Lesson 04 Sole proprietorship and Partenership

Liability for Crimes

Criminal liability is generally personal to the miscreant. Nonparticipating copartners are ordinarily not liable for crimes if guilty intent is an element.

Liability of the Partnership

When a partner has authority, the partnership is bound by contracts the partner makes on its behalf. "A partnership is liable for loss or injury, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course" [1] of partnership business or with its authority. But the firm is not liable for an act not apparently in the ordinary course of business, unless the act was authorized by the others.

Duty to Account

duty to allow copartners and their agents access to the partnership's books and records and to provide "any information concerning the partnership's business and affairs reasonably required for the proper exercise of the partner's rights and duties under the partnership agreement [or this Act]."

Under RUPA, then, a partnership has

entity characteristics, but the partners remain guarantors of partnership obligations all partners are, and each one of them is, ultimately personally liable for the obligations of the partnership, without limit, which includes personal and unlimited liability.

statement of qualification

establishes that the partnership has satisfied all conditions precedent to the qualification of the partnership as a limited liability partnership

the mercantile theory of the law merchant

held that a partnership is a legal entity that can have rights and duties independent of those of its members.

Sharing of Profits

There are two aspects to consider with regard to profits: first, whether the business is for-profit, and second, whether there is a sharing of the profit.

Right to Choose Partners

There is a relationship of trust and confidence between (or among) the parties; in both the poor judgment, negligence, or dishonesty of one can create liabilities on the other(s). No one is compelled to accept a partner against his or her will. The freedom to select new partners, however, is not absolute.

Validity of the Partnership Name

These require that anyone doing business under a name other than his real name register the name, together with the names and addresses of the proprietors, in some public office. Can not be described as a cooperation or use an already taken name

Forming a New Partnership

Under UPA the remaining partners have the right to carry on when (1) the dissolution was in contravention of the agreement, (2) a partner was expelled according to the partnership agreement, or (3) all partners agree to carry on.

Liability for Taxes

When partners get income from the firm they have to pay tax on it, but the partnership pays no tax

Winding Up the Partnership under UPA and RUPA

Winding up entails concluding all unfinished business pending at the date of dissolution and payment of all debts. The partners must then settle accounts among themselves in order to distribute the remaining assets. Can be stopped at anytime

How does a sole proprietorship differ from other company forms?

Sole proprietorships are the least complex and cheapest form of doing business Sole proprietorships require no formal paperwork to set up and don't need to be registered with the state Sole proprietorships do not shield individuals from liability for their business debts (see below) Sole proprietorships are treated as simple income for tax purposes, and do not need to have separate taxes prepared

Personal Liability of Partners, in General

Partnership as a form of business organization is that it imposes liability on the partners personally and without limit.

Who Can Be a Partner?

a partnership is not limited to a direct association between human beings but may also include an association between other entities, such as corporations or even partnerships themselves.

under the common-law theory,

a partnership was but a convenient name for an aggregate of individuals, and the rights and duties recognized and imposed by law are those of the individual partners.

Dissolution will happen in some cases by operation of law if

it becomes illegal to continue the business, or substantially all of it.

Business for Profit

Unincorporated nonprofit organizations (UNAs) cannot be partnerships.

Duties Partners Owe Each Other

(1) the duty to serve, (2) the duty of loyalty, (3) the duty of care, (4) the duty of obedience, (5) the duty to inform copartners, and (6) the duty to account to the partnership.

The Rights That Partners Have in a Partnership

(1) to distributions of money, (2) to management, (3) to choose copartners, (4) to property of the partnership, (5) to assign partnership interest, and (6) to enforce duties and rights.

Duty of Loyalty

In general, this requires partners to put the firm's interests ahead of their own. "something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior."

Dissolution by court order

A court may declare that it is, for various reasons specified in RUPA Section 801(5), no longer reasonably practicable to continue operation. Also, a court may order dissolution upon application by a transferee of a partner's transferable interest or by a purchaser at a foreclosure of a charging order if the court determines it is equitable.

Creation of Implied Partnership

An implied partnership exists when in fact there are two or more persons carrying on a business as co-owners for profit without intending to create a partnership at all.

How are sole proprietorships treated for tax purposes?

Any profit derived from your sole proprietorship is treated as your personal income and is accounted for on your individual tax return. Any such income is taxed to you in the year it was received.

Duty of Obedience

Expressly or impliedly that means no partner can disobey the partnership agreement or fail to follow any properly made partnership decision. This includes the duty to act within the authority expressly or impliedly given in the partnership agreement, and a partner is responsible to the other partners for damages or losses arising from unauthorized activities.

Effect of Dissolution on Authority

For the most part, dissolution terminates the authority of the partners to act for the partnership. No partner can bind the partnership if it has dissolved because it has become unlawful to carry on the business or if the partner seeking to exercise authority has become bankrupt.

A statement of denial

RUPA Section 304, operates to allow partners (and persons named as partners) an opportunity to deny any fact asserted in a statement of partnership authority. A statement of dissociation, RUPA Section 704, may be filed by a partnership or a dissociated partner, informing the world that the person is no longer a partner. This tells the world that the named person is no longer in the partnership.

Continuing after Dissociation

Section 701 of RUPA provides that if the firm continues in business after a partner dissociates, without winding up, then the partnership must purchase the dissociated partner's interest

Dissolution

Dissociation does not necessarily cause dissolution There are three causes of dissolution: (1) by act of the partners—some dissociations do trigger dissolution; (2) by operation of law; or (3) by court order. The partnership agreement may change or eliminate the dissolution trigger as to (1); dissolution by the latter two means cannot be tinkered with.

A statement of partnership authority

specifies the names of the partners authorized, or not authorized, to enter into transactions on behalf of the partnership and any other matters. The most important goal of the statement of authority is to facilitate the transfer of real property held in the name of the partnership. A statement must specify the names of the partners authorized to execute an instrument transferring that property.

Partnership is

the association of two or more persons to carry on as co-owners a business for profit The three elements are (1) the association of persons, (2) as co-owners, (3) for profit.

Can a Sole Proprietorship Stay in Operation After the Death of the Owner?

the sole proprietorship would technically expire upon the owner's death. Legally, there is no distinction between the sole proprietorship and the owner himself; they are one entity.

RUPA Section 105 allows partnerships to file these statements with

the state secretary of state's office; those affecting real estate need to be filed with (or also with) the local county land recorder's office.

Duty of Care

"the duty of care...is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law" The partnership agreement may reduce the duty of care so long as it is not "unreasonably reduce[d]"; it may increase the standard too

Under UPA, all partners are fiduciaries of each other

"Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property."

Dissolution by act of the partners may occur as follows

Any member of an at-will partnership can dissociate at any time, triggering dissolution and liquidation. The partners who wish to continue the business of aterm partnership, though, cannot be forced to liquidate the business by a partner who withdraws prematurely in violation of the partnership agreement. In any event, common agreement formats for dissolution will provide for built-in dispute resolution, and enlightened partners often agree to such mechanisms in advance to avoid the kinds of problems listed here. Any partnership will dissolve upon the happening of an event the partners specified would cause dissolution in their agreement. They may change their minds, of course, agree to continue, and amend the partnership agreement accordingly. A term partnership may be dissolved before its term expires in three ways. First, if a partner dissociated by death, declaring bankruptcy, becoming incapacitated, or wrongfully dissociates, the partnership will dissolve if within ninety days of that triggering dissociation at least half the remaining partners express their will to wind it up. Second, the partnership may be dissolved if the term expires. Third, it may be dissolved if all the partners agree to amend the partnership agreement by expressly agreeing to dissolve.

Right to Information and Inspection of Books

"A partnership shall provide partners and their agents and attorneys access to its books and records. It shall provide former partners and their agents and attorneys access to books and records pertaining to the period during which they were partners. The right of access provides the opportunity to inspect and copy books and records during ordinary business hours. A partnership may impose a reasonable charge, covering the costs of labor and material, for copies of documents furnished."

Activities Affected by the Duty of Loyalty

may not compete with the partnership, may not make a secret profit while doing partnership business, must maintain the confidentiality of partnership information.

Sharing the Profit

"a person who receives a share of the profits of a business is presumed to be a partner in the business," but this presumption can be rebutted by showing that the share of the profits paid out was (1) to repay a debt; (2) wages or compensation to an independent contractor; (3) rent; (4) an annuity, retirement, or health benefit to a representative of a deceased or retired partner; (5) interest on a loan, or rights to income, proceeds, or increase in value from collateral; or (5) for the sale of the goodwill of a business or other property.

any partner is entitled to a formal account (or accounting) of the partnership affairs under the following conditions:

1. If he is wrongfully excluded from the partnership business or possession of its property by his copartners; 2. If the right exists under the terms of any agreement; 3. If a partner profits in violation of his fiduciary duty (as per UPA 22); and 4. Whenever it is otherwise just and reasonable.

Effect of Dissolution

A partnership continues after dissolution only for the purpose of winding up its business. The partnership is terminated when the winding up of its business is completed.

Association of Persons

A partnership is a contractual agreement among persons, so the persons involved need to have capacity to contract. "'Person' means an individual, corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision, agency, or instrumentality, or any other legal or commercial entity."

What is a sole proprietorship?

A sole proprietorship is a company with only one owner and is not registered with the state, unlike a limited liability company (LLC) or corporation. Although you do not have to file paperwork to set up a sole proprietorship, you do still have to acquire business licenses and permits, just like with any other form of business.

By Operation of Law

A third reason for dissolution is the occurrence of some event, such as enactment of a statute, that makes it unlawful to continue the business. Or a partner may die or one or more partners or the entire partnership may become bankrupt. Dissolution under these circumstances is said to be by operation of law.

Effect of Dissociation

After a partner dissociates, the partner's right to participate in management terminates. The dissociated partner's duty of loyalty and care terminates; the former partner may compete with the firm, except for matters arising before the dissociation. [

After Dissolution

After a partnership has dissolved, it can follow one of two paths. It can carry on business as a new partnership, or it can wind up the business and cease operating

Partners' Personal Liability for Torts

All partners are also liable for any partner's tort committed in the scope of partnership business under agency law The partner who commits a tort or breach of trust must indemnify the partnership for losses paid to the third party

Right to Management

All partners are entitled to share equally in the management and conduct of the business, unless the partnership agreement provides otherwise. [

Voluntary Assignment

At common law, assignment of a partner's interest in the business—for example, as a mortgage in return for a loan—would result in a legal dissolution of the partnership. Section 27 of UPA declares that assignment of an interest in the partnership neither dissolves the partnership nor entitles the assignee "to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books."

Liability of Existing Partners

Contract liability is joint and several: that is, all partners are liable RUPA requires the judgment creditor to exhaust the partnership's assets before going after the separate assets of a partner.

By Court Order

Courts are empowered to dissolve partnerships when "on application by or for a partner" a partner is shown to be a lunatic, of unsound mind, incapable of performing his part of the agreement, "guilty of such conduct as tends to affect prejudicially the carrying on of the business," or otherwise behaves in such a way that "it is not reasonably practicable to carry on the business in partnership with him."

Dissolution in Violation of the Agreement

Dissolution may also result from violation of the agreement, as when the partners decide to discharge a partner though no provision permits them to do so, or as when a partner decides to quit in violation of a term agreement.

Written versus Oral Agreements

If the business cannot be performed within one year from the time that the agreement is entered into, the partnership agreement should be in writing to avoid invalidation under the Statute of Frauds. Most partnerships have no fixed term, however, and are partnerships "at will" and therefore not covered by the Statute of Frauds.

Co-owners of a Business

If what two or more people own is clearly a business—including capital assets, contracts with employees or agents, an income stream, and debts incurred on behalf of the operation—a partnership exists To establish a partnership, the ownership must be of a business, not merely of property.

Partnership "Statements"

New under RUPA is the ability of partnerships, partners, or even nonpartners to issue and file "statements" that announce to the world the establishment or denial of authority. The goal here is to control the reach of apparent authority.

Right to Assign Partnership Interest

One of the hallmarks of the capitalistic system is that people should be able to dispose of their property interests more or less as they see fit. Partnership interests may be assigned to some extent.

Settlement of Accounts among Partners

Partners are entitled to share equally in the profits and surplus remaining after all liabilities, including those owed to partners, are paid off, although the partnership agreement can state a different share—for example, in proportion to capital contribution. If after winding up there is a net loss, whether capital or otherwise, each partner must contribute toward it in accordance with his share in the profits, had there been any, unless the agreement states otherwise.

Right to Property of the Partnership

Partners are the owners of the partnership, which might not include any physical property; that is, one partner could contribute the building, furnishings, and equipment and rent those to the partnership Unless a contrary intention can be shown, property acquired with partnership funds is partnership property, not an individual partner's

Partnership Liability for Torts

Section 13 of UPA says the partnership is liable for "any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners." A civil "wrongful act" is necessarily either a tort or a breach of contract, so no distinction is made between them. For tortious acts, the partners are said to be jointly and severally liable under both UPA and RUPA, and the plaintiff may separately sue one or more partners.

Creation of an Express Partnership

The most common way of forming a partnership is expressly—that is, in words, orally or in writing. no agreement is necessary as long as the tests of partnership are met However, they ought to have an agreement in order to spell out their rights and duties among themselves. The agreement itself is a contract and should follow the principles and rules spelled out

Who Can Participate in Winding Up

The partners who have not wrongfully dissociated may participate in winding up the partnership business.

Rights to Distributions

The purpose of a partnership is ultimately to distribute "money or other property from a partnership to a partner in the partner's capacity." Profits and losses may be shared according to any formula on which the partners agree. A partner who incurs liabilities in the normal course of business or to preserve its business or property is entitled to indemnification The law provides that "the partnership must reimburse a partner for an advance of funds beyond the amount of the partner's agreed capital contribution, thereby treating the advance as a loan." A partner gets his money from the firm by sharing the profits, not by a salary or wages.

Dissolution in Accordance with the Agreement

The term of the partnership agreement may have expired or the partnership may be at will and one of the partners desires to leave it. All the partners may decide that it is preferable to dissolve rather than to continue.

Liability of Incoming Partners

Under RUPA Section 306(b), a new partner has no personal liability to existing creditors of the partnership, and only her capital investment in the firm is at risk for the satisfaction of existing partnership debts. Sections 17 and 41(7) of UPA are in accord. But, again, under either statute a new partner's personal assets are at risk with respect to partnership liabilities incurred after her admission as a partner.

Am I personally liable for my business under a sole proprietorship?

Yes. Unlike other forms of incorporation, you are personally liable for any of your sole proprietorship's debts or legal judgments against your business. This means that in order to satisfy debts owed by your business, debt collectors can come after your personal assets -- homes, cars, etc.

Duty to Inform Copartners

a partner is expected to inform copartners of notices and matters coming to her attention that would be of interest to the partnership.

Partnership law

a partnership as "the association of two or more persons to carry on as co-owners a business for profit...whether or not the persons intend to form a partnership."

For Purposes of Bankruptcy

a partnership is an entity that may voluntarily seek the haven of a bankruptcy court or that may involuntarily be thrust into a bankruptcy proceeding by its creditors. The partnership cannot discharge its debts in a liquidation proceeding under Chapter 7 of the bankruptcy law, but it can be rehabilitated under Chapter 11

legal entity

a person or group that the law recognizes as having legal rights, such as the right to own and dispose of property, to sue and be sued, and to enter into contracts; the entity theory is the concept of a business firm as a legal person, with existence and accountability separate from its owners.

Involuntary Assignment

if a partner is sued in his personal capacity and a judgment is rendered against him, the question arises: may the judgment creditor seize partnership property? Section 28 of UPA and RUPA Section 504 permit a judgment creditor to obtain a charging order, which charges the partner's interest in the partnership with obligation to satisfy the judgment. But the creditor is not entitled to specific partnership property. The partner may always pay off the debt and redeem his interest in the partnership. If the partner does not pay off the debt, the holder of the charging order may acquire legal ownership of the partner's interest.

For Purposes of Litigation

lawsuits to enforce a partnership contract or some other right must be filed in the name of all the partners. Similarly, to sue a partnership, the plaintiff must name and sue each of the partners. This cumbersome procedure was modified in many states, which enacted special statutes expressly permitting suits by and against partnerships in the firm name. In suits on a claim in federal court, a partnership may sue and be sued in its common name.

For Purposes of Owning Real Estate

partnership property, real or personal, could be held in the name of the partners as "tenants in partnership"—a type of co-ownership—or it could be held in the name of the partnership. Under RUPA, "property acquired by the partnership is property of the partnership and not of the partners." Under either law, a partner may bring onto the partnership premises her own property, not acquired in the name of the partnership or with its credit, and it remains her separate property. neither law can a partner unilaterally dispose of partnership property, however labeled, for the obvious reason that one cannot dispose of another's property or property rights without permission. [

Partnership law and tax law

permit an investor to put capital into a limited partnership and realize tax benefits without liability for the acts of the general partners.

For Accounting Purposes

the partnership may keep business records as if it were a separate entity, and its accountants may treat it as such for purposes of preparing income statements and balance sheets.

Creation of Partnership by Estoppel

Ordinarily, if two people are not legally partners, then third parties cannot so regard them. Partnership by estoppel has two elements: (1) a representation to a third party that there is in fact a partnership and (2) reliance by the third party on the representation.

every partnership contract should set forth clearly the following terms

(1) the name under which the partners will do business; (2) the names of the partners; (3) the nature, scope, and location of the business; (4) the capital contributions of each partner; (5) how profits and losses are to be divided; (6) how salaries, if any, are to be determined; (7) the responsibilities of each partner for managing the business; (8) limitations on the power of each partner to bind the firm; (9) the method by which a given partner may withdraw from the partnership; (10) continuation of the firm in the event of a partner's death and the formula for paying a partnership interest to his heirs; and (11) method of dissolution.

Closing a Sole Proprietorship

She filled her final orders. She closed her website in two stages - she initially posted a message about closing her business and no longer taking orders and removed the order-taking pages from the site. She planned a complete shutdown of the site a number of months later, when it seemed that enough customers had seen the message. She notified her creditors and debtors that she was closing and told them to submit final bills or payments. She paid all of her outstanding bills. She made sure that her suppliers knew that she was no longer in business. She donated the balance of her stock to food shelters. She sold her equipment. She put aside an appropriate amount of money for taxes and unknown creditors. She notified her commercial liability carrier of her closure. She kept detailed records of each transaction in anticipation of completing her income taxes

In Section 6(1), UPA provides a neutral definition of partnership

("an association of two or more persons to carry on as co-owners a business for profit") and retained the common-law theory that a partnership is an aggregation of individuals—the aggregate theory

Causes of Dissociation

(1) a partner says she wants out; (2) an event triggers dissociation as per the partnership agreement; (3) a partner is expelled as per the agreement; (4) a partner is expelled by unanimous vote of the others because it is unlawful to carry on with that partner, because that partner has transferred to a transferee all interest in the partnership (except for security purposes), or because a corporate partner's or partnership partner's existence is effectively terminated; (5) by a court order upon request by the partnership or another partner because the one expelled has been determined to have misbehaved (engaged in serious wrongful conduct, persists in abusing the agreement, acts in ways making continuing the business impracticable); (6) the partner has declared bankruptcy; (7) the partner has died or had a guardian appointed, or has been adjudicated as incompetent; (8) the partner is a trust whose assets are exhausted; (9) the partner is an estate and the estate's interest in the partnership has been entirely transferred; (10) the partner dies or, if the partner is another partnership or a corporation trust or estate, that entity's existence is terminated.

Under the Uniform Partnership Act (UPA) Section 9(3), the firm is not liable for five actions that no single partner has implied or apparent authority to do, because they are not "in the ordinary course of partnership."

(1) assignment of partnership property for the benefit of creditors, (2) disposing of the firm's goodwill (selling the right to do business with the firm's clients to another business), (3) actions that make it impossible to carry on the business, (4) confessing a judgment against the partnership, and (5) submitting a partnership claim or liability. RUPA omits that section, leaving it to the courts to decide the outer limits of the agency power of a partner.

Duty to Serve

Unless otherwise agreed, expressly or impliedly, a partner is expected to work for the firm.

For Purposes of Taxation

partnerships are not taxable entities, so they do not pay income taxes. each partner's distributive share, which includes income or other gain, loss, deductions, and credits, must be included in the partner's personal income tax return