1. Forms of Business Organization
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Forms of Business Organization

2. For Discussion What kind of business would you like to start?
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For Discussion
What kind of business would you like to start?

3. Entrepreneurship, Sole Proprietorships, and General Partnerships
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Entrepreneurship, Sole Proprietorships, and General Partnerships

4. PRINCIPAL BUSINESS FORMS
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PRINCIPAL BUSINESS FORMS
Sole proprietorships
Partnerships
Corporations

5. Entrepreneurial Forms of Conducting Business
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Entrepreneurial Forms of Conducting Business
Sole Proprietorship
General Partnership
Limited Partnership
Limited Liability Partnership
Limited Liability Company

6. Chapter 25
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7. Sole Proprietorship Owner is actually the business.
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Sole Proprietorship
Owner is actually the business.
Business is not a separate legal entity.
Most common form of business organization in the United States.

8. Advantages of a Sole Proprietorship
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Advantages of a Sole Proprietorship
Ease and low cost of formation.
Owner can make all management decisions.
hiring and firing employees.
No other approvals required.
Sole proprietor owns all of the business
Has the right to receive all of the business’s profits.
Easily transferred or sold

9. Disadvantages of a Sole Proprietorship
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Disadvantages of a Sole Proprietorship
Access to capital is limited to:
personal funds plus
any loans he or she can obtain.
Legally responsible for the business’s contracts
Responsible for any torts committed in the course of employment.

10. Creation of a Sole Proprietorship
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Creation of a Sole Proprietorship
No formalities.
No federal or state government approval is required.
Some local governments require a license to do business within the city.

11. Personal Liability of a Sole Proprietor
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Personal Liability of a Sole Proprietor
The sole proprietor bears the risk of loss of the business.
Will lose his or her entire capital contribution if the business fails.
The sole proprietor has unlimited personal liability.
Creditors may recover claims against the business from the sole proprietor’s personal assets.

12. Personal Liability of a Sole Proprietor (continued)
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Personal Liability of a Sole Proprietor (continued)
Debt or obligation owed
Sole Proprietorship
Third Party
Capital investment
Sole Proprietor (Owner)
Personal liability for sole proprietorship’s debts and obligations

13. For Discussion Scenario
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For Discussion
Scenario
After a year of losses, your business turned a sizable profit in its second year. You worked 70-hour weeks to produce it and you are now considering bringing in a partner.
Questions
What attributes would you look for in a partner?
What could you offer a potential partner?
What kind and size of investments would you expect in turn?
How would you divide the business duties with your partner?
What could go wrong with the partnership?

14. General Partnership Voluntary association Two or more people
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General Partnership
Voluntary association
Two or more people
Carry on business for profit
Creates rights and duties between partners and with third parties
General partners personally liable for the debts and obligations of the partnership.

15. General Partnership General Partnership Third Party General Partner
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General Partnership
Debt or obligation owed
General Partnership
Third Party
Personal liability for partnership’s debts and obligations
Capital investment
Capital investment
General Partner
General Partner
General Partner

16. Partnership Agreement
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Partnership Agreement
May be written or oral
Statute of Frauds applies
No formalities required
Recommended that it be in writing
Called partnership agreement or articles of partnership
UPA will fill gaps

17. CREATION OF A PARTNERSHIP
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CREATION OF A PARTNERSHIP
Form and content of the partnership agreement
Types of partnerships
Classification by purpose
Classification by extent of liability
General partners
Limited partners

18. CREATION OF A PARTNERSHIP
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CREATION OF A PARTNERSHIP
(continued)
Status of minors
Powers of a partnership
Status of a partnership

19. TERMINATION OF A PARTNERSHIP
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TERMINATION OF A PARTNERSHIP
By action of one or more of the partners
By operation of law
By court decree

20. Dissolution of General Partnership
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Dissolution of General Partnership
Defined as:
“Change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business”.
Partnership for a term
For a fixed duration
Until event occurs
Terminates automatically at end of time or when objective accomplished.
Partnership at will
Partner may rightfully withdraw and dissolve partnership at any time.

21. Chapter 25
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Winding-Up
Process of liquidating the partnership’s assets and distributing the proceeds to satisfy claims against the partnership.
The surviving or remaining partners have the right to wind-up the partnership.
A bankrupt partner cannot participate in the winding-up of a partnership.

22. Chapter 25
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Notice of Dissolution
Terminates partners’ actual authority to enter into contracts or act on behalf of partnership
Notice must be given to certain third parties
Third parties who dealt with partnership must be given actual notice.
Third parties who had knowledge of partnership must be given actual or constructive notice.
Third parties who had no knowledge owed no notice.
If no notice given, apparent authority to continue to bind partnership

23. Distribution of Assets
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Distribution of Assets
Upon the winding-up of a dissolved partnership, the assets of the partnership are distributed in the following order :
Creditors (except partners who are creditors)
Creditor-partners
Capital contributions
Profits

24. Chapter 25
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Wrongful Dissolution
Partner has power to withdraw at any time, but may not have the right to withdraw.
Withdraws before expiration of term
Withdraws before occurrence of event
Partner is liable for damages caused by the wrongful dissolution of the partnership.

25. Continuation of Partnership after Dissolution
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Continuation of Partnership after Dissolution
Remaining partners have right to continue after dissolution
Continuation agreement
Sets forth events that allow for continuation, amount paid to out-going partners, and other details.
Old partnership dissolved and new partnership created
Creditors of old partnership become creditors of new partnership
Have equal status with creditors of new partnership

26. Liability of Outgoing Partners
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Liability of Outgoing Partners
Dissolution of partnership does not discharge liability of outgoing partners for existing partnership debts and obligations

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Right of Survivorship
Upon the death of a partner, deceased partner’s right in specific partnership property vests in the remaining partner or partners
Does not pass to heirs or next of kin
Value passes to beneficiaries and heirs
Upon death of last partner, rights in specific partnership property vest in the deceased partner’s legal representative

28. A PARTNER’S POWERS A partner’s rights A partner’s authority Chapter 25
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A PARTNER’S POWERS
A partner’s rights
A partner’s authority

29. A PARTNER’S RIGHTS Right to participate in management Right to profits
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A PARTNER’S RIGHTS
Right to participate in management
Right to profits
Right in partnership property
Right to extra compensation

30. A PARTNER’S AUTHORITY Make binding contracts for the firm
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A PARTNER’S AUTHORITY
Make binding contracts for the firm
Receive money owed to and settle claims against the firm
Borrow money in the firm’s name
Sell
Buy
Make
Draw and cash checks and drafts
Hire and fire employees and agents
Receive notice of matters affecting the partnership

31. A PARTNER’S DUTIES AND LIABILITIES
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A PARTNER’S DUTIES AND LIABILITIES
A partner’s duties
Comply with partnership agreement and decisions
Use reasonable care
Act with integrity and good faith
Not conduct competing business
Keep accurate records
A partner’s potential liabilities

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Tort Liability
Partnership is liable for the tortious act of a partner, employee, or agent that is committed while the person is acting within the ordinary course of partnership business or with the authority of his or her co-partners.
Both negligence and intentional torts covered

33. Joint and Several Liability
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Joint and Several Liability
Partners are jointly and severally liable for tort liability of the partnership.
i.e., the plaintiff can sue one or more of the partners separately.
If successful, the plaintiff can recover the entire amount of the judgment from any or all of the defendant-partners.
Release of one partner does not discharge the others.

34. Chapter 25
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Contract Liability
Partners are jointly liable for contracts and debts of partnership.
Third party must name all partners in suit.
If suit does not list all, judgment cannot be collected.
If one is released, all are released.
Successful third party may collect judgment against any or all partners.
Partners may seek indemnification if they pay more than their share.

35. Chapter 25
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Limited Partnerships

36. Chapter 25
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Limited Partnership
A type of partnership that has two types of partners:
General Partners –invest capital, manage the business, and are personally liable for partnership debts.
Limited Partners –invest capital, but do not participate in management and are not personally liable for partnership debts beyond their capital contribution.

37. Limited Partnership (continued)
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Limited Partnership (continued)
A limited partnership must have at least one general partner and one limited partner.
There are no restrictions on the number of general or limited partners allowed.
Any person may be a general or limited partner.
Corporation may be sole general partner.
Shareholders are liable only up to their capital contributions.

38. Limited Partnership (continued)
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Limited Partnership (continued)
Debt or obligation owed
Limited Partnership
Third Party
Capital investment
General Partner
General Partner
Limited Partner
Limited Partner
Liability limited to capital contribution
Personal liability for partnership’s debts and obligations
No personal liability for partnership’s debts and obligations

39. Formation of Limited Partnerships
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Formation of Limited Partnerships
The creation of limited partnerships is formal
Requires public disclosure.
Entity must comply with the statutory requirements of the RULPA or other state statute.

40. Certificate of Limited Partnership
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Certificate of Limited Partnership
Document that two or more persons must execute and sign.
Contains name of limited partnership, purpose, names and addresses of partners, agent, and principal place of business, contributions of each partner.
Must be filed with secretary of state.
Not formed until certificate filed.

41. Name of Limited Partnership
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Name of Limited Partnership
The firm name of a limited partnership may not include the surname of a limited partner unless:
it is also the surname of a general partner, or
The business was carried on under that name before the admission of the limited partner.

42. Name of Limited Partnership (continued)
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Name of Limited Partnership (continued)
Other restrictions:
The name cannot be the same as or deceptively similar to the names of other businesses or partnerships.
States can designate the words that cannot be used in limited partnership names
The name must contain without abbreviation the words limited partnership

43. Limited Partnership Agreement
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Limited Partnership Agreement
Document that sets forth:
The rights and duties of the general and limited partners; and
The terms and conditions regarding the operation
dissolution and termination terms.
If no agreement, certificate serves as articles.

44. Share of Profits & Losses(continued)
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Share of Profits & Losses(continued)
The limited partnership agreement may specify how profits and losses are to be allocated among the general and limited partners.
If there is no such agreement, RULPA provides that profits and losses from a limited partnership are shared on the basis of the value of the partner’s capital contribution
A limited partner is not liable for losses beyond his or her capital contribution

45. Liability of General and Limited Partners
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Liability of General and Limited Partners
General partners of a limited partnership have unlimited liability for debts and obligations of the partnership.
Limited partners are liable only up to amount of their capital contributions.
Give up right to participate in the control and management

46. Participation in Management
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Participation in Management
General partners have management rights.
Limited partners give up these right in exchange for limited liability.
Liable as general partner if participation is substantially the same.
Only liable to persons who reasonably believe them to be general partners.

47. Summary: Liability of Limited Partners
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Summary: Liability of Limited Partners
General Rule
Limited partners are not individually liable for the obligations or conduct of the partnership beyond the amount of their capital contribution.
Exceptions to the General Rule
Limited partners are individually liable for the debt, obligations, and tortious acts of the partnership in three situations:
1. Defective Formation
2. Participation in Management
3. Personal Guarantee

48. Dissolution of a Limited Partnership
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Dissolution of a Limited Partnership
Partnership may be dissolved:
At the end of the life of the limited partnership as specified in the certificate of limited partnership.
With the written consent of all general and limited partners.
Because of the withdrawal of a general partner.
With the entry of a decree of judicial dissolution.

49. Winding-Up a Limited Partnership
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Winding-Up a Limited Partnership
A limited partnership must wind up its affairs upon dissolution.
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.

50. Distribution of Assets
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Distribution of Assets
After the assets of the limited partnership have been liquidated, the proceeds must be distributed.
The RULPA provides the following order of distribution of partnership assets:
Creditors of the limited partnership
Partners with respect to
Unpaid distributions
Capital contributions
The remainder of the proceeds

51. Final Exam Final Exam: If you were to start a business:
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Final Exam
Final Exam:
If you were to start a business:
1. What would it be?
2. What type of legal organization would it be?
3. Which particular laws or regulations would effect your business?

52. Final Exam cont. 4. Could it become unionized?
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Final Exam cont.
4. Could it become unionized?
5. What tort liability would you face?
I will welcome you to turn your final exam in anytime. You may it to me:
DUE on or before November 28th.

53. Chapter 25
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Tonight’s QUIZ
Describe the most significant difference between a general partner and a limited partner?