LGS 200- Abigail Hammond- Exam 3

What is critical to the growth of most small businesses?

Raising capital

What allows the owner to retain full ownership and control of his/her business?

Obtaining a bank loan

Loans with desirable terms may be available from what?

Small Business Administration (SBA)

One SBA program provides loans up to $25,000 to the following businesspersons:

- Women
- Low-income individuals
- Members of minority groups

Sole proprietorship

The simplest form of business organization, in which the owner is the business.

Where must the owner of a sole proprietorship report business income?

On his/her personal income tax return

Who is legally responsible for all debts and obligations incurred by the business?

The owner

What kind of account is a sole proprietor allowed to establish that is tax-exempt until the funds are withdrawn?

Retirement accounts

The sole proprietor is free to make any decision she or he wishes concerning the business, including:

- What kind of business to pursue
- Whom to hire
- When to take a vacation

True or false: The sole proprietor can sell or transfer all or part of the business to another party at any time without seeking approval from anyone else.

True

Does a sole proprietorship allow less flexibility than a partnership or corporation?

No, it allows more flexibility

What is the major disadvantage of a sole proprietorship?

The proprietor alone bears the burden of any losses or liabilities incurred by the business

Personal Assets at Risk

Creditors can pursue the owner's personal assets to satisfy any business debts.

Lack of Continuity and Limited Ability to Raise Capital

- The sole proprietorship has the disadvantage of lacking continuity after the proprietor's
- Another disadvantage is that in raising capital, the proprietor is limited to his or her personal
funds and any loans that he or she can obtain for the business.

What happens when the owner of a sole proprietorship dies?

The business dies as well, it is automatically dissolved

Why might lenders be unwilling to make loans to sole proprietorships?

The sole proprietor risks unlimited personal liability and may not be able to pay

Partnership

An agreement, expressed or implied, between two or more persons to carry on a business for a profit

Partners:

- Are co-owners of the business
- Have joint control over its operation
- Have the right to share in its profits

What kind of law are partnerships governed by?

- Common law
- Statutory law

Agency Concepts and Partnership Law

When two or more persons agree to do business as partners, their relationship is similar to an agency relationship

True or False: Each partner is deemed to be the agent of the other partners and of the partnership.

True

What concepts of agency law are applied to partnerships?

The individuals (agents) are charged with knowledge of, and responsibility for, acts carried out within the scope of the partnership relationship

Are partners bound by fiduciary ties?

Yes, this means they are required to act primarily in the best interest of one another

How does partnership law differ from agency law?

Each partner in a partnership has an ownership interest in the firm

Can a corporation be a partner in a partnership?

Yes, the UPA's definition of "person" includes corporations

What is a key element of a partnership?

Intent to associate

True or false: One can join a partnership without other partners consent

False, you must have all other partners consent

What do courts look for to determine wether a partnership exists?

The 3 essential elements

What are the 3 essential elements of a partnership?

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

Tax Treatment of Partnerships

- Federal (and most state) tax laws treat a partnership as a "pass through" entity, with profits, losses, and taxes attributed on a pro-rata basis to the partners.
- The partnership itself pays no taxes and is responsible only for filing an information return with the IRS.

Pass-through entity

A business entity that has no tax liability.
- The entity's income is passed through to the owners, and they pay taxes on the income.

True or False: A partnership itself is responsible only for filing an information return with the Internal Revenue Service.

True

Information return

A tax return submitted by a partnership that reports the business's income and losses

True or False: Partners cannot deduct a share of the partnership's losses on their individual tax returns

False, partners can deduct a share of losses on their individual tax returns

Articles of a partnership

A written agreement that sets forth each partner's rights and obligations with respect to the partnership

Partnership by Estoppel

A partnership imposed by a court when non-partners have held themselves put to be partners, or have allowed themselves to be help out as partners, and outside people have detrimentally relied on their misrepresentations.

Rights of Partners: The relation to different areas

- Management
- Interest in the partnership
- Compensation
- Inspection of books
- Accounting
- Property

Rights of Partners: Management/ interest in the partnership

- All partners have equal rights in management
- Unless otherwise agreed, each partner has one vote in management matters
- A majority vote controls decisions on ordinary matters
- A unanimous vote is required for decisions with significant change in the nature of the partnership

True or False: Unanimous consent is likely not required for a partnership to admit new partners, to amend the partnership agreement, or to enter a new line of business.

False, Unanimous consent is likely required for a decision like this

Rights of Partners: Compensation

- Each partner is entitles to the proportion of the business profits or losses
- A partner's income from the partnership takes the form of a distribution of profits according to the partners share in the business

Right of Partners: Inspection of Books/ Accounting

- Each partner has the right to receive full and complete information about all aspects of the business
- The partnership books must be kept at the firm's principal office
- Every partner is entitles to inspect all books and records on demand and can make copies

Rights of Partners: Property

- May uses or possess partnership property only on behalf of the partnership
- A partner is not a co-owner of partnership property
- A partner has no right to sell, mortgage, or transfer partnership property to another
- A partner cannot use the property to satisfy personal debt
(a partner's creditor can petition a court for a charging order)

Charging Order

An order granted by a court to a judgement creditor that entitles the creditor to attach a partner's interest in the partnership

Where are the duties and liabilities of partners derived from?

Agency law

Fiduciary Duties: Duty of Care

A partner's duty of care is limited to refraining from "grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law"
- A partner is not liable to the partnership for: Simple negligence & Honest errors in judgement in conduction partnership business

Fiduciary Duties: Duty of Loyalty

The duty of loyalty requires a partner to account to the partnership for "any property, profit, or benefit."
- A partner must refrain from competing with the partnership in business or dealing with the firm as an adverse party
- Duty of loyalty can be breached by: self-dealing, misusing partnership property, disclosing trade secrets, usurping a partnership business opportunity

Liability of Partners: Disadvantage

- The partners are personally liable for the debts of the partnership
- In most states, the liability is essentially unlimited, b/c the acts of one partner subject the other partners to personal liability

Liability of Partners: Joint liability

- Each partner in a partnership is jointly liable for the partnership's obligations
- If a third party sues one partner on a partnership contract, that partner has the right to demand that the other partners be sued with him/her

What happens if all of the partners are not named as defendants in a lawsuit?

The assets of the partnership cannot be used to satisfy any judgement in that case

Joint liability

A doctrine in which a plaintiff must sue all of the partners as a group, but each partner can be held liable for the full amount

Liability of Partners: Partnership Obligations

In the majority of the states, partners are both jointly and severally (separately, or individually) liable for all partnership obligations.
- All partners in a partnership can be held liable even if a particular partner did not participate in, know about, or ratify the conduct that gave rise to the lawsuit
- A partner newly admitted to an existing partnership is not personally liable for any partnership obligation before the person became a partner

Joint and Several Liability

A doctrine under which a plaintiff may sure all of the partners together or one or more of the partners separately

Dissociation

The severance of the relationship between a partner and a partnership

A partner can be dissociated from a partnership in how many ways?

5

Events That Cause Dissociation: 1

By the partner's voluntarily giving notice of an "express will to withdraw"
- When a partner give notice of intent to withdraw, the remaining partners must decide wether to continue the partnership business
- If they decide not to continue, the voluntary dissociation of partners will dissolve the firm

Events That Cause Dissociation: 2

By the occurrence of an event specified in the partnership agreement

Events That Cause Dissociation: 3

By a unanimous vote of the other partners under certain circumstances, such as when a partner transfers substantially all of her/his interest in the partnership

Events That Cause Dissociation: 4

By order of a court or arbitrator if the partner has engaged in wrongful conduct that affects the partnership business
- The court can order dissociation if the partner: Breached the partnership agreement, violated a duty owed to the partnership, or to the other partners, engaged in conduct that makes it "not reasonably practicable to carry on the business in partnership with the partner"

Events That Cause Dissociation: 5

By the partners:
- Declaring bankruptcy
- Assigning his/her interest in the partnership for the benefit of creditors
- Becoming physically or mentally incapacitated
- Death

True or False: A partner has the right to dissociate from a partnership at any time

False: A partner has the power to dissociate at any time, but may not have the right to do so

Wrongful Dissociation

If the partner lacks the right to dissociate, then the dissociation is considered wrongful under the law
- A partner who wrongfully dissociates if liable to the partnership and to the other partners for damaged caused by the dissociation
- This liability is in addition to any other obligation of the partner to the partnership or to the other partners

Effects on Dissociation: Rights & Duties

On a partner's dissociation (rightful or wrongful), his/her:
- Right to participate in the management and conduct of the partnership business terminates
- Duty of loyalty ends
- Duty of care continues

Effects on Dissociation

After a partner's dissociation, his/her interest in the partnership must be purchased according to the rules in UPA 701

Buyout Price

The amount payable to a partner on his/her dissociation from a partnership, based on the amount distributable to that partner if the firm were would up on that date, and offset by any damages from wrongful dissociation

Effects on Dissociation: Two Years After Dissociation

For two years after a partner dissociates, the partnership may be bound by the acts of the dissociated partner based on apparent authority
- If a third party believed at the time of transaction that the dissociated partner was still a partner, the partnership may be liable

What must you do to avoid the liability from a dissociated client?

- Notify its creditors, customers, and clients of a partner's dissociation
- File a statement of dissociation in the appropriate state office (limits the dissociated partner's authority to 90 days)

True of False: The same events that cause dissociation can result in the end of the partnership if the remaining partners no longer wish to (or are unable to) continue the partnership business.

True

What are the two stages for the termination of a partnership?

1. Dissolution
2. Winding up

Dissolution

The formal disbanding of a partnership, corporation, or other business entity

What can a partnership be dissolved by?

- Acts of the partners
- Operation of law
- Judicial decree

Winding up

When the firm's assets are collected, liquidated and distributed, and liabilities are discharged

True or False: A court may order dissolution if the business can only be operated at a loss.

True

True or False: If the partnership's liabilities are greater than its assets, the partners don't have to bear the losses.

False: If the partnership's liabilities are greater than its assets, the partners bear the losses in the same proportion in which they shared the profits unless they have agreed otherwise

Franchise

Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use in the selling of goods or services

Franchisee

One receiving a license to use another's (the franchisor's) trademark, trade name, or copyright in the sale of goods and services.

Franchisor

One licensing another (the franchisee) to use the owner's trademark, trade name, or copyright in the selling of goods and services

What are the three classification a franchise can fall into?

1. Distributorships
2. Chain-style business operations
3. Manufacturing arrangements

Franchise: Distributorship

A manufacturer (the franchisor) licenses a dealer (the franchisee) to sell its product

What is an example of a distributorship?

Automobile dealerships and beer distributorships

Franchise: Chain-Style Business Operation

A franchise operates under a franchisor's trade name and is identified as a member of a select group of dealers that engage in the franchisor's business
- Generally required to follow standard or prescribed methods of operation
- Franchisor insists that the franchisee maintain certain standards of performance
- May be required to obtain materials and supplies exclusively from the franchisor

Franchise: Manufacturing Agreement

The franchisor transmits to the franchisee the essential ingredients or formula to make a particular product and the franchisee then markets the product either as wholesale or at retail with the franchisor's standards

What is an example of a manufacturing agreement?

Soft-drink bottling companies

How does the federal government regulate franchising?

The federal government does this through laws that apply to specific industries and through the franchise rule, created by the FTC

What does FTC stand for?

Federal Trade Commission

What has congress enacted to protect franchisees in certain industries?

Laws that protect industries from unreasonable demands and bad faith terminations of the franchise by the franchisor

What does the FTC require franchisors to disclose?

Certain material facts that a prospective franchisee needs in order to make an informed decision concerning the purchase of a franchise

FTC's Franchise Rule Requirements: Written (or Electronic) Disclosures

The franchisor must make numerous disclosures, such as the range of goods and services included and the value and estimated profitability of the franchise.
- Can be delivered on paper or electronically
- Must be able to download or save any electronic disclosure documents

FTC's Franchise Rule Requirements: Reasonable Basis for Any Representations

To prevent deception, all representations made to a prospective franchisee must have a reasonable basis at the time they are made.

FTC's Franchise Rule Requirements: Projected Earnings Figures

If a franchisor provides projected earnings figures, the franchisor must indicate whether the figures are based on actual data or hypothetical examples.

FTC's Franchise Rule Requirements: Actual Data

If a franchisor makes sales or earnings projections based on actual data for a specific franchise location, they must also disclose the number and percentage of its existing franchises that have achieved this result

FTC's Franchise Rule Requirements: Explanation of Terms

Franchisors are required to explain termination, cancellation, and renewal provisions of the franchise contract to potential franchisees before the agreement is signed

What is state legislation aimed at protecting?

Franchisees from unfair practices and bad faith terminations by franchisors

What might state laws require a franchisor to submit?

Advertising, aimed at prospective franchisees, to the state for approval

What might a state law do to prevent arbitrary or bad faith terminations?

- Prohibit termination without "good cause"
- Require that certain procedures be followed in terminating a franchise

True or False: A number of states have laws that require franchisors to provide presale disclosures to prospective franchisees

True

What is the disclosure document required by many states to be registered or filed with a state official?

Franchise Disclosure Document (FDD)

What might state law require in the disclosure that protects franchisees?

- The actual costs of operation
- Recurring expenses
- Profits earned

Where is the franchise relationship defined?

In a contract between the franchisor and the franchisee

What is specified in the franchise contract?

- The terms and conditions
- The rights and duties of the franchisor and the franchisee

How long is the duration of the franchise?

It varies, it's decided between the parties
- Could include a trial period