1. Chapter 17 Small Business Organizations
The Legal Environment
of Business
Cross  Miller
Ninth Edition
Text and Cases
Chapter 17 Small Business Organizations

2. Introduction
When choosing a business entity, entrepreneurs should consider:
Ease of creation.
Owners’ liability.
Tax considerations.
Need for Capital.

3. §1: Sole Proprietorships
The owner is the business; doing business without creating a separate legal entity is a sole proprietorship.

4. Sole Proprietorships Advantages Disadvantages
Owner is in complete control & receives all profits
Owner is personally liable for all torts/contracts
Flexibility
Lacks continuity after death
Ease of creation; maintenance
Difficult to raise financing

5. Sole Proprietorships Major disadvantage:
Owner is personally liable for all losses or liabilities incurred by the business enterprise.
CASE Quality Car & Truck Leasing, Inc. v. Sark (2013). What would you have done to avoid this dispute?

6. §2: Partnerships Agency Concepts and Partnership Law:
Partnerships are governed by common law and statutory laws.
Partners are agents and fiduciaries of each other.

7. Partnerships Uniform Partnership Act.
In the absence of a partnership agreement the UPA, as adopted by most states, governs the partnership.

8. Partnerships Definition of a Partnership.
UPA defines as “association of two or more persons to carry on a business for profit.” 

9. Partnerships Essential Elements. Partnership presumed under UPA if:
1. Sharing of profits or losses.
2. Joint ownership of the business.
3. Equal right to be involved in the management of the business. 

10. Partnerships Essential Elements.
No partnership if profits were received as payment for:
1. A debt by installments or interest.
2. Wages of an employee (or services of independent contractor).
3. Rent to a landlord. 

11. Partnerships Essential Elements.
No partnership if profits were received as payment for:
4. Annuity to a surviving spouse or representative of a deceased partner.
5. Sale of a business or property's goodwill.

12. Partnerships Entity versus Aggregate.
Today, a majority of states recognize the partnership as a separate legal entity for the following purposes:
(1) To sue and be sued (for federal questions, yes; for state questions, differs). 

13. Partnerships Entity versus Aggregate. Today, a majority of states ….
(2) To have judgments collected against it’s assets, and individual partners’ assets.
(3) To own and convey partnership property.

14. Partnerships Tax Treatment.
Under federal (and most state) tax laws, a partnership is treated as a “pass through” entity, with profits, losses, and taxes attributed on a pro-rata basis to the partners.

15. Partnerships Formation. The Partnership Agreement.
Can be written or oral, unless the Statute of Frauds requires a written agreement.
Duration of the Partnership.
Partnership for a Term.
Partnership at Will. 

16. Partnerships Formation. Partnership by Estoppel.
Occurs when a person who is not a partner holds himself out to third parties and the third party relies to her detriment.
The “nonpartner” is an agent whose acts are binding on the partnership.

17. Partnerships Rights of Partners.
In the absence of a partnership agreement (oral or written) state statutes govern the partner rights. 

18. Partnerships Rights of Partners.
Management: equal, each one vote, majority wins; need unanimous consent for some actions.
Interest in the Partnership: equal profits, losses shared as profits shared.

19. Partnerships Rights of Partners. Compensation: none.
Inspection of the Books: always and also by rep. of deceased partner.
Accounting: if fraud, etc, is just and reasonable.

20. Partnerships Rights of Partners. Property Rights.
Property acquired by the partnership remains partnership property.
An individual partner has no right to sell, mortgage, or transfer partnership property. 

21. Partnerships Rights of Partners. Property Rights. Each partner can:
Use or possess property on behalf of the partnership.
Assign her right to her share of the profits to another to satisfy individual debt.
Creditor can secure charging order.

22. Partnerships Duties and Liabilities of Partners.
Fiduciary Duties. Partners are fiduciaries and general agents of one another and the partnership.
Breach and Waiver of Fiduciary Duties.

23. Partnerships Duties and Liabilities of Partners.
Authority of Partners.
UPA affirms general principles of agency law.
Partner may be able to subject partnership to tort liability. 

24. Partnerships Duties and Liabilities of Partners.
Authority of Partners.
Partner has apparent authority when carrying out partnership business. 

25. Partnerships Duties and Liabilities of Partners.
Authority of Partners.
Authorized versus Unauthorized Actions. If partner acts within scope of authority, partnership is bound.

26. Partnerships Duties and Liabilities of Partners.
Liability of Partners.
If Partner is sued for Partnership debt, Partner has right to insist that other partners be sued with her. 

27. Partnerships Duties and Liabilities of Partners.
Liability of Partners.
Joint Liability: third party must sue ALL partners as a group, but each partner can be held liable for the full amount. 

28. Partnerships Dissociation of a Partner.
Occurs when one partner ceases to be associated in the partnership business.
Allows partner to have her interest purchased by the partnership.
Terminates her voting interest in the partnership. 

29. Partnerships Dissociation of a Partner.
Events That Cause Dissociation:
Notice.
Triggering Event.
Unanimous Vote.
Court or Arbitrator Order.
Partner’s bankruptcy, assignment of interest, incapacity, or death. 

30. Partnerships Dissociation of a Partner. Wrongful Dissociation.
Dissociating partner breaches partnership agreement.
Dissociating partner files bankruptcy.
May be liable for costs. 

31. Partnerships Dissociation of a Partner. Effects of Dissociation.
Rights and Duties.
Liability to Third Parties. Partnership bound for two years by acts of outgoing partner, unless proper notice given.

32. Partnerships Partnership Termination
The termination of a partnership occurs in two stages:
Dissolution (is the legal “death” of the partnership), and
Winding up and Distribution of Assets (collecting and distributing partnership assets). 

33. Partnerships Partnership Termination
Dissolution: by operation of law or judicial decree. 
Partners can Agree to Dissolve.
By Operation of Law: death of a partner, bankruptcy of a partner, bankruptcy of partnership, or Illegality.

34. Partnerships Partnership Termination
Dissolution: by operation of law or judicial decree.
Good Faith.
Each partner must exercise good faith when dissolving a partnership.

35. Partnerships Partnership Termination
Winding Up and Distribution of Assets.
After dissolution, partnership continues to wind up the partnership affairs. 

36. Partnerships Partnership Termination
Winding Up and Distribution of Assets.
Partners have no authority except to:
Complete transactions already begun. 

37. Partnerships Partnership Termination
Winding Up and Distribution of Assets.
Partners have no authority except to:
Collect and preserve partnership assets, discharge liabilities, and provide an accounting.

38. Partnerships Partnership Termination Creditors’ Claims:
1. Payment of debts, including those owed to partner and nonpartner creditors.
2. Return of capital contributions and distribution of profits to partners. 

39. Partnerships Partnership Termination Creditors’ Claims.
If liabilities are greater than assets partners bear losses in proportion in which they shared profits, unless agreed otherwise.

40. Partnerships Partnership Buy-Sell Agreements.
Contract that determines in advance of an ‘event’, how remaining partners will buy-out partners’ interest.
CASE Estate of Webster v. Thomas (2013).

41. §3: Franchises Franchise:
Contract in which Franchisor (owner of trademark, trade name or copyright) licenses Franchisee to use the trade mark, trade name or copyright in the sale of goods or services. 

42. Franchises Types of Franchises: Distributorship.
Chain Style Business Operation.
Manufacturing or Processing Arrangement. 

43. Franchises Laws Governing Franchising.
Primarily governed by contract law.
UCC Article 2 governs franchises for sale of goods. 

44. Franchises Laws Governing Franchising.
Federal Regulation of Franchises.
Industry-Specific Standards: protect franchisee from unreasonable demands and bad faith termination.
The Franchise Rule: disclosure of material facts for informed decision. 

45. Franchises Laws Governing Franchising.
State Protection for Franchisees.
Protection from unfair trade practices and bad faith terminations.
Disclosure documentation, including costs of operation, recurring expenses, profits earned, and substantiating of these figures.

46. Franchises Laws Governing Franchising.
State Protection for Franchisees.
State law may prohibit termination without “good cause.”

47. Franchises The Franchise Contract.
Franchisee’s type of business entity including capital structure, sales quotas and record keeping.
Business Premises is leased or purchased.
Location of the Franchise. 

48. Franchises The Franchise Contract.
Quality Control is a legitimate issue for Franchisor because of good will, reputation and trademark value. 

49. Franchises The Franchise Contract.
Courts will not question Franchisor’s strict supervision but Franchisor may be liable for torts of agents.
Pricing Arrangements: franchisor cannot set prices of goods sold.

50. Franchises Termination.
Usually a franchise agreement sets out conditions of termination.
Notice Requirements.
Reasonable time to ‘wind up’ business. 

51. Franchises Termination. Opportunity to Cure a Breach.
Agreement may grant franchisee the opportunity to “cure” an ordinary breach within a period of time to prevent termination.

52. Franchises Termination. Wrongful Termination.
Generally termination provisions favor the franchisor who owns the trademark.

53. Franchises Termination. Importance of Good Faith and Fair Dealing.
Courts usually try to balance rights of both parties. If franchisor arbitrarily or unfairly terminates a franchise, franchisee may be able to sue for wrongful termination. 

54. Franchises Termination. Importance of Good Faith and Fair Dealing.
CASE Holiday Inn Franchising, Inc. v. Hotel Associates, Inc. (2011). Do you agree with the punitive damages awarded?