1. Fundamentals of Business Law Summarized Cases, 8 th Ed., and Excerpted Cases, 2 nd Ed. ROGER LeROY MILLER Institute for University Studies Arlington, Texas GAYLORD A. JENTZ Herbert D. Kelleher Emeritus Professor in Business Law University of Texas at Austin

2. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 2 Learning Objectives Which form of business organization is the simplest? Which form arises from an agreement between two or more persons to carry on a business plan for profit? What are the three essential elements of a partnership? What is meant by joint and several liability? Why is this often considered to be a disadvantage of the partnership form of business?

3. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 3 Learning Objectives Why do professional groups organize as a limited liability partnership? How does this form differ from a general partnership? What is a limited liability company? What are some of the advantages and disadvantages of this business form?

4. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 4Introduction Entrepreneurs wishing to start a new business must be aware of advantages and disadvantages of various business entities for their endeavor. Consider: –Ease of creation. –Owners’ liability. –Tax considerations. –Need for Capital.

5. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 5 AdvantagesDisadvantages Owner is in complete control & receives all profits Owner is personally liable for all torts/contracts FlexibilityLacks continuity after death Ease of creation; maintenanceDifficult to raise financing The owner is the business; anyone who does business without creating a separate business organization has a sole proprietorship. CASE 24.1 Garden City Boxing Club, Inc. v Dominguez (Illinois, 2006). Sole Proprietorships

6. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 6 Partnership arises from agreement, express or implied, between two or more persons to carry on a business together for profit. Partners are agents and fiduciaries of one another, but differ from agents in that they are also co-owners and have equal rights to manage and share in the profits and losses. If a commercial enterprise shares profits and losses, a partnership will be inferred. Law: Uniform Partnership Act. Agency Concepts and Partnership Law

7. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 7 In the absence of a partnership agreement (oral or written) state statutes govern the rights among partners: –Management: equal, each one vote, majority wins; need unanimous consent for some actions. –Partnership Interest: equal profits, losses shared as profits shared. Agency Concepts and Partnership Law

8. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 8 When Does a Partnership Exist? Intent to associate is a key element of a partnership, and all “partners” must consent. Key elements: –A sharing of profits and losses, AND –A joint ownership of the business, AND –An equal right to be involved in the management of the business.

9. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 9 When Does a Partnership Exist? Sharing profits or losses. Joint ownership of the business. Equal right in the management of the business. No inference if: –Debt. –Wages. –Rent. –Annuity. –Sale of goodwill.

10. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 10 Entity versus Aggregate Theory of Partnerships At common law, partnerships were treated as aggregate, not legal entities. –A suit at common law could never be brought by or against the firm in its own name; each individual partner had to sue or be sued.

11. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 11 Entity versus Aggregate Theory of Partnerships Today, many states recognize the partnership as a separate legal entity for the following purposes: –To sue and be sued (for federal questions, yes; for state questions, differs). –To have judgments collected against it’s assets, and individual partners’ assets.

12. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 12 Entity versus Aggregate Theory of Partnerships Partnerships are recognized as separate legal entities (cont’d): –To own partnership property. –To convey partnership property. At common law -- property owned in tenancy in partnership, all partners had to be named and sign the conveyance. Under UPA partnership property can be held and sold in firm name.

13. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 13 Partnership Formation Generally, agreements to form a partnership can be: –Oral. –Written, or –Implied by Conduct.

14. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 14 Partnership Formation Partnership agreements (Articles of Partnership) should be written. Partners must have legal capacity. UPA permits corporations to be a partner. Partnership for a Term. Partnership By Estoppel: parties who are not partners hold themselves out to 3rd Parties and 3rd Party relies to her detriment.

15. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 15 Rights of Partners Management: equal, each one vote, majority wins; need unanimous consent for some actions. Partnership Interest: equal profits, losses shared as profits shared. Compensation: generally, none.

16. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 16 Rights of Partners Inspection of the Books: always and also by rep. of deceased partner. Accounting: when other partner(s) committing fraud, embezzlement, wrongful exclusion, or anytime it is just and reasonable. Property Rights 

17. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 17 Rights of Partners Each partner has a property right, which includes: –An interest in the partnership. –A right in specific partnership property. –A right to participate in the management of the partnership, as mentioned above.

18. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 18 Fiduciary Duties: Partners are fiduciaries and general agents of one another and the partnership. Authority of Partners: Partners have implied authority to conduct ordinary partnership business but need unanimous consent to sell assets or donate to charity. Duties and Liabilities of Partners

19. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 19 Joint Liability for Contracts. If Partner is sued for Partnership debt, Partner has right to insist that other partners be sued with her. Joint and Several Liability for Torts: 3rd party can sue either one or all partners. 3rd party may collect against personal assets of all partners. Liability of Incoming Partner & Outgoing Partner. Newly admitted partner has no personal liability for existing partnership debts and obligations. Duties and Liabilities of Partners

20. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 20 Partner’s Dissociation Occurs when a partner ceases to be associated with the carrying on of partnership business. Events causing dissociation: –Giving notice of withdrawal. –Contractual event. –Expelled. –Bankruptcy, assignment to creditors, incapacity or death. Wrongful Dissociation. Effects of Dissociation.

21. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 21 Partnership Termination Dissolution (termination) can occur for a variety of reasons: –Partners agree to terminate. –Partner’s withdrawal can terminate. Termination has two stages: –Dissolution and “Winding Up” (actual process of collecting and distributing the partnership assets).

22. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 22Dissolution By Acts of the Partners: –Partners can agree to Agreement. –Partner’s Withdrawal. Partnership for term – breach. No term -- no breach. –Admission of a new partner. –Not a transfer of a partner’s interest. By assignment or attachment by creditor.

23. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 23Dissolution By Operation of Law: –Death of a partner. –Bankruptcy of a partner. –Bankruptcy of partnership. –Illegality.

24. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 24 Winding Up Partners have no authority after dissolution occurs except to: –Complete transactions already begun. –Wind up by collecting and preserving partnership assets, discharging liabilities, and accounting to each partner for the value of his share.

25. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 25 Winding Up If partner has violated the partnership agreement, he: –Must pay damages. –May not participate in winding up. –But other partners may choose to continue. If partner dies: –Other partners act as fiduciaries. –Accounting to deceased partner’s estate. –Survivors get paid for their services.

26. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 26 Winding Up Partnership obligations are paid in the following order: –First, 3rd party creditors. –Second, partner loans to partnership. –Third, return of capital contributions. –Fourth, distribution of the balance, if any to partners.

27. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 27 Limited Liability Partnerships Creature of state statute, similar to an LLC, except that an LLP is designed for professionals who normally do business as a partnership (lawyers and accountants). LLP allows partnership to limit personal liability of the partners but allows “pass through” tax advantages.

28. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 28 Liability in an LLP Recall that partnership law makes all partners jointly and severally for another partner’s tort, including personal assets. The LLP allows professionals to avoid personal liability for the malpractice of other partners. Supervising Partner is also liable for acts of subordinate.

29. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 29 Family Limited Liability Partnerships FLLP is a limited liability partnership in which the majority of the partners are related to each other. Used frequently for agriculture.

30. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 30 Limited Partnerships Agreement of two or more persons to carry on a business for profit with at least one general partner and one limited partner. Limits the liability of some of its owners (the limited partners) to their investment. A LP is a creature of state statute. Filing a certificate with the Secretary of State is required.

31. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 31 LP -- Rights and Liabilities The General partner assumes all management and personal liability. General partners are personally liable to 3 rd parties for breach of contract and tort liability. However, a corporation (or an LLC) can be a general partner and have limited liability.

32. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 32 LP – Rights and Liabilities Limited Partner contributes cash but has no management rights. Liability is limited to the amount of investment. A limited partner can forfeit this “veil” of immunity by taking part in the management of the LP. Limited partners have the right to inspect the LP’s books.

33. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 33 LP – Dissociation and Dissolution General partner has right to withdraw, but can lead to dissolution. On dissolution, the limited partner is entitled to return of capital contributions. LP interests are considered securities and regulated by both federal and state securities laws. Limited partners’ liability is limited to the capital investment.

34. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 34 LP – Dissolution Dissolved in much the same way as a general partnership (Chapter 33). Retirement, withdrawal, death bankruptcy or mental incompetence of a general partner will trigger dissolution unless the remaining GP’s consent to continue. Creditors are paid first then partners. CASE 24.2 In re Dissolution of Midnight Star Enterprises, LP (South Dakota, 2006).

35. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 35 Limited Liability Limited Partnerships Limited Liability Limited Partnership is a type of limited partnership. Difference between LP and LLLP is that the general partner has limited liability, like a limited partner, up to the amount of investment. Most states do not allow for LLLP’s.

36. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 36 Like corporations, LLC’s are creatures of state law. The owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares). Members of an LLC enjoy limited liability. Can a third party pierce the LLC “veil” and hold managing member liable? Limited Liability Companies

37. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 37 LLC Formation Articles of Organization require: –Name of Business. –Principal Address. –Name and Address of Registered Agent. –Names of the Owners; and –How the LLC will be managed. Business name must include LLC or Limited Liability Company. CASE 24.3 02 Development, LLC v. 607 South Park, LLC (California, 2008).

38. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 38 Jurisdictional Requirements An LLC is a legal entity separate from its owners. For federal jurisdiction based on diversity, an LLC may be treated differently than a corporation. For diversity purposes the citizenship of an LLC is the citizenship of its members, which may live in multiple jurisdictions.

39. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 39 AdvantagesDisadvantages Member liability is limited to amount of investment. State statutes are not uniform. Can be treated as a “pass through” entity for tax purposes. Not all states recognize LLC’s. Profits can be distributed to members without the double taxation of a corporation. Members pay personal income tax on received dividends. Advantages and Disadvantages of the LLC

40. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 40 The LLC Operating Agreement Operating agreement is analogous to corporation’s bylaws. Operating agreements may be oral and contain provisions relating to management, dividends, meetings, transfer of membership interests, and other significant issues. Generally, if the operating agreement is silent, courts will apply partnership principles.

41. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 41 Management of an LLC There are two options for management, generally set forth in the articles of organization: –Member-Managed: all of the members participate in management, like a partnership. –Manager-Managed: members are elected to manage the LLC. If the articles are silent, statutes provide either that each member has one vote or votes are made based on percentage of ownership.

42. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 42 Dissociation and Dissolution of an LLC Dissociation: same partnership principle applies. Member of LLC has power to dissociate but she may not have the right to do so. –External events may trigger dissociation: bankruptcy, court order, incompetence, death. Effect of Dissociation: member loses right to participate or act as agent for LLC, have his interest bought out.

43. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 43 Dissociation and Dissolution of an LLC Disassociated member has no right to force LLC to dissolve. –LLC operating agreement can stipulate what events cause dissolution. Winding up: Members must collect, liquidate, and distribute LLC assets. –After assets sold, proceeds used to pay off creditors (including members who are creditors). –Then members’ capital contributions are returned, and anything remaining is shared as “profits” among the members according to the operating agreement.

44. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 44 Special Business Forms Joint Venture: two or more entities combine efforts or property for a single transaction or project. Unless agreed otherwise, JV’s share profits and losses equally. Common in international transactions when U.S. companies wish to expand overseas.

45. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 45 JV Characteristics Resembles a partnership and is taxed like a partnership. However, a JV is limited in time and scope, whereas a partnership is an ongoing business. Other differences: –JV members has less implied and apparent authority than partners. –Death of JV member does not terminate JV. JV members can specify duration. If not, then JV terminates when purpose is accomplished.

46. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 46Franchises Franchise is an arrangement between a Franchisor (owner of a trademark or trade name) and a Franchisee can sell goods or services. 25% of all retail sales based on franchise merchandising.