1. Copyright © 2009 by Pearson Prentice Hall. All rights reserved. PowerPoint Slides to Accompany CONTEMPORARY BUSINESS AND ONLINE COMMERCE LAW 6 th Edition by Henry R. Cheeseman Chapter 26 Sole Proprietorships and General and Limited Partnerships

2. 26 - 2Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Entrepreneur A person who forms and operates a new business either by him- or herself or with others.

3. 26 - 3Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Limited Liability Partnership Limited Liability Company Corporation General Partnership Limited Partnership Sole Proprietorship Entrepreneurial Forms of Conducting Business

4. 26 - 4Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Sole Proprietorship A form of business where the owner is actually the business The business is not a separate legal entity. Sole proprietorships are the most common form of business organization in the United States.

5. 26 - 5Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Advantages of a Sole Proprietorship (1 of 2) The ease and low cost of formation The owner’s right to make all management decisions concerning the business Including those involving hiring and firing employees The sole proprietor owns all of the business and has the right to receive all of the business’s profits.

6. 26 - 6Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Advantages of a Sole Proprietorship (2 of 2) A sole proprietorship can be easily transferred or sold if and when the owner desires to do so. No other approval (such as from partners or shareholders) is necessary

7. 26 - 7Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Disadvantages of a Sole Proprietorship The sole proprietor’s access to capital is limited to personal funds plus any loans he or she can obtain. The sole proprietor is legally responsible for the business’s contracts and the torts committed by the proprietor and his or her employees in the course of employment.

8. 26 - 8Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Creation of a Sole Proprietorship (1 of 2) There are no formalities No federal or state government approval is required Some local governments require all businesses (including sole proprietorships) to obtain a license to do business within the city. A sole proprietorship can operate under the name of the sole proprietor or a trade name.

9. 26 - 9Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Creation of a Sole Proprietorship (2 of 2) A sole proprietorship is not a separate tax- paying entity for federal income tax purposes. A sole proprietor need not file an informational return with the Internal Revenue Service (IRS) Income and losses are reported on the sole proprietor’s personal income tax return.

10. 26 - 10Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Personal Liability of a Sole Proprietor (1 of 2) The sole proprietor bears the risk of loss of the business. The owner will lose his or her entire capital contribution if the business fails. unlimited personal liability. The sole proprietor has unlimited personal liability.

11. 26 - 11Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Personal Liability of a Sole Proprietor (2 of 2) Creditors may recover claims against the business from the sole proprietor’s personal assets. The law holds that a sole proprietorship is not a distinct legal entity. The sole proprietorship and the sole proprietor are one and the same.

12. 26 - 12Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Sole Proprietorship Sole Proprietor (Owner) Sole Proprietorship Third Party Capital investment Debt or obligation owed Personal liability for sole proprietorship’s debts and obligations

13. 26 - 13Copyright © 2009 by Pearson Prentice Hall. All rights reserved. General Partnership A voluntary association of two or more persons for carrying on a business as co- owners for profit partnership Also called a partnership General partnerspartners General partners, or partners are personally liable for the debts and obligations of the partnership.

14. 26 - 14Copyright © 2009 by Pearson Prentice Hall. All rights reserved. General Partnership Third Party Debt or obligation owed General Partnership Capital investment Personal liability for partnership’s debts and obligations General Partner

15. 26 - 15Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Uniform Partnership Act (UPA) Model act that codifies partnership law Most states have adopted the UPA in whole or part. The UPA covers most problems that arise in the formation, operation, and dissolution of ordinary partnerships.

16. 26 - 16Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Partner Rights Participate in management Share profits Reasonable reimbursement Accounting

17. 26 - 17Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Partner Duties Loyalty Care Inform Obedience

18. 26 - 18Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Right to Participate in Management Unless otherwise agreed, each partner: Has a right to participate in the management of the partnership, and Has an equal vote on partnership matters Under the UPA, a simple majority decides most ordinary partnership matters.

19. 26 - 19Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Right to an Accounting A formal judicial proceeding in which the court is authorized to: Review the partnership and the partners’ transactions; and Award each partner his or her share of the partnership assets

20. 26 - 20Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Tort Liability of Partnerships and Partners The partnership is liable if the tortious act of a partner, or an employee, or agent of the partnership is committed while the person is acting within the ordinary course of partnership business or with the authority of his or her co-partners.

21. 26 - 21Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Joint and Several Tort Liability jointlyand severally 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.

22. 26 - 22Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Summary: Personal Liability of General Partners IssueJoint LiabilityJoint and Several Liability Type of lawsuitContract action.Tort action. DefendantsPlaintiff must name all partners as defendants. Plaintiff can sue partners individually. RecoveryIf successful, the plaintiff can recover the judgment against all or any of the defendants. If successful, the plaintiff can recover the judgment against all or any of the named defendants. IndemnificationPartner who pays judgment can recover contribution from other partners for their share of the judgment.

23. 26 - 23Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Liability of Incoming Partners antecedent debts A new partner who is admitted to the partnership is liable for the existing debts and obligations (antecedent debts) of the partnership only to the extent of his or her capital contribution. The new partner is personally liable for debts and obligations incurred by the partnership after becoming a partner.

24. 26 - 24Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Dissolution of Partnerships (1 of 3) Partnership for a term Partnership for a term A partnership for a fixed duration Partnership at will Partnership at will A partnership with no fixed duration power right to do so. A partner has the power to withdraw and dissolve the partnership at any time, but he or she may not have the right to do so.

25. 26 - 25Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Dissolution of Partnerships (2 of 3) Wrongful dissolution Wrongful dissolution When 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 Notice of dissolution Notice of dissolution Notice of dissolution must be given to certain third parties The degree of notice depends on the relationship of the third person with the partnership

26. 26 - 26Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Dissolution of Partnerships (3 of 3) Continuation of a partnership after dissolution Continuation of a partnership after dissolution The surviving or remaining partners have the right to continue the partnership after dissolution Liability of outgoing partners Liability of outgoing partners The dissolution of a partnership does not itself discharge the liability of outgoing partners for existing partnership debts and obligations

27. 26 - 27Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Distribution of Partnership Assets 1. Non-partner creditors 2. Partner creditors 3. Capital 4. Profits

28. 26 - 28Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Limited Partnership A type of partnership that has two types of partners: General Partners General Partners – who invest capital, manage the business, and are personally liable for partnership debts. Limited Partners Limited Partners – who invest capital but do not participate in management and are not personally liable for partnership debts beyond their capital contribution.

29. 26 - 29Copyright © 2009 by Pearson Prentice Hall. All rights reserved. The Revised Uniform Limited Partnership Act (RULPA) Uniform Limited Partnership Act (ULPA) of 1916 Contained a uniform set of provisions for the formation, operation, and dissolution of limited partnerships Most states originally enacted this law Uniform Limited Partnership Act (ULPA) of 1916 Contained a uniform set of provisions for the formation, operation, and dissolution of limited partnerships Most states originally enacted this law Revised Uniform Limited Partnership Act (RULPA) A 1976 revision of the ULPA Provides a more modern comprehensive law for the formation, operation, and dissolution of limited partnerships A majority of states have adopted the RULPA Revised Uniform Limited Partnership Act (RULPA) A 1976 revision of the ULPA Provides a more modern comprehensive law for the formation, operation, and dissolution of limited partnerships A majority of states have adopted the RULPA

30. 26 - 30Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Limited Partnership Liability limited to capital contribution No personal liability for partnership’s debts and obligations Personal liability for partnership’s debts and obligations Capital investment Debt or obligation owed Limited Partnership Third Party Limited Partner General Partner

31. 26 - 31Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Formation of Limited Partnerships (1 of 2) The creation of limited partnerships is formal and requires public disclosure. RULPA The entity must comply with the statutory requirements of the RULPA or other state statute. Certificate of Limited Partnership Certificate of Limited Partnership – a document that two or more persons must execute and sign that makes the limited partnership legal and binding.

32. 26 - 32Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Formation of Limited Partnerships (2 of 2) Limited Partnership Agreement Limited Partnership Agreement – a 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 of the limited partnership

33. 26 - 33Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Summary: Liability of Limited Partners General RuleLimited 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

34. 26 - 34Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Defective Formation Occurs when: 1.A certificate of limited partnership is not properly filed, 2.There are defects in a certificate that is filed, or 3.Some other statutory requirement for the creation of a limited partnership is not met

35. 26 - 35Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Limited Liability Partnership (LLP) (1 of 4) A special form of partnership where all partners are limited partners and there are no general partners. None of the partners is personally liable for the debts and obligations of the partnership beyond his or her capital contribution.

36. 26 - 36Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Limited Liability Partnership (LLP) (2 of 4) Liability limited to capital contribution No personal liability for partnership’s debts and obligations Capital investment Debt or obligation owed Limited Liability Partnership (LLP) Third Party Limited Partner

37. 26 - 37Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Limited Liability Partnership (LLP) (3 of 4) The LLP is taxed as a partnership. Each partner’s share of the income or loss from the partnership is reported on his or her individual income tax return. The LLP is required to file an informational income tax return with the IRS. LLPs are mainly used by professionals such as accountants and lawyers.

38. 26 - 38Copyright © 2009 by Pearson Prentice Hall. All rights reserved. Limited Liability Partnership (LLP) (4 of 4) Many state laws require LLPs to carry a minimum of $1 million of liability insurance that covers negligence, wrongful acts, and misconduct by partners or employees of the LLP. This requirement guarantees that injured third parties will have compensation to recover for their injuries.