Business
Entrepreneur
- Entrepreneur is by definition one who initiates and assumes the financial risk of a new enterprise and undertakes to provide or control its management.
- Entrepreneur needs to consider a number of factors in deciding what type of business to open: (1) ease of creation; (2) the liability of the owners; (3) tax considerations; and (4) need for capital.
Traditionally entrepreneurs have used three major forms to structure their business enterprises: sole proprietorships, the partnership, and the corporation.
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Sole Proprietorships
- The simplest form of business; used by anyone who does business without creating an organization.
- The owner is the business.
- The owner pays personal income taxes on all profits and is personally liable for all business debts.
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General Partnerships
Created by express or implied agreement of the parties. Partners have right to:
Share profits and losses.
Joint ownership of the business.
Equal right to management.
Entity vs. Aggregate Theory:
At common law, a partnership was treated only as an aggregate of individuals and never as a separate legal entity.
In modern times, the law treats a partnership as an independent entity, but for at least one purpose—federal income taxes—a partnership is regarded as an aggregate of individual partners.
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General Partnerships
Income is “passed through” the partnership to the individual partners, who pay personal taxes on the income.
Partnership Formation:
- Partners may agree to any terms, as long as they are not illegal or contrary to public policy.
- As mentioned earlier, agreements to form partnership can be oral, written, or implied by conduct. However, some partnerships, however, must be in writing. A written partnership agreement is called articles of partnership.
- Partnership for a Term
- Partnership at will
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General Partnerships
Partner’s Duration.
Dissolution without consent of all partners before the end of the term is a breach of the agreement.
- If there is no fixed term, a partnership is at will, and any partner can dissolve the firm any time.
Partnership by Estoppel
A person who represents himself or herself to be a partner in an actual or alleged partnership is liable to any third person who acts in good faith reliance
Partnership Termination.
Dissolution (see above => depends of duration of partnership)
Winding Up of assets.
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General Partnerships
- Rights of Partners
- Management
- Interest in Partnership
- Compensation
- Inspection of Books
- Accounting
- Property Rights
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General Partnerships
- Duties and Liabilities of Partners
- Fiduciary Duties
- Duty of Loyalty
- Duty of Care
Case 14.2: Meinhard v. Salmon, 1928
- How did Salmon violate his duty of loyalty to Meinhard?
- Authority of Partners
- Joint & Several Liability
- Partners have joint and several liability for partnership debts.
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General Partnerships
- Partner’s Dissociation
- When a partner ceases to be associated in the carrying on of the partnership business
- Events Causing Dissociation
- Wrongful Dissociation
- This can occur if dissociation is in breach of a partnership agreement
- Effects of Dissociation
- Rights and duties
- Liability to Third parties
- Partnership bound for two years by acts of outgoing partner, unless proper notice given.
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General Partnerships
- Partnership Termination
- Dissolution
- A partnership may be dissolved by the partners’ agreement or dissociation of a partner. The firm may continue in business if the partners, including the withdrawing partner, agree.
- A partnership for a definite term or undertaking, or some other certain event, is dissolved when the term expires, the undertaking is accomplished, or the event occurs.
- A court can dissolve a partnership for impracticality.
- Winding Up
- After dissolution and notice, partners complete transactions begun and not finished (but they can create no new obligations). Partnership assets are collected, debts are paid, the values of partners’ interests in the partnership are accounted for, and profits and losses distributed.
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Limited Liability Partnerships
- Major advantage of an LLP: pass-through tax entity and limits personal liability of partners for the malpractice of other partners.
- LLP’s are created by state statute.
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Limited Partnerships
Limited partnerships:
- Must be formed in compliance with statutory requirements.
- A limited partnership consists of one or more general partners, who have unlimited liability for partnership losses, and one or more limited partners, who are liable only to the extent of their contributions.
- Only general partners can participate in management.
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Limited Partnerships
- An LP is dissolved in much the same way as a general partnership.
- Retirement, withdrawal, death, bankruptcy or mental incompetence of a general partner will trigger dissolution.
- On dissolution, creditors are paid first then partners.
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Limited Partnerships
- Dissociation & Dissolution:
The death, retirement, or mental incompetence of a general partner does NOT dissolve the partnership, if the other partners continue business.
A general partner’s bankruptcy or withdrawal may dissolve the business. In the case of a limited partner, none of these occurrences will dissolve the firm. A limited partnership can be dissolved by court decree. Priorities on dissolution—creditors, then partners.
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Limited Liability Companies
- The limited liability company (LLC) is a hybrid form of business organization that offers the limited liability feature for the corporation but the tax benefits of partnerships.
- Unlike limited partners, LLC members participate in management via the operating agreement.
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Limited Liability Companies
- Formation of an LLC.
- LLC’s are formed under state law by filing Articles of Organization.
- Name must include “Limited Liability Company” or initials “LLC”.
- The owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares).
- Members of an LLC enjoy limited liability.
- LLC’s are increasingly becoming the entity of choice for businesses.
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Limited Liability Companies
Jurisdictional Requirements (LLC’s vs. Corporations):
- Under Federal jurisdiction statute, a corporation is deemed to be a citizen of the state where it is incorporated and maintains its principal place of business.
- LLC’s and other incorporated associations, are regarded as citizens of every state in which their members are citizens.
- The state citizenship of an LLC may come into play when a party sues the LLC based on diversity of citizenship (Remember from Chapter 3)
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Advantages & Disadvantages of LLC’s
Advantages
- Limited Liability
- The liability of members is limited to the amount of their investments.
- Taxation
- An LLC that has two or more members can choose to be taxed either as a partnership or as a corporation.
Disadvantages
- LLC statutes are not uniform, therefore businesses that operate in more than one state may not receive consistent treatment in these states.
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LLC Operating Agreement
- LLC Operating Agreement.
- Contain provisions for:
- Management.
- Voting.
- Transfer of membership interests.
- New or Deceased members.
- Member-Managed, or Manager-Managed.
- The LLC’s operating agreement may also specify procedures for making decisions. If it does not, choosing and removing managers is done by majority vote
- If the agreement does not cover a point in dispute, the governing LLC statute applies.
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Management of an LLC
- Two Options:
- Member managed (equal rights).
- Manager-managed (typical “President”).
- Unless operating agreement says otherwise, member-management is presumed.
- Manager-managed LLC’s owe fiduciary duties to the LLC members, including the duty of loyalty and the duty of care.
- Members of an LLC can designate voting powers and rights in operating agreement. Members also set forth provisions in the operating agreement governing decision making procedures.
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Dissociation of an LLC
- Events triggering Dissociation: voluntary withdrawal, expulsion by other members or court order, bankruptcy, incompetence, or death.
- An LLC member has the power, but perhaps not the right, to dissociate at any time.
- Effects of Dissociation.
- Dissolution
- Remaining members can opt to dissolve and wind up or continue the LLC.
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Franchises
Any arrangement in which the owner of a trademark, trade name, or copyright licenses another to use that trademark, trade name, or copyright, under specified conditions or limitations, in the selling of goods and services.
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Types of Franchises
Distributorship
(e.g. automobile dealerships)
Chain-style operations
(e.g. fast-food chains)
Manufacturing/processingplant arrangement
(e.g. soft-drink bottling companies, such as
Coca-Cola)
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Laws Governing Franchising
- Franchises are governed by contract law, occasionally by agency law, and by federal and state statuary and regulatory laws.
The Franchise Rule:
- Federal Trade Commission has regulations that require disclosure of material facts so that a franchisee can make an informed decision concerning the purchase of the franchise.
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The Franchise Contract
- Ordinarily requires the franchisee (purchaser) to pay a price for the franchise license.
- Specifies the territory to be served by the franchisee’s firm.
- May require the franchisee to purchase certain supplies from the franchisor at an established price.
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The Franchise Contract
- May require the franchisee to abide by certain standards of quality relating to the product or service offered but cannot set retail resale prices.
Industry-Specific Standards:
- Usually provides for the date and/or conditions of termination of the franchise arrangement. But federal and state statutes attempt to protect certain franchisees from franchisors who unfairly or arbitrarily terminate franchisees.
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Termination of the Franchise
- Duration is determined by parties and contract.
- Usually termination is “for cause” such as the death or disability of franchisee, insolvency, etc.
- The franchise contract may grant franchisee the opportunity to “cure” an ordinary breach within a period of time to prevent termination.
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Termination of the Franchise
- Wrongful Termination
- Generally provisions are more favorable to franchisor because he owns the trademark.
- But federal and state laws do protect franchisees. Both statutory law and case law emphasize the importance of good faith and fair dealing in terminating a franchise agreement.
- Case 14.16: Holiday Inn Franchising, Inc v. Hotel Associates, Inc., 2011: Was Holiday Inn’s conduct in “bad faith”?
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