Chapter 17 Business Law - Small Business Organizations

Fiduciary Duty affects the relationships between partners, members, directors/officers and shareholders "The Duty of Loyalty"

- To subordinate personal interests

Fiduciary Duty affects the relationships between partners, members, directors/officers and shareholders "The Duty of Care"

- To use care and diligence when acting on behalf of the business. More specifically

Franchises "The Franchise Contract" Courts will not Question

-Franchisor's strict supervision but Franchisor may be liable for torts of agents.

What is Uniform Partnership Act (UPA)?

-Governs the operation of partnerships in the absence of express agreement and has done much to reduce controversies in the law relating to partnership

What are Rights and Duties?

-His or her right to participate in the management and conduct of the partnership business terminates

Partnerships "Duties and Liabilities of Partners" Liability of partners (1)

-If a Partners sued for the Partnership debt, Partner has right to insist that other partners be sued with her.

Partnerships "Rights of partners" Accounting

-If fraud, etc, is just and reasonable.

Partnerships "Rights of partners"

-In the absence of a partnership agreement (oral or written) state statutes govern the partner rights.

What does UPA define person as?

-Includes corporations, so a corporation can be a partner in a partnership

What is a pass-through entity?

-Is a business entity that has no tax liability- the entity's income is passed through to the owners of the entity, who pay income taxes on it

Franchises "The Franchise Contract" Quality Control

-Is a legitimate issue for Franchiser because of good will, reputation and trademark value.

What are flexibility's of Sole Proprietorship?

-Is free to make any decision he or she wishes concerning the business

Does joint property ownership create a partnership?

-Joint ownership of property does not in and of itself create a partnership

Partnerships "Dissociation of a Partner" Events that cause Dissociation

-Notice -Triggering Event -Unanimous Vote -Court or Arbitrator Order -Partner's bankruptcy, assignment of interest, incapacity, or death.

Fiduciary Duty affects the relationships between partners, members, directors/officers and shareholders "The Duty of Loyalty" (Violations would include)

- Self Dealing - Usurping a business opportunity - Competing with the business - Making a secret profit

Review the UPA "Of 2 or more persons"

- "persons" includes other legal entities, such as a corporation

Review the UPA "A business for profit"

- The UPA does not apply to not for profit endeavors.

Review the UPA "To Carry on"

- The duration may be indefinite, or defined, but the relationship is a continuing one.

What managerial rights do partners have in a Partnership?

- All partners have equal rights in managing the partnership

A partnership agreement is also know as?

- Articles of Partnership

What is Articles of Partnership?

- Can include almost any terms that the parties wish, unless they are illegal or contrary to public policy or statute in a partnership agreement

What happens if one withdrawals from a partnership for a term prematurely?

- Constitutes a breach of the agreement, and the responsible partner can be held liable for any resulting losses

Small Business Organizations "Introduction"

- Ease of creation - Owners' liability - Tax considerations - Need for Capital

Partnerships "Rights of Partners" Interest in the Partnership

- Equal profits, losses shared as profits shared.

Partnerships "Rights of Partners" Management

- Equal, each one vote, majority wins; need unanimous consent for some actions.

What is the duration of a Partnership? What is a Partnership for a term?

- It can specify the duration of the partnership by stating that it will continue until a designated date or until the completion of a particular project.

Fiduciary Duty affects the relationships between partners, members, directors/officers and shareholders "The Duty of Care" (More Specifically)

- Make a reasonable investigation of business matters - Attend meetings - Supervise subordinates - Stay informed about business matters

Fiduciary Duty affects the relationships between partners, members, directors/officers and shareholders "The Duty of Obedience"

- The fiduciary must act within the authority conferred by law and the business.

Review the UPA "As Co-Owners"

- This is the most important part of a partnership. Co-owners share profits, and participate in decision making

What is a Partnership at will?

- No fixed duration is specified - Partnership can be dissolved at any time

What is Partnership by Estoppel?

- Occurs when a person who is not a partner holds himself out to third parties and the third party relies on to her detriment. - The "non-partner" is an agent whose acts are binding on the partnership.

Agreements to form a partnership can be?

- Oral - Written - Implied by contact

How do partners in a large partnership deal with managerial rights?

- Partners often agree to delegate daily management responsibilities to a management committee made up of one or more of the partners

Review of LLC, Most States "Profits, Votes, Management"

- Profits: Divided equally - Votes: Apportioned according to capital contribution - Management: Assumed to be member managed

Review of LLC, TN "Profits, Votes, Management"

- Profits: Divided equally (TCA 48-220-101) - Votes: Equal voting (TCA 48-224-101) - Management: Majority vote

Review of UPA "Profits, Votes, Management"

- Profits: Share equally - Votes: Each partner has one vote - Management: Majority rules

How are decisions made on significant issues?

- Requires an unanimous consent of the partners

Review the UPA "An association"

- This means that this is a voluntary relationship. A person cannot become a partner in an existing partnership without the unanimous consent of the partners.

Franchises "Defined"

-A contract in which Franchiser (owner of a trademark, trade name or copyright) -Licenses Franchisee to use the track mark, trade name or copyright in the sale of goods or services.

What is it when partners do not have Ownership Interest?

-A non-partnership agency relationship -No ownership interest in the business and is not obligated to bear a portion of ordinary business losses

Partnerships "Partnership Termination" Winding Up and Distribution of Assets (1)

-After dissolution, the partnership continues to wind up the partnership affairs.

Partnerships "Rights of partners" Inspection of the Books

-Always and also by rep. of deceased partner.

Franchises "Termination" Opportunity to Cure a Breach

-An agreement may grant franchisee the opportunity to "cure" to an ordinary breach within a period of time to prevent termination.

What is a Franchise?

-An arrangement in which the owner of intellectual property, such as a trademark, a trade name, or a copy-right licenses others to use it in the selling of goods or services

What is a Partnership under UPA?

-An association of two or more persons to carry on as co-owners a business for profit

What is a Partnership? "Agency Concepts and Partnership Law"

-Arises from an agreement, express or implied, between two or more persons to carry on a business for a profit. Joint Control -Partnerships are governed by common law and statutory laws -Partners are agents and fiduciaries of each other.

Partnerships "Duties and Liabilities of Partners" Authority of partners (3)

-Authorized versus Unauthorized actions. If partner acts within scope of authority, partnership is bound.

What are buyouts?

-Buyout price is based on the amount that would have been distributed to the partner if the partnership had been wound up on the date of dissociation

Partnerships "Partnership Termination" Dissolution (Operation of Law)

-By operation of law or judicial decree. -Partners can Agree to Dissolve -By Operation of Laws: the death of a partner, bankruptcy of a partner, a bankruptcy of partnership, or illegality.

Partnerships "Partnership Buy-Sell Agreements"

-Contract that determines in advance of an "event" how remaining partners will buy-out partners' interest.

What personal risk do Sole Proprietorship's face?

-Creditors can pursue the owner's personal assets to satisfy any business debts

Franchises "Laws Governing Franchising" Federal Regulation of Franchises (The Franchise Rule)

-Disclosure of material facts for informed decision.

Partnerships "Dissociation of a Partner" Wrongful Dissociation

-Dissociating partner breaches partnership agreement. -Dissociating partner files bankruptcy. -May be liable for costs.

Partnerships "Partnership Termination" Two Stages

-Dissolution: is the legal death of the partnership -Winding up and Distribution of Assets: Collecting and distributing partnership assets

Franchises "Types of Franchises"

-Distributorship -Chain Style Business Operation -Manufacturing or Processing Arrangement

Partnerships "Partnership Termination" Dissolution (Good Faith)

-Each partner must exercise good faith when dissolving a partnership.

Franchises "The Franchise Contract"

-Franchisee's type of business entity including capital structure, sales quotas and record keeping. -Business Premises is leased or purchased. -Location of the Franchise.

Franchises "The Franchise Contract" Pricing Arrangements

-Franchiser cannot set prices of goods sold.

Partnerships "Dissociation of a Partner"

-Occurs when one partner ceases to be associated in the partnership business. -Allows partner to have her interest purchased by the partnership. -Terminates her voting interest in the partnership.

What are advantages of Sole Proprietorship?

-Owns the entire business and receives all of the profits -Flexibility -Ease of creation -B/C: he or she assumes all of the risks -Easier and less costly than starting any other kind of business -Few legal formations are required -No documents need to be filed with the government

Partnerships "Duties and Liabilities of Partners" Authority of partners (2)

-Partner has apparent authority when carrying out partnership business.

What is Ownership Interest in a Partnership ?

-Partners agree to commit funds or other assets, labor, and skills to the business with the understanding that profits and losses will be shared

Partnerships "Partnership Termination" Winding Up and Distribution of Assets (3)

-Partners have no authority except to: -Collect and preserve the partnership assets, discharge liabilities, and provide an accounting.

Partnerships "Partnership Termination" Winding Up and Distribution of Assets (2)

-Partners have no authority except to: -Complete transactions already began.

What is the Tax processes of a Sole Proprietorship?

-Pays only personal income taxes (Including Social Security and Medicare Taxes) on the business's profit, which reported as personal income on the proprietor's personal income tax return

Franchises "Laws Governing Franchising"

-Primarily governed by contract law -UCC Article 2 governs franchises for sale of goods.

Partnerships "Rights of partners" Property Rights

-Property acquired by the partnership remains partnership property. -An individual partner has no right to sell, mortgage, or transfer partnership property.

Franchises "Laws Governing Franchising" Federal Regulation of Franchises (Industry-Specific Standards)

-Protect franchisee from unreasonable demands and bad faith termination.

Franchises "Laws Governing Franchising" State Protection for Franchisees (1)

-Protection from unfair trade practices and bad faith terminations -Disclosure documentation, including costs of operation, recurring expenses profits earned, and substantiating of these figures.

What is a buy-sell agreement?

-Provides for one or more partners to buy out the other or others, should the situation warrant.

Partnerships "Dissociation of a Partner" Effects of Dissociation

-Rights and Duties -Liability to third parties. Partnership bound for two years by acts of outgoing partner, unless proper notice given.

Franchises "Laws Governing Franchising" State Protection for Franchisees (2)

-State Law may prohibit termination without "good cause"

What is a agent relationship?

-The Partnerships relationships with another partner, like agents, are bound by fiduciary ties

What are disadvantages of Sole Proprietorship?

-The proprietor alone bears the burden of any losses or liabilities incurred by the business enterprise. -Lacks continuity after death -Difficult to raise financing/capital

What are Sole Proprietorships?

-The simplest form of business -The owner is the business -2/3 of all U.S. business are sole proprietorships -99% of sole proprietorships are small enterprises -Have revenues less than $1 million per year

What is goodwill?

-The valuable reputation of a business viewed as an intangible asset

Partnerships "Rights of partners" Compensation

-There are no compensation.

Partnerships "Duties and Liabilities of Partners" Liability of partners (2) Joint Liabilty

-Third party must sue A:: partners as a group, but each partner can be held liable for the full amount.

Partnerships "Duties and Liabilities of Partners" Authority of partners (1)

-UPA affirms general principles of agency law. -The partner may be able to subject partnership to tort liability.

What does modern law say about tax treatment of partnerships?

-Under federal (and most state) tax laws, a partnership is treated as a "pass-through" entity, with profits, losses, and taxes attributed on a pro-rata basis to the partners.

Partnerships "Rights of partners" Property Rights: Each partner can

-Use or possess property on behalf of the partnership -Assign her right to her share of the profits to another to satisfy individual debt. -Creditor can secure Charging Order.

Franchises "Termination"

-Usually a franchise agreement sets out conditions of termination. -Notice Requirements -Reasonable time to "wind up" business.

What happens to a Sole Proprietorship when the owner passes?

-When the owner dies, so does the business-it is automatically dissolved.

How is a Partner's profit from a Partnership taxed?

-Whether distributed or not, it is taxed as individual income to the individual partner

What is Indemnification?

-With joint several liability, a partner who commits to tort can be required to indemnify (reimburse) the partnership for any damages it pays. -Will typically be granted unless the tort was committed in the ordinary course of the partnership's business

Identify the 3 factors that should be considered when choosing a form of business and discuss how a consideration of those factors would affect such a choice

1 - Method of creation 2 -Taxation 3 - Liability - The advantage of limited Liability generally outweighs those disadvantages.

Partnerships "Partnership Termination" Creditors Claims (1)

1 - Payment of debts, including those owed to partner and non-partner creditors.

Partnerships "Entity versus Aggregate" (1)

1 - To sue and be sued (for federal questions, yes; for state questions, differs).

Partnerships "Essential Elements" No partnership if profits were received as payment for

1. A debt by installments or interest on a loan 2. Wages of an employee or for the services of an independent contractor 3. Rent to a landlord 4. An annuity to a surviving spouse or representative of a deceased partner 5. A sale of the goodwill of a business of property

What are three essential elements, which are implicit in the UPA definition?

1. A sharing of profits or losses 2. A joint ownership of the business 3. An equal right to be involved in the management of the business

When might Unanimous Consent be required?

1. Alter essential nature of the firm's business as expressed in the partnership agreement 2. Change the capital structure of the partnership 3. Amend the terms of the partnership 4. Admit a new partner 5. Engage in a completely new business 6. Assign partnership property to a trust for the benefit of creditors, or allow a creditor to enter a judgment against the partnership, for an agreed sum without the use of the legal proceedings 7. Dispose of the partnership's goodwill 8. Submit partnership claims to arbitration 9. Undertake any act that would make further conduct of the partnership business impossible

Review of UPA "3 essential elements"

1. Sharing of profits or losses 2. Joint Ownership 3. Equal right in management

Partnerships "Partnership Termination" Creditors Claims (2)

2 - Return of capital contributions and distribution of profits to partners.

Partnerships "Entity versus Aggregate" (2)

2 - To have judgments collected against it's assets, and individual partners' assets.

Partnerships "Partnership Termination" Creditors Claims (3)

3 - If liabilities are greater than assets partners bear losses in proportion in which they shared profits, unless agreed otherwise.

Partnerships "Entity versus Aggregate" (3)

3 - To own and convey partnership property

What is joint and several liability of a partnership?

A third party has the option of suing all of the partners together (jointly) or one or more of the partners separately (severally)

What is joint liability of a partnership?

A third party must sue all of the partners as a group, but each partner can be held liable for the full amount

What is Dissociation?

Occurs when a partner ceases to be associated in the carrying on of the partnership business

Partnerships "Entity versus Aggregate"

Today, a majority of states recognize the partnership as a separate legal entity for the following purposes.