270
“One of the most fruitful sources of ruin to men of the world is the reckless or want of
principle of partners, and it is one of the perils to which every man exposes himself who
enters into partnership with another.” Malins, V.C. Mackay v. Dougkas
I. Teacher to Teacher Dialogue
corporation. In order to ensure the success of any organization, the proper business entity must be
carefully selected, allowing for appropriate control, flexibility, management organization, and
taxation benefits.
One of the key roles of attorneys engaged in the practice of modern business law is advising
everything in between.
With each choice comes a list of pros and cons in the eyes of the law. For example, if a
person seeks maximum privacy in his or her financial affairs along with the least possible
accountability to others, a private form of sole proprietorship may be best. Compare this with the
Business entity law literally has something for everyone. The real issue is first finding out
what options are legally available, and then choosing the best fit. That fit should be tailored by
sound advice from a number of quarters including law, accounting, finance, and business
management strategy. It is this constant interdependent equation that makes the practice of
business law so difficult yet so interesting.
SMALL BUSINESS,
ENTREPRENEURSHIP, AND GENERAL
PARTNERSHIPS
34
Small Business, Entrepreneurship, and General Partnerships
personal control over their fate.
The operation of a partnership is one of the oldest recognized methods of cooperative
business conduct. Many of its antecedents go back to the age of chivalry where the duties of
loyalty were paramount. “All for one and one for all” was more than just a rallying cry before
battle. The phrase connoted an expectation that made your acts the acts of your colleague and
at the start.
Given our nation’s divorce rate of nearly seventy percent, many social reformers have argued
for making marriage a more difficult institution to enter into. Perhaps the same argument can be
raised vis-à-vis partnership. Given the long and sometimes tortuous entanglements that people
Partnership Act.
II. Chapter Objectives
operate a business.
2. Define sole proprietorship and describe the liability of a sole proprietor.
III. Key Question Checklist
What are your objectives in doing business, and what business entity choice best meets those
objectives?
What are the advantages and disadvantages of doing business as a sole proprietor?
What other forms of doing business are there?
IV. Text Materials
Introduction to Small Business, Entrepreneurship, and General
Partnerships
Chapter 34
The selection of business as sole proprietorship, general partnership, limited partnership, limited
liability partnership, limited liability company, or corporation, depends on many factors,
Entrepreneurship
An entrepreneur is a person who forms and operates a business, alone or with others.
Entrepreneurial Forms of Conducting Business – The major forms for conducting business
Sole Proprietorship
The sole proprietorship is the simplest form of business. As the name indicates, the owner is the
business. It is easy to form and does not cost a lot. The owner has the right to make all
management decisions. He owns all of the business, receives all of the profit, and carries the tax
Creation of a Sole Proprietorship – There are no formalities and no government approvals
Business Environment: Using a “d.b.a.” to Conduct Business
Personal Liability of a Sole Proprietor – The owner has unlimited personal liability.
Critical Legal Thinking – The detriments of potential unlimited personal liability far outweigh
Case 34.1 Sole Proprietorship: Bank of America, N.A. v. Barr
9 A.3d 816, 2010 Me. Lexis 130 (2010), Supreme Judicial Court of Maine
Facts: Based on documents signed by Barr on behalf of The Stone Scone, Fleet Bank approved a
$100,000 unsecured small business line of credit for The Stone Scone. The bank sent account
Small Business, Entrepreneurship, and General Partnerships
had converted to a limited liability company, but denied personal responsibility for the unpaid
proprietorship.
Ethics Questions: A sole proprietorship is the simplest form of business organization. There is
only one owner of the business, who is called the sole proprietor. There is no separate legal entity.
General Partnership
General (ordinary) partnerships have been recognized since ancient times. It is a voluntary
association of two or more persons for the purpose of carrying on a business for profit.
Formation of a General Partnership – To be a partnership, a business must be a voluntary
association of at least two persons that are carrying on a business as co-owners for profit. The
appropriate governmental body.
General Partnership Agreement – The agreement may be oral, written, or implied by the
partners’ personal income tax returns.
Rights of General Partners
The partners of a general partnership have certain rights.
equal rights to participate in management.
Right to Share in Profits – Unless there is an agreement stating otherwise, all partners have a
Chapter 34
Right to Compensation – Unless the agreement states otherwise, no partner is entitled to
conduct of the business.
Right to Return of Loans – A partner who makes a loan to the partnership becomes a creditor of
Right to Information – Each partner has the right to information about the partnership, including
financial records and taxes.
Duties of General Partners
Duty of Care – Partners must use the reasonable skill and care that would be expected of
Duty to Inform – Partners have a duty to inform co-partners of any information that they have,
Duty of Obedience – Partners must adhere to the rules of the partnership, or they will be liable
for any damages caused by the breach.
Right to an Accounting – Partners cannot sue the partnership, but, instead, can bring an action
partner their share.
Liability of General Partners
Tort Liability of General Partners – The partnership is liable for any acts caused by a partner,
Small Business, Entrepreneurship, and General Partnerships
seek indemnification from the other partners.
Liability of Incoming Partners – A new partner is only liable for antecedent debts to the amount
Critical Legal Thinking – Joint liability means that a partner is responsible for her pro rata share
of the partnership liability along with the other partners. Joint and several liability is when a
partner is responsible for her pro rata share of liability and potentially, the other shares of liability
Dissolution of a General Partnership
A partnership for a term is for a fixed term or until a particular event occurs, while a partnership
at will is for an unspecified period. With the former, the partnership automatically dissolves at the
time.
Winding Up of the Partnership – Unless it is agreed that the partnership will continue, the
Notice of Dissolution – Notice of dissolution must be given to certain parties, or the partners will
be deemed to have apparent authority to continue to bind the partnership. Third parties who dealt
with the partnership must be given actual notice of the dissolution. Third parties who did not deal
Distribution of Assets – Partnerships assets should be liquidated, and payment made first to
Business Environment: Right of Survivorship General Partners
The surviving partners receive the partnership property from a deceased partner through the right
Chapter 34
V. Key Terms and Concepts
share of the partnership assets.
Actual notice—Third parties who have actually dealt with the partnership must be given
Antecedent debt—A new partner who is admitted to a general partnership is liable for the
her capital contribution.
Apparent authority—If proper notice is not given to a required third party after the
Breach of confidentiality—General partners owe a duty to keep partnership information
regularly conducted.
Continuation agreement—It is good practice for the partners of a partnership to enter into a
continuation agreement that expressly sets forth the events that allow for continuation of the
partnership, the amount to be paid outgoing partners, and other details.
Contract liability—A general partner who is made to pay more than his or her proportionate
business as.”
Dissolution—“The change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on of the business” [UPA § 29].
partnership.
Duty of obedience—A duty that partners must adhere to the provisions of the partnership
agreement and the decisions of the partnership.
Duty to inform—A duty a partner owes to inform his or her co-partners of all information he
or she possesses that is relevant to the affairs of the partnership.
with others.
Fictitious business name statement—A document that is filed with the state that designates a
trade name of a business, the name and address of the applicant, and the address of the
business.
Fiduciary relationship—General partners are in a fiduciary relationship with one another.
Small Business, Entrepreneurship, and General Partnerships
Form 1040 U.S. Individual Income Tax Return—For federal income tax purposes, a sole
form.
General partnership—An association of two or more persons to carry on as co-owners of a
business for profit [UPA § 6(1)].
General partnership agreement—A written agreement that partners sign to form a general
partnership.
general partnership after becoming a partner.
Indemnification—Right of a partner to be reimbursed for expenditures incurred on behalf of
the partnership.
Joint and several liability—Partners are jointly and severally liable for tort liability of the
Joint liability—Partners are jointly liable for contracts and debts of the partnership. This
means that a plaintiff must name the partnership and all of the partners as defendants in a
lawsuit.
Misuse of partnership property—If a general partner uses partnership property for personal
partnership is dissolved, each general partner is personally liable for debts and obligations of
the partnership that exist at the time of dissolution.
Ownership interest—Ownership of a general partner may be passed to an heir through a will
provision.
and torts of the partnership.
Revised Uniform Partnership Act—A Revised Uniform Partnership Act (RUPA) has been
issued by the National Conference of Commissioners on Uniform State Laws, but it has not
been adopted by many states.
Right of survivorship—A rule which provides that upon the death of a general partner, the
her beneficiaries or heirs.
Right to participate in management—A situation in which, unless otherwise agreed, each
partner has a right to participate in the management of a partnership and has an equal vote on
partnership matters.
Right to share in profits—The right to share in the profits of the partnership is considered to
Chapter 34
Schedule C—The income or loss from the sole proprietorship is reported on Schedule C
partnership property as a tenant in partnership.
Tort liability—The partnership and partners who are made to pay tort liability may seek
indemnification from the partner who committed the wrongful act.
Trade name—A sole proprietorship can operate under the name of the sole proprietor or a
trade name.
Usurping a partnership property—A general partner who is offered an opportunity on behalf
of the partnership cannot usurp the partnership opportunity for himself or herself.
Winding up—Process of liquidating the partnership’s assets and distributing the proceeds to
satisfy claims against the partnership.
to do so at that time.