partnership, and she blames this on the fact that the plaintiff only cares about herself. Can the partnership be rightfully dissolved simply because Ms. Smithers is upset?
Yes, partner can withdraw at will.
Once a partnership is ___, the partners begin the process of winding up.
liquidated
In a member-managed limited liability company (LLC), all members participate in management, with decisions in the ordinary course of business activities made by a __ vote.
majority
In a(n) ___-managed limited liability company (LLC), the members select a group of managers to manage the affairs of the company.
manager
In a(n) ___, the franchisor provides the franchisee with a formula or necessary ingredient to manufacture a product. The franchisee then manufactures the product and sells it according to the franchisor's standards.
manufacturing arrangement
A limited liability company (LLC) combines the tax advantages and management flexibility of a ___ with the limited liability of a(n) ___
partnership; corporation
Investor-owners of a corporation are called ___
shareholders
A ___ proprietorship is a business in which on person is in control of the management and profits.
sole
A(n) ___ is the single person at the head of a sole proprietorship.
sole proprietor
An investment group that comes together for the explicit purpose of financing a specific large project is called a ___.
syndicate
A franchisee is a person who sells goods or services under a ___ or ___ based on a franchise agreement.
trade name; trademark
A partnership is a ___ association between two or more persons who co-own a business for ___.
voluntary; profit
A limited partnership (LP) is an agreement between at least one __ and at least one __.
general partner; limited partner
Five realtors, Aaron, Barend, and their three friends form a partnership through a partnership agreement to make a real estate brokerage firm. Each of the partners shares equally in the liability and management of the partnership. One of the partners, Aaron, has been placed in charge of a major account to sell a piece of lakefront property. It is the company's biggest potential sale. In the course of the dealings to sell the land, however, Aaron becomes involved with one of the potential buyers of the property. This potential buyer happens to be his uncle's business firm. He becomes involved in a way that constitutes a conflict of interest to the partnership. He then gives preferential treatment to the potential buyer, thus harming the financial status of the partnership. He falsifies statements regarding the purchase of the lakefront property, and tampers with the numbers to give the client a better tax break and better deal because the client is his uncle. He does so without Barend and/or the other partners' permission. Barend finds out about the secret actions of Aaron, and is rightfully unhappy. He wants to investigate whether Aaron was in violation of his duties to the partnership.
(Q1)The most important type of duty partners have toward one another is (A1) fiduciary duty. (Q2) In the scenario in the case, who violated his fiduciary duty? (A2) Aaron did with his conflict of interest. (Q3) Suppose Aaron did not engage in preferential treatment, but was guilty of only an honest mistake regarding the financial statements and tax breaks. Is Aaron liable? (A3) Aaron will not be held liable because it was an accident. (Q4) Suppose Aaron did just make an honest mistake and was not violating his fiduciary duty. However, the partners are naturally upset that Aaron made a mistake regarding the bookkeeping. The partners want to meet to alter their partnership agreement to kick Aaron out of the partnership for his ineptitude. How many people would it take to alter the agreement to terminate Aaron's position in the partnership? (A4) Five (Q5) So suppose Aaron is not voted out of the partnership, but the partners are still skeptical about whether he is truly dedicated to the partnership. What right do the other partners have to make sure he is following the standards of the partnership? (A5) Right to inspect books to make sure Aaron is not tampering with the numbers again. (Q6) Suppose the partnership adds an additional partner to the agreement after the situation with Aaron arose. To what extent will the new partner be liable for Aaron's actions if they are inappropriate? (A6) The new partner assumes limited liability for any obligations that occurred before he was added.
Which of the following is an accurate statement about the formation of partnerships?
A written agreement that creates a partnership is called the articles of partnership.
Which of the following is a recognized disadvantage of a corporation?
Corporate income taxed twice
A(n) ___ is a business organization governed by a group of trustees.
business trust
A written business trust agreement establishes the duties and powers of the trustees and the interests of the ___.
beneficiaries
McDonald's and Burger King are examples of ___-style business operation.
chain
A ___ is an organization formed by individuals to market products.
cooperative
A ___ is a legal business entity formed by issuing stock to investors.
corporation
A joint stock company is a mixture of a(n) ___ and a ___.
corporation; partnership
A car dealership is an example of a ___
distributorship
A ___ partnership consists of an agreement that the partners will divide the profits and management responsibilities and share unlimited personal liability for the partnership's debts.
general
When a person goes into McDonald's to eat lunch, the person is likely eating at a ___.
franchise
A ___ is the owner of a trade name or trademark in a franchise.
franchisor