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BUSA 2106
Susan Willey, J.D.
Assoc. Professor of Legal Studies
Miller & Cross (2013)
Learning Outcomes
Describe the role of entrepreneurs in starting and
operating businesses
Define the liability of a sole proprietor
Define general partnership and explain the contract and
tort liability of partners
Define limited partnerships and the liability of general and
limited partners
Define LLP and describe the limited liability of partners of
an LLP
Define LLC and describe the limited liability shield
provided by an LLC
Miller & Cross (2013)
Forming a business
Obtain required licenses and
permits
Obtain sufficient insurance
Select a name
Register under fictitious
name statutes
Register name as domain
name on Web
Protect name as
trademark
Select form of business entity
Miller & Cross (2013)
Factors Influencing
the Choice of Business Entity
What are the costs of forming and operating the
business?
Is the business a separate legal entity?
Who manages and controls the business?
How is capital obtained to finance business
operations?
What is the liability of the owners?
Can ownership interests be easily transferred?
What is the duration of the business?
What are the tax implications of the form chosen?
Miller & Cross (2013)
Forms of Conducting
Domestic Business
Sole proprietorship
General partnership
Limited liability
partnership (LLP)
Limited partnership
Limited liability
company (LLC)
Corporation
Miller & Cross (2013)
Business Entities
Entity
% of Total
Businesses
% of Total
Revenue
Sole
Proprietor
73%
5%
Partnership
7%
6%
Corporation
20%
89%
Business Entities
90
80
70
60
50
Sole Prop.
Partnership
Corporation
40
30
20
10
0
% of Entities
Miller & Cross (2013)
% of Revenue
7
GA Active Entities
as of 10/30/12 (GA Secretary of State)
Type of Entity
Insurance Co
Domestic
Foreign
170
1,623
22,837
Limited Partner.
16,494
2,247
Non-Profit Corp
65,985
2,277
Prof Corp
11,976
31
201,810
31,504
60,519
LLC
Profit Corp
TOTAL
Miller & Cross (2013)
http://www.sos.ga.gov/corporations/stats.htm
Sole Proprietorship
Most common
form of
business entity
in US
Simple to form
Owner is the
business
Personal Liability of
Sole Proprietors
Sole proprietor bears the entire risk of
loss of the business
Owner will lose entire capital contribution if
the business fails
10
Ferguson v Jenkins
Jim Ferguson operated
Jims Auto Sales in
Tennessee as a sole
proprietorship
His insurance company
issued a policy to Jim
Ferguson, Jims Auto
Sales in 1999 that
covered Owned Autos
Only
Miller & Cross (2013)
11
12
13
Sole Proprietorships
Advantages
Easy to form
Owner is the business;
no separate legal entity
Flexibility: Owner has
complete control
Owner has right to
all profits
Subject to less
regulation than other
business forms
Disadvantages
Unlimited personal
liability for business
debts & obligations
Duration limited by
proprietors interest or
death
May be hard to raise
capital
Limited resources,
expertise
14
What is a Partnership?
UPA defines a partnership as a voluntary
association of two or more persons to carry
on as co-owners a business for profit
Elements in UPA definition
Sharing of profits and losses
Joint ownership of the business
Equal right in the management of the business
15
Sharing of Profits
Agreements to share profits may not create
a Partnership if profits are received as
Wages, rent, interest, etc.
16
Is there a
Partnership?
Dan owns six shoe stores
He hired Rubya as manager
of a new store for a monthly
salary and 20% of the profits
17
Partnership Agreements
Written agreements should contain
18
19
Formation of a Partnership
By agreement of the parties
Can be oral, written or implied by conduct
Partnership by estoppel
Third party relies on representation by a
partner that a nonpartner is a member of the
entity
Chavers v Epsco (Ark. 2003) at p 407
20
Has a Partnership
Been Formed?
Tammy worked as a waitress
at Bynums Diner in Valdosta,
owned by her mom (Hazel)
and step-father (Eddie)
The three later signed an agreement
Eddie would relinquish his management
responsibilities for 6 months
Tammy would become co-manager with her mom
The agreement made no mention of profit
Miller & Cross (2013)
21
Is Tammy a Co-owner
or an Employee?
The bank account remained
in Eddies name
A month later, Tammy fell off
a ladder at work, injuring her
knees; she a filed workers
compensation claim
The GA Workers Comp Board determined that she
was an employee and awarded her benefits
The diners insurance carrier sued, arguing that
Tammy was a co-owner, not an employee
Who wins?
Miller & Cross (2013)
22
Is this a Partnership?
In 1995, Stafford, Steve, Mike, Joe and Doug
agreed to sell food at the Atlanta Olympics as
Prairie Cajun Seafood
In May 1996, they applied for a license to
operate the business in Fulton County
In June, Ted sold a mobile kitchen for an
$8,000 check (drawn on the Prairie Cajun
Seafood account) and two promissory notes
totaling $32,000
The notes listed Stafford d/b/a Prairie Cajun
Seafood
Miller & Cross (2013)
23
Is there a Partnership:
Who is Liable?
On July 31, the 5 friends
signed a partnership
agreement, which listed
specific percentages of
profits and losses
They drove the mobile
kitchen to Atlanta, but
business was disastrous
When the notes were not
paid, Ted sued Stafford,
seeking payment
Miller & Cross (2013)
24
25
Duties of Partners
As agents of partnership, partners owe fiduciary
duties to each other and the partnership
What are fiduciary duties?
Duty of loyalty: Partners must subordinate interest to
that of the partnership and not compete with it
Meinhard v Salmon (NY Ct of Appeals, 1928 at pp 409-410)
26
27
Fial and
Steeby (2)
Unhappy with their agreement to divide profits
equally, Fial wrote Steeby in 1994 dissolving
the partnership.
Fial then formed a new business called Audit
Consultants of Colorado
28
Fial and
Steeby (3)
Fial also terminated the Ps contracts with its
independent-contractor auditors and signed
many to his new firm.
Steeby sued Fial, alleging breach of fiduciary
duty and seeking a final accounting.
Who wins?
How could Fial have terminated the partnership
without risking a lawsuit?
29
Implied authority
Unless a statement limiting a Partners
authority is filed with the state, Partners have
the authority to do what is reasonably
necessary to carry out Partnership business
Miller & Cross (2013)
30
31
32
Contract Liability to
Third Parties
Partnerships act through agents/partners
If partners have express, implied or apparent
authority, their contracts are binding on the
partnership
33
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35
Partnership Dissociation
Dissociation occurs when a partner ceases to
be associated in the carrying of partnership
business
The dissociated partner
is normally entitled to have his interest purchased
by the partnership
terminates his authority to act for the partnership
and can no longer participate in running the
business
36
37
More on Dissociation
If a partners dissociation is wrongful, (e.g., in
breach of the P agreement), the partner may be
liable to the P and other partners for damages
Upon dissociation, a partners right to participate
in the management of the P terminates and his
duty of loyalty ends
But under the UPA, a dissociated partner may still be
liable for partnership obligations entered into during a
2-year period following dissociation
Miller & Cross (2013)
38
Termination of a
Partnership Requires
Two steps
Dissolution and Winding Up
39
Termination: Winding Up
Winding Up
Collecting, liquidating and distributing
the Ps assets
40
General Partnerships
Advantages
Partners contribute
capital, property
and/or expertise
Partners share work
and accountability
Entity not taxed
Flexible allocation of
profits and losses
Miller & Cross (2013)
Disadvantages
Partners personally
liable for all debts
Potential for conflict
among partners
Duration limited by
life of partners
More difficult to
dissolve than S.P.
41
Limited Liability
Partnership (LLP)
Hybrid that gives all partners a liability shield and
pass through taxation
Partner and supervising partner may be liable for
wrongful acts in scope of LLP, but
innocent partners are generally not liable for
malpractice of other partners
42
Limited Partnership
A type of
partnership that
has two types
of partners
General partners
Limited partners
43
Limited Partnership
Debt or obligation
owed to 3rd party
Limited
partnership
Third
party
Capital
investment
Limited
partner
General
partner
Liability limited to
capital contribution
Miller & Cross (2013)
Unlimited personal
liability for partnerships
debts and obligations
44
45
Management, Control
and Tax of LP
General partners can participate in
management
General partners owe fiduciary duties to the
company and all partners (including limited
partners)
46
Liability of Partners in LP
General partners: unlimited personal liability to
Ps creditors
What if corporation is the general partner?
Formation is defective
Company name includes limited partners name
Limited partner participates in management
Limited partner co-signs a personal guarantee
47
Permissible Activities
of Limited Partners
Being an agent, employee or contractor
of the LP or a general partner
Serving as a consultant or advisor to a
general partner re the LP
Acting as a surety for the LP
Approving or disapproving an
amendment to the LP agreement
Voting on certain partnership matters
Miller & Cross (2013)
48
Is this limited
partner liable?
Asner and Burton formed
a LP called ProSkate to sell
inline skates.
Asner was the general partner
Burton was the limited partner
49
50
51
GE v Stover
Linnane Magnavox entered into a contract with
GE Credit to obtain financing for the partnership.
GE refused to grant credit to the under-capitalized
partnership until Stover signed as guarantor of the
credit
52
53
Disadvantages
Requires certificate
of LP
General partners
are personally liable
Defective formation
and/or participation
may expose limited
partners to liability
54
55
Debt or
Obligation owed
Third
party
Capital
investment
Member
Member
Member
56
Management of LLC
Owners are members
Members adopting
operating agreement
Specifies voting rights,
meetings, etc
Kuhn v Tumminelli (p 420) re
consequences of no OA
Management is by members
or a designated manager
Manager owes fiduciary duties
to LLC and members
Polk v Polk ( p 420)
Miller & Cross (2013)
57
58
Liability of an LLC
LLC is liable for any loss or injury
caused to anyone as a result of a
wrongful act or omission by a member,
manager, agent, or employee of the LLC
who commits the wrongful act while
acting within the ordinary course of
business of the LLC or
with authority of the LLC
Miller & Cross (2013)
59
60
Member Liability
Member liability is limited
to capital contribution
But, Court may pierce LLC
veil to hold members liable
if
LLC defectively formed
Wrongful conduct by LLC
members
LLC is inadequately
capitalized
61
Dissociation
from an LLC
Member can dissociate from LLC; Reasons
Voluntary withdrawal, expulsion by other LLC
members, or court decree
Members bankruptcy, incompetence or death
Effect?
Member can no longer act as agent of LLC or
participate in management; duties end
Under ULLCA, the LLC must purchase the
members interest at FMV within 120 days
Miller & Cross (2013)
62
63
Disadvantages
Must file articles of
organization
Can lose LLC status
if undercapitalized,
wrongful conduct or
defective formation
Non-uniform state
laws
64
Franchises
Franchise: Any
arrangement in which
the owner of a
trademark, trade
name or copyright
licenses another to
use their intellectual
property in selling
goods or services
Miller & Cross (2013)
65
Types of Franchises
Distributorship
Manufacturer licenses a dealer
to sell its products
Manufacturing
Franchisor licenses manufacturer to
make its product, using franchiser's
ingredients or formula
Miller & Cross (2013)
66
Regulating Franchises
Federal Regulation
Industry-specific laws
protect some
franchisees from bad
faith terminations
FTC Franchise Rule
requires disclosure of
material facts to
prospective
franchisees
Miller & Cross (2013)
State Regulation
Similar rules to protect
franchisees from
unfair practices
Rules typically require
disclosure of
operational costs,
recurring expenses,
and profits earned
67
Franchise Contracts:
Standard Clauses
Payment: Initial fee or lump-sum price for
license plus percentage of annual sales
Premises: Purchase or lease of real
estate, guidelines for construction or
remodeled facility, etc.
Organizational requirements: Entity
selected, capital structure of business, sales
quotas, training, record keeping, etc.
Miller & Cross (2013)
68
Franchise Contracts:
More Provisions
Location: Exclusive or
non-exclusive territories
granted by franchisor
Quality Control: Food,
product or services must
meet specified
standards to protect
franchisors name and
reputation; often permits
inspections
Miller & Cross (2013)
69
Terminating a Franchise
Termination may be
at expiration of stated period, e.g., lease
for cause, breach of the franchise
agreement or failure to maintain quality
controls or sales quotas
70
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The Holiday
Inn Case
HAI had 10-year franchise agreement with Holiday Inn
to renovate and operate a hotel
Parties had collaborated for decades
Did Holiday Inn violate its duty of good faith and fair
dealing? Why or why not?
Miller & Cross (2013)
72