Business Law Chapter 35 Sole Proprietorships and Partnerships
Sole Proprietorships Are the most common business type Are the most common business type Are the easiest to establish Are the easiest to establish May have as many as five employees May have as many as five employees There is no legal distinction between the individual and the business There is no legal distinction between the individual and the business Most are formed where capital investment/resources are low Most are formed where capital investment/resources are low
Creation and Operation of Sole Proprietorship A person may choose to use their own name for the business A person may choose to use their own name for the business Name must usually be advertised under the Fictitious Names Act Advertisement must meet certain requirements Once legally established the first individual gains the right to sue others if they use the same name in a similar business in the same area
Sole Proprietorships Must still meet all legal and licensing requirements Must still meet all legal and licensing requirements As with all businesses there may be local ordinances that limit business locations or operations As with all businesses there may be local ordinances that limit business locations or operations
Advantages and Disadvantages of Sole Proprietorships Advantages Advantages Owner has complete control Owner makes all decisions Owner gets to keep 100% of the profits Owner may get tax breaks in the event of a loss Required investment is low
Advantages and Disadvantages of Sole Proprietorships Disadvantages Disadvantages Personal Financial Liability Limited sources of investment/credit Limited resources/skills Issue of continuity if something happens to proprietor Sole proprietor may have to wear many hats
General Partnerships Covered/defined by the Uniform Partnership Act Covered/defined by the Uniform Partnership Act As “an association of two or more persons to carry on a business for a profit.”
Partnership Advantages Partnerships have an easier time raising money/getting credit Partnerships have an easier time raising money/getting credit Partners can divide labor and each can specialize in their strengths Partners can divide labor and each can specialize in their strengths Partners share the liability if things go wrong Partners share the liability if things go wrong
Partnership Disadvantages Each partner is libel for the actions of the other partner(s) Each partner is libel for the actions of the other partner(s) Partners don’t always agree and management decisions can be difficult Partners don’t always agree and management decisions can be difficult Profits must be shared among the partners Profits must be shared among the partners
Creation of a General Partnership Three methods of creation Three methods of creation By Agreement By Proof of Existence By Estoppel
By Agreement Agreements are usually very specific Agreements are usually very specific Partnership agreements can be written or oral Partnerships that are to last over 1 year must be evidenced in writing Agreement is called The Articles of Partnership
Articles of Agreement Also sometimes called Articles of Co-Partnership must contain: Also sometimes called Articles of Co-Partnership must contain: Parties to the agreement Specific nature, scope and limits of the business Planned duration of the business Amount of each partner’s original investment and procedures for further investment Provisions for salaries, withdrawal of funds and division of profits Terms for withdrawal from the partnership
Partnership by Proof of Existence If a business relationship meets the definition of a partnership then the courts will recognize it as one. If a business relationship meets the definition of a partnership then the courts will recognize it as one. Sharing of profits is often the indicator Sharing of profits is often the indicator
Partnership by Estoppel Happens when someone presents themselves as a partnership. Happens when someone presents themselves as a partnership. This is not a “true” partnership, but helps the court prevent injustice caused by someone relying on what they’ve been told.
Types of Partners There are five types of partners There are five types of partners General Secret Silent Dormant Limited
Types of Partners General General Directly and openly involved in the operation of the business Has unlimited liability for debts Secret Partner Secret Partner Has active role, but is kept secret from the public
Types of Partners Silent partner Silent partner Takes no active role in management Dormant Partner Dormant Partner Takes no active role in management and their involvement is kept secret from the public Limited Partner Limited Partner Liability is limited to their investment
Partnership Property Partnership property includes: Partnership property includes: Property contributed to start the partnership Property purchased by the partnership May include: Cash Real Estate Equipment
Property Rights of the Partners Right to use the property Right to use the property Limited to use for the business – unless other partners agree Right to Manage the Firm Right to Manage the Firm Each partner is to have an equal voice in managing the firm For most decisions the majority rules For some decisions such as adding a partner all partners must consent
Right to Share in the Profits Unless otherwise agreed all partners share equally in the profits Unless otherwise agreed all partners share equally in the profits It doesn’t matter how much each partner invested
Duties of the Partners Partners must be able to trust one another Partners must be able to trust one another Partners must put the firm above their own self-interest Partners must put the firm above their own self-interest Partners must act in good faith Partners must act in good faith If partners vote not to enter into a contract and a partner signs it anyway, then only the partner who signed the contract is bound by it. If partners vote not to enter into a contract and a partner signs it anyway, then only the partner who signed the contract is bound by it.
Liability of the Partners Partners have unlimited liability for the debts of the firm Partners have unlimited liability for the debts of the firm The debt liability is divided by the same proportion as the profits The debt liability is divided by the same proportion as the profits Joint Liability means that some who sue the firm must sue all the partners, not just one individual Joint Liability means that some who sue the firm must sue all the partners, not just one individual
Dissolution of the Partnership Dissolution occurs the moment any one partner ceases to be associated with the firm Dissolution occurs the moment any one partner ceases to be associated with the firm A partnership can also be dissolved by the court A partnership can also be dissolved by the court The firm may continue to exist even after the partnership ends The firm may continue to exist even after the partnership ends The remaining partners may elect to form a new firm and continue the business The remaining partners may elect to form a new firm and continue the business
Distribution of Assets If a firm is dissolved assets are to be distributed in this order: If a firm is dissolved assets are to be distributed in this order: Creditors other than partners Money lent by partners The original investment in the partnership Any remaining surplus
Limited Partnerships Limited partnerships are different than general partnerships Limited partnerships are different than general partnerships Covered by the Revised Uniform Partnership Act Defined as having one or more General Partners and one or more limited partners Limited partners are investors only. They share in profits but do not manage the firm. Limited partners are investors only. They share in profits but do not manage the firm. Their liability is limited to their investment Their liability is limited to their investment There are certain legal requirements that must be met.
That’s all folks! Quiz Tomorow