chapter 14. copyright © 2013 pearson education, inc. publishing as prentice hall. entrepreneur: a...

Chapter 14

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

Entrepreneur: A person who forms and operates a new business either by himself or herself or with others

Sole proprietorship: A form of business in which the owner is actually the business The business is not a separate legal entity Sole proprietor: The owner of a sole proprietorship

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No federal or state government approval is required D.b.a. (doing business as): A designation for a

business that is operating under a trade name Fictitious business name statement (certificate of

trade name) A document that is filed with the state that designates:▪ A trade name of a business

▪ The name and address of the applicant

▪ The address of the business

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Unlimited personal liability: The personal liability of a sole proprietor for the debts and obligations of a sole proprietorship

Taxation of a sole proprietorship A sole proprietorship does not pay taxes at the business

level A sole proprietor has to file tax returns and pay taxes to

state and federal governments

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An association of two or more persons to carry on as co-owners of a business for profit [UPA Section 6(1)] General partners (partners): Persons liable for the debts

and obligations of a general partnership Uniform Partnership Act (UPA): A model act that

codifies partnership law Most states have adopted the UPA in whole or in part

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To qualify as a general partnership under the UPA a business must be An association of two or more persons Carrying on a business As co-owners For profit

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A general partnership must file a fictitious business name statement with the appropriate government agency to operate under a trade name

General partnership agreement A written agreement that partners sign to form a general

partnership

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Flow-through taxation The income and losses of partnership flow onto and have to

be reported on the individual partners’ personal income tax returns

Right to participate in management Each partner has a right to participate in the management of

a partnership and has an equal vote on partnership matters▪ Unless otherwise agreed

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The right to share in the earnings from the investment of capital Unless otherwise agreed

Right to an accounting Action for an accounting: A formal judicial proceeding in

which the court is authorized to Review the partnership and the partners’ transactions Award each partner his or her share of the partnership assets

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Unlimited personal liability of a general partner A general partner’s personal liability for the debts and

obligations of the general partnership Joint and several liability: Tort liability of partners

together and individually A plaintiff can sue one or more partners separately If successful, the plaintiff can recover the entire amount of

the judgment from any or all of the defendant-partners who have been found liable

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General partners have unlimited personal liability for contracts of the partnership

Under the UPA General partners have joint liability for the contracts and

debts of the partnership Joint liability: Liability of partners for contracts and debts

of the partnership▪ A plaintiff must name the partnership and all of the partners as

defendants in a lawsuit

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A new partner who is admitted to a general partnership is Liable for the existing debts and obligations of the

partnership only to the extent of his or her capital contribution

Personally liable for debts and obligations incurred by the general partnership after becoming a partner

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The change in the relationship of partners in a partnership caused by any partner ceasing to be associated in the carrying on of the business [UPA Section 29]

Winding up: Liquidating a partnership’s assets and distributing the proceeds to satisfy claims against the partnership

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A situation in which a partner withdraws from a partnership without having the right to do so at that time The partner is liable for damages caused by the wrongful

dissolution of the partnership Upon dissolution the debts are satisfied in the

following order [UPA Section 40(b)]▪ Creditors (except partners who are creditors)▪ Creditor-partners▪ Capital contributions▪ Profits

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The surviving, or remaining, partners have the right to continue a partnership after its dissolution Continuation agreement – Expressly sets forth:▪ The events that allow for continuation of the partnership

▪ The amount to be paid outgoing partners and other details

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A rule which provides that upon the death of a general partner: The deceased partner’s right in specific partnership

property vests in the remaining partner or partners▪ The value of the deceased general partner’s interest in the

partnership passes to his or her beneficiaries or heirs Liability of outgoing partners

Personally liable for debts and obligations that exist at the time of dissolution

Not liable for any new debts and obligations incurred after the dissolution

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Contains a uniform set of provisions for the formation, operation, and dissolution of limited partnerships

Revised Uniform Limited Partnership Act (RULPA) Provides a more modern, comprehensive law for the

formation, operation, and dissolution of limited partnerships

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Certificate of limited partnership: A document that two or more persons must execute and sign that makes a limited partnership legal and binding Under RULPA, two or more persons must execute and sign

the certificate The certificate of limited partnership must be filed with▪ The secretary of state of the appropriate state

▪ The county recorder in the county or counties in which the limited partnership carries on business, if required by state law

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Incorrect creation of a limited partnership that occurs when: A certificate of limited partnership is not properly filed There are defects in a certificate that is filed Some other statutory requirement for the creation of a

limited partnership is not met

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A document that sets forth: The rights and duties of general and limited partners The terms and conditions regarding the operation,

termination, and dissolution of a partnership, and so on

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Unlimited liability of general partners The unlimited personal liability of general partners of a

limited partnership for the debts and obligations of the general partnership

Limited liability of limited partners The limited liability of limited partners of a limited

partnership only up to their capital contributions to the limited partnership

Limited partners are not personally liable for the debts and obligations of the limited partnership

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A creditor may require a limited partner to personally guarantee the repayment of a loan in order to extend credit to the limited partnership If the limited partnership defaults on the loan:▪ The creditor may enforce the personal guarantee and recover

payment from the limited partner who personally guaranteed the repayment of the loan

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Under the RULPA A limited partner is liable as a general partner if his or her

participation in the control of the business is substantially the same as that of a general partner

The limited partner is liable only to persons who reasonably believed him or her to be a general partner

New Section 303 of the RULPA permits limited partners to participate in the management of a limited partnership without losing their limited liability shield

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A certificate of cancellation must be filed by the limited partnership with the secretary of state of the state in which the limited partnership is organized

Distribution of assets of a limited partnership Creditors of the limited partnership, including partners who

are creditors (except for liabilities for distributions) Partners with respect to:▪ Unpaid distributions

▪ Capital contributions

▪ The remainder of the proceeds

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