The Legal Environment Today-Chapter 14
A local Taco Bell restaurant is an example of which kind of franchise?
A chain-style business operation.
Articles of Partnership
A written agreement that sets forth each partner's rights and obligations with respect to the partnership.
What are the major advantages/disadvantages for a sole proprietorship?
Advantages: The proprietor receives all of the profits. Lower start-up costs. More flexibility. Only tax on profits. Tax-exempt retirement accounts in the form of Keogh plans. Disadvantages: Full liability. Owner dies, business dies. Hard to raise money
Partnership
An agreement by two or more persons to carry on, as co-owners, a business for profit.
In an LLC, the members themselves can decide how to operate the various aspects of the business by forming:
An operating agreement
Franchise
Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright in the selling of goods or services.
How are limited liability companies formed, and who decides how they will be managed and operated?
Articles of organization must be filed with a central state agency. A few states also require that a notice of the intention to form an LLC be published in a local newspaper. The members can decide how to operate the business. If there is no agreement, the state LLC statute will govern the outcome, and if there is no statute on the issue, partnership law principles apply.
A partner's fiduciary duty includes which of the following?
Duties of loyalty and care
What are the key differences between the rights and liabilities of general partners and those of limited partners?
General partners, are personally liable to the partner-ship's creditors. Limited partners enjoy this limited liability only so long as they do not participate in management.
Entrepreneur
One who initiates and assumes the financial risk of a new business enterprise and undertakes to provide or control its management.
Certificate of Limited Partnership
The basic document filed with a designated state official by which a limited partnership is formed.
Who typically controls the day-to-day operations of a franchise?
The franchisee.
A key advantage of the LLC is that:
The liability of members is limited to the amount of their investments.
What advantages do limited liability partnerships offer to entrepreneurs that are not offered to general Partnerships?
The liability of their partners for partnership and partners' debts and torts can be limited to the amount of the partners' investments. Flexibility of these entities in regard to taxation and management.
Winding Up
The second of two stages in the termination of a partnership or corporation. Once the firm is dissolved, it continues to exist legally until the process of winding up all business affairs is complete.
The key characteristics of a limited liability company (LLC) are:
The tax characteristics of a partnership plus the liability of a corporation.
The simplest form of business is:
a sole proprietorship
In order for a limited partnership to be legally valid, it must:
file a certificate of limited partnership
Dorinda, Luis, and Elizabeth form a limited partnership. Dorinda is a general partner, and Luis and Elizabeth are limited partners. Consider each of the separate events below, and discuss fully which event(s) constitute(s) a dissolution of the limited partnership. 1 Luis assigns his partnership interest to Ashley. 2 Elizabeth is petitioned into involuntary bankruptcy. 3 Dorinda dies.
1. A limited partner's interest is assignable. In fact, assignment allows the assignee to become a substituted limited partner with the consent of the remaining partners. The assignment, however, does not dissolve the limited partnership. 2. Bankruptcy of the limited partnership itself causes dissolution, but bankruptcy of one of the limited partners does not dissolve the partnership unless it causes the bankruptcy of the firm. 3. The retirement, death, or insanity of a general partner dissolves the partner¬ship unless the business can be continued by the remaining general partners. Because Dorinda was the only general partner, her death dissolves the limited partnership.
Pass-Through Entity
A business entity that has no tax liability. The entity's income is passed through to the owners, and the owners pay taxes on the income.
Limited Liability Company (llc
A hybrid form of business enterprise that offers the limited liability of the corporation but the tax advantages of a partnership.
Limited Liability Partnership (llp)
A hybrid form of business organization that is used mainly by professionals who normally do business in a partnership. Like a partnership, an LLP is a pass-through entity for tax purposes, but the personal liability of the partners is limited.
Limited Partnership (LP)
A partnership consisting of one or more general partners (who manage the business and are liable to the full extent of their personal assets for debts of the partnership) and one or more limited partners (who contribute only assets and are liable only up to the extent of their contributions).
Member
A person who has an ownership interest in a limited liability company.
Julie Anne Gaskill is an oral and maxillofacial surgeon in Bowling Green, Kentucky. Her medical practice is a sole proprietorship consisting of herself as the sole surgeon and an office staff. She sees every patient, exercises all professional judgment and skill, and manages the business. When Gaskill and her spouse, John Robbins, initiated divorce proceedings In a Kentucky state court, her accountant estimated the value of the practice at $221,610, excluding goodwill. His accountant estimated $669.075, including goodwill. (Goodwill is the ability or reputation of a business to draw customers, get them to return, and contribute to future profitability.) How can a sole proprietor's reputation, skill, and relationships with customers be valued? Could these qualities be divided into "personal" and "enterprise" goodwill, with some goodwill associated with the business and some solely due to the personal qualities of the proprietor? If so, what might comprise each type? Is this an effective method for valuing Gaskill's practice?
A sole proprietor's reputation, skill, and relationships with customers can be valued by dividing these qualities into "personal" and "enterprise" goodwill, with some goodwill associated with the business and some solely due to the personal qualities of the proprietor. This distinction is as susceptible to valuation as goodwill on the whole is. If the value of goodwill can be reasonably determined, the amount of enterprise goodwill, which is all that can be considered marital property, can be determined. Enterprise goodwill is based on the intangible, but generally marketable, existence in a business of established relations with employees, customers, and suppliers. Factors affecting this goodwill may include a business's location, its name recognition, its reputation, and others intrinsic to the particular business. These factors contribute to future profitability. Enterprise goodwill is an asset of the business, is independent of any single individual's personal efforts, and outlasts any person's involvement in the business. It may not be marketable, but it is transferrable and has value. Goodwill that depends on the continued presence of a particular individual is a personal asset, and any value that attaches to a business as a result of this "personal goodwill" represents only the future earning capacity of the individual. In this case, the skill, personality, work ethic, reputation, and relationships developed by Gaskill are hers alone and cannot be sold to a subsequent practitioner. In this sense, these attributes constitute non-marital property.
Information Return
A tax return submitted by a partnership that only reports the income and losses earned by the business. The partnership as an entity does not pay taxes on the income received by the partnership.
Daniel is the owner of a chain of shoe stores. He hires Rubya to be the manager of a new store, which is to open in Grand Rapids, Michigan. Daniel, by written contract, agrees to pay Rubya a monthly salary and 20 percent of the profits. Without Daniel's knowledge, Rubya represents himself to Classen as Daniel's partner and shows Classen the agreement to share profits. Classen extends credit to Rubya. Rubya defaults. Discuss whether Classen can hold Daniel liable as a partner.
Classen cannot hold Daniel liable as a partner, because a true partnership never existed; nor is Daniel liable under a theory of partnership by estoppel. A part-nership is defined as an association of two or more persons to conduct, as co owners, a business for profit.
John, Lesa and Tabir form a limited liability company. John contributes 60% of the capital, and Lesa and Tabir each contribute 20%. Nothing is decided about how profits will be divided. John assumes that he will be entitled to 60% of the profits, in accordance with his contribution. Lesa and Tabir, however, assume that the profits will be divided equally. A dispute over the question arises, and ultimately a court has to decide the issue. What law will the court apply? In most states, what will result" How could this dispute have been avoided in the first place? Discuss fully.
If there is no agreement covering how profits will be divided, the applicable state LLC statute will govern. Most LLC statutes provide that if members do not specify how profits are to be divided, they will be divided equally. If there is no operating agreement or LLC statute addressing the particular issue, the principles of partnership law apply. Those principles also indicate that profits are divided equally among the owners of a firm unless specified otherwise.
Operating Agreement
In a limited liability company, an agreement in which the members set forth the details of how the business will be managed and operated. State statutes typically give the members wide latitude in deciding for themselves the rules that will govern their organization.
General Partner
In a limited partnership, a partner who assumes responsibility for the management of the partnership and liability for all partnership debts.
Limited Partner
In a limited partnership, a partner who contributes capital to the partnership but has no right to participate in the management and operation of the business. The limited partner assumes no liability for partnership debts beyond the capital contributed.
Joint and Several Liability
In partnership law, a doctrine under which a plaintiff can file a lawsuit against all of the partners together (jointly) or one or more of the partners separately (severally, or individually). All partners in a partnership can be held liable regardless of whether the partner participated in, knew about, or ratified the conduct that gave rise to the lawsuit.
Joint Liability
In partnership law, partners share liability for partnership obligations and debts. Thus, if a third party sues a partner on a partnership debt, the partner has the right to insist that the other partners be sued with him or her
After Koss, Schmidt, and Jacobsen have been partners for three years, Jacobsen declares bankruptcy. What will happen as a result?
Jacobsen will be dissociated from the partnership.
What is meant by joint and several liability? Why is this often considered to be a disadvantage of doing business as a general partnership?
Joint and several liability means that a third party may sue any one or more of the partners without suing all of them or the partnership itself. This might be considered a disadvantage because it makes it easier for a third party to sue the firm and its partners.
Franchisor
One licensing another (the franchisee) to use the owner's trademark, trade name, or copyright in the selling of goods or services.
Franchisee
One receiving a license to use another's (the franchisor's) trademark, trade name, or copyright in the sale of goods and services.
Buyout Price
The amount payable to a partner on his or her dissociation from a partnership, based on the amount distributable to that partner if the firm were wound up on that date, and offset by any damages for wrongful dissociation.
Articles of Organization
The document filed with a designated state official by which a limited liability company is formed.
Dissolution
The formal disbanding of a partnership or a corporation.
Dissociation
The severance of the relationship between a partner and a partnership when the partner ceases to be associated with the carrying on of the partnership business.
Sole Proprietorship
The simplest form of business organization, in which the owner is the business. The owner reports business income on his or her personal income tax return and is legally responsible for all debts and obligations incurred by the business.
Assume that Kyle and Larsen have a general partnership. In this situation, what rights does each have regarding the management of the dog biscuit business?
They have equal management rights