Chapter 15 Entrepreneurship, Sole Proprietorships, and Partnerships PowerPoint Slides to accompany The Legal Environment of Business and Online Commerce 5E, by Henry R. Cheeseman Chapter 15 Entrepreneurship, Sole Proprietorships, and Partnerships Prentice Hall © 2007
Entrepreneurship Entrepreneur – person who forms and operates a new business Prentice Hall © 2007
Entrepreneurial Forms of Conducting Business Sole proprietorship General partnership Limited partnership Limited liability partnership (LLP) Limited liability company (LLC) Corporation Prentice Hall © 2007 2
Advantages of Sole Proprietorship Formation is easy. Owner has the right to make all management decisions concerning the business. Sole proprietor owns all of the business and has the right to receive all of the business’s profits. Sole proprietorship can be easily transferred and sold at the owner’s discretion. Prentice Hall © 2007 3
Disadvantages of Sole Proprietorship Sole proprietor’s access to capital is limited. Sole proprietor has unlimited personal liability. Creditor may recover claims against the business from the sole proprietor’s personal assets. Prentice Hall © 2007
General Partnership Criteria for a general partnership: A voluntary association of two or more persons Carrying on a business As co-owners For profit Receipt of profits is prima facie evidence of a partnership. Prentice Hall © 2007
Uniform Partnership Act (UPA) Uniform act has been adopted as state law by 48 states. UPA adopts the “entity” theory of partnership, which considers partnerships a separate legal entity. Prentice Hall © 2007
Characteristics of a General Partnership Under UPA General partnership agreement Right to participate in management Right to an accounting Right to share in profits Joint and several tort liability Prentice Hall © 2007
Characteristics of a General Partnership Under UPA Joint liability for contracts and debts Right of indemnification New partners are liable for existing debts at the time of their entry only to extent of their contribution. Duration Partnership for a term Partnership at will Prentice Hall © 2007
Dissolution of Partnership It is a wrongful dissolution of a partnership for a term if a partner leaves before the term of the partnership expires. Notice of dissolution must be give to third parties. Distribution of assets Continuation after dissolution creates a new partnership. Prentice Hall © 2007
Limited Partnership A type of partnership that has two types of partners General partners Invest capital Manage the business Are personally liable for partnership debts Limited partners Do not participate in partnership management Are not personally liable for partnership debts Prentice Hall © 2007
Revised Uniform Limited Partnership Act (RULPA) Limited partnerships must file a certificate of limited partnership with the secretary of state. Certificate must include, among other information: Name of limited partnership Character of the business Names of general and limited partners Contributions by each partner Prentice Hall © 2007
Defective Formation Defective formation occurs when The certificate is not properly filed. There are defects in the certificate filed. A statutory requirement for creating limited partnership is not met. Limited partner liability A limited partner may be liable as general partner to a third party under some circumstances. Prentice Hall © 2007
Limited Partnership Agreement Partners may sign a separate partnership agreement. Agreement should establish Voting rights Allocation of profits and losses If there is no separate partnership agreement, the certificate serves as the articles of limited partnership. Prentice Hall © 2007
Dissolution and Distribution of Assets Certificate of dissolution must be filed under RULPA. After assets have been liquidated, the proceeds must be distributed. Creditors, including partners who are also creditors Partners Prentice Hall © 2007