Chapter 14

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  Entrepreneur: A person who forms and operates a new business either by himself or herself or with others  Sole proprietorship: A form of business in which the owner is actually the business  The business is not a separate legal entity  Sole proprietor: The owner of a sole proprietorship 14-2

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  No federal or state government approval is required  D.b.a. (doing business as): A designation for a business that is operating under a trade name  Fictitious business name statement (certificate of trade name)  A document that is filed with the state that designates: ▪ A trade name of a business ▪ The name and address of the applicant ▪ The address of the business 14-3

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  Unlimited personal liability: The personal liability of a sole proprietor for the debts and obligations of a sole proprietorship  Taxation of a sole proprietorship  A sole proprietorship does not pay taxes at the business level  A sole proprietor has to file tax returns and pay taxes to state and federal governments 14-4

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 14-5

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  An association of two or more persons to carry on as co-owners of a business for profit [UPA Section 6(1)]  General partners (partners): Persons liable for the debts and obligations of a general partnership  Uniform Partnership Act (UPA): A model act that codifies partnership law  Most states have adopted the UPA in whole or in part 14-6

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  To qualify as a general partnership under the UPA a business must be  An association of two or more persons  Carrying on a business  As co-owners  For profit 14-7

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 14-8

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  A general partnership must file a fictitious business name statement with the appropriate government agency to operate under a trade name  General partnership agreement  A written agreement that partners sign to form a general partnership 14-9

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  Flow-through taxation  The income and losses of partnership flow onto and have to be reported on the individual partners’ personal income tax returns  Right to participate in management  Each partner has a right to participate in the management of a partnership and has an equal vote on partnership matters ▪ Unless otherwise agreed 14-10

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  The right to share in the earnings from the investment of capital  Unless otherwise agreed  Right to an accounting  Action for an accounting: A formal judicial proceeding in which the court is authorized to  Review the partnership and the partners’ transactions  Award each partner his or her share of the partnership assets 14-11

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  Unlimited personal liability of a general partner  A general partner’s personal liability for the debts and obligations of the general partnership  Joint and several liability: Tort liability of partners together and individually  A plaintiff can sue one or more partners separately  If successful, the plaintiff can recover the entire amount of the judgment from any or all of the defendant-partners who have been found liable 14-12

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  General partners have unlimited personal liability for contracts of the partnership  Under the UPA  General partners have joint liability for the contracts and debts of the partnership  Joint liability: Liability of partners for contracts and debts of the partnership ▪ A plaintiff must name the partnership and all of the partners as defendants in a lawsuit 14-13

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  A new partner who is admitted to a general partnership is  Liable for the existing debts and obligations of the partnership only to the extent of his or her capital contribution  Personally liable for debts and obligations incurred by the general partnership after becoming a partner 14-14

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  The change in the relationship of partners in a partnership caused by any partner ceasing to be associated in the carrying on of the business [UPA Section 29]  Winding up: Liquidating a partnership’s assets and distributing the proceeds to satisfy claims against the partnership 14-15

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  A situation in which a partner withdraws from a partnership without having the right to do so at that time  The partner is liable for damages caused by the wrongful dissolution of the partnership  Upon dissolution the debts are satisfied in the following order [UPA Section 40(b)] ▪ Creditors (except partners who are creditors) ▪ Creditor-partners ▪ Capital contributions ▪ Profits 14-16

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  The surviving, or remaining, partners have the right to continue a partnership after its dissolution  Continuation agreement – Expressly sets forth: ▪ The events that allow for continuation of the partnership ▪ The amount to be paid outgoing partners and other details 14-17

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  A rule which provides that upon the death of a general partner:  The deceased partner’s right in specific partnership property vests in the remaining partner or partners ▪ The value of the deceased general partner’s interest in the partnership passes to his or her beneficiaries or heirs  Liability of outgoing partners  Personally liable for debts and obligations that exist at the time of dissolution  Not liable for any new debts and obligations incurred after the dissolution 14-18

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  Contains a uniform set of provisions for the formation, operation, and dissolution of limited partnerships  Revised Uniform Limited Partnership Act (RULPA)  Provides a more modern, comprehensive law for the formation, operation, and dissolution of limited partnerships 14-20

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  Certificate of limited partnership: A document that two or more persons must execute and sign that makes a limited partnership legal and binding  Under RULPA, two or more persons must execute and sign the certificate  The certificate of limited partnership must be filed with ▪ The secretary of state of the appropriate state ▪ The county recorder in the county or counties in which the limited partnership carries on business, if required by state law 14-21

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  Incorrect creation of a limited partnership that occurs when:  A certificate of limited partnership is not properly filed  There are defects in a certificate that is filed  Some other statutory requirement for the creation of a limited partnership is not met 14-22

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  A document that sets forth:  The rights and duties of general and limited partners  The terms and conditions regarding the operation, termination, and dissolution of a partnership, and so on 14-23

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  Unlimited liability of general partners  The unlimited personal liability of general partners of a limited partnership for the debts and obligations of the general partnership  Limited liability of limited partners  The limited liability of limited partners of a limited partnership only up to their capital contributions to the limited partnership  Limited partners are not personally liable for the debts and obligations of the limited partnership 14-24

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  A creditor may require a limited partner to personally guarantee the repayment of a loan in order to extend credit to the limited partnership  If the limited partnership defaults on the loan: ▪ The creditor may enforce the personal guarantee and recover payment from the limited partner who personally guaranteed the repayment of the loan 14-25

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  Under the RULPA  A limited partner is liable as a general partner if his or her participation in the control of the business is substantially the same as that of a general partner  The limited partner is liable only to persons who reasonably believed him or her to be a general partner  New Section 303 of the RULPA permits limited partners to participate in the management of a limited partnership without losing their limited liability shield 14-26

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.  A certificate of cancellation must be filed by the limited partnership with the secretary of state of the state in which the limited partnership is organized  Distribution of assets of a limited partnership  Creditors of the limited partnership, including partners who are creditors (except for liabilities for distributions)  Partners with respect to: ▪ Unpaid distributions ▪ Capital contributions ▪ The remainder of the proceeds 14-27

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall