Business Law

Chapter 35Chapter 35

Sole Proprietorships and PartnershipsSole Proprietorships and Partnerships

Sole Proprietorships

Are the most common business typeAre the most common business type Are the easiest to establishAre the easiest to establish May have as many as five employees May have as many as five employees There is no legal distinction between the There is no legal distinction between the

individual and the businessindividual and the business Most are formed where capital Most are formed where capital

investment/resources are lowinvestment/resources are low

Creation and Operation of Sole Proprietorship A person may choose to use their own name for A person may choose to use their own name for

the businessthe business Name must usually be advertised under the Name must usually be advertised under the

Fictitious Names Act Fictitious Names Act Advertisement must meet certain requirementsAdvertisement must meet certain requirements Once legally established the first individual Once legally established the first individual

gains the right to sue others if they use the same gains the right to sue others if they use the same name in a similar business in the same areaname in a similar business in the same area

Sole Proprietorships

Must still meet all legal and licensing Must still meet all legal and licensing requirementsrequirements

As with all businesses there may be local As with all businesses there may be local ordinances that limit business locations or ordinances that limit business locations or operationsoperations

Advantages and Disadvantages of Sole Proprietorships AdvantagesAdvantages

Owner has complete controlOwner has complete control Owner makes all decisionsOwner makes all decisions Owner gets to keep 100% of the profitsOwner gets to keep 100% of the profits Owner may get tax breaks in the event of Owner may get tax breaks in the event of

a lossa loss Required investment is lowRequired investment is low

Advantages and Disadvantages of Sole Proprietorships DisadvantagesDisadvantages

Personal Financial LiabilityPersonal Financial Liability Limited sources of investment/creditLimited sources of investment/credit Limited resources/skillsLimited resources/skills Issue of continuity if something happens Issue of continuity if something happens

to proprietorto proprietor Sole proprietor may have to wear many Sole proprietor may have to wear many

hatshats

General Partnerships

Covered/defined by the Uniform Covered/defined by the Uniform Partnership ActPartnership Act AsAs “an association of two or more “an association of two or more

persons to carry on a business for a persons to carry on a business for a profit.”profit.”

Partnership Advantages

Partnerships have an easier time raising Partnerships have an easier time raising money/getting creditmoney/getting credit

Partners can divide labor and each can Partners can divide labor and each can specialize in their strengthsspecialize in their strengths

Partners share the liability if things go Partners share the liability if things go wrongwrong

Partnership Disadvantages

Each partner is libel for the actions of the Each partner is libel for the actions of the other partner(s)other partner(s)

Partners don’t always agree and Partners don’t always agree and management decisions can be difficultmanagement decisions can be difficult

Profits must be shared among the partnersProfits must be shared among the partners

Creation of a General Partnership

Three methods of creationThree methods of creationBy Agreement By Agreement By Proof of ExistenceBy Proof of ExistenceBy EstoppelBy Estoppel

By Agreement

Agreements are usually very specificAgreements are usually very specificPartnership agreements can be Partnership agreements can be

written or oralwritten or oralPartnerships that are to last over 1 Partnerships that are to last over 1

year must be evidenced in writingyear must be evidenced in writingAgreement is called Agreement is called The Articles The Articles

of Partnershipof Partnership

Articles of Agreement Also sometimes called Articles of Co-Partnership Also sometimes called Articles of Co-Partnership

must contain:must contain: Parties to the agreementParties to the agreement Specific nature, scope and limits of the businessSpecific nature, scope and limits of the business Planned duration of the businessPlanned duration of the business Amount of each partner’s original investment Amount of each partner’s original investment

and procedures for further investmentand procedures for further investment Provisions for salaries, withdrawal of funds and Provisions for salaries, withdrawal of funds and

division of profitsdivision of profits Terms for withdrawal from the partnershipTerms for withdrawal from the partnership

Partnership by Proof of Existence

If a business relationship meets the If a business relationship meets the definition of a partnership then the courts definition of a partnership then the courts will recognize it as one.will recognize it as one.

Sharing of profits is often the indicatorSharing of profits is often the indicator

Partnership by Estoppel

Happens when someone presents Happens when someone presents themselves as a partnership.themselves as a partnership. This is not a “true” partnership, but helps This is not a “true” partnership, but helps

the court prevent injustice caused by the court prevent injustice caused by someone relying on what they’ve been someone relying on what they’ve been told. told.

Types of Partners

There are five types of partnersThere are five types of partners GeneralGeneral SecretSecret SilentSilent DormantDormant LimitedLimited

Types of Partners

GeneralGeneral Directly and openly involved in the Directly and openly involved in the

operation of the businessoperation of the business Has unlimited liability for debtsHas unlimited liability for debts

Secret PartnerSecret Partner Has active role, but is kept secret from Has active role, but is kept secret from

the publicthe public

Types of Partners

Silent partnerSilent partner Takes no active role in managementTakes no active role in management

Dormant PartnerDormant Partner Takes no active role in management and Takes no active role in management and

their involvement is kept secret from the their involvement is kept secret from the public public

Limited Partner Limited Partner Liability is limited to their investmentLiability is limited to their investment

Partnership Property

Partnership property includes:Partnership property includes: Property contributed to start the partnershipProperty contributed to start the partnership Property purchased by the partnershipProperty purchased by the partnership May include:May include:

CashCashReal EstateReal EstateEquipmentEquipment

Property Rights of the Partners

Right to use the propertyRight to use the property Limited to use for the business – unless other Limited to use for the business – unless other

partners agreepartners agree Right to Manage the FirmRight to Manage the Firm

Each partner is to have an equal voice in Each partner is to have an equal voice in managing the firmmanaging the firm

For most decisions the majority rulesFor most decisions the majority rules For some decisions such as adding a partner all For some decisions such as adding a partner all

partners must consentpartners must consent

Right to Share in the Profits

Unless otherwise agreed all partners share Unless otherwise agreed all partners share equally in the profitsequally in the profits It doesn’t matter how much each partner It doesn’t matter how much each partner

investedinvested

Duties of the Partners

Partners must be able to trust one anotherPartners must be able to trust one another Partners must put the firm above their own Partners must put the firm above their own

self-interestself-interest Partners must act in good faithPartners must act in good faith If partners vote not to enter into a contract If partners vote not to enter into a contract

and a partner signs it anyway, then only the and a partner signs it anyway, then only the partner who signed the contract is bound by partner who signed the contract is bound by it.it.

Liability of the Partners

Partners have unlimited liability for the Partners have unlimited liability for the debts of the firmdebts of the firm

The debt liability is divided by the same The debt liability is divided by the same proportion as the profitsproportion as the profits

Joint LiabilityJoint Liability means that some who sue the means that some who sue the firm must sue all the partners, not just one firm must sue all the partners, not just one individualindividual

Dissolution of the Partnership

Dissolution occurs the moment any one Dissolution occurs the moment any one partner ceases to be associated with the firmpartner ceases to be associated with the firm

A partnership can also be dissolved by the A partnership can also be dissolved by the courtcourt

The firm may continue to exist even after The firm may continue to exist even after the partnership endsthe partnership ends

The remaining partners may elect to form a The remaining partners may elect to form a new firm and continue the businessnew firm and continue the business

Distribution of Assets

If a firm is dissolved assets are to be If a firm is dissolved assets are to be distributed in this order:distributed in this order: Creditors other than partners Creditors other than partners Money lent by partnersMoney lent by partners The original investment in the The original investment in the

partnershippartnership Any remaining surplusAny remaining surplus

Limited Partnerships Limited partnerships are different than general Limited partnerships are different than general

partnershipspartnerships Covered by the Revised Uniform Partnership Covered by the Revised Uniform Partnership

ActAct Defined as having one or more General Defined as having one or more General

Partners and one or more limited partnersPartners and one or more limited partners Limited partners are investors only. They share in Limited partners are investors only. They share in

profits but do not manage the firm.profits but do not manage the firm. Their liability is limited to their investmentTheir liability is limited to their investment

There are certain legal requirements that must There are certain legal requirements that must be met.be met.

That’s all folks!

Quiz TomorowQuiz Tomorow