Chapter 19 Business Law

Partnership

An agreement by two or more persons to carry on, as co-owners, a business for profit.

Operating agreement

An agreement in which the members of a limited liability company set forth the details of how the business will be managed and operated

Operating Agreement

An agreement in which the members of a limited liability company set forth the details of how the business will be managed and operated.

cooperative

An association, which may or may not be incorporated, that is organized to provide an economic service to its members.

Rights of Partners

In a general partnership, all partners have equal rights in managing the partnership [UPA 401(f)]. Unless the partners agree otherwise, each partner has one vote in management matters regardless of the proportional size of his or her interest in the firm.

Essential Elements of a Partnership

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

The Sharing of Profits and Losses

1.Debt by installments or interest on a loan 2.Wages of employee or payment for services 3.Rent to a landlord 4.Annuity to surviving spouse 5.Sale of the goodwill of business or property

Business Trust

A form of business organization, created by a written trust agreement, that resembles a corporation

chain-style franchise

A franchisor licenses a franchisee to make and sell its products or distribute its services to the public from a retail outlet serving an exclusive territory.

Distributorship Franchise

A franchisor manufactures a product and licenses a franchisee to distribute the product to the public

Syndicate

A group of individuals or firms that join together to finance a project. A syndicate is also called an investment group.

Limited Liability Company (LLC)

A hybrid form of business enterprise that offers the limited liability of a corporation and the tax advantages of a partnership

Joint stock company

A hybrid form of business organization that combines the characteristics of a corporation and 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. An LLP is a pass-through entity for tax purposes, but a partner's personal liability for the malpractice of other partners is limited.

Joint venture

A joint undertaking by two or more persons or business entities to combine their efforts or their property for a single transaction or project or for a related series of transactions or projects.

Advantages of the Sole Proprietorship

A major advantage of the sole proprietorship is that the proprietor owns the entire business and has a right to receive all of the profits (because he or she assumes all of the risks). In addition, starting a sole proprietorship is often easier and less costly than starting any other kind of business, as few legal formalities are involved. A sole proprietor pays only personal income taxes (including Social Security and Medicare taxes) on the business's profits, which are reported as personal income on the proprietor's personal income tax return.

Liability in LLP

An LLP allows professionals, such as attorneys and accountants, to avoid personal liability for the malpractice of other partners. A partner in an LLP is still liable for her or his own wrongful acts, such as negligence, of course. Also liable is the partner who supervised the individual who committed a wrongful act.

State Regulation of Franchising

A number of states have laws similar to the federal rules requiring franchisors to provide presale disclosures to prospective franchisees. Many state laws also require that a disclosure document (known as the Franchise Disclosure Document, or FDD) be registered or filed with a state official. A state law may require the disclosure of information such as the actual costs of operation, recurring expenses, and profits earned, along with data substantiating these figures. State deceptive trade practices acts may also apply and may prohibit certain actions on the part of franchisors. To prevent arbitrary or bad faith terminations, state law may prohibit termination without "good cause" or require that certain procedures be followed in terminating a franchising relationship.

Limited Partnership (LP):

A partnership consisting of one or more general partners and one or more limited partners.

Dissociation and Dissolution

Dissociation is a change in the relationship of the partners caused by any partner ceasing to be associated with the carrying on of the business. Dissociation and Dissolution occurs when a partner expressly indicates an intent to withdraw. This requires that the business be wound up. A partnership is sound by a partner's act after dissolution if it is appropriate for winding up the business or there is a new contract with someone who did not know about the dissolution. Therefore, the onus is on the dissolving partner to announce his departure.

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

Federal Regulation of Franchising

Franchise Rule requires franchisors to disclose certain material facts that a prospective franchisee needs in order to make an informed decision concerning the purchase of a franchise.7 Those who violate the Franchise Rule are subject to substantial civil penalties, and the FTC can sue on behalf of injured parties to recover damages.

Tax Treatment of Partnerships

Modern law does treat a partnership as an aggregate of the individual partners rather than as a separate legal entity in one situation—for federal income tax purposes. The partnership is a pass-through entity and not a taxpaying entity.

Partner's Dissociation

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

Jurisdictional requirements of a LLC

One of the significant differences between LLCs and corporations involves federal jurisdictional requirements. Under federal law, a corporation is deemed to be a citizen of the state where it is incorporated and maintains its principal place of business.

Dissociation of an LLC

Recall that in the context of partnerships, dissociation occurs when a partner ceases to be associated in the carrying on of the business. The same concept applies to LLCs. A member of an LLC has the power to dissociate from the LLC at any time, but she or he may not have the right to dissociate.

Dissolution of an LLC

Regardless of whether a member's dissociation was wrongful or rightful, normally the dissociated member has no right to force the LLC to dissolve. The remaining members can opt to either continue or dissolve the business.

Dissoulution

The formal disbanding of a partnership or a corporation. Partnerships can be dissolved by acts of the partners, by operation of law, or by judicial decree.

Advantages of a LLC

The main disadvantage of the LLC is that state LLC statutes are not uniform. Therefore, businesses that operate in more than one state may not receive consistent treatment.

Disadvantages of the Sole Proprietorship

The major disadvantage of the sole proprietorship is that the proprietor alone bears the burden of any losses or liabilities incurred by the business enterprise. In other words, the sole proprietor has unlimited liability, or legal responsibility, for all obligations incurred in doing business. The personal liability of a sole proprietor was at issue in the following case.

Winding Up

The second of two stages in the termination of a partnership or corporation, in which the firm's assets are collected, liquidated, and distributed, and liabilities are discharged.

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.

Formation of an LLC

To form an LLC, articles of organization must be filed with a central state agency—usually the secretary of state's office [ULLCA 202]. Typically, the articles are required to include such information as the name of the business, its principal address, the name and address of a registered agent, the names of the members, and information on how the LLC will be managed. The business's name must include the words Limited Liability Company or the initials LLC. In addition to requiring the filing of articles of organization, a few states require that a notice of the intention to form an LLC be published in a local newspaper.

liabilities of a limited partnership

Unlimited personal liability of all general partners; limited partners liable only to the extent of their capital contributions.

Winding Up LLC

When an LLC is dissolved, any members who did not wrongfully dissociate may participate in the winding-up process. To wind up the business, members must collect, liquidate, and distribute the LLC's assets.

Formation of an LLP

When an LLP formed in one state wishes to do business in another state, it may be required to register in the second state—for instance, by filing a statement of foreign qualification [UPA 1102].

Manufacturing or processing-plant arrangement

the franchisor transmits to the franchisee the essential ingredients or formula to make a particular product. The franchisee then markets the product either at wholesale or at retail in accordance with the franchisor's standards. Examples of this type of franchise are Pepsi-Cola and other soft-drink bottling companies.