Chapter 34 Small Business, Entrepreneurship, and General Partnerships

Entrepreneur  Entrepreneur: A person who forms and operates a new business either by himself or herself or with others Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 34-2

Entrepreneurial Forms of Conducting Business  Sole Proprietorship  General Partnership  Limited Partnership  Limited Liability Partnership  Limited Liability Company  Corporation Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 34-3

Sole Proprietorship  Owner is actually the business  No separate legal entity  Advantages:  Easy to form and low cost  Owner makes management decisions  Owner receives all profits  Ownership can be easily transferred or sold Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 34-4

Sole Proprietorship  Disadvantages:  Capital is limited to personal funds and loans  Owner is legally responsible for all activities  Creation:  No formalities  No federal or state government approval Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 34-5

Personal Liability of a Sole Proprietor Sole Proprietor (Owner) Sole Proprietorship Third Party Capital investment Debt or obligation owed Personal liability for sole proprietorship’s debts and obligations Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 34-6

Case 34.1: Sole Proprietorship  Case  Bank of America, N.A. v. Barr  9 A.3d 816 (2010)  Supreme Judicial Court of Maine  Issue  Is Barr, the sole owner of The Stone Scone, personally liable for the unpaid debt? Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 34-7

Taxation of Sole Proprietorship  No taxes at business level  Earnings and losses are reported on personal income tax filing  File tax returns and pay taxes to state and federal governments Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 34-8

General Partnership  Voluntary association of two or more persons for carrying on a business as co-owners for profit  Creates rights and duties among partners and with third parties  Partners are personally liable for debts and obligations  Uniform Partnership Act establishes consistent partnership law  Formed with little or no formality Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall. 34-9

Name of the General Partnership  Can operate under name of any one or more of the partners, or  May use fictitious name  Must file fictitious business name statement  Publish notice in newspaper  Cannot be similar to name used by another business Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Partnership Agreement and Taxation  General partnership agreement:  Written agreement signed by partners  No formalities are necessary  Taxation of general partnerships:  No federal income taxes  Income and losses reported on individual partners’ personal income tax returns, called flow-through taxation Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Rights of General Partners  Right to participate in management  Right to share in profits  Right to compensation  Right to indemnification or reimbursement  Right to return of loans  Right to return of capital contributions  Right to demand true and full information Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Duty of Loyalty Duty of Obedience Duty of Care Duty to Inform Duties of General Partners Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Duties of General Partners  Duty of loyalty: partner should not act adversely to the interests of the partnership  Forms of breach of loyalty:  Self-dealing  Usurping a partnership opportunity  Competing with the partnership  Making secret profits  Breach of confidentiality  Misuse of partnership property Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Duties of General Partners  Duty of care:  Obligation to use same level of care and skill that a reasonable person would use  Breach of duty of care is negligence  Duty to inform:  Provide all information relevant to affairs of the partnership  Other partners are imputed with knowledge of all notices Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Duties of General Partners  Duty of obedience:  Adhere to provisions of partnership agreement and decisions  Action for an accounting: formal judicial proceeding in which court is authorized to:  Review partnership and partners’ transactions  Award each partner his or her share of partnership assets Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Liability of General Partners Third Party Debt or obligation owed General Partnership Capital investment General Partner Capital investment Personal liability for partnership’s debts and obligations Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Liability of General Partners  Tort liability:  Unlimited personal liability for debts and obligations of partnership  Joint and several liability: for torts and breaches of trust  Plaintiff can sue each partner separately  Plaintiff can recover entire amount from all liable partners Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Liability of General Partners  Contract liability:  Unlimited personal liability for contracts of partnership  Joint liability: for contracts and debts of partnership  Plaintiff must name all partners as defendants in a lawsuit Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Liability of General Partners  Liability of incoming partners: liable to debts and obligations only to extent of capital contribution  Liability of outgoing partners:  Liable for debts and obligations incurred at time of dissolution  Not liable for new debts and obligations incurred after dissolution Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Summary: Personal Liability of General Partners IssueJoint LiabilityJoint and Several Liability Type of lawsuit Contract actionTort 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 Indemni- fication Partner who pays judgment can recover contribution from other partners for their share of the judgment Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Dissolution of General Partnership  Change in the relation of partners caused by any partner ceasing to be associated in the business  Winding up: liquidation of partnership assets and distributing the proceeds to satisfy claims against the partnership  Wrongful dissolution: partner withdraws from partnership prior to the expiration of the term Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Dissolution of General Partnership  Notice of dissolution:  Third parties, who have dealt with the partnership, must be given actual notice of dissolution  Third parties, who have not dealt with the partnership but have knowledge of it, must be given actual or constructive notice  Third parties, who have no knowledge of the partnership, do not have to be given notice Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Dissolution of General Partnership  Distribution of assets:  After dissolution of partnership, debts are satisfied in the following order:  Creditors (except creditor-partners)  Creditor-partners  Capital contributions  Profits  If partnership cannot satisfy claims, partners are personally liable Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

Continuation of Partnership after Dissolution  Partners enter a continuation agreement for continuation of partnership  Right of survivorship: upon the death of a general partner  His right in specific partnership property rests in remaining partners  Value of his interest in the partnership passes to his beneficiaries Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

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