LAW 101 Activity

For each assigned case, write an analysis of the issue based on the following criteria:

Identify the parties involved in the case dispute (who is the plaintiff and who is the defendant).

Identify the facts associated with the case and fact patterns.

Develop the appropriate legal issue(s) in question (i.e., the specific legal issue between the two parties). Provide a judgment on who should win the case – be clear.

Support your decision with an appropriate rule of law.

Be prepared to defend your decision and to objectively evaluate the other points of view.

CHAPTER
PA R T 7
35
Forms of Business Organization
LEARNING OBJECTIVES
1
2
3
CASE OPENER
The Dunkin’ Donuts Franchise Agreement
Chapter 35
Forms of Business Organization
771
Suppose you come up with an idea to produce a novel product you think could lead to
ay to produce this product? Should you do it
yourself by creating your own business? Do you have enough money to create your own
business? What are the le
usiness is not successful? What legal
responsibilities do you have with respect to your business?
o of you
its associWhat are the disadvantages?
business you should consider?
Choosing the form of b
es. The extent of liability and control the owner will have depends on
the form of the business. The business world is not static, however, and businesses can
and do change form over time, so this chapter relates not only to new businesses but
also to existing ones. The first section introduces the major types of business organizations, describing how these forms are both created and ended. The second section considers several types of business or
wn, b
nev
Major Forms of Business Organization
S OL E P RO P RI E T O R SH I P
If you decide to go into business on your o
sole proprietorship, a
business organization in which you, as the sole proprietor, are in sole control of the manThus, if you wanted to open a lawn-mowing business or a sewing
shop, you would likely be creating a sole proprietorship.
ver other forms
of business or
ery few legal
ganization, with freedom to hire emplo
usiness hours, and expand or change
the nature of the business.
usiness.
ed as the personal income of the sole proprietor.
However
ve disadv
usiness. You are
personally liable for an
large debts because of your business, you might have to sell your home to cover them.
Moreover, because the sole proprietorship is not considered a separate legal entity, you, as
the o
automatically when the sole proprietor dies.
Funding for your b
y
have lar
v
y make.
Exhibit 35-1 summarizes the advantages and disadvantages of the sole proprietorusiness organization in
the United States. As the Comparing the Law of Other Countries box illustrates, they are
popular in German
”
v
usiness or
y adv
proprietorship but addresses its funding dra
LO1
forms of business
organization, and what
are the differences
among them?
772
Part 7
Business Organizations
Exhibit 35-1
Advantages and
Disadvantages of the
Sole Proprietorship
Creation is easy
Proprietor is
personally liable for
all losses
Proprietor is in total
control of
management
Funding is limited to
personal funds and
loans
Proprietor keeps all
profits
PA RT N E R SH I P
Suppose you and your best friend from college decide to create a business to buy and sell
used books and CDs online. Both of you agree to share control of the business and split the
.
Act (UP
ve
created a partnership, a v
o or more persons who co-own
ab
w cases, a partnership is not considered a separate legal
ed when an
The Uniform P
Act gov
nerships in most states in the absence of an express agreement.
antages of a partnership? First, formation is easy.
ficial or
ev
is not considered a separate legal entity, income from the business is taxed as individual
.F
usiness losses from
their taxable income.
The major disadvantage of partnerships is that partners are personally liable for the
through the business, you will likely be held personally liable for that $50,000. Exhibit 35-2
summarizes the advantages and disadv
There are several types of partnerships (see Exhibit 35-3). In a general partnership the
s debts.
usiness example,
.
COMPARING THE LAW OF OTHER COUNTRIES
Sole Traders in Germany
Now imagine that your parents want to invest in your Internet business, sharing in its
profits b
Your parents can join your b
a limited partnership (LP), an agreement between at least one general partner and at
.
personal liability for the partnership’s debts, but your parents, the limited partners, assume
no liability beyond the capital they have invested in it and no part in its management. However, as limited partners, the
es on their share of the profit.
ner dies, however
ed.
–
ships. First, it must use the word limited
Exhibit 35-2
DISADVANTAGES
P
all losses. Including those of
Advantages and
Disadvantages of the
P
ADVANTAGES
Creation is easy.
Income of business is
personal income.
Business losses can be
deducted from taxes.
773
774
Part 7
Business Organizations
Exhibit 35-3
Types of Partnerships
fice to create it; otherwise, it e
as ne
y.
unlimited liability for professional malpractice. But will you and the other partners also be
held liable?
ve created a limited liability partnership (LLP),
s professional malpractice, but only to the extent of the
partnership’
en. Moreover, each
wn negligence and the negligence of those that she supervises.
This distinctive feature of the LLP is the reason many professionals who do business
Legal Principle: Every partner in a limited liability partnership has liability limited to the partnership’
airly new; in 1991, Te
their creation. Almost all states now hav
LLP has several special requirements. First, the b
artnership or an abbre
.
The LLP is not considered a separate legal entity
es on his or her
usiness. An alternative form of business organization, the corporation, separates business ownership from business control.
C O R P OR AT IO N
ord business,
eW
McDonald’s, and Nike. Perhaps the most dominant form of business organization is the
Chapter 35
Forms of Business Organization
775
corporation, a le
vestors, who then become
shareholders and the owners of the company. These shareholders elect a board of directors, which is responsible for managing the business.
icers to run the day-to-day business.
None of the other forms of business we have discussed are separate legal entities. How
gal entity? It must be created according to state law.
(Chapter 38 discusses the laws gov
What are the consequences of being a separate le
tion can be sued and can be held liable for its debts, shareholders cannot. Their liability is
y have invested in their share purchases, which supplies
the compan
Third, the corporation must pay tax
and its shareholders must pay taxes on
the dividends (distributions of those profits) they receive from it. Exhibit 35-4 summarizes
the advantages and disadv
usiness.
One way to avoid the double taxation is by forming an S corporation, which is a
w but is taxed like a partnership as long as it follows certain regulations. For e
ve more than 100 shareholders.
Its income is taxed only when distributed to the shareholders, who must report the
income on their personal income tax forms. S corporations are often, though not always,
formed under federal law. Alternatively, other forms of corporation are created under
state law.
Legal Principle: A corporation is a separate legal entity and can be sued.
Exhibit 35-4
Advantages and
Disadvantages of the
Corporation
Profits are taxed as income
to the shareholders, not the
partners (if any)
Formalities are required in
establishing and maintaining
corporate form
It is easy to raise capital
by issuing stock
Corporate income is taxed
twice
Shareholders have limited
liability
776
Part 7
Business Organizations
L IM I T E D LI A B I LI T Y C O MPA N Y
One of the newest forms of business organization in the United States is the limited liability
company (LLC),
usiness organization that many people see
as combining the most adv
bines the tax adv
xibility of a partnership with the limited liability of a corporation.
First recognized in the United States in 1977 in Wyoming, the LLC is now recognized
in every state, although the rules on LLCs have not evolv
. To bring some uniw
La
y Act (ULLCA) in 1995. In 2006, the
commissioners revised the ULLCA. This act provides a model for states to follow, but it
w
ments in the state in which you wish to create your LLC.
Companies.
members) the same
e the corwnership
interests; nor is it required to hold an annual meeting and draft meeting minutes, so record
k
xible. Unlik
, an LLC member does not have to giv
management of the LLC. In fact, an additional adv
xibility it
of
ve w
The most frequently cited adv
e
As previously mentioned, the LLC offers its o
limited liability for b
, no separate tax is
assessed on the company itself, thereby allowing its members to av
wever, if the LLC
members prefer, they may elect to have the entity taxed lik
vested in the business, this option allows the
ed at the lo
avoid double taxation as a ke
act that
the members have the choice of how they wish to be taxed.
In our global environment, an increasingly important advantage of LLCs is that members need not be citizens or permanent residents of the United States. Other organizational
v
U.S. citizens. Finally
usiness e
paid to o
s income is
A limited
want to establish their LLC. While precise requirements v
include the name of the business, which must include the words
pany
LLC, its principal b
gistered agent for service, the names of the o
w the company’s
management will be structured.
LLCs typically want to do business in more states than just the state where the
formed, and they usually need to register in every additional state in which they intend
Chapter 35
Forms of Business Organization
777
Qualif
certif
usiness license, in each
additional state in which the business plans to operate.
a foreign company in the additional states, and under most state statutes the LLC is govas created, regardless of where it is transacting
business.
For purposes of jurisdiction, however, an LLC is considered a citizen of ev
volves more than $75,000, is the existence of diversity of
or determining
whether diversity exists, a corporation is considered a resident of the state in which it is
usiness. However, this rule does
not apply to LLCs, as their citizenship is determined by the residences of their members.
Consequently
elihood of ha
y may want to consider either limiting LLC membership to individuals of only
one or a few states or using a different form of business organization.
y typically draft an operating agreement, which is
the foundational contract among the entity’s owners. It spells out such matters as how the
company is to be managed, ho
w interests may
w and when the LLC may be dissolved. Any matter not covered in
the operating agreement will be resolved in accordance with the state LLC statute; if a
matter is not covered by the relev
w are generally
followed.
While there is no requirement for an LLC to have a detailed, written operating agreement, in order to ensure the smooth functioning of the company, it is a good idea to have
one. Failure to hav
LLC that may be very dif
company.
Exhibit 35-5
usiness organization discussed above.
Legal Principle: As a general rule, an LLC is f
of organization in the state in which members want to establish their LLC.
Precise requirements for formation vary by state. Moreover, an LLC needs
to register in every additional state in which it will do business.
www.mhhe.com/kubasek2e.
Specialized Forms of Business Organization
specialized forms hav
usiness organization we’ve mentioned above, some
ves, joint stock companies, business
entures, and franchises.
C OO P ERAT IV E
A cooperative is an organization formed by individuals who usually pool their resources
to gain an adv
et. Farmers might pool their yields of certain crops to
ensure a high mark
, members of the cooperative receive dividends in proportion to how many times per year they engage in business with the cooperative.
Cooperativ
v
ve’s actions.
LO2
specialized forms of
business organization?
778
Exhibit 35-5
Part 7
Business Organizations
Traditional Forms of Business Organizations
COMPARING THE LAW OF OTHER COUNTRIES
Limited Liability Companies in Mexico
ves, on the other hand, enjo
J OI N T ST OC K CO MPA NY
A joint stock company
y members hold transferable shares while all the goods of the compan
Thus, the joint stock compan
wn the joint stock company. As in the partnerve personal liability, and in most cases the company is not a
gal entity.
B U S I NE SS T R U ST
A business trust is a business organization gov
trustees, who operate
beneficiaries. A written trust agreement establishes the duties and pow, and in most states b
ed like
S YN D I CAT E
An investment group that comes together for the e
inancing a specific
ge project is a syndicate.
teams and are quite useful for their ability to raise large amounts of mone
The
enture; thus they are almost always governed
w.
J OI N T VE N TU R E
A joint venture is a relationship between tw
.
Joint ventures can be agreements between small or v
ge businesses. For example,
Penske Truck Leasing Co., L.P., is a joint venture among Pensk
e
Automotive Group, and General Electric with annual revenues of more than $4 billion.
779
E-COMMERCE AND THE LAW
Exploring Forms of Business Organization
on the Internet
COMPARING THE LAW OF OTHER COUNTRIES
Types of Business Organization in China
This joint venture operates more than 225,000 v
America, South America,
Europe, and Asia. From a legal standpoint, partnerships and joint ventures are virtually
the same.
w to joint ventures. Joint ventures
dif
wever, because they are usually created for making and sellusiness. The joint venmembers.
Also unlike a partnership, the joint venture is not automatically terminated when one of
the members dies. Members of a joint venture also hav
ners because they are not agents of the other members.
Joint-v
y have
come together, but they can agree to give one party greater management responsibilities.
sible for the liability of the other(s).
Lik
wing up a formal
agreement.
Case 35-1 provides a judicial discussion of the elements necessary for the establishment
of a joint venture.
780
C A S E 3 5 -1
MMK GROUP, LLC v. THE SHESHELLS COMPANY, LLC, ET AL.
U .S . D I STRI C T C O U RT F O R TH E N O RT H ER N D I S T R I C T
OF O HI O
5 91 F. S UP P. 2 D 94 4 ( 2 0 0 8)
[continued]
CRIT IC AL TH INKI NG
E T H I CA L DE CI S IO N M A KI N G
F R A N C H IS E
LO3
782
When you go into McDonald’s to eat lunch, what type of business are you patronizing?
Y
ely eating at a franchise. This form of business organization is a business that
e
franchisor, an owner of a trade name or
trademark, and the franchisee, a person who sells goods or services under the trade name
Exhibit 35-6
antages of a franchise for
the franchisor.
Generally, franchises fall into one of three cate
chain-style business
operation,
s and Bur
sor’s business name and is required to follow the franchisor’s standards and methods of
business operation.
Chapter 35
Forms of Business Organization
783
Exhibit 35-6
Starting a Franchise:
Advantages and
Disadvantages for
the Franchisor
Can become liable
for the franchise if
it exerts too much
control
Earns increased
income from
franchise
Has little control
over the franchise
Takes low risk in
starting a
franchise
In the second cate
, distributorships, the franchisor manufactures a product and
licenses a dealer to sell it in an exclusiv
.
xample of a
utorship.
Finally, the third category is the manufacturing
arrangement, in which the franchisor provides the franchisee with the formula or necessary ingredient to manuf
xample,
pro
then sell it, according to the franchisor’s standards.
Exhibit 35-7 indicates ho
for the market economy.
Look at Case 35-2 to see ho
e
Exhibit 35-7
The Top 10 Global Franchises, 2009
Source: Ranked by Entrepreneur Magazine
,
gro
te, and size of the system;
.entrepreneur.com/franchise500/index.html.
Franchising is one way to spread your business across the world.
C A S E 35 -2
M A RY K AY, I N C. , A /K / A M A RY K AY C O S M E T I C S , I N C .
v. J A N ET I SB EL L
SU P RE M E CO URT O F A R K A N S A S
3 38 A RK . 5 56 ; 999 S . W. 2 D 6 6 9 ; 1 9 9 9 A R K. L E X I S 4 4 3
[continued]
CR IT ICA L TH INK ING
E T H I CA L DE CI S IO N M A KI N G
Franchise Law.
ger than franchisees and have
more resources, they often have the upper hand in franchise relationships. However, federal and state laws hav
A franchise is a contractual relationship between the franchisor and the franchisee.
Thus, contract law
, apply. If the terms of
In the franchise relationship, the parties make a
franchise agreement re
w, and method of termination of the franchise.
The franchise agreement usually sets out what the franchisee pays the franchisor
ge sum) for use of the trade name or trademark and what percentage of sales income
will go to the franchisor. If the franchise requires a building, the agreement will specify
who pays for buying or renting it or for b
The franchisor usually includes in the agreement business practices that are forbidden
and b
The franchisor can also
set sales quotas and record-keeping requirements.
ut the franchisor cannot establish
the price at which the franchisee sells the goods.
785
786
Part 7
Business Organizations
actor
in franchise agreements. Because man
usiness practices
quality
y reasonable time.
Although the franchisor has the le
exercises too much authority in the day-to-day affairs of the business, the franchisor could
be held liable for the torts of the franchisee’s employees.
Termination of the Franchise. Much of the litigation associated with franchises
regards wrongful termination of a franchise. The franchise agreement establishes how the
franchise will be terminated. The b
. If the franchisee does not meet the requirements in the agreement, the franchisor can
ut must give suf
ve cause.
For example, good cause exists if the franchisee repeatedly violates the franchise agreement. Additionally, the franchisor needs to have documented the warnings sent to the franchisee regarding the violations. The typical agreement gives the franchisor broad authority
wever, many states have been giving the franchisee greater
Legal Principle: When a franchisee does not uphold the franchise agreement, the
franchisor can terminate the r
The courts usually rely hea
franchise w
C A S E 35 -3
C O U S I N S SU BS S YS T E M S , I N C . v. M I C H A E L R .
McKINNEY
U .S . D I STRI C T CO U RT F OR T H E EA S T ER N D I S T R I C T
OF W I SC ONS IN
5 9 F. SU PP. 2 D 8 1 6 ( 1 9 9 9)
s
[continued]
CR IT ICA L TH INK ING
E T H I CA L DE CI S IO N M A KI N G
CASE OPENER WRAP-UP
Dunkin’ Donuts
Key Terms
Summary of Key Topics
Point / Counterpoint
Should a New Restaurateur Open a Franchise Rather than Become a Sole Proprietor?
YES
Questions & Problems
NO
Looking for more review material?
CHAPTER
Partnerships: Nature, Formation,
and Operation
1
2
3
4
CASE OPENER
Jax Restaurant Partnership
PA R T 7
LEARNING OBJECTIVES
36
Act (UPA) is the main statute gov
agreement, UP
The Uniform P
w. If there is no e
wing
chapter considers ho
w
partnerships are created, and how they function.
Nature of the Partnership
LO1
What e
tion of tw
According to UPA Section 6, a partnership is “an associawners a business for profit.” Let’s analyze
Exhibit 36-1.)
First, by “association,” UPA means that the partnership is a voluntary and consensual
.
o or more persons.” UP
persons as “individuals,
partnerships, corporations, and other associations.” Therefore, almost any individual or
e as a partner, but these persons must have the legal capacity to
voidable.
business.
Finally, the partners must serve as co-owners. Being co-owners means that they must
usiness.
Exhibit 36-1
Characteristics of a
P
794
Chapter 36
Partnerships: Nature, Formation, and Operation
”
T
•
•
•
•
•
V
and consensual relationship.
Between two or more individuals, partnerships, corporations, or other forms of business organization.
Who engage in numerous business transactions ov
Intending to make a pr
And sharing the pr
and management of the business.
xists.
e
several e
ship. For example, when an emplo
ment for w
A has established
yee as payv
y of the
follo
•
•
•
•
Payment of a debt.
Payment of an annuity to a widow or representativ
Payment from the sale of goodwill of a b
Payment of interest on a loan.
www.mhhe.com/kubasek2e.
.
.
Legal Principle: Perhaps the most important factor in determining whether a
partnership exists is whether the pr
e shared. Furthermore, this sharing of
pr
A exceptions.
Case 36-1
C A S E 3 6 -1
xists.
I N G R A M v. D EE R E
SU P RE M E C OU RT OF T E XA S
5 2 T E X. S UP. J . 1 03 0 ( 2 00 9 )
795
[continued]
[continued]
CR IT ICA L TH INK ING
E T H I CA L DE CI S IO N M A KI N G
or example, before actress Vanessa Hudgens became
f
High School Musical movie series, she worked
with business manager Johnny Vieira. During their time together, V
. However, once Hudgens became a teen star, Vieira
claims that she stopped w
its. Consequently, Vieira filed a la
tive damages. In his lawsuit, Vieira noted a signed photograph on which Hudgens wrote
“Johnny, thank you for ev
ould be no where, we will make it
797
E-COMMERCE AND THE LAW
Forms of Partnerships in the ICT Sector
in Developing Countries
BIG—Vanessa Hudgens.”1 The case was set to go to trial; however, two weeks before
trial, Hudgens and V
No
w ho
of le
ve? They can be either legal entities or aggregates of the
PA RT N E R SH I P A S A L EG A L E N T I T Y
le
,
wn.
First, a partnership is often considered a legal entity when it is sued or being sued.
any outstanding debts. P
v
individual personal creditors have first priority on the assets of the indi
ept separate from the indi
Finally, ev
relationship with the others.
PA RT N E R SH I P A S A L EG A L A G G R EG AT E
Sometimes a partnership is considered a legal aggregate of the partners, such as when
ventually become the debts of the indi
es on the income
xist when
gate of the indi
LO2
ways in which a
partnership can be
formed?
Formation of the Partnership
1
798
www
Chapter 36
Partnerships: Nature, Formation, and Operation
799
you and your partner orally agree you will receiv
wever
v
ve a dif
ute the funds,
Without a writavor.
articles of partnership.
the duration of the partnership, such as the date or event that signals the agreement’s expiThird, the agreement should
state the di
vision of
management duties. Fifth, the agreement should state e
utions
e.
Legal Principle: A written agreement, although not legally mandatory, should be
created when a partnership begins. This way, both parties can be protected if a dispute occurs or if an issue is brought to court.
PARTN E RS H I P B Y E ST OP PE L
P
w? Suppose
Y
usiness. On the basis of your parents’
participation, she decides to place an order with you. Your parents discover that you have
ut the
When your business cannot afford to purchase the goods to sell them to the
customer, the customer sues you and your parents. Because your parents were aw
ut did not correct it, they will be estopped from denying they are your
partners. While the
its), in many states they could be held liable for damages to the
customer.
Most states recognize tw
xists: (1) as in
the example abov
w
a third party reasonably relies on this information to his or her detriment.
s damages.
Exhibit 36-2
w a partnership can be created.
Exhibit 36-2
Formation of a
P
800
Part 7
Business Organizations
Interactions between Partners
LO3
partners as they interact
with each other?
o types of interactions: those between
The partners have certain
D U T I E S OF PA RT N E RS TO O N E A N O T H E R
yal. The duty to be loyal funcduty of obedience. The duty of obedience is an e
Perhaps the most important type of duty partners have tow
. P
ork for the benef
They
should not take any action that will undermine it, such as engaging in business that competes with it.
P
y material f
usiness.
ves
benef
Case 36-2 considers ho
s
.
C A S E 36 -2
C O L E T T E B O HAT C H v. B UT L E R & B I N I O N
SU P RE M E CO URT O F T EX A S
9 77 S. W.2 D 54 3 ( 19 9 8)
[continued]
CR IT ICA L TH INK ING
E T H I CA L DE CI S IO N M A KI N G
v
A partner who
makes an honest mistake in fulf
liable for the mistake.
Exhibit 36-3
.
801
802
Part 7
Business Organizations
Exhibit 36-3
Duties of P
to One Another
R I G H T S O F T H E PA RTN E R S I N T H E I R I N T E R A C T I O N S
W I T H OT H E R PART N ER S
According to the law, partners have certain rights regarding their interactions with other
ment, all
v
Ev
ner will have one v
ment, they all must agree with the change. Other decisions that require a unanimous vote
include the admission of ne
usiness.
Right to Shar
di
If the partnership agreement does not establish another
Right to Compensation.
usiness re
ve a salut no partner
usiness
acti
wever
s business affairs.
Pr
P
v
the management of the business, (2) the right to specific partnership property, and (3) the
Exhibit 36-4.) We’v
ve;
here we discuss the other two.
tenants in pr
, which means they
own it as a group. An
ut purchased
.
One w
usiness
of the partnership, it will lik
. However, a partner cannot
Chapter 36
Partnerships: Nature, Formation, and Operation
803
Exhibit 36-4
A Partner’
Rights
According to the right of
survivorship,
However, the survi
s estate for the value
.
This interest, composed of a
uted by the
partner
s personal property
in the partnership to a creditor.
s personal creditor cannot seize specific items of
wever, the creditor can obtain a charging order, which entitles the
usiness.
Right to Inspect Books.
ve full information
re
disclose any information af
ve access to all
partnership books and records and be allowed to make copies of them. Unless otherwise
agreed, the records must be kept at the principal business office.
Right to an Account.
An accounting is a review and listing of all partnership assets
partner has a right to an accounting in four circumstances:
•
•
•
•
Whenever the partnership agreement provides for an accounting.
Whenev
access to the books.
Whenever an
.
Whenever circumstances render an accounting “just and reasonable.”
Legal Principle: Unless otherwise stated in the partnership agreement, a partner’s
rights include the right to share in management, the right to share in pr
right to compensation, property rights, the right to inspect books, and the right to an
account.
804
Part 7
Business Organizations
Interactions between Partners and Third Parties
LO4
partnership liable for
interactions with third
parties?
Each partner can serv
As
long as the partner has authority to act, each partner’s act in performing business duties as
personal liability for the obligation.
A C T UA L A U T H O R IT Y O F T H E PA RT N E R S
According to UPA, general agenc
v
, following normal business procedures,
Suppose Brittan
While alle
usiness, she engages in a b
Yet suppose Brittany really didn’t hav
with the third party. In this case, both Brittany and the firm are liable for the obligation.
However
as aw
y did not hav
y will be held liable for the obligation b
ship will not.
I MP L I E D A U TH O R I T Y O F T H E PA RTN E R S
v
than do typical agents. Their implied authority is usually determined by the nature of the
b
business.
business. However
v
L IA B I L IT Y TO T H IR D PA RT IE S
According to UP
.
jointly liable for the partnership’s debts. To bring a claim, a party
ment, the other partners must indemnify, or reimburse, him or her. In the Case Opener, the
gued that they should not be held jointly liable
because it was the negligence of one partner that caused her own son’s injury. They argued
that if they were liable, Moren should have to indemnify the other partners as a result of
her negligent behavior
ververally liable for the entire amount of any
judgment rendered. Joint and several liability means that a third party can choose to sue
William sues your
W
irst
W
.
However, if in the f
as not liable in any
W
s liability.
Chapter 36
Partnerships: Nature, Formation, and Operation
If W
.
damages it pays to William. Case 36-3 considers how other partners can be held liable for
the ne
.
C A S E 3 6 -3
E R I C J O H N S O N & L O R I J OHN S O N v. S T. T H E R E S E
M E D I C A L CE N T E R
A PP E L L ATE C OU RT OF I L LI N O I S , SE C O N D D I S T RI C T
2 96 I L L . APP. 3 D 3 4 1; 6 94 N . E . 2 D 1 0 8 8 ; 1 9 9 8 I L L . A P P.
L E XI S 3 0 1
805
[continued]
CRIT ICA L TH INK ING
E T H I CA L DE CI S IO N M A KI N G
Legal Principle: As a general rule, if the partnership is liable, all partners are
liable for the debts of the partnership. Furthermore, all partners are liable for a tort
or breach of trust committed by a single partner.
L IA B I L IT Y OF IN C OMI N G PA RT N E R S
, the ne
an
as added. The ne
personally liable for them, but the capital the ne
f.
, the dates of agreements,
as well as the date the ne
806
COMPARING THE LAW OF OTHER COUNTRIES
Silent Partnerships in Germany
The Revised Uniform Partnership Act
Act gov
express agreement, the Revised Uniform P
Act (RUP
several la
ved in 1996, RUPA has been
adopted in roughly half the states, so it is wise to determine whether the state in which a
partnership was formed operates under UPA or RUPA. Although RUPA generally serves
to expand UP
CASE OPENER WRAP-UP
Crushed Hand in the Dough Press at Jax Restaurant
Key Terms
Summary of Key Topics
Point / Counterpoint
Should a Minor Be Allowed to Enter into a Business Partnership?
YES
Questions & Problems
NO
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CHAPTER
PA R T 7
37
Partnerships: Termination
and Limited Partnerships
LEARNING OBJECTIVES
1
2
3
CASE OPENER
Partnership Problems of Wildmeadow Village
Interactions between
Partners and Third
Parties
The Revised Uniform
Partnership Act
Lach partner nas specme nigins, meruuing.
Right to share in management
Right to inspect books
Right to compensation
Rights to partnership property
If a partnership has a liability, each partner has unlimited personal liability. All partners are jointly
and severally liable for the commission of a tort by any partner.
There is only implied liability when purchases are made to perpetuate the partnership’s business.
RUPA is a revised version of UPA, and its use varies from state o state.
Questions & Problems
1. Explain each element of UPA’s definition of a
partnership.
2. What is the distinction between partnership as a
legal entity and partnership as a legal aggregate?
3. What is the relationship between the obligations of
a general partner and those of a limited partner?
4. Abdul Bensaid and Cynthia Brown are the sole
members of Nadia’s LLC, a limited liability com-
pany that owns and operates Nadia’s Restaurant.
After purchasing the restaurant, Bensaid discussed
possible renovations for the building with the
Alexander Company. Bensaid met with an architect
810
Part 7 Business Organizations
at the restaurant several times. Brown was present at
one of those meetings, but neither she nor Bensaid
stated they were or were not operating as a partner-
ship and neither disclosed that they were part of a
limited liability company. Later, Bensaid entered
into a contract with Alexander Company for remod-
eling work. Bensaid was designated in the contract
as both the owner and the owner’s
r’s representative.
Brown did not sign the contract, but she did issue
it
a check from her personal I checking account for the
initial work at
at the restaurant. Furthermore, when
Alexander Company asked Bensaid to provide
proof of financial ability before completion of the
renovations, it received a letter from the bank indi-
cating that Brown was approved for a loan in the
amount of $75,000, contingent on an appraisal of
her home. However, Alexander Company was not
paid any additional amounts allegedly owed and
subsequently filed a
filed a complaint against Bensaid
and Brown. Brown rejected the notion that she
should be found liable since she was not in a part-
nership with Bensaid. Alexander Company alleged
of dealings with
that on the basis of its course of
Bensaid and Brown, I was led to believe that the
two were partners and assumed joint responsibility
for payments. Did a partnership by estoppel exist
between Bensaid and Brown in their dealings with
Alexander Company? [The Alexander Company,
Inc. v. Abdul Bensaid and Cynthia Brown, 2002 WI
App 165; 256 Wis. 2d 693; 647 N.W.2d 467 (2002).]
5. Paul Berkowitz is the minority shareholder of
several related corporations and partnerships. He
brought suit to force the appellants, Astro Moving
and Storage Co., Inc., to produce certain books and
records. Astro was currently in the process of
voting
to remove Berkowitz from his position as officer
and director of the business entities. Berkowitz
argued that
that his partner status gave him the right to
inspect the books. According to Berkowitz, Astro
had made an offer to buy him out, and he wanted
to access the books to determine the true value of
his shares. Do you think Berkowitz had a right to
inspect the books? How do you think the court
decided? [Berkowitz v. Astro Moving and Storage
Co., Inc., 658 N.Y.S.2d 425 (1997).]
6. Ian M. Starr was a partner in the law firm Fordham &
Starrett. After Starr’s first year of employment, the
firm’s profits were divided evenly among all partners.
During his second year with the firm, Starr’s rela-
tionship with the other partners began to deterio-
rate, and he quit the firm on the last day of the year.
Listing several negative factors relevant to Starr’s
performance, the firm paid him less than half an
equal share. Starr brought an action to recover
amounts to which he claimed he was entitled under
the partnership a
ement. He also claimed breach
agreement.
of fiduciary duty. Starr’s former partners counter-
claimed that Starr had violated his fiduciary duties
to the partners and breached the partnership agree-
ment. How do you think the court settled this con-
flict? [Starr v. Fordham, 648 N.E.2d 1261 (1995).]
7. The Vancouver Group is made up of five investors,
Pietz, Wynne, Fordham, Indermuehle, and Smith.
The
loubt Berry, Pietz withdrew his interests
to doubt
to
The group entered into a partnership with Robert
Berry for the joint purchase of the Sundance Hotel
and Casino. The group and Berry made an
an offer to
purchase the hotel. Pietz agreed to supply $500,000
to the deal and post a $285,000 letter of credit.
However, after receiving information that caused
him to
from the partnership. Berry threatened to sue Pietz
for breach of contract, fraud, and tortious breach of
the covenant of good faith. Pietz and Berry settled,
and Pietz subsequently sued the group for the cost
of the settlement. The trial court rejected Pietz’s
claim of breach of fiduciary duty. He appealed the
decision. How do you think the court decided? Was
there a breach of fiduciary duty? [Pietz v. Inderm-
uehle, 949 P.2d 449 (1998).]
Cause
8. David Byker was an accountant working for Tom
Mann
Mannes. The two talked about going into business
together because they had complementary business
skills Mannes (defendant) could locate certain
properties because of his real estate background
and Byker (plaintiff) could raise money for the
property purchases. Subsequently, the two agreed
to engage in an ongoing business enterprise, to fur-
nish capital, labor, and/or skill to the enterprise,
raise investment funds, and to share equally in the
profits, losses, and expenses of the enterprise. To
facilitate the investment of limited partners, Byker
and Mannes created separate entities wherein they
were general partners or shareholders for the pur-
poses of operating each separate entity. After the
two men encountered some financial difficulties
with a venture, Byker approached Mannes with
Chapter 36 Partnerships: Nature, Formation, and Operation
regard to equalizing payments as a result of the
losses incurred with the failed business opportunity.
Mannes claims that this was the first time he ever
received notice about any outstanding payments.
After unsuccessfully seeking reimbursement from
Mannes, Byker filed suit for the recovery of the
the basis
money on the that the two men had
I entered
into a partnership. Specifically, Byker asserted that
the obligations between him and the defendant
were not limited to their formal business relation-
ships established by the individual partnerships and
corporate entities but that there was a “general”
partnership underlying all their business affairs. In
response, Mannes asserted that he merely invested
in separate business ventures with the plaintiff and
that there were no other understandings between
them. Did the two businessmen form a partnership,
or were their business deals all separate ventures?
Was there intent to make a consensual business
relationship even though Mannes argues there was
not? [Byker v. Mannes, 465 Mich.637; 641 N.W.2d
210 (2002).]
9. Richard Hunley, Nada Tas, Joseph Tas, and Kenneth
Brown all became general partners of Parham-
Woodman between 1986 and 1987. In 1985, Citizens
Bank of Massachusetts loaned Parham-Woodman
$2 million for the construction of a new office
811
facility. When Parham-Woodman stopped making
payments on the loan, the bank sold the building
and sued the firm and the partners to recover the
debt not paid. The partners argued that they were
not liable for the debt because they had joined the
firm after the loan agreement was made. Do you
agree with them? Why or why not? [Citizens Bank
of Massachusetts v. Parham-Woodman Medical
Associates, 874 F. Supp. 705 (1995).]
10. Phillip Heller was a partner of the Pillsbury,
Madison & Sutro law firm. The relationship between
Heller and the firm was not strong, as Heller’s
work performance was unsatisfactory. He billed.
1,000 hours fewer than he had estimated that he
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partners
would produce, and he did not establish strong
working relationships. Heller signed the partner-
ship agreement in 1992. The agreement autho-
rized the Executive Committee to
to expel partners.
After Heller submitted a derogatory and lewd article
entitled “Why I Fired My Secretary,” the commit-
tee met and terminated Heller’s partnership. Heller
challenged the authority of the committee to
expel
him, regardless of whether he had signed the part-
nership agreement. Do you think the court agreed
with him? Why or why not? [Heller v. Pillsbury,
Madison & Sutro, 58 Cal. Rptr. 2d 336 (1996).]
The Online Learning Center at www.mhhe.com/kubasek2e contains this chapter’s “Assignment on the
Internet” and also a list of URLS for more information, entitled “On the Internet.” Find both of them in
the Student Center portion of the OLC, along with quizzes and other helpful materials.Questions & Problems
1. What is the distinction between a general partner-
ship and a limited partnership?
2. Explain why a cooperative could not claim to be a
syndicate.
3. Suppose you were asked to review and assess a
franchise agreement. What responsibilities would
you expect to find included in that agreement?
4. Joe Orosco, an employee of Sun-Maid Growers,
Inc., lost his arm in an industrial accident with a
raisin elevator in 1991. Sun-Maid was one of four
members of a marketing cooperative called the
Sun-Diamond Corporation. According to the coop-
erative agreement, Sun-Diamond was authorized
to provide certain management services to Sun-
Maid. Orosco sued Sun-Maid and Sun-Diamond,
arguing that both corporations were liable because
they were involved in a joint venture to design,
manufacture, construct, repair, maintain, install,
and test the processing line on which Orosco lost
his arm. Were the two corporations involved in a
joint venture? What additional facts would you
want to know before forming your answer? If
they were involved in a joint venture, should Sun-
Diamond be held liable for Orosco’s injuries? Why
or why not? [Orosco v. Sun-Diamond Corp., 51
Cal. App. 4th 1659 (1997).]
5. “YOU AND I” was a thoroughbred racehorse
owned by a syndicate composed of 40 equal own-
ership shares. The syndicate agreement stated that
if an acceptable offer was made to purchase the
horse from the syndicate, each syndicate member
had a “first right to purchase” under which he could
sell his interest in the horse or buy the interests
of the other syndicate members who had elected
Chapter 35 Forms of Business Organization
to sell their interests in the horse. The syndicate
agreement, however, required that if a syndicate
member planned to exercise his first right to pur-
chase, he had to notify the syndicate manager of his
intent within 10 days of his receiving notification of
the acceptable offer. In September 2003, Brereton
Jones, a syndicate member and the syndicate man-
ager, received an offer from Blooming Hills Farms
to buy YOU AND I for $500,000. Jones sent a
memo to all the syndicate members notifying them
that Blooming Hills Farms had made the offer, that
he believed the offer to be fair, and that he planned
to sell his interest. Jones received word from 39
of the 40 syndicate members that they planned to
sell their interests in YOU AND I. The following
day, Never Tell Farm, a syndicate member, notified
Jones that it planned to exercise its first right to pur-
chase. Jones and Never Tell proceeded to negoti-
ate over whether Never Tell would exercise its first
right to purchase, and the 10-day window elapsed.
When the negotiations fell through, Never Tell
notified Jones of its intent to exercise its first right
to purchase. Jones told Never Tell that it had not
timely asserted its right and thus the horse had been
sold to Blooming Hills Farms. Never Tell sued
Jones, claiming that under the syndicate agreement
it should have had the right to purchase the other
syndicate members’ interests in YOU AND I. With
whom do you think the court sided in this case?
Why? [Never Tell Farm, LLC v. Airdrie Stud, Inc.,
123 Fed. Appx. 194 (2005).]
6. The Garden City Boxing Club held exclusive sat-
ellite licensing rights for a live broadcast of a
boxing match between Oscar De La Hoya and
Fernando Vargas. Luis Dominguez owned Antenas
Enterprises, the installer of a satellite account at
Mundelein Burrito restaurant. However, Antenas
listed Mundelein Burrito as a residence instead of a
commercial location. A commercial establishment
could show the boxing match only if it was contrac-
tually authorized by GCB to do so and if it paid the
appropriate fee of $20 times the maximum fire code
occupancy of the establishment. Mundelein Burrito
showed the event to its patrons. However, because
Mundelein Burrito was classified as a residence, it
did not pay the proper fee for a commercial estab-
lishment. The Garden City Boxing Club filed suit
against Dominguez, the sole proprietor of Antenas,
to collect the lost fees from the boxing match.
791
As a sole proprietor, should Dominguez be held
personally liable for Antenas Enterprises’ actions?
[Garden City Boxing Club, Inc. v. Luis Dominguez,
2006 U.S. Dist. LEXIS 38184 (2006).]
7. Chic Miller operated a General Motors (GM)
franchise car dealership. His written franchise
agreement with GM stipulated that Miller had to
maintain a floor-plan financing agreement with a
lender to enable him to buy new cars from GM.
Initially, Miller maintained a line of credit with a
GM affiliate (GMAC), but he terminated the agree-
ment because he felt that GMAC charged him
an exorbitant interest rate. Miller was able to find
another line of credit from Chase Manhattan Bank,
but Chase withdrew its financing agreement with
Miller after one year. Miller attempted to resume
the agreement with GMAC, but GMAC refused.
Miller alleged ipse dixit (an assertion without evi-
dence) that GMAC discouraged other lenders from
providing a line of credit to Miller. GM then noti-
fied Miller that it was terminating its franchise
relationship with him because he failed to satisfy
the financing stipulation of the written franchise
agreement. Two months after receiving this notice
from GM, Miller attempted to sell his franchise to
Kenneth Crowley, the owner of another car deal-
ership. GM rejected this sale, alleging that Miller
no longer had a franchise to sell because GM had
terminated the franchise agreement two months
earlier. Miller sued GM for failing to help his fran-
chise obtain floor-plan financing and for rejecting
the sale of his franchise to Crowley. How do you
think the court ruled in this case? What require-
ments must GM meet to lawfully terminate a fran-
chise? Did GM meet those requirements? [Chic
Miller’s Chevrolet, Inc. v. GMC, 352 F. Supp. 2d
251 (2005).]
8. Margaret Miller operated an H&R Block tax prep-
aration franchise for 15 years. She hired William
Hehlen as an income tax return preparer for five
years, from 1997 to 2001. Each year, Miller and
Hehlen signed an employment agreement drawn up
by H&R Block. The 2001 agreement was between
Hehlen and “Margaret Miller, doing business as
H&R Block,” and included stipulations prohibit-
ing Hehlen from reproducing confidential business
information and from soliciting clients away from
Miller’s business. Hehlen maintained on his home
computer a spreadsheet of customer names that he792
Part 7 Business Organizations
obtained from Miller. In April 2001, H&R Block
terminated its franchise agreement with Miller,
and Miller subsequently operated her business as
a sole proprietorship under the name “MJM &
Associates.” Hehlen’s employment with Miller
ended after the 2001 tax season. In December
2001, Miller sent advertising postcards to clients
referring to Hehlen as one of her associates. When
Hehlen, who went to work for another H&R Block
office, learned of the postcards, he began telephon-
ing the customers whose names he had obtained
from Miller. Miller learned of the calls in February
2002 and filed a cease-and-desist action against
Hehlen, arguing that Hehlen was violating his
employment contract with Miller. Hehlen argued
that his employment contract was with Miller’s
H&R Block franchise, which ceased to exist after
April 2001. Do you think Hehlen’s employment
contract was signed with Miller’s franchise or with
Miller’s sole proprietorship? If you think Hehlen’s
contract was with Miller’s franchise, should Miller
have the right to enforce the contract provisions
after H&R Block terminated her franchise agree-
ment? Why or why not? [Miller v. Hehlen, 104 P.3d
193 (2005).]
9. Tammy Duncan began working as a waitress at
a diner owned by her mother Hazel Bynum and
stepfather Eddie Bynum. A few weeks later, the
three created an agreement in which Tammy was
to assume comanager duties for her stepfather.
Tammy then began doing paperwork and book-
keeping for the diner in addition to occasionally
waiting tables and performing other duties. She
testified that she made no agreement to share in
the diner’s profits and that she understood she
was going to take over her stepfather’s duties as
manager. The bank account for the diner was still
to remain in Eddie Bynum’s name and Tammy’s
parents did not change any business tax informa-
tion. In the course of her employment, Tammy
was injured when she slipped off a ladder and fell
onto both knees. The diner’s insurer, Cypress, paid
Tammy temporary total disability benefits. How-
ever, five months later Cypress notified Tammy
that it intended to controvert her claim on the basis
of alleged newly discovered evidence that she was
not an employee of the diner but was a co-owner
under the agreement she had made with her mother
and stepfather. What are the essential elements of a
partnership? Was Tammy Duncan a partner in the
diner? Why or why not? [Cypress Insurance Com-
pany v. Duncan, 281 Ga. App. 469 (2006).]
10. Harvey Pierce was a work-release inmate from the
local county jail who worked at an Arby’s fran-
chise restaurant owned by Dennis Rasmussen, Inc.
(DRI). One day in June 1999, Pierce walked off
the job without permission and crossed the street
to wait for his former girlfriend, Robin Kerl, and
her fiancé, David Jones, in the parking lot of the
Walmart store where both Kerl and Jones worked.
When Kerl and Jones exited the store, Pierce shot
both of them in the head, killing Jones and seri-
ously injuring and permanently disabling Kerl.
Pierce then shot himself and died immediately.
Kerl and Jones’s estate sued Arby’s and DRI for
negligent supervision, hiring, and retention, argu-
ing that Arby’s, the franchisor, was vicariously
liable for the negligence of DRI, the franchisee.
Do you think Arby’s should be vicariously liable
for the negligence of its franchisee? Why or why
not? [Kerl v. DRI and Arby’s, Inc., 682 N.W.2d 328
(2004).]
Looking for more review material?
The Online Learning Center at www.mhhe.com/kubasek2e contains this chapter’s “Assignment on the
Internet” and also a list of URLS for more information, entitled “On the Internet.” Find both of them in
the Student Center portion of the OLC, along with quizzes and other helpful materials.