Law: #18 Flashcards
What are key characteristics of a sole proprietorship?
It is owned and controlled by a single person.
What are the advantages to owning a sole proprietorship mentioned in the lesson?
1) Simplicity (little documentation needed)
2) Control
3) Finances (all profits belong to the proprietor and no double tax.)
What are the disadvantages to owning a sole proprietorship mentioned in the lesson?
1) Financial risk ( personally liable for debts)
2) Capital Investment (hard to raise capital)
3) Transfer Difficulties (hard to transfer only part of the business, or to transfer when proprietor dies)
What does “Jed Jones DBA Peanut Butter Enterprises” mean? and what are the implications?
This means “Jed Jones ‘doing business as’ Peanut Butter Enterprises”. The implication is that even though there is an enterprise name there is still liability by Jed.
What methods may be used to start a partnership?
1) simply engage in business together and never discuss the existence of a partnership
2) orally agree to engage in business together
3) sign a formal partnership agreement.
How is a partnership defined?
Association of two or more persons to carry on as co-owners a business for profit
What is the difference between a joint venture and a partnership?
A joint venture is for one project and a partnership is ongoing.
There are situations when profits are shared, but this does not create a partnership. What are they?
1) paying a creditor for debts, loans, goodwill, etc.
2) Paying and independent contractor or employee for work
3) Paying pension to a former partner
4) Joint ownership of a property
suppose that a poor Mr. Smith falsely tells Mr. Gonzalez that a wealthy Ms. Jones is his partner. Ms. Jones is not,
in fact, the partner of Mr. Smith but as a favor she allows Mr. Smith to say that she is his partner. If Mr. Gonzalez justifiably relies on the representation of partnership, and suffers a financial loss (a detriment), what doctrine may help in this situation?
The doctrine of partnership estoppel would say that if Mr. Gonzalez justifiably relied on the representation to his detriment then Ms. Jones will be stopped from denying that Mr. Smith was not a partner.
How is a partnership taxed?
The partnership is ignored for federal income taxation, and the partners themselves are taxed based on their share of the profits.
In a partnership how does liability work?
Essentially all partners are potentially liable for the actions of another partner who is acting under the normal course of business of the partnership. All partners are liable “jointly and severally”.
What does being liable “jointly and severally” mean?
It means that if If there was a partnership with three partners, it means that a claimant may choose to satisfy his claim against all three partners together (“jointly) or
to assert his claim against one or two alone (“severally”). (If the choice is to proceed against individuals, the individuals may litigate against each other to balance accounts.) To have the flexibility to proceed against a group or against individuals is a considerable advantage for the claimant.
1 Charlie (a partner) negligently drove the ABC truck.
Who is liable in the following situations? If a person is hit while the driver of the ABC truck (some as Charlie a partner and some as Herbert an employee) is working under the ordinary course of business.
1) Partnership
2) Partners are personally liable (jointly and severally)
3) Charlie is liable.
4) Herbert is personally liable, but ABC company must indemnify Herbert
5) Herbert is liable, but the partners are personally liable to indemnify.
6) Herbert is liable.
What are general rules controlling the operation of a partnership? (5)
1) Management: equal right to vote to control operations
2) Profits: unless specified, share equally
3) Compensation: Share of profits, not a salary usually
4) Information: unrestricted access
5) Loyalty: fiduciary duty to the other
During a dissolution of a partnership in what order are assets distributed?
1) Creditors
2) Creditor-partners
3) Capital Contributions
4) Profits
Is a partner liable for debts incurred while she was a partner?
Yes.
What is the danger involved with remaining partners and an outgoing partner and the perception of the community?
It may not be known by the community that the old partner has left, which gives apparent authority, and may cause the firm to be liable.
In a normal case: (1) What is the greatest advantage of a sole proprietorship and (2) What is the greatest disadvantage of a sole proprietorship?
In a normal case, the greatest advantage of a sole proprietorship is the “single” tax. The greatest disadvantage is the unlimited personal liability of the proprietor for the debts and tort liability of the business.)
James Schuster was a sole proprietor DBA Diversity Heating and Plumbing. James died and his son, Jerry, took over the business, which then became Jerry Schuster DBA Diversity Heating and Plumbing. The plaintiff, George Vernon, purchased a boiler from James. After James died, the boiler proved defective and Vernon demanded that Jerry honor the warranty received from James and fix the boiler. (Vernon v. Schuster, d/b/a Diversity Heating and Plumbing, 688 N.E.2d 1172) Is Jerry liable for the warranty issued by his father?
James made the promise and Jerry did not; therefore, James (who is dead) is responsible and Jerry is not. (If the estate of James left any assets, Mr. Vernon could pursue his claim against the estate.))
Assume that the ABC Company goes out of business and it has $10,000 in the bank. Place the following claimants (each of whom demand the $10,000) in priority order: (a) Charlie (a partner) demands the money to reimburse him for equipment he loaned the Company, (b) Helen (a tour agent) demands the money to pay for a Caribbean cruise for the partners, and (c) Beta (a partner) demands the money to reimburse him for his share of the Company profits.
(b) Helen the tour agent: she is a non-partner creditor.
(a) Charlie for his equipment: Charlie is a creditor-partner.
(c) Beta for profits: Beta is a partner seeking a share of partnership profits.)
Which business organization is the easiest to form: sole proprietorship or partnership?
Neither is the “easiest” to form because each one can be formed by doing nothing except going into business.)
Mildred and Joel are equal partners in the partnership of Mildred’s Floral. Both Mildred and the partnership are bankrupt. Mildred personally has $150,000 of liabilities and $100,000 of assets. The partnership’s liabilities are $450,000 and its assets total $250,000. Joel, the other partner, is solvent with $800,000 of assets and $150,000 of liabilities. What are the rights of the various creditors of Mildred, Joel, and the partnership?
Joel will be liable in full for the $200,000 partnership deficit.
Joel is liable only for $100,000, his equal share of the partnership deficit.
Mildred’s personal creditors can recover the $50,000 deficit owed to them from Joel.
a
The correct answer is: Joel (like all partners) is liable for all debts of the partnership. “Mildred’s personal creditors can recover the $50,000 deficit owed to them from Joel.” is not a correct answer because Jed is not liable for Mildred’s personal debts. “Joel is liable only for $100,000, his equal share of the partnership deficit.” is not correct because Jed (like all partners) is liable for all debts of the partnership.)
A partnership is defined as “an association of two or more persons.” Can two corporations form a partnership? In other words, can a corporation (or other artificial entity) qualify as a “person” for purposes of forming a partnership?
A corporation is a legal “person” and can be a partner in a partnership.)
Which of the following is considered a weakness of the sole proprietor form of business?
a double tax
difficulty in organizing the sole proprietorship
liability of the proprietor
Options a and c are both considered weaknesses.
c
The potential liability of the sole proprietorship is a major weakness of a sole proprietorship. On the other hand, a double tax is experienced with a corporation. A sole proprietorship is simple to organize.
