1. Chapter 34 Small Business, Entrepreneurship, and General Partnerships

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

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

4. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
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
34-4
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

5. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
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
34-5
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

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

7. Case 34.1: Sole Proprietorship
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?
34-7
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

8. 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
34-8
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

9. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
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
34-9
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

10. 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
34-10
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

11. 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
34-11
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

12. 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
34-12
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

13. Duties of General Partners
Duty of Loyalty
Duty of Obedience
Duty of Care
Duty to Inform
34-13
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

14. 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
34-14
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

15. 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
34-15
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

16. 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
34-16
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

17. Liability of General Partners
Debt or obligation owed
General Partnership
Third Party
Personal liability for partnership’s debts and obligations
Capital investment
Capital investment
General Partner
General Partner
General Partner
34-17
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

18. 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
34-18
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

19. 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
34-19
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

20. 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
34-20
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

21. Summary: Personal Liability of General Partners
Issue
Joint Liability
Joint and Several Liability
Type of lawsuit
Contract action
Tort action
Defendants
Plaintiff must name all partners as defendants
Plaintiff can sue partners individually
Recovery
If 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
34-21
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

22. 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
34-22
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

23. 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
34-23
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

24. 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
34-24
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

25. 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
34-25
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.

26. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
34-26
Copyright © Pearson Education, Inc. Publishing as Prentice Hall.