Chapter 17: Business Organizations

17-1 Sole Proprietorships (style ownership)

1. What advantages and disadvantages are associated with the sole proprietorship?
 Advantages of the Sole Proprietorship:
1. Flexibility: The sole proprietor is free to make any decision s/he wishes concerning the business.
 The proprietor can also sell or transfer all or part of the business to another party at any time and does not need approval from anyone else.
2. Taxes: A sole proprietor pays only personal income taxes (including self-employment tax) on the business’s profits.
 Disadvantages of the Sole Proprietorship:
1. A sole proprietor bears the burden of any losses or liabilities in the business.
2. Any lawsuit against the business or its employees can lead to unlimited personal liability for the owner of a sole proprietorship.
3. Creditors can go after personal assets to satisfy business debts.
4. When the owner dies, the business automatically dissolves.
17-2 Partnerships *deleted*
a. Agency Concepts and Partnership Law: Each partner is deemed to be the agent of the other partners and of the partnership.
 Act on behalf of the partnership – authority only to do ABCD tasks e.g., you can hire, you can example rent
b.Essential Elements of a Partnership: Three essential elements are implicit in the UPA’ s definition of a partnership: Imp
1. A sharing of profits and losses.
2. joint ownership of the business.
3. An equal right to be involved in the management of the business.
c. Entity versus Aggregate Theory of Partnerships
A majority of the states treat a partnership as an entity for most purposes. It can usually sue or be sued, collect judgments, and have all accounting procedures
performed in the name of the entity [UPA 201, 307(a)].
d.Formation and Operation:
 A partnership agreement (or articles of partnership) can include any terms that the parties wish, unless the terms are illegal or contrary to public policy or
statute. You can create the partnership formally or informally but it’s better to have it in writing.
 Duration of the Partnership: as long as you want.
 When does it dissolves? 1- Bankruptcy. 2- If one of the partners decided to leave.
X Partnership by Estoppel: A partnership imposed by a court when nonpartners have held themselves out to be partners or have allowed themselves to be held out as
partners, and others have detrimentally relied on their misrepresentations. Case Example 17.4 Best Cartage, Inc. v. Stonewall Packaging, LLC (2012)
e. Rights of Partners:
1. Management Rights
2. Interest in the Partnership
3. Compensation
4. Inspection of Books
5. Accounting of Partnership Assets or Profits
6. Property Rights
f. Duties and Liabilities of Partners:
 Each partner is: An agent of every other partner and acts as both a principal and an agent in any business transaction within the scope of the partnership
agreement. A general agent of the partnership in carrying out the usual business of the firm.
 Fiduciary (Credit) Duties: A partner owes the (1) duty of care and (2) the duty of loyalty to (1) the partnership and to (2) the other partners. Trust Confidence
 Authority of Partners: Both have responsibility for each other in the parentship.
2. What is meant by joint and several liability? Why is this often considered to be a disadvantage of doing business as a general partnership?
 Liability of Partners (IMP)
o Joint Liability of Partners: In partnership law, the partners’ shared liability for partnership obligations and debts. A third party must sue all of the partners
as a group, but each partner can be held liable for the full amount. The partners have equal liability the third party must sue all the partners.
o Joint and Several Liability: The option of a third party to sue all of the partners together (jointly) or one or more of the partners separately (severally).
Here either I sue the partnership or sue one partner separately
The partnership liability type is decided and agreed when we make the partnership agreement.
g. Partner’s Dissociation: Dissociation occurs when a partner ceases to be associated in the carrying on of the partnership business.
 Events Causing Dissociation:
1) “Express will to withdraw.”
2) Occurrence of an event agreed to in partnership agreement
3) Unanimous vote of other partners under certain circumstances
4) Order of a court or arbitrator
5) Partner’s declaring bankruptcy
h.Partnership Termination
 Dissolution is the formal disbanding of a partnership or a corporation. The partnership comes to an end.
 But you still your debts which is Winding up is the actual process of collecting, liquidating, and distributing the partnership assets.
17-3 Limited liability partnership (LLP) Very Imp
3. What advantages do limited liability partnerships offer to entrepreneurs that are not offered by general partnerships?
LLP: Hybrid form of business organization that used mainly by professionals who normally do business in a partnership.
a. Formation of an LLP
b.Liability in an LLP
1. An LLP allows professionals to avoid personal liability for the malpractice of other partners
Avoid personal liability. Only the owners who want to be liable are liable.
2. Liability outside the State of Formation
3. Sharing Liability among Partners
17-4 Limited Partnerships
4. What are the key differences between the rights and liabilities of general partners and those of LP?

1
A limited partnership (LP) limits the liability of some of its owners. It consists of at least one general partner and one or more limited partners.
Limited liability means that the liability is limited to the money instead in the company.
17-5 Limited Liability Companies
A limited liability company (LLC) is a hybrid business form that combines the limited liability aspects of a corporation and the tax advantages of a partnership.
a. Formation of an LLC
Articles of Organization
• Articles of Organization: The document filed with a designated state official by which a limited liability company is formed.
• Member: A person who has an ownership interest in a limited liability company
b. Landmark in the Law
• Limited Liability Company (LLC) Statutes
• Once it became clear that LLCs could be taxed as partnerships, the LLC form of business organization was widely adopted.
c. Limited Liability of LLC Members
• The liability of members is limited to the amount of their investments.
5. How are LLC taxed, and why is this means of taxation advantageous?
d. Flexibility in Taxation
• Unless it indicates that it wishes to be taxed as a corporation, the IRS automatically taxes an LLC as a partnership.
• Its profits are “passed through” the LLC to the members, who then personally pay taxes on the profits.
e. Dissociation and Dissolution of an LLC
Events that trigger a member’s dissociation from an LLC include:
• voluntary withdrawal,
• expulsion by other members or by court order,
• bankruptcy,
• incompetence, and
• death.
17-6 Franchises:
6. What are the basic requirements of the Franchise Rule?
A franchise is an arrangement in which the owner of intellectual property licenses others to use it in the selling of goods or services.
• A franchisee (a purchaser of a franchise) is generally legally independent of the franchisor (the seller of the franchise).