1. Chapter 1: Legal Ethics 1

2. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 1.What advantages and disadvantages are associated with the sole proprietorship? 2.What is meant by joint and several liability? Why is this often considered to be a disadvantage of doing business as a general partnership?  2

3. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 3.What advantages do limited liability partnerships offer to entrepreneurs that are not offered by general partnerships? 4.What are the key differences between the rights and liabilities of general partners and those of limited partners?  3

4. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 5.How are limited liability companies formed, and who decides how they will be managed and operated? 4

5. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Introduction  When choosing a business entity, entrepreneurs should consider: – Ease of creation. – Owners’ liability. – Tax considerations. – Need for Capital. 5

6. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Sole Proprietorships  The owner is the business. – Anyone who does business without creating a separate business organization has a sole proprietorship. – Major disadvantage is the owner is personally liable for all losses or liabilities incurred by the business enterprise. 6

7. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Sole Proprietorships 7

8. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  A partnership arises from an agreement, express, or implied, between two or more persons to carry on a business for profit. – Governed by either common law or the Uniform Partnership Act (in the absence of express agreement ). 8

9. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Agency Concepts and Partnership Law. – Partnerships are governed both by common law and by statutory laws. – Each partner is deemed to be an agent and fiduciary of the other. – There may be imputation of liability. 9

10. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  When does a partnership exist? – Under the UPA there is a presumption of a partnership if: 1.A sharing of profits or losses. 2.A joint ownership of the business. 3.An equal right to be involved in the management of the business. 10

11. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  When does a partnership exist? – However, no presumption of partnership if profits received as payment for: 1.A debt by installments or interest on a loan. 2.Wages of an employee or for the services of an independent contractor.  11

12. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  When does a partnership exist? – However, no presumption of partnership if profits received as payment for: 3.Rent to a landlord. 4.An annuity to a surviving spouse or representative of a deceased partner. 5.A sale of the goodwill (the valuable reputation of a business viewed as an intangible asset) of a business or property. 12

13. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  When does a partnership exist? – Joint ownership of property—or the sharing of profits from the property-- does not, by itself, create a presumption of a partnership. However the sharing of profits and losses usually does. 13

14. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Entity versus Aggregate Theory. – At common law, a partnership was not a separate legal entity distinct from its owners. Today, a majority of states recognize the partnership as a separate legal entity for many legal purposes.  14

15. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Entity versus Aggregate Theory. – To sue and be sued. – To have judgments collected against it’s assets, and individual partners’ assets. – To own and convey partnership property.  Tax Treatment: under federal law it is a “pass through” tax entity. 15

16. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Partnership Formation. – The Partnership Agreement: can be written or oral, unless the Statute of Frauds requires a written agreement. – Duration of Partnership. – Partnership for a Term. – Partnership at Will.  16

17. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Partnership 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. In this case the “nonpartner” is considered an agent whose acts are binding on the partnership. 17

18. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Rights of Partners. – In the absence of a partnership agreement: Management: equal, each one vote, majority wins; need unanimous consent for some actions. Interest in the Partnership: equal profits, losses shared as profits shared.  18

19. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Rights of Partners. – In the absence of a partnership agreement: Compensation: none. Inspection of the Books. Accounting: when other partner(s) committing fraud, embezzlement, wrongful exclusion, or anytime it is just and reasonable.  19

20. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Rights of Partners. – In the absence of a partnership agreement: Property Rights. Property acquired by the partnership remains partnership property. An individual partner has no right to sell, mortgage, or transfer partnership property. 20

21. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Rights of Partners. – In the absence of a partnership agreement: Use or possess property on behalf of the partnership. Assign her right to her share of the profits to another to satisfy individual debt. 21

22. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Duties and Liabilities of Partners. – Fiduciary Duties: p artners are fiduciaries and general agents of one another and the partnership. CASE 23.1 M EINHARD V. S ALMON (1928). CASE 23.1 M EINHARD V. S ALMON (1928). How did Salmon violate his duty of loyalty to Meinhard?  22

23. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.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. Partner has apparent authority when carrying out partnership business.  23

24. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Duties and Liabilities of Partners. – Authority of Partners. Authorized versus Unauthorized Actions. If partner acts within scope of authority, partnership is bound. Partners generally do not have authority to make charitable contributions. 24

25. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Duties and Liabilities of Partners. – Joint Liability of Partners. if partner is sued for partnership debt, partner has right to insist that other partners be sued with her. – Joint and Several Liability: third party can sue either one or all partners. 3rd party may collect against personal assets of all partners. 25

26. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Duties and Liabilities of Partners. – Liability of Incoming Partners: new admitted partner has no personal liability for existing partnership debts and obligations. 26

27. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Partner’s Dissociation. – 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.  27

28. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Partner’s Dissociation. – Events That Cause Dissociation: Notice. Triggering Event. Unanimous Vote. Court or Arbitrator Order. Partner’s bankruptcy, assignment of interest, incapacity, or death.  28

29. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Partner’s Dissociation. – Wrongful Dissociation. Dissociating partner breaches partnership agreement. Dissociating partner files bankruptcy. May be liable for costs. 29

30. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Partner’s Dissociation. – Effects of Dissociation. Rights and Duties. Liability to Third Parties. Partnership bound for two years by acts of outgoing partner, unless proper notice given. 30

31. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Partnership Termination: termination of a partnership occurs in two stages: – Dissolution (is the legal “death” of the partnership).  – Winding up and Distribution of Assets (collecting and distributing partnership assets).  31

32. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Winding Up. – After dissolution, partnership continues to wind up the partnership affairs. Obligations are paid as follows: 1. Payment of debts, including those owed to partner and nonpartner creditors. 2. Return of capital contributions and distribution of profits to partners.  32

33. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Partnerships  Winding Up. – If liabilities are greater than assets partners bear losses in proportion in which they shared profits, unless agreed otherwise. 33

34. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Partnerships  Designed for professionals service firms, it allows limits on personal liability of the partners but allows “pass through” tax advantages.  LLP allows professionals to avoid personal liability for the malpractice of other partners. 34

35. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Partnerships  An LP is an entity that limits the liability of some of its owners (the limited partners). – Consists of at least one general partner and one limited partner to carry on a business for profit. 35

36. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Partnerships  Formation of an LP. – An LP is a creature of state statute and must follow statutory requirements. – Documents must be filed with the a secretary of state who will issue a certificate of limited partnership. 36

37. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Partnerships  Liabilities of the LP. – Only General Partners can manage, but they have a fiduciary obligation to LP’s. – Limited partners enjoy limited liability as long as they do not engage in management functions.  37

38. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Partnerships  Liabilities of the LP. – A General partner assumes all management and personal liability. – A Limited Partner has no management rights, and liability is limited to the amount of investment; however a limited partner can be liable if he participates in management. 38

39. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Partnerships  Dissociation and Dissolution. – A general partner has the right to dissociate unless the LP agreement states otherwise. – On dissolution, the limited partner is entitled to return of capital contributions.  39

40. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Partnerships  Dissociation and Dissolution. – LP interests are considered securities and regulated by both federal and state securities laws. – Limited partners’ liability is limited to the capital investment.  40

41. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Partnerships  Dissociation and Dissolution. – 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. 41

42. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Partnerships  Dissociation and Dissolution. – An LP is dissolved in much the same way as a general partnership. – Retirement, withdrawal, death, bankruptcy or mental incompetence of a general partner will trigger dissolution. – On dissolution, creditors are paid first then partners.  42

43. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Partnerships  Dissociation and Dissolution. – Then partners are paid according to the terms of the buy-sell agreement, if one exists. CASE 23.2 C RATON C APITAL, LP V. N ATURAL P ORK P RODUCTION II, LLP (2011). CASE 23.2 C RATON C APITAL, LP V. N ATURAL P ORK P RODUCTION II, LLP (2011). What document did the court rely on in its ruling? 43

44. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Companies 44  An LLC is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership.  LLC’s are increasingly becoming the entity of choice for businesses.

45. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Companies 45  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.

46. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Companies 46  Formation of an LLC. – Requires filing articles of organization with central state authority: Name of Business. Principal Address. Name and Address of Registered Agent. Names of the Owners. 

47. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Companies 47  Formation of an LLC. – How will the LLC will be managed? – And what about ‘pre-formation’ contracts? LLC’s may apply the well-established rules relating to corporations and preincorporation contracts.

48. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Companies  Jurisdictional Requirements. – An LLC is a legal entity separate from its owners. – For federal diversity jurisdiction, the LLC may be treated differently than a corporation. Citizenship of an LLC is the citizenship of its members, which may live in multiple jurisdictions. 48

49. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Companies  Advantages of the LLC. – Limited Liability: liability of members limited to amount of investment. – Flexibility in Taxation. – Management and Foreign Investors. Foreign investors can be member-owners of an LLC. 49

50. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Companies  Disadvantages of the LLC. – There are not many disadvantages to an LLC. The main disadvantage is the lack of uniformity with state laws. 50

51. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  The LLC Operating Agreement. – The LLC operating agreement is the same as a corporation’s bylaws. – Written agreement is preferred. – Partnership law may apply: if the operating agreement is silent, courts will apply partnership principles. Limited Liability Companies 51

52. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Management of an LLC. – An LLC can be either member-managed, or manager-managed. – Fiduciary Duties. Managers and members owe fiduciary duties to the LLC and each other. CASE 23.3 P OLK V. P OLK (2011). CASE 23.3 P OLK V. P OLK (2011). What was the lower court’s “reversible error”? Limited Liability Companies 52

53. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Management of an LLC. – Decision-Making Procedures. Generally set forth in the operating agreement. Can include, for example: – Choosing or removal of managers. – Meetings. – Voting Rights. – Sale of interests. Limited Liability Companies 53

54. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Companies 54  Dissociation and Dissolution of an LLC. – Dissociation. Member has power, but not right, to dissociate from the LLC at any time. Trigger events: voluntary withdrawal, expulsion by other members or court order, bankruptcy, incompetence, or death.

55. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Companies 55  Dissociation and Dissolution of an LLC. – Dissociation. Dissociating member loses the right to participate in the management, and the right to act as an agent. Member also has the right to have her interest bought out by other members. 

56. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Companies 56  Dissociation and Dissolution of an LLC. – Dissociation. If the dissociation violates the operating agreement, it is wrongful and the member can be held liable for damages.

57. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Companies 57  Dissociation and Dissolution of an LLC. – Dissolution. Dissociated member has no right to force the LLC to dissolve. Remaining members can choose to continue or dissolve. 

58. © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Companies 58  Dissociation and Dissolution of an LLC. – Dissolution. Operating agreement ‘trigger’ events will cause dissolution. Members who did not wrongfully dissociate may participate in the winding up process.