Forms of Business Forms of Business OrganizationOrganization

2

For DiscussionFor Discussion What kind of business would you like What kind of business would you like

to start?to start?

Entrepreneurship, Sole Entrepreneurship, Sole Proprietorships, and Proprietorships, and General PartnershipsGeneral Partnerships

4

PRINCIPAL BUSINESS FORMSPRINCIPAL BUSINESS FORMS

Sole proprietorshipsSole proprietorships PartnershipsPartnerships CorporationsCorporations

5

Entrepreneurial Forms of Entrepreneurial Forms of Conducting BusinessConducting Business

Sole Sole ProprietorshipProprietorship General General

PartnershipPartnership

Limited Limited PartnershipPartnership

Limited Liability Limited Liability CompanyCompany

Limited Liability Limited Liability PartnershipPartnership

6

7

Sole ProprietorshipSole Proprietorship Owner is actually the Owner is actually the

business.business. Business is not a separate Business is not a separate

legal entity.legal entity. Most common form of Most common form of

business organization in the business organization in the United States.United States.

8

Advantages of a Sole Advantages of a Sole ProprietorshipProprietorship

Ease and low cost of Ease and low cost of formation.formation.

Owner can make all Owner can make all management decisions.management decisions. hiring and firing employees.hiring and firing employees. No other approvals required.No other approvals required.

Sole proprietor owns all of the Sole proprietor owns all of the business business

Has the right to receive all of Has the right to receive all of the business’s profits.the business’s profits.

Easily transferred or soldEasily transferred or sold

9

Disadvantages of a Sole Disadvantages of a Sole ProprietorshipProprietorship

Access to capital is limited to:Access to capital is limited to: personal funds plus personal funds plus any loans he or she can obtain.any loans he or she can obtain.

Legally responsible for the Legally responsible for the business’s contractsbusiness’s contracts

Responsible for any torts Responsible for any torts committed in the course of committed in the course of employment.employment.

10

Creation of a Sole Creation of a Sole ProprietorshipProprietorship

No formalities.No formalities. No federal or state No federal or state

government approval is government approval is required.required.

Some local governments Some local governments require a license to do require a license to do business within the city.business within the city.

11

Personal Liability of a Sole Personal Liability of a Sole ProprietorProprietor

The sole proprietor bears the The sole proprietor bears the risk of loss of the business.risk of loss of the business. Will lose his or her entire Will lose his or her entire

capital contribution if the capital contribution if the business fails.business fails.

The sole proprietor has The sole proprietor has unlimited personal liabilityunlimited personal liability..

Creditors may recover claims Creditors may recover claims against the business from the against the business from the sole proprietor’s personal sole proprietor’s personal assets.assets.

12

Personal Liability of a Sole Personal Liability of a Sole Proprietor Proprietor (continued)(continued)

Sole Sole Proprietor Proprietor (Owner)(Owner)

Sole Sole ProprietorshipProprietorship Third PartyThird Party

Capital investmentCapital investment

Debt or obligation Debt or obligation owedowed

Personal liability for sole Personal liability for sole proprietorship’s debts and proprietorship’s debts and

obligationsobligations

13

For Discussion For Discussion ScenarioScenario After a year of losses, your business turned a sizable profit in After a year of losses, your business turned a sizable profit in

its second year. You worked 70-hour weeks to produce it and its second year. You worked 70-hour weeks to produce it and you are now considering bringing in a partner.you are now considering bringing in a partner.

QuestionsQuestions What attributes would you look for in a partner? What attributes would you look for in a partner? What could you offer a potential partner? What could you offer a potential partner? What kind and size of investments would you expect in turn?What kind and size of investments would you expect in turn? How would you divide the business duties with your partner? How would you divide the business duties with your partner? What could go wrong with the partnership?What could go wrong with the partnership?

14

General PartnershipGeneral Partnership

Voluntary associationVoluntary association Two or more peopleTwo or more people Carry on business for profitCarry on business for profit Creates rights and duties Creates rights and duties

between partners and with between partners and with

third partiesthird parties General partners personally General partners personally

liable for the debts and liable for the debts and

obligations of the partnership.obligations of the partnership.

15

General PartnershipGeneral Partnership

Third PartyThird Party

Debt or obligation Debt or obligation owedowedGeneral General

PartnershipPartnership

Capital investmentCapital investment

General General PartnerPartner

General General PartnerPartner

General General PartnerPartner

Capital investmentCapital investment

Personal liability for Personal liability for partnership’s debts and partnership’s debts and

obligationsobligations

16

Partnership AgreementPartnership Agreement May be written or oralMay be written or oral

Statute of Frauds appliesStatute of Frauds applies No formalities requiredNo formalities required Recommended that it be in writingRecommended that it be in writing

Called partnership agreement or articles Called partnership agreement or articles of partnershipof partnership

UPA will fill gapsUPA will fill gaps

17

CREATION OF CREATION OF A PARTNERSHIPA PARTNERSHIP Form and content of the partnership Form and content of the partnership

agreementagreement Types of partnershipsTypes of partnerships

Classification by purposeClassification by purpose Classification by extent of liabilityClassification by extent of liability General partnersGeneral partners Limited partnersLimited partners

18

CREATION OF CREATION OF A PARTNERSHIPA PARTNERSHIP

Status of minorsStatus of minors Powers of a partnershipPowers of a partnership Status of a partnershipStatus of a partnership

(continued)

19

TERMINATION OF TERMINATION OF A PARTNERSHIPA PARTNERSHIP

By action of one or more of the By action of one or more of the partnerspartners

By operation of lawBy operation of law By court decreeBy court decree

20

Dissolution of General PartnershipDissolution of General Partnership Defined as:Defined as:

““Change in the relation of the Change in the relation of the partners caused by any partner partners caused by any partner ceasing to be associated in the ceasing to be associated in the carrying on of the business”.carrying on of the business”.

Partnership for a termPartnership for a term For a fixed durationFor a fixed duration Until event occursUntil event occurs Terminates automatically at end of Terminates automatically at end of

time or when objective time or when objective accomplished.accomplished.

Partnership at willPartnership at will Partner may rightfully withdraw and Partner may rightfully withdraw and

dissolve partnership at any time.dissolve partnership at any time.

21

Winding-UpWinding-Up Process of liquidating the Process of liquidating the

partnership’s assets and partnership’s assets and distributing the proceeds distributing the proceeds to satisfy claims against to satisfy claims against the partnership.the partnership.

The surviving or remaining The surviving or remaining partners have the right to partners have the right to wind-up the partnership.wind-up the partnership.

A bankrupt partner cannot A bankrupt partner cannot participate in the winding-participate in the winding-up of a partnership.up of a partnership.

22

Notice of DissolutionNotice of Dissolution Terminates partners’ actual Terminates partners’ actual

authority to enter into contracts or authority to enter into contracts or act on behalf of partnershipact on behalf of partnership

Notice must be given to certain third Notice must be given to certain third partiesparties Third parties who dealt with partnership Third parties who dealt with partnership

must be given actual notice.must be given actual notice. Third parties who had knowledge of Third parties who had knowledge of

partnership must be given actual or partnership must be given actual or constructive notice.constructive notice.

Third parties who had no knowledge Third parties who had no knowledge owed no notice.owed no notice.

If no notice given, apparent If no notice given, apparent authority to continue to bind authority to continue to bind partnershippartnership

23

Distribution of AssetsDistribution of AssetsUpon the winding-up of a Upon the winding-up of a dissolved partnership, the dissolved partnership, the assets of the partnership are assets of the partnership are distributed in the following distributed in the following order order ::

1.1. Creditors (except partners who Creditors (except partners who are creditors)are creditors)

2.2. Creditor-partnersCreditor-partners

3.3. Capital contributionsCapital contributions

4.4. ProfitsProfits

24

Wrongful DissolutionWrongful Dissolution Partner has power to Partner has power to

withdraw at any time, but withdraw at any time, but may not have the right to may not have the right to withdraw.withdraw. Withdraws before expiration of Withdraws before expiration of

termterm Withdraws before occurrence of Withdraws before occurrence of

eventevent Partner is liable for damages Partner is liable for damages

caused by the wrongful caused by the wrongful dissolution of the dissolution of the partnership.partnership.

25

Continuation of Partnership Continuation of Partnership after Dissolutionafter Dissolution Remaining partners have right to Remaining partners have right to

continue after dissolutioncontinue after dissolution Continuation agreementContinuation agreement

Sets forth events that allow for Sets forth events that allow for continuation, amount paid to out-going continuation, amount paid to out-going partners, and other details.partners, and other details.

Old partnership dissolved and new Old partnership dissolved and new partnership createdpartnership created Creditors of old partnership become Creditors of old partnership become

creditors of new partnership creditors of new partnership Have equal status with creditors of new Have equal status with creditors of new

partnershippartnership

26

Liability of Outgoing Partners Liability of Outgoing Partners

Dissolution of partnership Dissolution of partnership does not discharge liability does not discharge liability of outgoing partners for of outgoing partners for existing partnership debts existing partnership debts and obligationsand obligations

27

Right of SurvivorshipRight of Survivorship

Upon the death of a partner, Upon the death of a partner, deceased partner’s right in deceased partner’s right in specific partnership property specific partnership property vests in the remaining partner vests in the remaining partner or partnersor partners

Does not pass to heirs or next Does not pass to heirs or next of kinof kin Value passes to beneficiaries Value passes to beneficiaries

and heirsand heirs Upon death of last partner, Upon death of last partner,

rights in specific partnership rights in specific partnership property vest in the deceased property vest in the deceased partner’s legal representativepartner’s legal representative

28

A PARTNER’S POWERSA PARTNER’S POWERS

A partner’s rightsA partner’s rights A partner’s authorityA partner’s authority

29

A PARTNER’S RIGHTSA PARTNER’S RIGHTS Right to participate in Right to participate in

managementmanagement Right to profitsRight to profits Right in partnership propertyRight in partnership property Right to extra compensationRight to extra compensation

30

A PARTNER’S AUTHORITYA PARTNER’S AUTHORITY Make binding contracts for the firmMake binding contracts for the firm Receive money owed to and settle claims Receive money owed to and settle claims

against the firmagainst the firm Borrow money in the firm’s nameBorrow money in the firm’s name SellSell BuyBuy MakeMake Draw and cash checks and draftsDraw and cash checks and drafts Hire and fire employees and agentsHire and fire employees and agents Receive notice of matters affecting the Receive notice of matters affecting the

partnershippartnership

31

A PARTNER’S DUTIES A PARTNER’S DUTIES AND LIABILITIESAND LIABILITIES A partner’s dutiesA partner’s duties

Comply with partnership agreement and Comply with partnership agreement and decisionsdecisions

Use reasonable careUse reasonable care Act with integrity and good faithAct with integrity and good faith Not conduct competing businessNot conduct competing business Keep accurate recordsKeep accurate records

A partner’s potential liabilitiesA partner’s potential liabilities

32

Tort LiabilityTort Liability

Partnership is liable for the Partnership is liable for the tortious act of a partner, tortious act of a partner, employee, or agent that is employee, or agent that is committed while the person committed while the person is acting within the ordinary is acting within the ordinary course of partnership course of partnership business or with the business or with the authority of his or her co-authority of his or her co-partners.partners. Both negligence and intentional Both negligence and intentional

torts coveredtorts covered

33

Joint and Several LiabilityJoint and Several Liability Partners are Partners are jointlyjointly and and severallyseverally

liableliable for tort liability of the for tort liability of the partnership.partnership. i.e., the plaintiff can sue one i.e., the plaintiff can sue one

or more of the partners or more of the partners separately.separately.

If successful, the plaintiff can If successful, the plaintiff can recover the entire amount of recover the entire amount of the judgment from any or all the judgment from any or all of the defendant-partners.of the defendant-partners.

Release of one partner does Release of one partner does not discharge the others.not discharge the others.

34

Contract LiabilityContract Liability Partners are jointly liable for contracts and Partners are jointly liable for contracts and

debts of partnership.debts of partnership. Third party must name all partners in suit.Third party must name all partners in suit.

If suit does not list all, judgment cannot be If suit does not list all, judgment cannot be collected.collected.

If one is released, all are released.If one is released, all are released. Successful third party may collect judgment Successful third party may collect judgment

against any or all partners.against any or all partners. Partners may seek indemnification if they pay Partners may seek indemnification if they pay

more than their share. more than their share.

Limited PartnershipsLimited Partnerships

36

Limited PartnershipLimited Partnership A type of partnership that has two types of A type of partnership that has two types of

partners:partners: General Partners –General Partners –invest capital, invest capital,

manage the business, and are manage the business, and are personally liable for partnership debts.personally liable for partnership debts.

Limited Partners –Limited Partners –invest capital, but do invest capital, but do not participate in management and are not participate in management and are not personally liable for partnership not personally liable for partnership debts beyond their capital contribution.debts beyond their capital contribution.

37

Limited PartnershipLimited Partnership (continued)(continued)

A limited partnership must have at least one A limited partnership must have at least one general partner and one limited partner.general partner and one limited partner.

There are no restrictions on the number of There are no restrictions on the number of general or limited partners allowed.general or limited partners allowed.

Any person may be a general or limited Any person may be a general or limited partner.partner.

Corporation may be sole general partner.Corporation may be sole general partner. Shareholders are liable only up to their capital Shareholders are liable only up to their capital

contributions.contributions.

38

Limited Partnership Limited Partnership (continued)(continued)

Liability limited to capital Liability limited to capital contributioncontribution

No personal liability for partnership’s No personal liability for partnership’s debts and obligationsdebts and obligations

Personal liability for partnership’s Personal liability for partnership’s debts and obligationsdebts and obligations

Capital investmentCapital investment

Debt or obligation Debt or obligation owedowedLimited Limited

PartnershipPartnershipThird PartyThird Party

Limited Limited PartnerPartner

Limited Limited PartnerPartner

General General PartnerPartner

General General PartnerPartner

39

Formation of Limited Formation of Limited PartnershipsPartnerships

The creation of limited The creation of limited partnerships is formal partnerships is formal

Requires public disclosure.Requires public disclosure. Entity must comply with Entity must comply with

the statutory requirements the statutory requirements of the of the RULPARULPA or other state or other state statute.statute.

40

Certificate of Limited PartnershipCertificate of Limited Partnership Document that two or more persons must Document that two or more persons must

execute and sign.execute and sign. Contains name of limited partnership, Contains name of limited partnership,

purpose, names and addresses of purpose, names and addresses of partners, agent, and principal place of partners, agent, and principal place of business, contributions of each partner.business, contributions of each partner.

Must be filed with secretary of state.Must be filed with secretary of state. Not formed until certificate filed.Not formed until certificate filed.

41

Name of Limited PartnershipName of Limited Partnership The firm name of a limited partnership The firm name of a limited partnership

may not include the surname of a limited may not include the surname of a limited partner unless:partner unless:1.1. it is also the surname of a general partner, it is also the surname of a general partner,

oror

2.2. The business was carried on under that The business was carried on under that name before the admission of the limited name before the admission of the limited partner.partner.

42

Name of Limited Partnership Name of Limited Partnership (continued)(continued)

Other restrictions:Other restrictions:1.1. The name cannot be the same as or deceptively The name cannot be the same as or deceptively

similar to the names of other businesses or similar to the names of other businesses or partnerships.partnerships.

2.2. States can designate the words that cannot be States can designate the words that cannot be used in limited partnership namesused in limited partnership names

3.3. The name must contain without abbreviation the The name must contain without abbreviation the words words limited partnershiplimited partnership

43

Limited Partnership AgreementLimited Partnership Agreement

Document that sets forth:Document that sets forth: The rights and duties of the The rights and duties of the

general and limited general and limited partners; andpartners; and

The terms and conditions The terms and conditions regarding the operationregarding the operation

dissolution and termination dissolution and termination terms.terms.

If no agreement, If no agreement, certificate serves as certificate serves as articles.articles.

44

Share of Profits & LossesShare of Profits & Losses(continued(continued))

The limited partnership agreement The limited partnership agreement may specify how profits and losses may specify how profits and losses are to be allocated among the are to be allocated among the general and limited partners.general and limited partners.

If there is no such agreement, RULPA If there is no such agreement, RULPA provides that profits and losses from provides that profits and losses from a limited partnership are shared on a limited partnership are shared on the basis of the value of the the basis of the value of the partner’s capital contributionpartner’s capital contribution

A limited partner is not liable for losses A limited partner is not liable for losses beyond his or her capital contributionbeyond his or her capital contribution

45

Liability of General and Liability of General and Limited PartnersLimited Partners General partners of a limited General partners of a limited

partnership have partnership have unlimited liabilityunlimited liability for for debts and obligations of the debts and obligations of the partnership.partnership.

Limited partners are liable only up to Limited partners are liable only up to amount of their capital contributions.amount of their capital contributions. Give up right to participate in the Give up right to participate in the

control and managementcontrol and management

46

Participation in ManagementParticipation in Management General partners have management General partners have management

rights.rights. Limited partners give up these right Limited partners give up these right

in exchange for limited liability.in exchange for limited liability. Liable as general partner if participation Liable as general partner if participation

is substantially the same.is substantially the same. Only liable to persons who reasonably Only liable to persons who reasonably

believe them to be general partners.believe them to be general partners.

47

Summary: Liability of Limited PartnersSummary: Liability of Limited Partners

General RuleGeneral Rule Limited partners are not individually liable for the Limited partners are not individually liable for the obligations or conduct of the partnership beyond obligations or conduct of the partnership beyond the amount of their capital contribution.the amount of their capital contribution.

Exceptions to the General Exceptions to the General RuleRule

Limited partners are individually liable for the debt, Limited partners are individually liable for the debt, obligations, and tortious acts of the partnership in obligations, and tortious acts of the partnership in three situations:three situations:1. Defective Formation1. Defective Formation2. Participation in Management2. Participation in Management3. Personal Guarantee3. Personal Guarantee

48

Dissolution of a Dissolution of a Limited PartnershipLimited Partnership

Partnership may be dissolved:Partnership may be dissolved: At the end of the life of the limited At the end of the life of the limited

partnership as specified in the certificate partnership as specified in the certificate of limited partnership.of limited partnership.

With the written consent of all general With the written consent of all general and limited partners.and limited partners.

Because of the withdrawal of a general Because of the withdrawal of a general partner.partner.

With the entry of a With the entry of a decree of judicial decree of judicial dissolution.dissolution.

49

Winding-Up a Winding-Up a Limited PartnershipLimited Partnership A limited partnership must A limited partnership must wind upwind up its its

affairs upon dissolution.affairs upon dissolution. Certificate of cancellationCertificate of cancellation must be must be

filed by the limited partnership with filed by the limited partnership with the secretary of state of the state in the secretary of state of the state in which the limited partnership is which the limited partnership is organized.organized.

50

Distribution of AssetsDistribution of Assets

After the assets of the limited partnership After the assets of the limited partnership have been liquidated, the proceeds must have been liquidated, the proceeds must be distributed.be distributed.

The RULPA provides the following order of The RULPA provides the following order of distribution of partnership assets:distribution of partnership assets: Creditors of the limited partnershipCreditors of the limited partnership Partners with respect toPartners with respect to

Unpaid distributionsUnpaid distributions Capital contributionsCapital contributions The remainder of the proceedsThe remainder of the proceeds

51

Final ExamFinal Exam

Final Exam:Final Exam: If you were to start a business:If you were to start a business: 1. What would it be?1. What would it be? 2. What type of legal organization 2. What type of legal organization

would it be?would it be? 3. Which particular laws or 3. Which particular laws or

regulations would effect your regulations would effect your business?business?

52

Final Exam cont.Final Exam cont.

4. Could it become unionized?4. Could it become unionized? 5. What tort liability would you face?5. What tort liability would you face? I will welcome you to turn your final exam I will welcome you to turn your final exam

in prior to class of the 16in prior to class of the 16thth. You may e-mail . You may e-mail it to me:it to me:

cfeer@bakersfieldcollege.edu You may leave it for me at Delano Center of You may leave it for me at Delano Center of

Distance Ed. in the Library of the main Distance Ed. in the Library of the main campus.campus.

53

Tonight’s QUIZ

Describe the most significant difference between a general partner and a limited partner?