BUSINESS LAW TEXT AND CASES Commercial Law for Accountants Fourteenth Edition MILLER © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A limited liability company (LLC) is a hybrid entity that combines the limited liability of a corporation and the tax advantages of a partnership.  LLCs are increasingly the entity of choice for businesses.  LLCs are governed by state law.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2  Nature of the LLC:  Owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares).  Limited Liability of Members: LLC members are shielded from personal liability in most situations and any liability of members is normally limited to the amount of their investments.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3  Nature of the LLC:  When Liability May Be Imposed: • An individual guarantees payment of a business loan to the LLC. • The courts may hold the owners of a business liable for its debts or “pierce the corporate veil” to achieve justice or hold its members personally liable in circumstances that are clearly extraordinary. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4  Nature of the LLC:  Other Similarities to Corporations: • Separate legal entity from owners. • Can hold property separately. • “Foreign” designation if doing business in state other than the one where the LLC was formed. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  Formation of the LLC:  Articles of Organization: Must be filed with a central state agency—usually the secretary of state’s office (ULLCA 202). • Articles must usually include the business name, its principal address, the name and address of a registered agent, the members’ names, and how the LLC will be managed (ULLCA 203).  6 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Formation of the LLC:  Articles of Organization: The business’s name must include the words Limited Liability Company or the initials LLC [ULLCA 105(a)].  A majority of the states permit onemember LLCs but some states require at least two members.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7  Formation of the LLC:  Preformation Contracts: • Prior to charter, owners of the firm are called “promoters.” • If a promoter forms a “preincorporation contract” prior to formation, they may be personally liable. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8  Formation of the LLC:  Jurisdictional Requirements: • An LLC is a legal entity separate from its owners. • For federal diversity jurisdiction, the LLC may be treated differently than a corporation.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  Formation of the LLC:  Jurisdictional Requirements: • Citizenship of an LLC is the citizenship of its members, which may live in multiple jurisdictions. • The state citizenship of an LLC may come into play when a party sues the LLC based on diversity of citizenship. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  Advantages of the LLC:  Limited Liability: Members are liable to amount of investment.  Flexibility in Taxation: Two or more members can choose to be taxed as partnership or corporation. A one-member LLC is automatically taxed as sole proprietorship unless the owner wishes to be taxed as corporation.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11  Advantages of the LLC:  Management and Foreign Investors: LLCs allow foreign investors to own LLC interests. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12  Disadvantages of the LLC:  The main disadvantage is the lack of uniformity with state laws.  Therefore, businesses that operate in multiple states may not receive consistent treatment. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Management of an LLC: Either membermanaged or manager-managed. In member management, all members participate in management and decisions.  Fiduciary Duties: In a manager-managed LLC, the managers owe fiduciary duties to the LLC (duty of loyalty and duty of care) and its members [ULLCA 409(a), 409(h)].  14  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  LLC Operating Agreement:  Analogous to corporation’s bylaws.  Not required for LLC to exist, but strongly recommended the agreement be in writing. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15  LLC Operating Agreement:  Management and how future managers will be chosen and removed.  How profits will be divided.  How membership interests may be transferred.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  LLC Operating Agreement:  Dissociation procedures.  Whether formal meetings will be held.  How voting rights will be apportioned. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17 An LLC member has the power—but not necessarily the right—to dissociate from the LLC at any time.  Dissociation of an LLC is triggered by events similar to dissociation of a partnership including voluntary notice,  triggering event, unanimous vote, bankruptcy, incapacity, or death.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18  Dissociation in an LLC:  Effects of Dissociation: Dissociating member loses the right to participate in the management and the right to act as an agent.  Member also has the right to have her interest bought out by other members.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19  Dissociation in an LLC:  Effects of Dissociation: If the dissociation violates the operating agreement, it is wrongful and the member can be held liable for damages. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  Dissolution:  Dissociated member has no right to force the LLC to dissolve.  Remaining members can choose to continue or dissolve.  Operating agreement “trigger” events will cause dissolution.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21  Dissolution of an LLC:  Winding Up: Members who did not wrongfully dissociate may participate in the winding up process.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22  Winding Up:  Members must collect and liquidate the assets.  After all assets are sold, proceeds are distributed to pay creditors, then capital contributions, and then remaining money is distributed pro rata to the members. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 Joint ventures, syndicates, joint stock companies, business trusts, and cooperatives are other forms that can be used to organize a business.  For the most part, these special business forms are hybrid organizations that combine features of other organizational forms such as partnerships.   © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24  Joint Venture: Business form in which two or more persons or entities combine their efforts or their property for a single transaction, project, or a related series of transactions or projects.  Unless otherwise agreed, joint venturers share profits and losses equally and have an equal voice in controlling the project.  25 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Joint Venture:  Similarities to Partnerships: A joint venture resembles a partnership and is taxed like one. • Joint venturers owe each other the same fiduciary duties, including the duty of loyalty, that partners owe each other.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26  Joint Venture:  Similarities to Partnerships: • Liability and Management Rights: A joint venturer can be held personally liable for the venture’s debts. Joint venturers have equal rights to manage the activities of the enterprise, but they can agree to give control of the operation to one of the members.  27 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Joint Venture:  Similarities to Partnerships: • Authority to Enter Contracts: Joint venturers have authority as agents to enter into contracts that will bind the joint venture.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28  Joint Venture:  Differences from Partnerships: • A joint venture is typically created for a single project/series of transactions, whereas a partnership usually involves an ongoing business. • A joint venture normally terminates when the project/transaction for which it was formed has been completed.  29 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Joint Venture:  Differences from Partnerships: • Because the activities of a joint venture are more limited relative to those in a partnership, members of a joint venture are presumed to have less power to bind their co-venturers. Thus, the members of a joint venture have less implied and apparent authority. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30  Syndicate (or Investment Group): A form in which several individuals or firms join together to finance a particular project.  A syndicate may be organized as a corporation or as a general or limited partnership.  Members may not have a legally recognized business arrangement but merely purchase and own property jointly. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31  Joint Stock Company: A form that is a true hybrid of a partnership and a corporation. It has many characteristics of a corporation in that (1) its ownership is represented by transferable shares of stock, (2) it is managed by directors and officers of the company or association, and (3) it can have a perpetual existence.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32  Joint Stock Company:  It is generally treated as a partnership.  It is formed by agreement (not statute).  Property usually is held in the names of the owners (called shareholders) and they have personal liability.  In a joint stock company, shareholders are not considered to be agents of each other. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33  Business Trust: A form that is created by a written trust agreement that spells out the interests of the beneficiaries and the obligations and powers of the trustees.  Legal ownership/management of the trust’s property stay with one or more of the trustees, and the profits are distributed to the beneficiaries.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34  Business Trust: A business trust resembles a corporation in the following ways:  Beneficiaries of the trust are not personally responsible for the trust’s debts or obligations.  In a number of states, business trusts must pay corporate taxes. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35  Cooperative: An association that is organized to provide an economic service to its members (or shareholders). It may or may not be incorporated.  Most cooperatives are organized under state statutes for cooperatives, general business corporations, or LLCs.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36  Cooperative: This form of business is generally adopted by groups of individuals who wish to pool resources to gain some marketplace advantage.  Consumer purchasing co-ops are formed to obtain lower prices through quantity discounts. Seller marketing co-ops are formed to control the market and enable members to sell their goods at higher prices.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37  Cooperative:  Incorporated Co-ops: Usually distribute dividends to its owners on the basis of their transactions with the cooperative rather than their capital contributions. Members of incorporated cooperatives have limited liability.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38  Cooperative:  Unincorporated Co-ops: Cooperatives that are not incorporated are often treated like partnerships. • The members have joint liability for the cooperative’s acts. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39 BUSINESS LAW TEXT AND CASES Commercial Law for Accountants Fourteenth Edition MILLER © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  When choosing a business entity, entrepreneurs should consider:  Ease of creation.  Owners’ liability.  Tax considerations.  Need for capital. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2  Requirements for All Business Forms:  Business name registration.  Occupational licensing.  State tax registration.  Health and environmental permits.  Zoning and building codes.  Import/export regulations. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3  Protecting Intellectual Property:  Trademarks: A trademark cannot be the same as another’s mark or so similar that confusion might result. • For the most protection, trademarks should be registered with the U.S. Patent and Trademark Office (PTO).  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4  Protecting Intellectual Property:  Trade Secrets: Must be divulged to key employees. • Employees may be required to agree in their employment contracts never to divulge those secrets. • Noncompete clauses may also be included in employment contracts. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  Obtaining Loans: A bank loan allows the owner to retain full ownership and control of the business but the bank may restrict some future business decisions as a condition of granting the loan.  Banks may be also reluctant to loan funds to businesses that are not established.  SBA loans or state grants may also be available to small-business owners. 6 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A sole proprietorship is the simplest form of business.  The owner is the business and the law considers all new, single-owner businesses to be sole proprietorships unless the owner affirmatively adopts some other form.   © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7  Advantages of the Sole Proprietorship: Proprietor owns the entire business and receives all the profits. There are fewer legal formalities with the set-up of the business.  Taxes: A sole proprietor pays only personal income taxes on the business’s profits.  Flexibility: The sole proprietor is free to make any decision she or he wishes concerning the business.  8 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Disadvantages of the Sole Proprietorship:  Owner has unlimited personal liability for all losses or liabilities incurred by the business.  The business is automatically dissolved when the owner dies.  When raising capital, the proprietor is limited to personal funds and any loans that she/he can obtain for the business. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  Franchise: An arrangement in which franchisor (owner of trademark, trade name or copyright) licenses a franchisee to use the trademark, trade name, or copyright in the sale of goods or services.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  Types of Franchises:  Distributorship.  Chain Style Business Operation.  Manufacturing or Processing Arrangement.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11  Types of Franchises:  Distributorship: A manufacturer (the franchisor) licenses a dealer (the franchisee) to sell its product. Often, a distributorship covers an exclusive territory.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12  Types of Franchises:  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. • The franchisee is generally required to follow standardized methods of operation.  13 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Types of Franchises:  Chain-Style Business Operation: • The franchisee must usually maintain certain standards of performance. • The franchisee may also be required to obtain materials and supplies exclusively from the franchisor.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14  Types of Franchises:  Manufacturing Arrangement: The franchisor transmits to the franchisee the essential ingredients or formula to make a certain product. The franchisee markets the product at wholesale or at retail in accordance with the franchisor’s standards. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15  Laws Governing Franchising:  Primarily governed by contract law.  UCC Article 2 governs franchises for sale of goods.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  Laws Governing Franchising:  Federal Regulation of Franchises. • Industry-Specific Standards: Protect franchisee from unreasonable demands and bad faith termination. • The Franchise Rule: Disclosure of material facts for informed decision.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17  Laws Governing Franchising:  State Regulation of Franchising: Protects franchisees from unfair trade practices and bad faith terminations. • State Disclosures: Disclosure documentation (Franchise Disclosure Document), including costs of operation, recurring expenses, profits earned, and substantiating of these figures.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18  Laws Governing Franchising:  State Regulation of Franchising: To prevent arbitrary or bad faith terminations, a state law may prohibit termination without “good cause” or require that certain procedures be followed in terminating a franchise. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19  The Franchise Contract: Specifies the terms and conditions of the franchise and spells out the rights and duties of the franchisor and the franchisee.  If either party fails to perform its contractual duties, that party may be subject to a lawsuit for breach of contract.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  The Franchise Contract:  Payment for the Franchise: The franchisee usually pays an initial fee or lump-sum price for the franchise license. • The franchisee may also have to pay a percentage of the franchisor’s advertising costs and certain administrative expenses.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21  The Franchise Contract:  Payment for the Franchise: • The franchisor may rely heavily on the initial sale of the franchise for realizing a profit OR depend on continued dealings with its franchisees for profit. • Generally, the franchisor receives a stated percentage sales or volume of business done by the franchisee. 22 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Franchise Contract:  Business Premises: The franchise agreement may specify whether the premises for the business must be leased, purchased outright, or constructed to meet the terms of the agreement. • The agreement will specify which party is responsible for supplying equipment and furnishings for the premises. 23 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Franchise Contract:  Location of the Franchise: The franchisor usually determines the territory to be served. • Some franchise contracts give the franchisee exclusive rights, or “territorial rights,” to a certain geographic area while others state that the franchise’s territory is nonexclusive. 24 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Franchise Contract:  Business Organization: The franchisor may require that the business use a certain organizational form, capital structure, and certain standards such as sales quotas and record-keeping requirements. • A franchisor may retain control over the training of personnel involved in the operation and administrative aspects of the business. 25 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Franchise Contract:  Quality Control by the Franchisor: The day-to-day operation of the franchise business is usually left up to the franchisee.  Means of Control: When the franchise prepares a product or provides a service, the contract often states that the franchisor will establish certain standards for the facility.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26  The Franchise Contract:  Quality Control by the Franchisor: • Means of Control: Typically, the contract will state that the franchisor can make periodic inspections to ensure that the standards are being maintained. Franchise agreements also typically limit the franchisee’s ability to sell the franchise to another party. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27  The Franchise Contract:  Quality Control by the Franchisor: • Degree of Control: As a general rule, the validity of a provision permitting the franchisor to establish and enforce certain quality standards is unquestioned. The franchisor has a legitimate interest in maintaining the quality of the product or service to protect its name and reputation. 28 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  The Franchise Contract:  Pricing Arrangements: Franchisor may require franchisee to purchase certain supplies from the franchisor at an established price. • A franchisor cannot set the prices at which the franchisee will resell the goods. A franchisor can suggest retail prices but cannot mandate them. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29 The duration of the franchise is determined between the parties.  Grounds for Termination Set by Franchise Contract: A franchise agreement usually sets out conditions of termination.  Notice Requirements: Franchisee must be given reasonable time to wind up the business.   © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30  Grounds for Termination Set by Franchise Contract:  Opportunity to Cure a Breach: Agreement may grant franchisee the opportunity to “cure” an ordinary breach within a period of time to prevent termination. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31  Wrongful Termination:  Termination provisions of contracts are usually more favorable to the franchisor than to the franchisee.  The franchisee may receive little or nothing on termination since the franchisor owns the trademark—and the business.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32  Wrongful Termination:  Federal and state laws attempt to protect franchisees from arbitrary or unfair termination by franchisors. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33  Importance of Good Faith and Fair Dealing: Courts usually try to balance rights of both parties.  If franchisor arbitrarily or unfairly terminates a franchise, franchisee may be able to sue for wrongful termination.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34  Importance of Good Faith and Fair Dealing:  Most courts will not consider the termination “wrongful” if: • Franchisor’s decision to terminate was made in the normal course of business operations. • Reasonable notice of termination was given to the franchisee. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35 BUSINESS LAW TEXT AND CASES Commercial Law for Accountants Fourteenth Edition MILLER © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A partnership arises from an agreement (express or implied) between two or more persons to carry on a business for a profit.  Partners are co-owners of the business who have joint control over its operation and the right to share in its profits.   © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2  Partnerships are governed by common law and statutory laws.  Agency Concepts and Partnership Law: Each partner is deemed to be the agent of the other partners and of the partnership, similar to an agency relationship.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3  Agency Concepts and Partnership Law: Partners have an ownership interest in the firm in which each person agrees to commit funds or other assets, labor, and skills to the business with the understanding that profits and losses will be shared.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4   The Uniform Partnership Act: In the absence of a partnership agreement, the Uniform Partnership Act (UPA)—as adopted by most states—governs the partnership. Definition of a Partnership: The UPA defines a partnership as “association of two or more persons to carry on a business for profit.”  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5  Essential Elements of a Partnership: Partnership presumed under UPA if  Sharing of profits or losses.  Joint ownership of the business.  Equal right to be involved in the management of the business.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6  Essential Elements of a Partnership:  Sharing of Profits and Losses: No partnership if profits were received as payment for the following [UPA 202(c)(3)]: • A debt by installments or interest. • Wages of an employee (or services of independent contractor). • Rent to a landlord.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7  Essential Elements of a Partnership:  Sharing of Profits and Losses: • Annuity to a surviving spouse or representative of a deceased partner. • Sale of a business or property's goodwill. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8  Essential Elements of a Partnership:  Joint Property Ownership: Joint ownership of property does not in and of itself create a partnership [UPA 202(c)(1) and (2)]. The parties’ intentions are key. • Most states treat a partnership as an entity. As an entity, a partnership may hold the title to real or personal property in its name. 9 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Entity versus Aggregate: Most states treat a partnership as an entity.  Partnerships usually can sue or be sued, collect judgments, and have all accounting performed in the name of the partnership entity [UPA 201, 307(a)].  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  Entity versus Aggregate: • A partnership may hold the title to real or personal property in its name rather than in the names of the individual partners. • Federal procedural laws permit the partnership to be treated as an entity in suits in federal courts and bankruptcy proceedings. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11  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. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 The Partnership Agreement: As a general rule, agreements to form a partnership (or articles of partnership) can be oral, written, or implied by conduct. They can include almost any terms that the parties wish.  Duration of the Partnership: Can be specified by the agreement.  Partnership for a term (fixed duration).  Partnership at will (indefinite duration). 13  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Partnership by Estoppel: Occurs when a third person has reasonably and detrimentally relied on the representation that a nonpartner was part of a partnership.  The “nonpartner” is an agent whose acts are binding on the partnership (UPA 308).  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14  Partnership by Estoppel:  Liability Imposed: In this situation, a court may impose liability—but not partnership rights—on the alleged partner.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15  Partnership by Estoppel:  Nonpartner as Agent: A partnership by estoppel may also be imposed when a partner represents that a nonpartner is a member of the firm. In this situation, the nonpartner may be regarded as an agent whose acts are binding on the partnership (UPA 308). © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16  Rights of Partners: Relate to the following areas: management, interest in the partnership, compensation, inspection of books, accounting, and property.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17  Rights of Partners:  Management Rights: Equal among all partners; each gets one vote, and the majority wins. Unanimous consent is needed for some actions.  Interest in the Partnership: Each partner is entitled to the proportion of business profits and losses that is specified in the partnership agreement.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18  Rights of Partners:  Compensation: Each partner’s income comes from distribution of profits according to the partner’s share in the business.  Inspection of the Books: Each partner has the right to receive full and complete information concerning the conduct of all aspects of partnership business (UPA 403).  19 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Rights of Partners:  Inspection of the Books: Books must also be kept at the firm’s principal business office (unless agreed otherwise). Right of access also extends to any personal representative of a deceased partner’s estate.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20  Rights of Partners:  Accounting of Partnership Assets or Profits: An accounting of partnership assets or profits is required to determine the value of each partner’s share. • An accounting can be voluntary or compelled by court order. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21  Rights of Partners:  Property Rights: Property acquired by the partnership remains partnership property and not of the partners individually (UPA 203). • An individual partner has no right to sell, mortgage, or transfer the partnership property (UPA 501).  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22  Rights of Partners:  Property Rights: • Each partner can use or possess property on behalf of the partnership [UPA 401(g)]. • Partners cannot use the property to satisfy an individual debt. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23  Duties and Liabilities of Partners:  Fiduciary Duties: Partners are fiduciaries and general agents of one another and the partnership. • SEE CLASSIC CASE 3.1 MEINHARD V. SALMON (1928).  A partner’s duty of care is limited to refraining from “grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law” [UPA 404(c)]. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24  Duties and Liabilities of Partners:  Waiver of Fiduciary Duties: Each partner must act consistently with the obligation of good faith and fair dealing [UPA 103(b), 404(d)]. The partnership agreement can specify acts that violate a fiduciary duty. • A partner may pursue his or her own interest without automatically violating these duties [UPA 404(e)]. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25  Duties and Liabilities of Partners:  Authority of Partners: • UPA affirms general principles of agency law. • Partner may be able to subject partnership to tort liability. • Partner has apparent authority when carrying out partnership business.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26  Duties and Liabilities of Partners:  Authority of Partners: • Limitations on Authority: A partnership may limit a partner’s capacity to act as the firm’s agent or transfer property on its behalf by filing a “statement of partnership authority” in a designated state office (UPA 105, 303).  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27  Duties and Liabilities of Partners:  Authority of Partners: • The Scope of Implied Powers: In an ordinary partnership, partners can exercise all implied powers reasonably necessary and customary to carry on that particular business. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28  Duties and Liabilities of Partners:  Liability of Partners: Partners are personally liable for the debts of the partnership. In most states, the liability is essentially unlimited, because the acts of one partner subject the other partners to personal liability (UPA 305).  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29  Duties and Liabilities of Partners:  Liability of Partners: • Joint Liability: Third party must sue ALL partners as a group, but each partner can be held liable for the full amount. • Joint and Several Liability: If partner is sued for partnership debt, partner has right to insist that other partners be sued with her.  30 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Duties and Liabilities of Partners:  Liability of Partners: • Indemnification: With joint and several liability, a partner who commits a tort can be required to indemnify (reimburse) the partnership for any damages it pays. • Liability of Incoming Partners: A new partner to an existing partnership is not personally liable for any partnership obligations incurred before becoming a partner [UPA 306(b)].  31 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Dissociation occurs when one partner ceases to be associated in the partnership business.  Allows partner to have her interest purchased by the partnership.  Terminates her voting interest in the partnership.  Partnership can continue to do business without the dissociated partner.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32  Events That Cause Dissociation:  Voluntary notice.  Triggering event.  Unanimous vote.  Court/arbitrator order (if wrongful conduct).  Partner’s bankruptcy, assignment of interest, incapacity, or death.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33  Wrongful Dissociation: A partner has the power to dissociate from a partnership at any time but may not have the right to do so. If the partner lacks the right to dissociate, the dissociation is considered wrongful under the law (UPA 602) and a breach of the partnership agreement.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34  Effects of Dissociation:  Rights and Duties: A partner’s dissociation terminates the right to participate in the management and conduct of the partnership business (UPA 603). • Partner’s duty of loyalty also ends, but the duty of care continues only with respect to events that occurred before dissociation or the winding up process.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35  Effects of Dissociation:  Buyouts: Contract that determines how remaining partners will buy out partners’ interest in advance of an “event.”  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36  Effects of Dissociation:  Liability to Third Parties: Partnership is bound for two years by acts of outgoing partner, unless proper notice is given. • Dissociated partner may be liable for partnership obligations entered into during the two-year period following dissociation (UPA 703). © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37  Partnership Termination:  The termination of a partnership occurs in two stages: • Dissolution (the legal “death” of the partnership). • Winding up and Distribution of Assets (collecting and distributing partnership assets).  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38  Partnership Termination:  Dissolution: Can generally be brought about by acts of the partners, by operation of law, or by judicial decree (UPA 801).  Partners can agree to dissolve any partnership.  • SEE ESTATE OF WEBSTER V. THOMAS (2013). © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39  Partnership Termination:  Dissolution: • Illegality or Impracticality: Any event that makes it unlawful for the partnership to continue its business will result in dissolution [UPA 801(4)]. Under the UPA, a court may order dissolution when it becomes obviously impractical for the firm to continue [UPA 801(5)]. 40 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Partnership Termination:  Dissolution: • Good Faith: Each partner must exercise good faith when dissolving a partnership.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41  Partnership Termination:  Winding Up and Distribution of Assets: • Partners cannot create new obligations on behalf of the partnership, only complete transactions begun at the time of dissolution and to wind up the business of the partnership [UPA 803, 804(1)].  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42  Partnership Termination:  Winding Up and Distribution of Assets: • Duties and Compensation: Winding up includes preserving partnership assets, discharging liabilities, and providing an accounting to each partner. UPA 401(h) provides that a partner is entitled to compensation for services above and apart from a share in the partnership profits.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43  Partnership Termination:  Winding Up and Distribution of Assets: • Creditors’ Claims.  Payment of debts, including those owed to partner and nonpartner creditors.  Return of capital contributions and distribution of profits to partners.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44  Partnership Termination:  Winding Up and Distribution of Assets: • If liabilities are greater than assets, partners bear losses in proportion in which they shared profits, unless agreed otherwise. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45  Partnership Termination:  Partnership Buy-Sell Agreements: Before entering into a partnership, partners may form a buy-sell agreement (or buyout agreement) that provides for one or more partners to buy out the other or others should the situation warrant.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46  Partnership Termination:  Partnership Buy-Sell Agreements: An agreement may specify that partner(s) will determine the value of the interest being sold and decide whether to buy or sell. • Under UPA 701(a), if a partner’s dissociation does not result in a partnership dissolution, a buyout of the partner’s interest is mandatory. 47 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The limited liability partnership (LLP) is a hybrid form of business designed mostly for professionals who normally do business as partners in a partnership.  An LLP allows a partnership to continue as a pass-through entity for tax purposes but limits the personal liability of the partners.   © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 48  Formation of an LLP:  LLPs must be formed and operated in compliance with state statutes.  The appropriate form must be filed with a central state agency and the business’s name must include either “Limited Liability Partnership” or “LLP” (UPA 1001, 1002).  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49  Formation of an LLP:  An LLP must file an annual report with the state to remain qualified as an LLP in that state (UPA 1003).  In most states, it is easy to convert a traditional partnership into an LLP.  All statutory and common law rules governing partnerships apply, apart from those modified by the LLP statute. 50 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Liability in an LLP: An LLP allows professionals to avoid personal liability for the malpractice of other partners.  A partner in an LLP is still liable for her or his own wrongful acts. The partner who supervised the individual who committed a wrongful act is also liable.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 51  Liability in an LLP:  Liability outside the State of Formation: An LLP formed in one state may do business in another state and the LLP statutes in the two states may provide different liability protection. Most states apply the law of the state in which the LLP was formed, even when the firm does business in another state, which is also the rule under UPA 1101.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 52  Liability in an LLP:  Sharing Liability among Partners: When more than one partner in an LLP commits malpractice, a general partner is jointly and severally liable for the entire result in most states.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 53  Liability in an LLP:  Sharing Liability among Partners: Some states provide for proportionate liability for each LLP partner—allowing for separate determinations of the negligence of the partners. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 54  Family Limited Liability Partnerships: A limited liability partnership in which the partners are related to each other.  A person acting in a fiduciary capacity for persons so related can also be a partner.  All partners must be natural persons or be acting in a fiduciary capacity for the benefit of natural persons. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 55 The limited partnership (LP) is a business organizational form that limits the liability of some of its owners.  Most states and the District of Columbia have adopted laws based on the Revised Uniform Limited Partnership Act (RULPA).  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56 A limited partnership consists of at least one general partner and one or more limited partners.  A general partner:  Assumes management responsibility for the partnership.  Has full responsibility for the partnership and for all its debts.   © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 57  A limited partner:  Contributes cash or other property and owns an interest in the firm.  Is not involved in management responsibilities.  Is not personally liable for partnership debts beyond the amount of his or her investment.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 58  Formation of an LP:  Formation of a limited partnership is a public and formal proceeding in which partners must strictly follow statutory requirements.  The partners must also sign a certificate of limited partnership.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 59  Formation of an LP:  Certificate of limited partnership must include certain information such as the name, mailing address, and capital contribution of each general and limited partner.  Certificate must be filed with the designated state official (under the RULPA, the secretary of state). 60 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Liabilities of Partners in an LP:  General partners are personally liable to the partnership’s creditors. This policy can be circumvented in states that allow a corporation to be the general partner in a partnership.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 61  Liabilities of Partners in an LP:  Because the corporation has limited liability, if a corporation is the general partner, no one in the LP has personal liability.  Liability of a limited partner is limited to the capital that she/he contributes or agrees to contribute to the partnership (RULPA 502).  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 62  Liabilities of Partners in an LP:  Liability arises when the creditor believes—based on the limited partner’s conduct—that the limited partner is a general partner (RULPA 303). © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 63  Rights and Duties in a Limited Partnership:  Except for right to participate in management, limited and general partners have essentially the same rights.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 64  Rights and Duties in a Limited Partnership:  Limited partners have the right to inspect the LP’s books and be informed of the LP’s business.  Both general and limited partners owe each other a fiduciary duty.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 65  Dissociation and Dissolution:  General partners can voluntarily dissociate (withdraw) from a limited partnership unless partnership agreement specifies otherwise.  Under the RULPA, a limited partner can withdraw by giving six months’ notice, unless the partnership agreement specifies a term.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 66  Dissociation and Dissolution:  Events That Cause Dissociation: A general partner’s voluntary dissociation will usually lead to dissolution unless all partners agree to continue the business.  Bankruptcy, retirement, death, or mental incompetence of a general partner will cause the dissociation of that partner and the dissolution of the LP unless the other members agree to continue the firm (RULPA 801).  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 67  Dissociation and Dissolution:  Distribution of Assets: Upon dissolution, creditors’ claims (including those of partners who are creditors) take priority. After that, partners and former partners receive unpaid distributions of partnership assets.  © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 68  Dissociation and Dissolution:  Distribution of Assets: Unless otherwise agreed, they are entitled to a return of their contributions in the proportions in which they share in distributions (RULPA 804).  Valuation of Assets: Disputes commonly arise about how the partnership’s assets should be valued and distributed and whether the business should be sold.  69 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Dissociation and Dissolution:  Buy-Sell Agreements: Partners in an LP can agree ahead of time on how the partnership’s assets will be valued and divided if the partnership dissolves.  Buy-sell agreements can help the partners avoid disputes but do not eliminate all potential for litigation, especially if the terms are open to interpretation. 70 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Limited liability limited partnerships differ from limited partnerships in that the liability of a general partner in an LLLP is limited to the amount of his or her investments in the firm.  Only a few states provide expressly for LLLPs. In states that do not provide for them but do allow for LPs and LLPs, a limited partnership should probably still be able to register with the state as an LLLP. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 71
Purchase answer to see full attachment