Chapter 17 - Business Organizations

Disadvantages of the Sole Proprietorship

-A sole proprietor bears the burden of any losses or liabilities in the business. -Any lawsuit against the business or its employees can lead to unlimited personal liability for the owner of a sole proprietorship. -Creditors can go after personal assets to satisfy business debts. When the owner dies, the business automatically dissolves. -Gets sued goes after everything she owns -If there is no heirs at all, goes to the state

Limited liability company (LLC) -

-Is a hybrid business form that combines the limited liability aspects of a corporation and the tax advantages of a partnership. MMGP

Events Causing Dissociation

1. "Express will to withdraw" 2. Occurrence of an event agreed to in partnership agreement 3. Unanimous vote of other partners under certain circumstances 4. Order of a court or arbitrator 5. Partner's declaring bankruptcy

Liabilities of Partners in an LP

General partners are personally liable to the partnership's creditors (need at least 1 general partner)

Federal Regulation of Franchising

Laws, Franchise Rule created by the Federal Trade Commission (FTC)

Dissociation and Dissolution

Limited partner can withdraw with 6 months notice- most specify a term A general partner's voluntary dissociation will lead to dissolution unless all partners agree to continue the business

Flexibility in Taxation

Unless it indicates that it wishes to be taxed as a corporation, the IRS automatically taxes an LLC as a partnership. --Elect to be taxed as a corporation Its profits are "passed through" the LLC to the members, who then personally pay taxes on the profits.

Articles of partnership

*A written partnership agreement* Can include any terms that the parties wish, unless the terms are illegal or contrary to public policy or statute --Some partnership agreements must be in writing

Partnership

- Co-owners of a business and have joint control over its operation and the right to share in its profits - An association of two or more persons to carry on as co-owners a business for profit

Sole Proprietorship (cont.)

-The simplest form of business in which the owner is the business --Abby's pizza shop -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 -Proprietor owns the entire business and has a right to receive all of the profits

Dissolution

-the formal disbanding of a partnership or a corporation. -Can be bought up by the acts of the partners, operation of law, or by judicial decree -If the agreement says it will dissolve on a certain event, such as a partner's death or bankruptcy, then the occurrence of that event will dissolve the partnership

Three essential elements are implicit in the UPA' s definition of a partnership:

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

Chain-Style Business Operation

A franchise operates under a franchisor's trade name and is a member of a select group of dealers that engage in the franchisor's business. Follows standardized or prescribed methods of operation -McDonald's

Entity versus Aggregate Theory of Partnerships

A majority of the states treat a partnership as an entity for most purposes. It can usually sue or be sued, collect judgments, and have all accounting procedures performed in the name of the entity --Treat partnership as an entity - can sue or be sued --Can have title to real or personal property in its name rather than the names of its individual partners

Wrongful Dissociation

A partner has the power to dissociate at any time, but they may not have the right to do so

Fiduciary Duties

A partner owes the duty of care and the duty of loyalty to the partnership and to the other partners. -Must act consistently in good faith and fair dealing -Abby bought me out and then sold it the next day for 10 million **Breach of fiduciary duty by not telling me about the offer

Partnership by Estoppel

A partnership imposed by a court when nonpartners have held themselves out to be partners, or have allowed themselves to be held out as partners, and others have detrimentally relied on their misrepresentations. -Does not have to be written, just act as partners

Pass through entity

A partnership is a pass-through entity and not a taxpaying entity -Does not have tax liability

Partnership for a term

A partnership that is specifically limited in duration -Withdrawing before it is over is a breach of the agreement

Member:

A person who has an ownership interest in a limited liability company

Taxes

A sole proprietor pays only personal income taxes (including self-employment tax) on the business's profits.

Management Rights

All partners have equal rights in managing the partnership Each partner has one vote in management regardless of the proportional size of his or her interest in the firm -Unanimous consent for new partners, new business..etc.

The LLC can be member-managed

All the members participate in management and decisions are made by majority vote

Liability in an LLP

An LLP allows professionals to avoid personal liability for the malpractice of other partners

Accounting of Partnership Assets or Profits

An accounting of partnership is required to determine the value of each partner's share in the partnership --Want equitable remedy Order older brother to turn in books to younger brother

(Duties and Liabilities of Partners) Each partner is:

An agent of every other partner and acts as both a principal and an agent in any business transaction within the scope of the partnership agreement A general agent of the partnership in carrying out the usual business of the firm "or business of the kind carried on by the partnership" -Each partner buys in the partnership

Operating agreement:

An agreement in which the members of a limited liability company (LLC) set forth the details of how the business will be managed and operated. -Like bylaws

Partnership formation

An agreement to form a partnership can be oral, written, or implied by conduct If there is a partnership agreement it is over the partnership act

General partner

Assumes responsibility for the management of the partnership and liability for all partnership debts General Partner - Cassidy Inc by Cassidy President of Cassidy Inc Only liability is investment in Cassidy Inc

Inspection of books

Book and records must be accessible to all partners Entitled to inspect and make copies of the materials

Buy Sell Agreement

Buyout agreement

Industry-Specific Standards

Cannot make car dealer franchises have unrealistically high sales quotas

Preformation contracts

Contracts on behalf of a business org that is not formed yet -Pre Incorporation contracts

Limited Partner

Contributes capitol but has no right to participate in the management and operation of the business -Assumes no liability for partnership debts beyond the capital contributed

The Importance of Good Faith and Fair Dealing

Courts generally try to balance the rights of both parties.

Agency Concepts and Partnership Law

Each partner is deemed to be the agent of the other partners and of the partnership. -If I buy the oven and Abby does not want it, does not matter we are together

Dissociation and Dissolution of an LLC

Events that trigger a member's dissociation from an LLC include voluntary withdrawal, expulsion by other members or by court order, bankruptcy, incompetence, and death.

Decision-Making Procedures

Ex: Procedures for choosing or removing managers

Provisions

Ex: division of profits, dissociation and dissolution

Advantages of the Sole Proprietorship

Flexibility -The sole proprietor is free to make any decision she or he wishes concerning the business. -The proprietor can also sell or transfer all or part of the business to another party at any time and does not need approval from anyone else. Cooper's collectables Single taxes - through personal income tax Can have car expenses under company - Cooper's car is under the business

Laws governing franchising

Franchise relationships are governed by contract law. Sale of products - Article 2

Payment for the Franchise

Franchisee normally pays an initial fee or lump sum for the franchise license.

State Disclosures

Franchisors to provide presale disclosures to prospective franchisees

Authority of Partners

If a partner acts within the scope of their authority, the partnership is legally bound to honor the partner's commitments to third parties

Interest in the Partnership

If the agreement does not indicate how profits will be shared, UPA said that the profits will be shared *equally* - No matter if Emily put in 10,000 and abby put in 1,000 If they both get 5,000 then that is for taxes too If agreement does not apportion losses, losses will be shared in the same ratio as profits

Joint Liability of Partners

In partnership law, the partners' shared liability for partnership obligations and debts. --A third party must sue all of the partners as a group, but each partner can be held liable for the full amount.

Limited liability of LLC members

Liability of members is limited to the amount of their investments -Members are generally not personally liable -When member guarantees payment of business loan to the LLC the member may be held personally liable

The LLC can be manager-managed.

Members designate a group of people to manage the firm (members and/or nonmembers)

Partnership at will

No fixed duration is specified

Dissociation

Occurs when a partner ceases to be associated in the carrying on of the partnership business. --Normally entitles the partners to have their interest bought by the partnership (Bought out)

Sole Proprietorship

One level of taxation -Tiffany sues Cooper's mom for trade dress Insulate personal wealth from judgement

Compensation

Partner's income is normally a form of distribution of profits, according to their share

Information return

Partnership itself pays no taxes and is responsible only for filling an information return

Requirements for Termination

Prohibit termination without "good cause"

Property rights

Property acquired by a partnership is the property of the partnership and not of the partners individually -A partner is not a co-owner of partnership property and has no right to sell, mortgage, or transfer property to another

Formation of an LP

Public and formal proceeding Partners have to sign certificate of limited partnership -name , mailing address, and capital contribution of each general and limited partner

Formation of an LLP

Relatively easy to convert because the basic organizational structure remains the same

The Franchise Rule

Requires franchisors to disclose certain material facts that a prospective franchisee needs to make an informed decision concerning the purchase of a franchise -Weigh risks and benefits of an investment

Effects of Dissociation

Rights and duties of the dissociated partner Buyouts --Based on the amount that would have been distributed to the partner if the partnership had been wound up on the date of dissociation Liability to third parties

Groups

Sole Proprietorship Partnership Corporations

Grounds for Termination Set by the Franchise Contract

Termination of the franchise must be 'for cause"

Wrongful Termination

Termination provisions are more favorable to the franchisor Franchisee may receive little or nothing for the business on termination -Because franchisor owns the trademark and hence the business

Dissolution

The dissociated member normally has no right to force the LLC to dissolve.

Articles of Organization:

The document filed with a designated state official by which a limited liability company is formed.

Business Premises

The franchise agreement may specify whether the business premises must be leased or purchased.

Distributorship

The franchisor licenses a dealer (the franchisee) to sell its product. -Car dealer or beer distributor

Joint and Several Liability

The option of a third party to sue all of the partners together (jointly) or one or more of the partners separately (severally). -All partners can be held liable regardless of whether they participated in, knew about, or ratifies the conduct that gave rise to the lawsuit **Can get all the money for one partner if the other one does not have money

Liability of Partners

The partners are personally liable for the debts of the partnership

Jurisdictional Requirements

Unlike a corporation, federal law does not mention the citizenship of unincorporated associations such as the LLC, but the courts have tended to regard these entities as citizens of every state of which their members are citizens

Limited liability partnership (LLP)

is a hybrid form of business organization that is used mainly by professionals (attorneys and accountants) who normally do business as partners -Allows the partnership to continue as a pass through entity for tax purposes, but limits the personal liability of the partners *Single level taxation and limited liability*

Franchise

is an arrangement in which the owner of intellectual property licenses others to use it in the selling of goods or services. A franchisee (a purchaser of a franchise) is generally legally independent of the franchisor (the seller of the franchise).

Limited partnership (LP)

limits the liability of some of its owners -It consists of at least one general partner and one or more limited partners.

Winding up

the actual process of collecting, liquidating, and distributing the partnership assets.

Manufacturing or Processing-Plant Arrangement

the franchisor transmits to the franchisee the essential ingredients or formula to make a particular product. -Coca-Cola