Chapter 36, 37
Partnership obligations are paid in the following order:
1.Creditors 2.Debts to individual partners 3.Return of capital contributions to partners 4.Remaining assets divided equally among partners If liabilities are greater than assets, partners bear losses in proportion in which they shared profits, unless agreed otherwise.
The termination of a partnership occurs in two stages:
1.Dissolution (is the legal "death" of the partnership), and 2.Winding up and Distribution of Assets (collecting and distributing partnership assets).
Liabilities - Contract Liability
Contracts entered into by partners and employees of the partnership are binding on the partnership. General partners have unlimited personal liability for partnership contracts. A general partner who pays more than his or her proportionate share of the liability may seek indemnification from partners who did not pay their share of the liability.
co-ownership
Determined by sharing of business profits, losses and management responsibilities. Non-partners do not normally share profits and losses.
Notice of Dissolution
Dissolution terminates the partners' authority to enter into contracts. Notice to third parties depends on the relationship of the parties. ACTUAL NOTICE Third parties who have actual dealings with the partnership must be provided actual oral or written notice of dissolution. CONSTRUCTIVE NOTICE Third parties who have not had dealings with the partnership but have knowledge of its existence must be provided actual or constructive notice of the dissolution. Constructive notice consists of publication in a newspaper in the area where partnership business was conducted. NO NOTICE Third parts who have not dealt with the partnership and do not have any knowledge of it do not require any notification.
pricing arrangements
Franchisor cannot set prices of goods sold without violating antitrust laws.
Sole Proprietorships and Franchises: Termination
GENERAL RULES -franchisors may terminate the agreement for cause, such as repetitive failure to adhere to terms of the agreement. Single incidents do not usually rise to the level necessary for termination and agreements that are terminated for one incident may be deemed wrongful terminations. -agreements may grant franchisees the opportunity to "cure" an ordinary breach within a period of time to prevent termination. INDUSTRY SPECIFIC RULES -Holders of automobile franchises are protected from bad-faith termination of their dealerships by federal Automotive Dealers Day in Court Act. If franchisor makes arbitrary and unreasonable demands, then terminates the franchise agreement, the franchisor is liable for damages to franchisee.
Liabilities - Tort Liability
If a partner or employee of the partnership commits a tort while acting on behalf of the partnership and causes injury to a third person, the partnership is liable. The general partners have unlimited personal liability for the debts and obligations of the partnership.
Partnership by Estoppel
If a person who is not a partner holds himself out to third parties and the third party relies to his or her detriment, the "non-partner" is considered an agent whose acts are binding on the partnership.
quality control
Important to the Franchisor because of good will, reputation and trademark value. Courts will not question Franchisor's strict supervision but Franchisor may be liable for torts of agents.
Sole Proprietorships and Franchises: Franchising Liability - Apparent Authority
In the rare occasion that a franchisee is an actual or apparent agent of a franchisor, then the franchisor may be liable for the torts and/or contracts of the franchisee within the scope of the agency.
business organization
Includes form, quality, record keeping, training and other administrative issues.
entrepreneur
a person who creates a new business entity and operates it alone or with other people
business premises:
leased or purchased
sole proprietorship
form of business owned by one person who is responsible for all obligations of the business
LPs, LLCs, LLPs
form of business that qualifies for special income tax treatment, which is taxed the same as a partnership but the owners enjoy the privileges of limited liability
Joint Venture
form of businesses where two or more persons or firms come together for a single project and share profits and losses equally unless otherwise agreed
S corporation
hybrid forms of businesses hat permit limited liability and single taxation
Franchise
type of business where the primary "owner" grants another party the right to sell products or deliver services based on the owners business model within a specific geographic area for a specific time
the federal trade commission defines a commercial business arrangement as a franchise if it meets 3 primary elements. the franchisor must:
1. promise to provide a trademark or other commercial symbol 2. promise to exercise significant control or provide significant assistance in the operation of the business 3. require a min payment of at least $500 during the first 6 months of operations
Partnership Termination
-Partnerships can be set up for a specific term (10 years), for a specific purpose (commercial development) or for an unspecified term (partnership at will). -Dissolution occurs automatically for partnerships for specific terms and purposes. A partnership at will may be dissolved when any partner withdraws from the partnership.
Limited Partnerships - Formation
-Similar to general partnership but limits the liability of some of its owners (the limited partners). -Do not confuse Limited Partnershipswith Limited Liability Partnerships (LLP). -Consists of at least onegeneral partner and onelimited partner. -Governed by the Revised Uniform Limited Partnership Act (RULPA) -Using the names of limited partners is not allowed in most circumstances and if used, the limited partner becomes liable as a general partner. -The name must include the words limited partnership without abbreviations. -Certificate of Limited Partnership filed with the state.
Limited Partnerships - Liability
-The general rule limits the amount of personal liability of limited partners to the amount of capital contributed. -Exceptions: Participation in management, defective formation and personal guarantee.
Liabilities - Authority of Partners
-Uniform Partnership Act affirms general principles of agency law. -A partner may be able to subject partnership to tort liability. -A partner has apparent authority when carrying out partnership business.
Duties of Partners - Care
-Use reasonable care, skill and judgment exercised by a business manager in the same position in the same circumstances. -No grossly negligent conduct -No intentional misconduct -No knowing violation of the law -Not liable for honest errors
General Partnership Formation - Names
-A general partnership can use one or more of the partner's names or a fictitious name. -When using a fictitious name, the business is often referred to as d.b.a (doing business as). -Most states require businesses that use trade names to file a fictitious business name statement with the designated government agency. -Publication of the registration in the county where the principal office of the business is located is required. -In Florida, registration of a fictitious name is not required to form a corporation, limited liability company or limited partnership.
Liabilities - Incoming and Outgoing Partners
-A new partner is liable for debts existing at the time of admission, but only up to the amount of capital contributions and all debts incurred by the partnership after admission to the partnership. -Outgoing partners are liable for the debts of the partnership at the time of dissolution, but not debts incurred after leaving the partnership, if it continues.
Allowable Activities for Limited Partners
-Acting as an agent, employee, contractor, consultant to the partnership. -Approving or disapproving amendments to the limited partnership agreement. -Voting on dissolution and winding up of the limited partnership. -Voting on the incurrence of debt other than debt incurred in the ordinary course of business. -Voting on the removal of a general partner.
The UPA requires four criteria to form a general partnership.
-Association of two or more persons -Carrying on a business -As co-owners -For profit
Operation of Law
-Death of a partner -Bankruptcy of a partner -Bankruptcy of partnership -Illegality
Dissociation of a Partner
-Dissociation occurs when one partner ceases to be associated in the partnership business. -Allows partner to have his or her interest purchased by the partnership. -Terminates voting interest in the partnership. -Partnership may or may not continue doing business without partner. -A wrongful dissolution occurs when a partner breaches partnership agreement or withdraws before the end of term in a partnership for term. -The party who wrongfully disassociates cannot participate in management and is liable for any damages caused by the wrongful dissolution.
Tax Treatment
-Federallaw treats partnerships as a "pass through" tax entity. -Partnership does not pay taxes on income. -Income is passed to the owners who pay taxes on it. -Partnership files a tax return for informational purposes.
Sole Proprietorships and Franchises: Wrongful Termination
-Franchise agreements usually favor the franchisor, which means a franchisee that invested a great deal of effort could be left with nothing if the agreement is terminated. -Franchisors in Massachusetts sued 7-Eleven to keep their Slurpee machine, hot dogs and lottery tickets that were taken away in retaliation for not stocking unpopular items -Franchisees claim stores in high traffic locations are targeted for violations so 7-Eleven can offer the locations to new franchisees at higher prices -California franchisees gave up their store with no compensation after running it since 1995 -McDonald's employees are suing the franchisee AND franchisor over terminations related to race, union organization efforts and sexual harassment.
Sole Proprietorships and Franchises: Franchising Liability - General
-Franchisors and franchisees are usually separate legal entities, which means franchisors treat franchisees like independent contractors. -Franchisors and franchisees are liable for their own torts and contracts, but not for those of the other.
Limited Partnerships -Management
-General partners manage the business and are responsible for debts. -Limited partners contribute cash or property but do not participate in management and not liable for debts more than their investment. Limited partners lose protection by participating in management. -Except for right to participate in management, limited and general partners have essentially the same rights and duties.
Authorized v Unauthorized Actions
-If partner acts within scope of authority, the partnership is bound. -House Cleaning Partnership- assumed partners can enter into contracts to purchase cleaning materials. Not presumed that partners can purchase cars or other capital equipment. -Partners generally do not have authority to make charitable contributions unless ratified by other partners.
Judicial Decree
-Insanity -Incapacity -Business Impracticality -Improper Conduct -Other Circumstances (personal dissension)
Limited Liability Partnerships: LIABILITY
-LLP allows professionals to avoid personal liability for the malpractice of other partners. -LLP still liable for own wrongdoing and the wrongdoing of those he or she supervises. -Liability statutes are not uniform from state to state. 1.Proportionate liability - partners only liable for their responsibility in the wrongdoing. 2.No proportionate liability - one partner can be liable for the entire loss.
Limited Liability Partnerships
-Limited Liability Partnerships (LLPs) are governed by state law and may be restricted to certain types of professionals such as accountants, lawyers and doctors. -Relatively easy to convert a partnership to an LLP. -Comply with state statutes -File required forms such as the articles of limited liability partnership (Florida Department of State, n.d.) -Some states mandate LLPs carry a minimum amount in liability insurance. -File annual report -No general partners, all partners limited partners who have limited liability in relationship to the amount of capital contributions. -Allows "pass through" tax advantages.
Rights of Partners In the absence of a partnership agreement (oral or written) state statutes govern the rights of the partners.
-Management(Equal) -Share of Profits & Losses(Equally or in ratio of contributions) -Compensation(No compensation unless agreed) -IndemnificationReimbursement for expenses on behalf of partnership -Inspection of Books(Personal representative) -Accounting of Assets (Embezzlement/fraud) -Property Not individually owned but can use or assign part
Agreements can be written or oral, unless the Statute of Frauds requires a written agreement.
-Name of partnership -Names of partners -Location of business and state -Purpose -Duration -Amount of capital contributed by each partner -Value of real or personal property contributed -Distribution of gains and losses -Management -Bank -Fiscal Year -Dissolution events - retirement, death, incapacity -Arbitration of disputes
Events That Cause Dissociation:
-Notice -Unanimous Vote -Court or Arbitrator Order -Partner's bankruptcy, assignment of interest, incapacity, or death.
sole proprietorships and franchises: taxes
-a sole proprietor reports income from the business on his or her personal income taxes -the individual will file the form 1040, u.s. individual income tax returns. the income or loss from the business will be reported on schedule C, profit or loss from business, which is included with the form 1040 -also file schedule SE, self-employment tax, which consists of social security and medicare taxes due on profits. self-employed individuals may need to make quarterly payments for taxes -internal revenue service (IRS) provides some useful tips for small business owners
sole proprietorships and franchises: franchises
-agreement where franchisor (owner of trademark, trade name or copyright) licenses the franchisee to use the trade mark, trace name or copyright in the sale of goods or services -a franchise is a method of doing business; not actually a form of business organization
sole proprietorships and franchises: franchises advantages
-allows franchisors to enter new markets -franchisee receives the benefit of franchisor's expertise and resources while running their own business -ongoing support from franchisor -est brand-name recognition -customers receive uniform product expectations and quality
when choosing a business entity, entrepreneurs should consider:
-ease of creation -owners' liability -tax considerations -need for capital
sole proprietorships and franchises: franchises disadvantages
-franchisee is not completely independent as they must comply with certain procedures and restrictions -fees and royalties paid to franchisor -limited input on termination of franchises
distributorship
-license to sell product -exclusive territory -ex: car dealerships and beer distributors
chain style business operation
-member of a larger group of dealers -follow standard procedures -ex: restaurants; dunkin donuts, century 21
sole proprietorships
-one person owns the business, controls all decisions, receives all profits, and has unlimited liability for all obligations -sole proprietorship ≠ sole owner corporation -there are no special contracts or forms needed to establish a sole proprietorship, other than what might be required by local law (such as a certificate of occupancy for a business location)
sole proprietorships advantages
-owner is in complete control & receives all profits -flexibility -ease of creation; maintenance -earnings of the business taxed as personal income
sole proprietorships disadvantages
-owner is personally liable for all torts/contracts -business terminates at the owner's death -difficult to raise financing
Sole Proprietorships and Franchises: Laws Governing Franchising
-primarily governed by contract law -UCC article 2 governs franchises for sale of goods -laws protect franchisees from dishonest franchisors and prevent franchisors from wrongfully terminating franchises -federal trade commission (FTC) enacted the ftc franchise rule (16 CFR parts 436 and 437 requiring certain disclosures to prospective franchisees
franchise rule
-requires the franchisor provide a franchise disclosure document to the franchisee 14 days prior to signing the agreement -includes approx 23 items for disclosure such as, experience of the franchisor, current and past litigation against the franchisor, previous bankruptcies, costs of operation, recurring expenses, profits earned, and substantiating of these figures -Requires franchise cautionary statement to appear in at least 12 pt font in the required disclosure statement.
manufacturing or processing arrangement
-right to manufacture or sell -ingredients or materials furnished by the franchisor -ex: coca cola
sole proprietorships and franchises: fictitious names
-sole proprietors can operate using their own name or a trade name -when using a trade name, the business is often referred to as dba (doing business as) -most states require businesses that use trade names to file a fictitious business name statement with the designated government agency -discloses the name of the individual transacting business using the trade name
sole proprietorships and franchises: personal liability
-sole proprietors may lose his or her capital contributions to the business if it fails and is subject to unlimited personal liability -creditors with claims against the business may recover from the sole owners' personal assets such as cars, houses, bank accounts and other property
Under the UPA there is a presumption of a partnership if:
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.
principal forms of business organizations
1. Individual (sole) proprietorships 2. Partnerships (general & limited) 3. Corporations 4. S corporations 5. LLPs and LLCs 6. Joint Ventures 7. Franchises
Partners are fiduciaries and general agents of one another and the partnership. Partners have duties of:
Loyalty Care Inform Obedience Accounting
Duties of Partners - Loyalty
NO COMPETITION Partners cannot compete with the partnership without permission of the other partners. NO SELF-DEALING Self-dealing occurs when a partner deals with the partnership on a personal level such as selling goods to the partnership. NO TAKING PARTNERSHIP OPPORTUNITIES When a third party offers a partner an opportunity in his or her partnership status, the partner must first offer it to the partnership. If the partnership declines the opportunity, the partner may pursue it NO BREACH OF CONFIDENTIALITY Partners must keep partnership information confidential NO SECRET PROFITS Partners may not make secret profits from their status as partners
location of the franchise
Normally determined by franchisor. May include exclusive territorial rights.
Rights of Partners - Profits and Losses
PROFITS Unless an agreement specifies other arrangements, all general partners have the right to an equal share of the partnership's profits and losses. LOSSES If a partnership agreement specifies sharing of profits, but does not mention losses, the losses are shared in the same proportion as the profits. However, if the agreement provides for the sharing of losses, but does not specify how profits are shared, the profits are shared equally.
Duties of Partners - Accounting
Partners cannot sue the partnership or other partners, but may bring an action for an accounting, which is a formal judicial proceeding. The court reviews the partnership's transaction and awards each partner his or her share of the assets
Duties of Partners - Obedience
Partners must obey the provisions set forth in the partnership agreement and any decisions made by the partnership.
Duties of Partners - Inform
Partners owe a duty to inform the other partners of information that her or she possesses that is relevant to the partnership. If the partner does not inform the other partners, they are deemed to have knowledge, also known as imputed knowledge.
payment for the franchise:
Price to obtain the license and percentage of sales.
Joint and Several Liability
Third party can sue all partners (jointly) or individual partners (severally). The assets of partners not named in the lawsuit are not subject to the judgment. If partners are sued jointly and one partner pays the entire judgment he or she may seek contribution (reimbursement) from the other partners. NEW UPA
joint liability
Third party must sue ALL partners as a group, but each partner can be held liable for the full amount. All partnership assets must be used before individual assets can be taken. OLD UPA.
Rights of Partners - Management
Unless an agreement specifies other arrangements, all general partners have an equal right to participate in the management of the business, regardless of his or her financial contribution or share of profits.
corporation
artificial being created by government grant, which for many purposes is treated as a natural person
general partnership definition
partnerships are governed by both common and statutory law -in the absence of a partnership agreement, the uniform partnership act, as adopted by most states, governs the partnership
partnership
pooling of capital resources and the business or professional talents of two or more individuals with the goal of making a profit