Chapter 20 – Small Businesses, Entrepreneurs, and General Partnerships – Flashcards

person who forms and operates a new business either by himself or herself or with others -sole proprietorship -general partnership -limited partnership -limited liability partnership -limited liability company -corporation ---certain requirements must be met to form and operate each of these forms of business

-simplest form of business organization -no separate legal entity -most common form of business organization in the United states ------------------------------------------------------------------ ADVANTAGES: -easy and does not cost a lot -the owner has the right to make all management decisions concerning the business, including those involving hiring and firing employees -the sole proprietor owns all of the business and has the right to receive all of the business's profits -a sole proprietorship can be easily transferred or sold if and when the owner desires to do so; no other approval(such as from partners or shareholders) is necessary ------------------------------------------------------------------ DISADVANTAGES: -access to capital is limited to personal funds plus any loans he or she can obtain -sole proprietor is legally responsible for the business's contracts and the torts he or she or any of his or her employees commit in the course of employment ------------------------------------------------------------------ HOW TO CREATE: -easy -no formalities, no federal or state government approval is required -some local governments require all businesses to obtain licenses to do business within the city -if no other form of business organization is chosen, the business is by default a sole proprietorship ------------------------------------------------------------------ PERSONAL LIABILITY -sole proprietor bears the risk of loss of the business -owner will lose his or her entire capital contribution if business fails -unlimited personal liability---creditors may recover claims against the business from the sole proprietor's personal assets---home, automobile, bank accounts ------------------------------------------------------------------ TAXATION -not a separate legal entity...so it does not pay taxes at the business level -earnings and losses are reported on the sole proprietor's personal income tax filing -1040 - individual income tax return -Schedule C - Profit or Loss from Business

-voluntary association of two or more persons for carrying on a business as co-owners for profit -the formation of a partnership creates certain rights and duties among partners and with third parties -general partners, or partners are personally liable for the debts and obligations of the partnership -must file a fictitious business name with the appropriate government agency to operate under a trade name -usually must publish a notice of the use of the trade name in a newspaper of general circulation where the partnership does business---name cannot indicate it is a corporation FORMATION - two or more persons,...carrying on a business....as co-owners---for profit AGREEMENT - may be oral, written, or implied from the conduct of the parties---partnerships that exist for more than one year or are authorized to deal in real estate must be in writing under the statute of frauds -written partnership agreement is called a partnership agreement or articles of partnership TAXATION - do not pay federal income taxes.....income and losses of partnerships flow onto and have to be reported on the individual partners' personal income tax returns---"flow-through" taxation

-RIGHT TO PARTICIPATE IN MANAGEMENT---a situation in which, unless otherwise agreed, each partner has a right to participate in the management of a partnership and has an equal vote on partnership matters -RIGHT TO SHARE IN PROFITS -RIGHT TO COMPENSATION AND REIMBURSEMENT---partner is entitled to indemnification---reimbursement for such expenditures(travel, business, other expenses in behalf of partnership) if they are reasonably incurred in the ordinary and proper conduct of the business -RIGHT TO RETURN OF LOANS AND CAPITAL -RIGHT TO INFORMATION---that could affect or is affecting the partnership

-DUTY OF LOYALTY -DUTY OF CARE---use the same level of care and skill that a reasonable person in the same position would use in the same circumstances---negligence is a breach of the duty of care -DUTY TO INFORM---owes to inform his or her co-partners of all information he or she possesses that is relevant to the affairs of the partnership -DUTY OF OBEDIENCE---requires partners to adhere to the provisions of the partnership agreement and the decisions of the partenrship

-a duty that a partner owes not to act adversely to the interests of the partnership -parties are in a fiduciary relationship with one another -if there is a conflict between partnership interests and personal interests the partner must choose the interest of the partnership -BASIC FORMS OF BREACH OF LOYALTY: -self-dealing---buying selling goods or property to the partnership -usurping a partnership opportunity -competing with the partnership -secret profits -breach of confidentiality -misuse of property

TORT LIABILITY -joint and several liability--- tort liability of partners together and individually. a plaintiff can sue one or more partners separately. If successful, the plaintiff can recover the entire amount of the judgement from any or all of the defendant-partners who have been found liable -Jim causes an automobile accident that injures Catherine, a pedestrian----Catherine can sue Nicole, Jim, or Maureen, separately, or any two of them, or all of them ------------------------------------------------------------------- CONTRACT LIABILITY -joint liability---liability of partners for contracts and debts of the partnership. -a plaintiff must name the partnership and all of the partners as defendants in a lawsuit ------------------------------------------------------------------- LIABILITY OF INCOMING PARTNERS -a new partner who is admitted to a partnership is liable for the existing debts and obligations(antecedent debts) of the partnership only to the extent of his or her capital contribution -the incoming partner is personally liable for debts and obligation incurred by the partnership after becoming a partner -800,000 debt exists when new guy comes in. new guy pays capital contribution of 100,000 to the 800,000 but is not personally liable for the rest of the 800,000 debt left. BUT he is personally liable for the $1 million of unpaid debt that the partnership borrowed after he became a partner -------------------------------------------------------------------- 1. General partnership: know what types of liability attach to different types of wrongs a. General partners can be held jointly or separately liable for contracts? i. Contract versus torts

-a partnership with a fixed duration is called a partnership for a term---TEST**** -a partnership created with no fixed duration is called a partnership at will---TEST**** -the dissolution of a partnership is "the change in the relation of the partners caused by any partner ceasing to be associated in carrying on of the business -unless the partnership is continued, the winding up of the partnership follows its dissolution---the process of winding up consists of the liquidation(sale) of partnership assets and the distribution of the proceeds to satisfy claims against the partnership ------------------------------------------------------------------- WRONGFUL DISSOLUTION -a partner who withdraws from a partnership for a term prior to the expiration of the term does not have the right to dissolve the partnership ---the partner's action causes a wrongful dissolution of the partnership ---the partner is liable for damages caused by the wrongful dissolution of the partnership ------------------------------------------------------------------- NOTICE OF DISSOLUTION -notice of dissolution must be given to certain third parties...the degree of notice depends on the relationship of the third party with the partnership: 1. third parties who have actually dealt with the partnership must be given *actual notice*(verbal or written) of dissolution or have acquired knowledge of the dissolution from another source 2. third parties who have not dealt with the partnership but have knowledge of it must be given actual or constructive notice of dissolution-----consists of publishing a notice of dissolution in a newspaper of general circulation serving the are where the business of partnership was regularly conducted 3. third parties who have not dealt with partnership and do not have knowledge of it do not have to be given notice -if proper notice is not given.....and a partner enters into a contract with the third party...liability may be imposed on the previous partners on the grounds of apparent authority -------------------------------------------------------------------

DISTRIBUTION OF ASSETS -debts are satisfied in the following order: 1. Creditors(except partners who are creditors) 2. Creditor-partners 3. Capital contributions 4. Profits ------------------------------------------------------------------- CONTINUATION OF A GENERAL PARTNERSHIP AFTER DISSOLUTION -to continue...remaining partners enter into a continuation agreement that expressly sets forth the events that allow for continuation of the partnership, the amount to be paid outgoing partners, and other details -creditors of old partnerships become creditors of the new partnership and have equal status with the creditors of the new partnership ------------------------------------------------------------------- LIABILITY OF OUTGOING PARTNERS -if a partnership is dissolved, each partner is personally liable for debts and obligations of the partnership that exist at the time of dissolution -outgoing partner not liable for any new debts and obligations incurred by partnership after the dissolution, as long as proper notification of his or her withdrawal from the partnership has been given to the creditor

a. General partner is the agent of all of the other partners and the partnership itself

a. Default: sole proprietorship b. Will be taxed and personally liable

a. Default: a general partnership b. Both held equally liable