Partnership and Joint Venture Discussion

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1.let's consider the differences between joint ventures and partnerships.  Joint ventures and partnerships are discussed briefly in Chapter 41.  Each form of business operation offers (and carries) certain burdens and benefits.  Assuming that you could select only between entering a joint venture or a partnership, what factors might influence your choice?  about 100 words

2.You know that a partnership may be general or limited and is a voluntary association of two or more persons to carry on a co-owner of a business for profit.  In a general partnership, the parties contribute capital or services or both.

For income and tax purposes, a partnership is simply an aggregate of the partners and the income and losses flow through to the partners.  Partners' rights are determined by agreement, or, if they have not provided for such, by the Uniform Partnership Act or the later Revised Uniform Partnership Act.

There are various classifications of partners within a partnership including general partners, nominal partners, silent partners, secret partners, and dormant partners.  Any person is competent to enter into contracts maybe a partner.

The creation of a partnership may be by agreement or implied, may arise by estoppel or other means.  An agreement should carefully spell out all terms and rights of the parties.  However, often individuals create a partnership and partnership liability by their conduct and its appearance to third parties.  Several factors can influence the determination of whether a partnership exists but, the sharing of profits creates a prima facie presumption that a partnership exists.

If you decided to enter into a partnership for business purposes, what factors would you need to consider?  What steps could you take to ensure that your personal assets are not subject to liability for partnership debts? about 100 words


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Unit 4 Business Organizations Eight Chapters in Three Weeks! What a ride!?!? The Chapters… 41. Types of Business Organizations 42. Partnerships 43. LPs, LLCs, and LLPs 44. Corporation Formation 45. Shareholder Rights in Corporations 46. Securities Regulation 47. Accountants’ Liability and Malpractice 48. Management of Corporations A quick overview of each chapter in Unit 4… And then let’s consider our schedule… 41. Types of Business Organizations An overview chapter The principal forms of business organizations: Individual proprietorships Partnerships, LLPs, & LLCs Corporations The specialized forms of business organizations: Joint ventures Unincorporated associations Cooperatives The franchise business format: Types of franchises, franchise agreements, and liability of franchisors 42. Partnerships How partnership is created… Characteristics; rights, classifications, and nature of partners; acquisition and transfer of partnership property; assignment of interests Authority of partners… Express and customary authority, limitations on partners’ authority, and prohibited transactions Duties, Rights, Remedies, and Liabilities of Partners… Extent of partners’ liabilities and rights of partnership and partnership creditors Dissolution and termination of partnership… Methods of dissolution by act of parties, operation of law, court decree; process of winding up; distribution of assets; and right to continue business 43. LPs, LLCs, and LLPs Partnership limited liability… Limited partnerships… How formed and characteristics (ULPA) Limited liability companies… Characteristics, comparison to other forms of ownership, and requirements for creation Limited liability partnerships… Limited liability and requirements for registration 44. Corporation Formation Nature and classification of corporations… Rights of corporation as person; classifications; ignoring corporate entity Powers of corporations…including ultra vires acts Creation and termination… Duties of promoters; incorporation process; defective corporations; insolvency, bankruptcy and reorganization; grounds for dissolution Consolidation, mergers, and conglomerates… Definitions and legality, liability of successor corporations 45. Shareholder Rights in Corporations Nature and acquisition of corporate stock… Nature of stock, kinds of stock, and characteristics of bonds; requirements for stock acquisition and transfer of shares; lost, destroyed, and stolen shares Rights of corporate shareholders… Ownership rights, voting rights, inspection of books, dividends and capital distributions, and shareholder lawsuits Liability of shareholders… Exceptions to shareholders’ limited liability; professional corporations and owners’ liability 46. Securities Regulation State regulation of securities… Blue sky laws and the Uniform Securities Act Federal laws on the sale of securities… Securities Act of 1933, Securities Exchange Act of 1934, trading on insider information, short swing profits, tender offers, accountants’ liability and regulation under the SEC Securities industry self-regulation… 47. Accountants’ Liability and Malpractice General principles of law… Accountant malpractice, remedies for accountant malpractice, current environment, ways to limit liability Accountants’ liability to 3rd parties… Status of an accountant, legal theories of accountant liability to 3rd parties, parties to whom accountants have no liability, defenses to accountants’ liability, accountant liability for fraud Provisions of Sarbanes-Oxley applicable to accountants… Responsibilities of audit committees, auditors’ obligations on keeping records and penalties for destruction 48. Management of Corporations Role of shareholders… Shareholder authority and control, legal aspects of shareholders meetings Role and power of directors… Qualifications of directors, powers, conflicts of interests, directors’ meetings, director liability Role, authority, powers and liability of officers, agents and employees of corporation… Corporate liability to 3rd persons… Liability of management to 3rd persons, criminal liability, indemnification of officers and directors, civil liability of corporation How are we going to do this? Chapter 41 is an overview. You read it for today. We won’t cover it per se in class. Chapters 42 & 43 (partnerships and limited liability companies) we will cover today Chapters 44, 45, & 46 (corporations, shareholders rights, and securities regulation) after Spring Break Chapters 47 & 48 (accountants’ liability and malpractice and corporate management) the next week. Entrepreneurship, Sole Proprietorships, and General Partnerships 31 - 1 Entrepreneur A person who forms and operates a new business either by him- or herself or with others. 31 - 2 Entrepreneurial Forms of Conducting Business Sole Proprietorship General Partnership Limited Partnership Limited Liability Partnership Limited Liability Company 31 - 3 Sole Proprietorship • Owner is actually the business. • Business is not a separate legal entity. • Most common form of business organization in the United States. 31 - 4 Advantages of a Sole Proprietorship • Ease and low cost of formation. • Owner can make all management decisions. – hiring and firing employees. – No other approvals required. • Sole proprietor owns all of the business • Has the right to receive all of the business’s profits. • Easily transferred or sold 31 - 5 Disadvantages of a Sole Proprietorship • Access to capital is limited to: – personal funds plus – any loans he or she can obtain. • Legally responsible for the business’s contracts • Responsible for any torts committed in the course of employment. 31 - 6 Creation of a Sole Proprietorship • No formalities. • No federal or state government approval is required. • Some local governments require a license to do business within the city. 31 - 7 Personal Liability of a Sole Proprietor • The sole proprietor bears the risk of loss of the business. – Will lose his or her entire capital contribution if the business fails. • The sole proprietor has unlimited personal liability. • Creditors may recover claims against the business from the sole proprietor’s personal assets. 31 - 8 Personal Liability of a Sole Proprietor (continued) Sole Proprietorship Debt or obligation owed Third Party Capital investment Sole Proprietor (Owner) Personal liability for sole proprietorship’s debts and obligations 31 - 9 General Partnership • Voluntary association • Two or more people • Carry on business for profit • Creates rights and duties between partners and with third parties • General partners personally liable for the debts and obligations of the partnership. 31 - 10 General Partnership General Partnership Capitalinvestment investment Capital General Partner General Partner Debt or obligation owed Third Party Personal liability for partnership’s debts and obligations General Partner 31 - 11 Uniform Partnership Act (UPA) • • • • Model act Codifies partnership law Most states have adopted Covers most problems that arise in the formation, operation, and dissolution of ordinary partnerships 31 - 12 Entity Theory of Partnership • UPA considers partnerships as separate legal entities. • Partnerships can: – Hold title to personal and real property – Transact business in the partnership name – Sue in the partnership name 31 - 13 General Partnership Name • Can operate under name of any one or all of partners • May use fictitious name – Must file fictitious business name certificate – Publish notice – Cannot be similar to name used by another business 31 - 14 Requirements for a General Partnership • UPA states that a partnership is: 1. A voluntary association of two or more persons ◼ Includes natural persons, partnerships, corporations 2. Carrying on a business 3. As co-owners ◼ All partners must agree to participation 4. For profit 31 - 15 Evidence of Partnership • Prima facie evidence: – Receipt of a share of business profits • Compelling evidence: – Agreement to share in profits and losses – Right to participate in management 31 - 16 Partnership Agreement • May be written or oral – Statute of Frauds applies • No formalities required • Recommended that it be in writing – Called partnership agreement or articles of partnership – UPA will fill gaps 31 - 17 Rights Among Partners • Unless otherwise agreed, each partner: – Has a right to participate in management, and – Has an equal vote on partnership matters. • Under UPA, a simple majority decides most ordinary partnership matters. 31 - 18 Partners’ Rights to Share in Profits • UPA mandates right to an equal share in profits and losses • Agreements often provide otherwise – If agreement describes sharing of profits, but losses are silent, then losses are shared in same proportion – If agreement states sharing of losses, but is silent as to profits, then profits are shared equally 31 - 19 Right to Compensation and Reimbursement • UPA provides that no partner is entitled to remuneration – Implied partners will devote full time and service to partnership • Partner entitled to indemnification – Partner to be reimbursed for expenditures incurred on behalf of the partnership 31 - 20 Right to Return of Loans and Capital • Partner entitled to repayment of loan – Right is subordinated to claims of creditors who are not partners • Partners entitle to have capital contributions returned at termination of partnership – Right is subordinated to rights of creditors 31 - 21 Right to Information • Partner has right to true and full information – From any partner – All things affecting partnership • Partner has a duty to provide information • Partnership books must be kept at partnership’s principal place of business – Partners have absolute right to inspect and copy records 31 - 22 Duties Among Partners Duty of Loyalty Duty of Obedience Duty to Inform Duty of Care 31 - 23 Duty of Loyalty • Duty that a partner owes not to act adversely to the interests of the partnership. • Duty is imposed by law • Cannot be waived. • In case of conflict between partnership interests and personal interests, partner must choose the interest of the partnership. 31 - 24 Partners breach their duty of loyalty if they: 1. Self-deal with the partnership without permission 2. Usurp a partnership opportunity 3. Compete with the partnership without permission 4. Make secret profits from partnership business 5. Disclose confidential partnership information 6. Misuse partnership property 7. Make other breaches of their fiduciary duty 31 - 25 Duty of Care • Partners must use the same level of care and skill that a reasonable person in the same position would use in the same circumstances. • A breach of the duty of care is negligence. • A partner is liable to the partnership for any damages caused by his or her negligence. 31 - 26 Duty to Inform • Duty partner owes to inform his or her copartners of all information he or she possesses, that is relevant to the affairs of the partnership. • Knowledge is imputed to other partners. 31 - 27 Duty of Obedience • Duty that partners must adhere to the provisions of the partnership agreement and the decisions of the partnership. • Partner who breaches this duty is liable to the partnership for any damages caused by the breach. 31 - 28 Right to an Accounting • Partners cannot sue partnership • They may bring an action for an accounting – Formal judicial proceeding in which the court is authorized to: • Review the partnership and the partners’ transactions, and • Award each partner his or her share of the partnership assets 31 - 29 Tort Liability • Partnership is liable for the tortious act of a partner, employee, or agent that is committed while the person is acting within the ordinary course of partnership business or with the authority of his or her copartners. – Both negligence and intentional torts covered 31 - 30 Joint and Several Liability • Partners are jointly and severally liable for tort liability of the partnership. – i.e., the plaintiff can sue one or more of the partners separately. – If successful, the plaintiff can recover the entire amount of the judgment from any or all of the defendant-partners. – Release of one partner does not discharge the others. 31 - 31 Contract Liability • Partners are jointly liable for contracts and debts of partnership. • Third party must name all partners in suit. – If suit does not list all, judgment cannot be collected. – If one is released, all are released. • Successful third party may collect judgment against any or all partners. – Partners may seek indemnification if they pay more than their share. 31 - 32 Summary: Personal Liability of General Partners Issue Joint Liability Joint and Several Liability Type of lawsuit Contract action Tort action Defendants Plaintiff must name all partners as defendants Plaintiff can sue partners individually Recovery If successful, the plaintiff can recover the judgment against all or any of the defendants If successful, the plaintiff can recover the judgment against all or any of the named defendants Indemnification Partner who pays judgment can Partner who pays judgment can recover recover contribution from other contribution from other partners for their partners for their share of the share of the judgment judgment 31 - 33 Liability of Incoming Partners • New partner who is admitted to the 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 new partner is personally liable for debts and obligations incurred by the partnership after becoming a partner. 31 - 34 Dissolution of General Partnership • Defined as: – “Change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business”. • Partnership for a term – For a fixed duration – Until event occurs – Terminates automatically at end of time or when objective accomplished. • Partnership at will – Partner may rightfully withdraw and dissolve partnership at any time. 31 - 35 Winding-Up • Process of liquidating the partnership’s assets and distributing the proceeds to satisfy claims against the partnership. • The surviving or remaining partners have the right to wind-up the partnership. • A bankrupt partner cannot participate in the winding-up of a partnership. 31 - 36 Notice of Dissolution • Terminates partners’ actual authority to enter into contracts or act on behalf of partnership • Notice must be given to certain third parties – Third parties who dealt with partnership must be given actual notice. – Third parties who had knowledge of partnership must be given actual or constructive notice. – Third parties who had no knowledge owed no notice. • If no notice given, apparent authority to continue to bind partnership 31 - 37 Distribution of Assets 1. 2. 3. 4. Upon the winding-up of a dissolved partnership, the assets of the partnership are distributed in the following order : Creditors (except partners who are creditors) Creditor-partners Capital contributions Profits 31 - 38 Wrongful Dissolution • Partner has power to withdraw at any time, but may not have the right to withdraw. – Withdraws before expiration of term – Withdraws before occurrence of event • Partner is liable for damages caused by the wrongful dissolution of the partnership. 31 - 39 Continuation of Partnership after Dissolution • Remaining partners have right to continue after dissolution • Continuation agreement – Sets forth events that allow for continuation, amount paid to out-going partners, and other details. • Old partnership dissolved and new partnership created – Creditors of old partnership become creditors of new partnership – Have equal status with creditors of new partnership 31 - 40 Liability of Outgoing Partners • Dissolution of partnership does not discharge liability of outgoing partners for existing partnership debts and obligations 31 - 41 Right of Survivorship • Upon the death of a partner, deceased partner’s right in specific partnership property vests in the remaining partner or partners • Does not pass to heirs or next of kin – Value passes to beneficiaries and heirs • Upon death of last partner, rights in specific partnership property vest in the deceased partner’s legal representative 31 - 42 Twomey  Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e Chapter 42 Partnerships Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Nature of a Partnership • A partnership is a relationship: – created by the voluntary association of two or more persons, – to carry on as co-owners a business for profit. • Partnership consists of: – Voluntary relationships. – Capital or in-kind contributions. • If no profit intended, then an unincorporated association. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 Characteristics of a Partnership • The existence of a partnership may be found from the existence of: – shared control in the running of the business and – the fact that the parties share profits and losses. – The sharing of gross returns, as opposed to profits, is very slight evidence of a partnership. 3 Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Partnership Agreement • The partnership agreement governs the partnership during its existence and may also contain provisions relating to dissolution. • The partnership agreement will generally be in writing; this may be required by the statute of frauds. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 Partnership Property • Partners hold title to firm property by tenancy in partnership. Surviving partners receive property. • A creditor of a partner cannot proceed against any specific item of partnership property but must obtain a charging order to seize the debtorpartner’s share of the profits. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 Partnership Property • An assignee of a partner’s interest does not become a partner without the consent of the other partners and is entitled only to a share of the profits and the assignor’s interest upon dissolution. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 Authority of Partners • Scope of authority is determined by partnership agreement. • Majority of partners prevails. • Individual partners may have express authority under agency theory. – Implied powers as co-owner of business. – Partnership may be bound by act of partner with third party if third party did not know of limitations. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 Partners as to Third Parties Make contracts. Adjust claims for or against the partnership. Sell goods in the regular course of business. Execute commercial paper in the name of the firm. An individual partner can: Buy insurance. Purchase items needed by the business. Hire employees. Borrow money for the firm’s purposes. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 Limitations on Authority of Partner to Bind Partnership Law of Agency Individual partners, acting in an apparently proper way, have authority to bind the firm. Individual Partner Business Transactions Third Person Prohibited Transactions Cessation of business, suretyship, agreement to arbitrate, confession of judgement, assignment for creditors. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 Prohibited Transactions • Certain transactions a partner cannot undertake without express approval: – Cessation of business. – Suretyship. – Arbitration. – Confession of judgment (admission). – Assignment of partnership property. – Personal obligations. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 10 Duties, Rights, and Liabilities of Partners • Duties (general agency law): – Loyalty and good faith. – Obedience. • Rights: – Management. – Inspection of Books. – Share of Profits. – Contribution and Indemnity. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 11 Liability of Partners • Partnership Contracts: Partners are jointly liable. • Partnership Torts: Partners are jointly and severally liable for torts within scope of business. – Partner who has paid has right to contribution. • Liability of New Partners. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 12 Rights and Liabilities of Partners DUTIES RIGHTS LIABILITIES Loyalty and Good Faith Management Firm Contracts Obedience Share of Profits Torts of Employees Partners Within Scope of Business Reasonable Care Repayment of Loans Breach of Duties Information Payment of Interest Partners Remain Liable After Dissolution Accounting Contribution and Indemnity New Partner Not Personally Liable for Participation in Distribution Existing Debts of Capital Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Inspection of Books 13 Dissolution and Termination • A partnership may be dissolved by the parties themselves in accordance with the terms of the partnership agreement, by the expulsion of a partner, by the withdrawal of a partner, or by the bankruptcy of the firm or one of the partners. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 14 Dissolution (cont’d) • A court may order dissolution of a partnership upon the petition of a partner because of the insanity, incapacity, or major misconduct of a partner. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 15 Dissolution (cont’d) • Dissolution may be decreed because of lack of success, impracticability, or other circumstances that equitably call for dissolution. • Dissolution ends the right of the partnership to exist as a going concern. • Notice of dissolution, except dissolution by operation of law, must be given. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 16 Winding Up • Dissolution is followed by a winding-up period and the distribution of assets. • Distribution of Assets. After the firm’s liabilities to non-partners have been paid, the assets are distributed among the partners as follows: – (1) refund of advances, Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 17 Winding Up • Winding Up (cont’d): – (3) division of remaining assets in accordance with the partnership agreement or, if no agreement is stated, division of net assets equally among the partners. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 18 Twomey  Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e Chapter 41 Types of Business Organizations Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Forms of Business Organizations • The three principal forms of business organizations are: – Sole Proprietorships, – Partnerships, LLP’s and LLC’s and – Corporations. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 Forms of Business Organizations • Newly created forms of business --the LLC and LLP -- allow for tax treatment as a partnership with some limited liability. • The selection of the form of organization is determined by: – – – – – Nature of the business, Tax considerations, Financial risk involved, Importance of limited liability, and The extent of management control desired. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 Definitions • In a sole proprietorship one person owns the business, controls all decisions, receives all profits, and has unlimited liability for all obligations. • A partnership involves the pooling of capital resources and talents of two or more persons whose goal is making a profit; the partners are subject to unlimited personal liability. • A corporation is an entity--an artificial being-created by a government grant; the corporation 4 itself bears all liability; shareholders elect a board Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Definitions • In a sole proprietorship one person owns the business, controls all decisions, receives all profits, and has unlimited liability for all obligations. • A partnership involves the pooling of capital resources and talents of two or more persons whose goal is making a profit; the partners are subject to unlimited personal liability. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 Specialized Forms of Business Organizations • A cooperative consists of two or more persons or enterprises, such as farmers, who cooperate to achieve a common objective, such as the distribution of farm products. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 Franchise Business Format • By a franchise, the owner of a trademark, trade name, or copyright licenses others to use the mark or copyright in selling goods or services. • The Automobile Dealers’ Franchise Act and the Petroleum Marketing Practices Act are federal laws that provide covered franchisees with protection from bad-faith terminations. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 Liability of Franchisors • A franchisor is not liable to third persons dealing with its franchisees. • Liability of the franchisor may, however, be imposed on the ground of the apparent authority of the franchisee or the latter’s control by the franchisor. • Liability of the franchisor may also arise in cases of product liability. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 Protection of Franchisors • Special Protections under Federal Laws. – Automobile Dealer’s Day in Court Act. – Petroleum Marketing Practices Act. • Disclosure. • Vicarious Liability Claims Against Franchisors. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 Limited Liability Companies and Limited Liability Partnerships 34 - 1 Limited Liability Companies • An unincorporated business entity that combines the most favorable attributes of general partnerships, limited partnerships, and corporations. • An LLC may elect to be taxed as a partnership. • The owners can manage the business. • The owners have limited liability. 34 - 2 Limited Liability Company (LLC) • Limited liability companies are creatures of state law, not federal law. • Limited liability companies can only be created pursuant to the laws of the state in which the LLC is being organized. – Limited liability company codes regulate the formation, operation, and dissolution of LLCs. 34 - 3 Limited Liability Company (LLC) (continued) Legal Entity – An LLC is a separate legal entity (an artificial person) that can: – Own property – Sue and be sued – Enter into and enforce contracts – Be found civilly and criminally liable for violations of law 34 - 4 The Uniform Limited Liability Company Act • A model act that provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs. • The ULLCA is not law unless a state adopts it as its LLC statute. • Many states have adopted all or part of the ULLCA as their limited liability company law. 34 - 5 Taxation of LLCs • LLCs are taxed as partnerships unless it elects to be taxed as a corporation. – Taxes flow through to individual’s tax returns. – No taxation at the entity level 34 - 6 Powers of an LLC • An LLC has the same powers as an individual – It can own, mortgage, and transfer real estate. – It can own and transfer personal property. – It can enter into contracts and make guarantees. – The LLC may borrow money, and issue notes and bonds. – An LLC can be sued and can sue. 34 - 7 Member’s Limited Liability Member – an owner of an LLC. – Members have limited liability. – Members are liable for the LLC’s debts, obligations, and liabilities only to the extent of their capital contributions. 34 - 8 Limited Liability Company (LLC) Limited Liability Company (LLC) Debt or obligation owed Third Party Capital investment Member Member Member Member Liability limited to capital contribution No personal liability for company’s debts and obligations 34 - 9 Liability of an LLC • LLC is liable for loss or injury caused by wrongful act or omission or member, manager, employee, or agent in course of ordinary business. • Managers are not personally liable for debts, obligations, and liabilities of LLC. • Tortfeasors are still personally liable for injuries they cause. 34 - 10 Formation of an LLC • An LLC may be organized to operate businesses and real estate developments. – May not be certain professional groups. • An LLC can be organized in only one state even though it can conduct business in all other states. 34 - 11 Articles of Organization • An LLC is formed by delivering articles of organization to the office of the secretary of state of the state (or other designated office) of organization for filing. – The existence begins when the articles of organization are filed. • Articles include name, address of office, name and address of agent and organizers, type of LLC. 34 - 12 Duration • Term LLC – An LLC that has a specified term of duration • At-Will LLC – An LLC that has no specified term of duration 34 - 13 Capital Contribution • Money, tangible or intangible property, services performed or promised to be performed, promissory notes, or other agreements to provide cash or property • Not excused by death or disability 34 - 14 Certificate of Interest • Document that evidences a member’s ownership interest in an LLC. – Acts the same as a stock certificate issued by a corporation. 34 - 15 Operating Agreement • Agreement entered into among member that governs the affairs and business of the LLC and the relations among members, managers, and the LLC. • May be amended by the approval of all the members unless otherwise provided in the agreement. 34 - 16 Conversion of an Existing Business to an LLC • Some existing businesses may want to convert to an LLC. – To obtain the tax benefits and limited liability shield of an LLC. – Law permits such conversions. • Agreement of conversion sets forth terms. • Articles of organization must be filed with the secretary of state. 34 - 17 Dividing an LLC’s Profits and Losses • ULLCA mandates that each member has right to equal share of profits and losses. • Operating agreement may have other provisions. 34 - 18 Distributional Interest • A member’s ownership interest in an LLC that entitles the member to receive distributions of money and property from the LLC. • A transferee of a distributional interest in an LLC receives the right to receive profit and other distributions of the LLC. 34 - 19 Member-Managed LLC • In a member-managed LLC, all members can bind the LLC to authorized contracts. • Each member has equal rights in the management of the business irrespective of the size of his or her capital contribution. • Any matter relating to the business of the LLC is decided by a majority vote of the members. 34 - 20 Manager-Managed LLC • In a manager-managed LLC, only the managers can bind the LLC to authorized contracts. • The members and non-members who are designated managers control the management of the LLC. • The members who are not managers have no rights to manage the LLC unless otherwise provided for in the operating agreement. 34 - 21 Compensation and Reimbursement • A non-manager member is not entitled to remuneration. – Except for winding-up the LLC. • Managers of an LLC are paid compensation and benefits. – Specified in their employment agreements. • An LLC is obligated to reimburse members and managers for payments made on behalf of the LLC. 34 - 22 Agency Authority to Bind an LLC to Contracts • All members in member-managed LLC may bind LLC. • Only managers have authority to bind LLC in manager-managed LLC. – Members cannot bind LLC unless they are also a manager. 34 - 23 Duty of Loyalty • Duty owed by a member of a member-managed LLC and a manager of a manager-managed LLC. – Must be honest in dealings with the LLC and not act adversely to the interests of the LLC. • Breaches of the duty of loyalty by a covered member or manager include: – Usurping an LLC opportunity – Making secret profits – Secretly dealing with the LLC – Secretly competing with the LLC – Representing any interest adverse to that of the LLC 34 - 24 Limited Duty of Care • A duty owed by a member of a member of a member-managed LLC and a manager of a manager-managed LLC to not engage in conduct that injures the LLC: – A known violation of law – Intentional conduct – Reckless conduct – Grossly negligent conduct 34 - 25 Duty of Care (continued) • A member or manager of an LLC is not liable to the LLC for injuries caused to the LLC by his or her ordinary negligence. • The ordinarily negligent member or manager, and the LLC on whose behalf the member or manager was acting when the negligent act occurred, are liable to the injured third party. 34 - 26 No Fiduciary Duty Owed by a Nonmanager Member • A nonmanager member of a manager-managed LLC owes no fiduciary duties of loyalty, care, or good faith and fair dealing to the LLC or its members. 34 - 27 Dissolution • The ULLCA gives a member of an LLC the power to disassociate from the LLC. • Wrongful disassociation – Occurs when a member withdraws from a term LLC prior to the expiration of the term or from an at-will LLC when the operating agreement eliminates a member’s power to withdraw. – This could cause the dissolution of the LLC. 34 - 28 Payment of Distributional Interest • If no wrongful disassociation, LLC must purchase the disassociated member’s distributional interest. • Price and terms may be fixed in operating agreement, otherwise, must pay fair market value. • If wrongful disassociation, payment made at expiration of term. – Damages may be offset against price. 34 - 29 Notice of Disassociation • A document filed with the secretary of state that gives constructive notice that a member has disassociated from an LLC. • Effective against any person who later deals with LLC. 34 - 30 Continuation of an LLC • Members may vote unanimously to continue LLC before the expiration of the term. • LLC may be continued as an at-will LLC by simple majority vote. 34 - 31 Winding-Up an LLC’s Business • The process of preserving and selling the assets of the LLC and distributing the money and property to creditors and members. • Creditors are paid first. • Surplus amounts are distributed to members in equal amounts. – May be modified by operating agreement. 34 - 32 Articles of Termination • Document that is filed with the secretary of state (of the state in which the LLC is organized) that terminates the LLC as of the date of filing or upon a later effective date specified in the document. 34 - 33 Limited Liability Partnership (LLP) • A special form of partnership where all partners are limited partners and there are no general partners. • No partners are personally liable; all have limited liability. • LLPs have flow through tax benefits. – No taxes at entity level. 34 - 34 Limited Liability Partnership (LLP) (continued) Limited Liability Partnership (LLP) Debt or obligation owed Third Party Capital investment Limited Partner Limited Partner Limited Partner Limited Partner Liability limited to capital contribution No personal liability for partnership’s debts and obligations 34 - 35 Articles of Partnership • LLP’s must be created formally by filing articles of partnership with the secretary of the state in which the LLP is organized. • The LLP is a domestic LLP in the state in which it is organized. • An LLP must register as a foreign LLP in any state in which it wants to conduct business. 34 - 36 Liability Insurance Required • Many state laws require LLPs to carry a minimum of $1 million of liability insurance that covers negligence, wrongful acts, and misconduct by partners or employees of the LLP. • Quid pro quo for limited liability of partners. 34 - 37 Limited Partnerships Limited Partnership A type of partnership that has two types of partners: – General Partners –invest capital, manage the business, and are personally liable for partnership debts. – Limited Partners –invest capital, but do not participate in management and are not personally liable for partnership debts beyond their capital contribution. Limited Partnership (continued) • A limited partnership must have at least one general partner and one limited partner. • There are no restrictions on the number of general or limited partners allowed. • Any person may be a general or limited partner. • Corporation may be sole general partner. – Shareholders are liable only up to their capital contributions. The Revised Uniform Limited Partnership Act (RULPA) • Uniform Limited Partnership Act (ULPA) – Promulgated in 1916 – Contained a uniform set of provisions for the formation, operation, and dissolution of limited partnerships – Most states originally enacted this law The Revised Uniform Limited Partnership Act (RULPA) (continued) • Revised Uniform Limited Partnership Act (RULPA) – A 1976 revision of the ULPA – Provides a more modern comprehensive law for the formation, operation, and dissolution of limited partnerships – A majority of states have adopted the RULPA Limited Partnership (continued) Limited Partnership Debt or obligation owed Third Party Capital investment Limited Partner Limited Partner Liability limited to capital contribution No personal liability for partnership’s debts and obligations General Partner General Partner Personal liability for partnership’s debts and obligations Formation of Limited Partnerships • The creation of limited partnerships is formal • Requires public disclosure. • Entity must comply with the statutory requirements of the RULPA or other state statute. Certificate of Limited Partnership • Document that two or more persons must execute and sign. • Contains name of limited partnership, purpose, names and addresses of partners, agent, and principal place of business, contributions of each partner. • Must be filed with secretary of state. • Not formed until certificate filed. Amendments to Certificate of Limited Partnership • Certificate must be kept current by filing amendments • Filed at same offices as certificate • Changes must be filed within 30 days – – – – Change in capital contributions Admission of new partner Withdrawal of partner Continuation of business after judicial dissolution or withdrawal of general partner Name of Limited Partnership The firm name of a limited partnership may not include the surname of a limited partner unless: 1. It is also the surname of a general partner, or 2.The business was carried on under that name before the admission of the limited partner. Name of Limited Partnership (continued) Other restrictions: 1. The name cannot be the same as or deceptively similar to the names of other businesses or partnerships. 2. States can designate the words that cannot be used in limited partnership names 3. The name must contain without abbreviation the words limited partnership Capital Contributions • Under RULPA, these may be in cash, property, services rendered, or a promissory note or other obligations to contribute cash, property, or to perform services. • Partners or creditors may bring lawsuit to enforce promise to make contribution. Defective Formation • Occurs when: 1. A certificate of limited partnership is not properly filed, 2. There are defects in a certificate that is filed, or 3. Some other statutory requirement for the creation of a limited partnership is not met. • Limited partners who have been erroneously been listed as a general partner can have certificate of amendment filed or can withdraw • Liable as a general partner for all transactions until amendment filed. Limited Partnership Agreement • Document that sets forth: – The rights and duties of the general and limited partners; and – The terms and conditions regarding the operation – dissolution and termination terms. • If no agreement, certificate serves as articles. Share of Profits and Losses (continued) • The limited partnership agreement may specify how profits and losses are to be allocated among the general and limited partners. • If there is no such agreement, RULPA provides that profits and losses from a limited partnership are shared on the basis of the value of the partner’s capital contribution • A limited partner is not liable for losses beyond his or her capital contribution Right to Information The limited partnership must also keep the following records at its principal office: – Copy of certificate of limited liability and all amendments thereto – List of the full names and business addresses of each partner – Copies of effective written limited partnership agreements – Copies of federal, state, and local income tax returns – Copies of financial statements for the three most recent years. Admission of New Partners • A new limited partner can be added only upon the written consent of all partners. – Agreement can provide otherwise. • Admission effective after amendment filed. Foreign or Domestic? • Domestic Limited Partnership – A limited partnership in the state in which it is formed. • Foreign Limited Partnership – A limited partnership in all other states than the one in which it was formed. Foreign or Domestic? (continued) • Under the RULPA, the law of the state in which the entity is organized governs its organization, its internal affairs, and the liability of its limited partners. • Certificate of Registration – A document permitting a foreign limited partnership to transact business in a foreign state. Liability of General and Limited Partners • General partners of a limited partnership have unlimited liability for debts and obligations of the partnership. • Limited partners are liable only up to amount of their capital contributions. – Give up right to participate in the control and management Participation in Management • General partners have management rights. • Limited partners give up these right in exchange for limited liability. – Liable as general partner if participation is substantially the same. – Only liable to persons who reasonably believe them to be general partners. Permissible Activities of Limited Partners Being an: – Agent of the limited partnership – Employee of the limited partnership – Contractor of the limited partnership – General partner Being a consultant or advisor to a general partner regarding the limited partnership. Permissible Activities of Limited Partners (continued) • Acting as a surety for the limited partnership. • Approving or disapproving an amendment to the limited partnership agreement. • Voting on certain specific partnership matters. Liability on Personal Guarantee • When an extension of credit from a bank, supplier, or other creditor is not approved based on the credit of the limited partnership, the creditor may require a limited partner to guarantee the repayment of the loan in order to secure repayment. • Creditor may enforce personal guarantee if limited partnership defaults. Summary: Liability of Limited Partners General Rule Limited partners are not individually liable for the obligations or conduct of the partnership beyond the amount of their capital contribution. Exceptions to the General Rule Limited partners are individually liable for the debt, obligations, and tortuous acts of the partnership in three situations: 1. Defective Formation 2. Participation in Management 3. Personal Guarantee Dissolution of a Limited Partnership Partnership may be dissolved: – – – – At the end of the life of the limited partnership as specified in the certificate of limited partnership. With the written consent of all general and limited partners. Because of the withdrawal of a general partner. With the entry of a decree of judicial dissolution. Winding-Up a Limited Partnership • A limited partnership must wind up its affairs upon dissolution. • Certificate of cancellation must be filed by the limited partnership with the secretary of state of the state in which the limited partnership is organized. Distribution of Assets • After the assets of the limited partnership have been liquidated, the proceeds must be distributed. • The RULPA provides the following order of distribution of partnership assets: – Creditors of the limited partnership – Partners with respect to • Unpaid distributions • Capital contributions • The remainder of the proceeds Twomey  Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e Chapter 43 LPs, LLCs, and LLPs Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Limited Partnerships • A limited partnership consists of one or more limited partners, and one or more general partners. • Limited partners contribute assets or services with no liability for loss beyond their investment, but do not manage the business. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 Limited Partnerships • General partners manage the business and have unlimited personal liability. • A certificate must be properly executed and filed when a limited partnership is formed. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 Limited Liability Companies • A limited liability company is a hybrid form of business organization that combines the tax advantages of a partnership with the limited liability feature of the corporation. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 Limited Liability Companies • Distributions: profits and losses are shared according to the LLC operating agreement. • Property: LLC owns property in its own name. – Interest in an LLC is personal and assignable. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 Limited Liability Companies • Disregarding the LLC entity. – Similar to ‘piercing the veil’ of corporations. – Members may be personally liable even beyond their capital investment. • LLCs and other entities. – LLCs vs. Sub-S corporations. – LLCs vs. Limited Partnerships. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 Limited Liability Partnership • A limited liability partnership is a new form of business organization that allows existing partnerships to convert to this new form without major renegotiation of the underlying partnership agreement. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 Limited Liability Partnership • Innocent partners in a limited liability partnership are not personally liable for the torts of other partners beyond their investment in the firm. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 Comparison of Business Forms General Partne rship Limite d Partne rship No formality required. Filing a certificate of limited partnership with appropriate state office. Filing articles of organization with secretary of state. Registration of LLP filed with state government. Unlimited liability of each partner for fir m debts. General partners: unlimited liability for firm debts. All members are liable for LLC debts to the extent of their capital contr ibutions and equity in firm. No personal liability beyond such. No liability for partners beyond their contributions and equity in firm, except unlimited personal liability for their own wrongful acts and those of persons whom they supervise. By members of fir m, who may delegate authority to managers. All partners according to partnership agreement or the UPA. As set forth in LLC statute or articles of organization. As set forth in partnership agreement or the UPA or RUPA. Creation Liability Management Limited partners: no liability beyond loss of investment. All partners accord ing to their partnership agreement or the UPA or RUPA. General partners according to their partnership agreement or the UPA or RUPA. Limited Liability Company (LLC) Limite d Liability Partnership (LLP) Limited partners excluded. Dissolution As set forth in the partnership agreement or the UPA or RUPA Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning As set forth in the partnership agreement or the ULPA or RULPA 9 Discussion 1 ( three students) Student 1 In choosing between a joint venture and partnership, the key issues seem to revolve around the participants and purpose. While a partnership's participants are usually both people and joint venture could include people or businesses. Additionally, a partnership is people coming together to create a business, while a joint venture's participants are usually coming together only for the life of a project. Ultimately the purpose of coming together would determine what entity is formed. Student 2 Partnerships and joint ventures each have their own benefits and flaws. If I were looking to start a business with a colleague, there are a few factors that I would weigh before deciding which business organization to enter such as the purpose, the legal definition, the different options available, as well as the benefits and flaws. For example, if my colleague and I were looking to start a firm together, I would lean towards a partnership. In a partnership, two or more people merge their capital together to start the business, with the main purpose to have a profitable business. Also, a partnership can be converted into a limited liability partnership where each partner is only liable for their initial capital investment used to start the partnership. However, if my friend and I were looking to produce a music concert with We Are Messengers as the headliner, I would lean towards a joint venture. In a joint venture, a business relationship is formed between two or more people who combine their assets for a specific event/transaction and share all profits and losses equally. It allows for the relationship to be absolved at the will of any participating member if there is not a terminating date included in the contract. Overall, both partnerships and joint ventures are great options depending on the type of business one is looking to start. Student 3 Joint ventures are the joining of two or more persons pulling their sources together to achieve a goal. In a joint venture, all parties are responsible for all losses as well as all gains. Joint ventures are more limited and are created for one purpose, usually. They are not made up solely for profit. Partnerships are the pooling of resources of two or more whose goal is to make a profit. In partnerships, partners are subject to unlimited personal liability. Partnerships are ongoing for an indefinite amount of time. The factors I would consider when deciding whether to choose a joint venture or partnership are the amount of time I wish to be apart of this agreement, the amount of money I could gain or lose, and the purpose of the agreement. Discussion 2 ( three students) Student 1 If I entered a partnership, I would mainly consider the terms of the partnership agreement like the rights and responsibilities of all partners, the distribution of profits and losses, as well as the actions taken in the event of a partner's death. The partnership agreement contains all of the conditions and terms that will be implemented in the partnership. It would also make sure that the other partners understand their rights and responsibilities to the partnership. Also, to ensure that my personal assets are protected, I could ask for a provision to be added to the partnership agreement that states that my personal assets are not to be used to settle outstanding debts for the partnership. Student 2 There are multiple factors that I would want to consider when forming a partnership for business purposes. I would want to make sure that there were limitations on authority which means that if a partner violates that agreement then they are liable to the other partners for any loss caused by the breach of the limitation. I would want to lay out all of the duties of the partners and what is expected from each partner in the agreement. I would consider forming an LLC or LLP. Unlimited personal liability is remedied by the LLC form of business organization. Professional partnerships that convert to an LLP shield innocent partners from personal liability beyond their investment in the firm. Student 3 If I were entering into a partnership the first step I would take is setting up a partnership agreement and have all parties sign it. In the partnership agreement I would address the issues of personal liability. Personal liability is very real concern that everyone should be careful about especially when related to partnerships. Partnerships and sole proprietorships are the most risky forms of business because there are not as many laws set in place to protect these businesses. With both businesses the owners put themselves at risk because creditors can come directly after their personal assets when they don't make their business payments on time. Therefore, this topic needs to be addressed first in the partnership agreement.
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Discussion 1
A joint venture is achieved when two or more people join efforts to pursue a particular
project, whereas a partnership is when individuals come together to do a combined business. Both
joint venture and partnership have advantages and disadvantages. However, an individual's choice
to join either a joint venture or partnership depends on various factors. This includes the terms of
the agreement, flexibility, and alignment. The terms of the agreement involve the rights and duties
of each party and the liabilities. Besides, the terms of the agreement should clearly outline the scale
of investments required from each particular party and terms of dissolution or termination of the
joint venture or partnership. The parties should also be informed of any potential differences in
business culture or any matters arising in a flexible scenario. For a joint venture, success is based
on a shared objective. Therefore, the strategies set by the partners must be aligned to ensure the
ultimate goal is achieved.
Discussion 2
Partnership towards business is an essential risk that an individual or company can take
because it increases your knowledge and ability in terms of resources to make better products.
Various factors can be considered before joining a business partnership. The first factor that an
individual needs to consider is goal alignment. In this case, one must make sure that he has similar
ambitions and outcomes with the other partner. Therefore, it could be easy for all partners to work
towards achieving their ultimate business goal. Secondly, there is a need for a partnership
agreement. This is an essential requirement that partners should put in willingness for protection
from personal liability and other critical issues that ma...


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