MGMT Chapter 7

Zhou v. Bickley

-Bickley suggested to Zhou and Zang that they open a new motorcycle repair shop -the 3 of them signed a lease on a building for the shop -they gave Bickley more money than he asked for -Bickley refused to let them be involved at all -they demanded a written agreement and he refused -suit was filed demanding return of funds expended -Bickley counterclaimed for breach of contract by his partners -the trial court held that there was no partnership; there was only a vague agreement to open a motorcycle repair shop -Bickley operated as a sole proprietor who borrowed money that he owed to Zhour and Zang

Eagles Landing Development v. Eagles Landing Apartments

-Eagles Landing Development LLC (Eagles) contracted to build apartments for Eagles Landing Apartments LP (ELA) for $1.4 million -ELA's general partner was Bluff City -There were two limited partners, PNC (LP) and Columbia (corporation) -Eagles completed the work but was still owed $931,000 -The agreement states that Bluff City's contribution would not exceed the net cash low from the rental apartments -The cash flow was not good, so there was no money there -All cash invested in ELA by the partners was gone -Eagles sued for contribution by PNC and Columbia -The trial court held that LP owed the $931,000 -Trial court awarded Appellee Developer the remaining balance due under a Development Agreement that was entered by and between Appellee and the Appellants, a partnership and its limited liability partners, for construction of an apartment complex -Appellants contend that Appellee was not entitled to final payment because the general partner had not funded the development fees that were contemplated under a Partnership Agreement, to which Appellee was not a party. -Specifically, Appellants argue that the payment under the Development Agreement is contingent upon satisfaction of the funding requirements specified in the Partnership Agreement. -We conclude that the conditions precedent under the Development Agreement were met, and that the Appellee was, therefore, entitled to its full fee under the Development Agreement. -The trial court assessed judgment against the limited liability partners and the partnership -Appellants' status as limited partners protects them from liability for the debts of the partnership. -Appellee contends that it is a third-party beneficiary under the Partnership Agreement and may, therefore, have judgment against the limited partners who were parties to that agreement. -We conclude that the third-party beneficiary issue is waived and that the trial court erred in entering judgment against the limited partners. Affirmed in part, reversed in part, and remanded.

Ocean Avenue

-LLC was owned by two companies who each appointed a manager. -the operating agreemnet contained no provisions relating to dissolution of the LLC -These managers argued and King wanted his company (Crown Royal) to pull out and he sued for work to stop and the dissolution of the LLC. -He won. -The appellate court said that the supreme court should be reversed, the petition denied and the proceeding dismissed Courts must 1st examine the LLC Operating agreement

Dunkin' Donuts Franchised Restaurants v. Sandip

-Sandip was a Dunkin Donus franchise -Dunkin Donuts alleges that the defendants breached their franchise agreements by failing to follow the franchise agreement -Dunkin Donuts moved for a court order for Sandip to turn over physical possession of the shops to Dunkin Donuts -Sandip counterclaimed that Dunnkin Donuts rejected a reasonable proposal from a buyer to take over the shops -Dunkin Donuts analysis showed that the stores at issue would not breakeven, therefor they did not act unreasonably by failing to investigate the buyer's financial condition =Dunkin Donuts is entitled to terminate the franchise agreements pursuant to the termination clauses and is entitled to terminate the lease agreements

general partners and limited partners

-a limited partnership has at least one general partner and one or more limited partners -the general partners in a limited partnership are treated in the same manner as are partners in a general partnership -they have responsibility for managing the business and are personally liable to the partnership's creditors

benefit corporation

-a new class of corporation that voluntarily meets high standards of purpose, accountability, and transparency -have corporate purpose to create a material positive impact on society and the environments -are required to consider the impact of their decisions not only on shareholders but also on workers, community, and the environment -are required to make available to the public an annual benefit report that assesses their overall social and environmental performance against a 3rd party standard

forming a partnership

-a partnership can begin with an oral agreement between two or more persons to do business as partners or with an implied agreement that may be inferred from the conduct of the partners as they do business together -if you and your friend start selling t-shirts together on the internet, you have a formed partnership -partnerships formalize their relationship by a written agreement that covers basics, finances, management, dissolution

limited liability

-allows persons to invest in a business without placing their personal wealth at risk -limited liability means that if the sums owed are so large that the organization must go into bankruptcy, the owners-the shareholders or members- could lose their investments but cannot be held personally liable -no creditor of the business can assert that the owners must draw on their personal assets to pay the debts of the limited liability organization -in the case of a general partnership or proprietorship, the owners can face unlimited liability

corporation

-an artificial person, or legal entity, created under state law (rights and responsibilities are separate from the owners) -like a proprietorship, the corporation is a legal entity with rights and responsibilities separate from the owners (recognized under both federal and state law as "a person")

partnership

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

Forming a partnership

-can begin with an oral agreement -formalize relationship with written agreement that covers (basics, finances, management, and dissolution)

pierce the corporation viel

-courts can pierce the corporate veil of limited liability organizations and hold the owners personally liable under some circumstances -that is, the court disregards the corporate entity by finding that the entity is a sham and that the owners actually operate the business as a proprietorship or partnership -the court can then impose liability on shareholders in instances of fraud, undercapitalization, or failure to follow corporate formalities -as the K.C. Roofing case illustrates, the court pierces the corporate veil so the corporate form of business organization may not be used to simply avoid obligations

Terminating a limited partnership: in the final dispersal of the assets of the limited partnership...

-creditors rights precede partners' rights -the limited partners receive their shares of the profits and their capital contributions before general partners receive anything unless the LP agreement holds otherwise

disadvantage/advantage of corporate form of organization

-disadvantage: double taxation of profits -advantage: limited liability

true or false: corporations and LLCs are allowed perpetual life

-false: only corporations are -although death, bankruptcy, retirement, resignation, or expulsion of any member terminates the membership of a member, similar to a partnership, the LLC itself can continue if all remaining members give their consent

professional corporation

-formed so the liability of the members of the group, such as the doctors, can be limited to what is invested in the PC -therefore, each physician is not personally liable for the debts of all the doctors, which could arise from a costly malpractice judgment against one doctor in the group -a doctor who loses a malpractice case does not have limited liability because she is still personally liable for her negligence, but the other members of the practice are protected because the joint entity cannot be used to attribute the negligent doctor's liability to others

disadvantages of sole proprietership

-limited alternatives exist for raising capital -owner is personally liable for all business debts

close corportation

-limited number of shareholders, usually 30 to 50, depending on the state law -shares may not be sold openly so there is very limited market for shares -the shareholders must have an agreement that governs the affairs of the corporation, but these entities are not subject to formal rules regarding shareholder and director meetings as are required of regular corporations

dissolution of a partnership

-occurs when an event takes place that precludes the partners from engaging in any new business

Latta v. Kilbourn

-one partner cannot directly or indirectly use partnership assets for his own benefits -he cannot, in conducting the business of a partnership, take any profit clandestinely for himself -he cannot carry on the business of the partnership for his private advantage -he cannot carry on another business in competition or rivalry with that of the firm, thereby depriving it of the benefit of his time, skill, and fidelity without being accountable to his copartners for any profit that may accrue to him

S corporation

-only natural persons who are US citizens or legal residents may be shareholders, not other corporations or partnerships -internal revenue service -does not pay taxes, so it is like a partnership for tax purposes

joint venture

-particular kind of partnership -an association of two or more persons to carry out a single business enterprise for profit; also a common undertaking in which two or more combine their property, money, efforts, skill, or knowledge

forming a limited partnership

-partners must execute a written agreement called a certificate of limited partnership and files it with the appropriate state official, usually the Secretary of State -the certificate puts third parties on notice that the limited partners' assets are not available to satisfy claims that the limited partners lack the ability to commit the partnership to obligations

Sole proprietorship

-person doing business for himself or herself -legally and practically, the owner is the business -proprietor generally owns all or most of the business property and is responsible for the control, liabilities, and management of the business -capital comes from the owner's own resources or is borrowed with the owner as debtor

operating agreement

-provides rules about the operation of the company and the relationships of the members -establishes the company's method of management, allocation of profits and losses among members, restrictions on the transfer of membership interests, and the process to be followed in dissolving the company

general partners

-share control over the business's operations and profits -may be treated as a legal entity -a partnership may sue or be sued and collect judgments in its own name

3 major groups of a corporation

-shareholders -board of directors -managers

limited partnership

-special form of a general partnership -business organization made up of 2 or more persons who have entered into an agreement to carry on a business venture for a profit -unlike in a general partnership, however, not all partners in a limited partnership have the right to participate in the management of the enterprise and not all are liable for partnership debts -limited partners are investors who may not participate in managing the business--they are not liable for the debts or torts of the LP beyond their capital contibutions

successful franchise

-trademark that conveys authenticity and exclusivity -uniform product or service

limited liability company

-treated like a corporation for liability purposes (limited liabilty) but like a partnership for federal tax purposes (profits are taxed only once as the earnings of the owners of the LLC) -no members or manager is personally liable for the debts of an LLC (however, members may agree by contract to be personally liable for the company's debts)

termination

1. dissolution phase 2. wining up phase

franchises may be separated into 3 basic cateegories

1. product distributorships 2. trademark or trade-name licensing 3. business format franchising

Storetrax.com v. Gurland

Gurland founded the company and as part of the contract he was to get a years pay if he were fired. He was later demoted and was not given payment and sued. he won. The issue was with fiduciary duty and the appeal was affirmed

KC Roofing Center v On Top Roofing

The Nugents owned many businesses for a short time. KC roofing was owed money from the Nungents' On top roofing but it didn't exist anymore. KC Roofing sued Nugents as personally liable and won. Issue was with corporate shielding. Appellate court affirmed.

the dissolution of a limited liability company is initially....

a contract based analysis

proxy

a well written authorization to cast their vote so that the do not have to attend the meeting in person

limited liabilty

allows persons to invest in a business without placing their personal wealth at risk

unlike a corporation, an LLC is technically not allowed "perpetual life"

although death, bankruptcy, retirement, resignation, or expulsion of any member terminates the membership of the member, similar to a partnership, the LLC itself can continue if all remaining members give their consent

corporation: method of creation

chartered under state statute

if the shares of stock in a company are held by a small group of shareholders and not actively traded, the company is said to be a...

close corporation

limited liability company: duration

company dissolves after fixed time or a specific event

partnership: method of creation

created by agreement of parties; statutes may apply

limited liability company: method of creation

created under statute by agreement of members

proprietorship: control

determined by owner

corporation: taxation

double taxation; profits of corporation and shareholders' shares of profits are both taxed

partnership: duration

ended by agreement or by death or withdrawal of a partner

true or false: in Dunnkin Donuts v Sandip, the court held that the parent company abused the rights of the franchisee by demanding unrealistic sales levels

false

true or false: limited partners may take control of the firm, contribute services to the business, and allow their names to appear in the name of the business

false

true or false: partners in a partnership are said to have a duty based on ordinary care to each other

false

true or false: both the employees and the corporation itself enjoy the privilege against self incrimination under the 5th amendment

false: the corporation itself does not

The Federal Trade Commission regulation that guides disclosure when franchise offerings are made is called the....

franchise rule

franchise

generally exists whenever a franchisee, in return for payment of a franchise fee, is granted the right to sell goods or services by a franchiser according to a marketing plan

partnership: transferability of ownership interests

generally, sale of partnership interest terminates partnership

In the case Storetrax.com v. Gurland, the appeals court held that when the board of directors refused to pay a large sum to a board member who was a former manager, the directors...

had an obligation to make the payment promised by contract

managers

have the same broad duties of care and loyalty as directors do

limited liability company: taxation

if IRS conditions are met, same as a partnership (profits taxed to each owner's share)

winding up of partnership affairs

includes completing any unfinished business and then collecting and distributing the partnership's assets

corporation: entity status

legal entity district from owners

limited liability company: capital

limited to what members contribute, may also borrow

proprietorship: capital

limited to what owner can raise or borrow

partnership: capital

limited to what partners contribute or can borrow

business judgement rule

makes directors and managers immune from liability when problems result from honest mistakes in judgement, so long as there is a reasonable basis for the decisions

who controls a corporation

management and board of directors

proprietorship: transferability of ownership interests

may be sold at any tie; new proprietorship formed

corporation: duration

may have perpetual existence

investors in a limited liability corporation (LLC) are called...

members

limited liability company: liability of owners

members liable to the extend of paid-in capital

proprietorship: entity status

not separate form owner

limited liability company: control

operating agreement specifies management control

limited liability company: transferability of ownership interests

other members must consent to transfers

proprietorship: method of creation

owner begins business operations

proprietorship: liability of owners

owner personally liable for debts

partnership: control

partners have equal control unless otherwise agreed; limited partners have no management rights

if the owner of a corporation abuses the purpose of the corporation so as to avoid payments due to creditors, it is possible that the court will ______ of the coporation

pierce the veil

how is a sole proprietorship taxed?

profits of the business are taxed to the owner personally

partnership: taxation

profits taxed to each owner's share

proprietorship: taxation

profits taxed to owner as individual

C corporation

regular corporation

fiduciary duty

requires that each partner act in good faith for the benefit of the partnership

bylaws

rules that regulate and govern the internal operations of the corporation

corporation: capital

sale of more shares increases capital; may also borrow

proprietorship: duration

same as owner

limited liability company: entity status

separate from owners for same purposes

partnership: entity status

separate from owners for some purposes

who owns the corporation

shareholders

corporation: control

shareholders elect board of directors who set policy and appoint officers to manage

corporation: liability of owners

shareholders liable only to the extend of paid-in captial

corporation: transferability of ownership interests

shares of stock can be transferred unless restricted by contract

legally, the principal of a corporation is...

the board of directors

board of directors

the governing committee of a corporation (must meet at least once a year and keep records of meetings or the corporate status may be lost)

method of creation: LLC

the organizers file a document referred to as articles of organization

in the Ocean Avenue case, where the members in an LLC argue about how to run a business, the appeals court held that..

there was no reason to terminate the LLC; it would continue to function

so long as limited partners maintain their investor position...

they are not liable for debts owed by the limited partnership

what happens is limited partners take an active role in managing the business

they lose their limited liability and become general partners

true or false: LLCs ordinarily, by law, have limited life

true

true or false: limited partnerships must have at least one general partner

true

true or false: partners must execute a written agreement called a certificate of limited partnership and file it with the appropriate state official, usually the Secretary of state

true

true or false: sole proprietorship need not file Federal Sole Proprietorship tax returns...

true

true or false: the limited partners in a limited partnership may not manage the partnership

true

true or false: under most state laws a partnership may be sued as an entity

true

true or false: a shareholder has no legal relationship with creditors of the corpration

true: a shareholder's obligation to creditors is limited to the shareholder's capital contributions, usually the amount paid to buy stock

true or false: shareholders are not responsible for managing the corporation and are not allowed to exercise day-to-day control

true: instead, shareholders elect the board of directors and vote only on matters that change the corporation's structure or existence

in a general partnership, the partners usually have ______ liabilty

unlimited

partnership: liability of owners

unlimited liability expect for limited partner in a limited partnership

quorum

usually more than half of the total shares