Law: #18

Question 1

What are key characteristics of a sole proprietorship?

Answer 1

It is owned and controlled by a single person.

Question 2

What are the advantages to owning a sole proprietorship mentioned in the lesson?

Answer 2

1) Simplicity (little documentation needed)
2) Control
3) Finances (all profits belong to the proprietor and no double tax.)

Question 3

What are the disadvantages to owning a sole proprietorship mentioned in the lesson?

Answer 3

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)

Question 4

What does “Jed Jones DBA Peanut Butter Enterprises” mean? and what are the implications?

Answer 4

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.

Question 5

What methods may be used to start a partnership?

Answer 5

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.

Question 6

How is a partnership defined?

Answer 6

Association of two or more persons to carry on as co-owners a business for profit

Question 7

What is the difference between a joint venture and a partnership?

Answer 7

A joint venture is for one project and a partnership is ongoing.

Question 8

There are situations when profits are shared, but this does not create a partnership. What are they?

Answer 8

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

Question 9

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?

Answer 9

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.

Question 10

How is a partnership taxed?

Answer 10

The partnership is ignored for federal income taxation, and the partners themselves are taxed based on their share of the profits.

Question 11

In a partnership how does liability work?

Answer 11

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”.

Question 12

What does being liable “jointly and severally” mean?

Answer 12

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.

Question 13

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.

Answer 13

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.

Question 14

What are general rules controlling the operation of a partnership? (5)

Answer 14

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

Question 15

During a dissolution of a partnership in what order are assets distributed?

Answer 15

1) Creditors
2) Creditor-partners
3) Capital Contributions
4) Profits

Question 16

Is a partner liable for debts incurred while she was a partner?

Answer 16

Yes.

Question 17

What is the danger involved with remaining partners and an outgoing partner and the perception of the community?

Answer 17

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.

Question 18

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?

Answer 18

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.)

Question 19

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?

Answer 19

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.))

Question 20

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.

Answer 20

(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.)

Question 21

Which business organization is the easiest to form: sole proprietorship or partnership?

Answer 21

Neither is the “easiest” to form because each one can be formed by doing nothing except going into business.)

Question 22

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.

Answer 22

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.)

Question 23

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?

Answer 23

A corporation is a legal “person” and can be a partner in a partnership.)

Question 24

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.

Answer 24

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.

Question 25

Assume that a successful partnership is going out of business. That means, of course, that people who have a financial interest in the business must be repaid (as long as there is money). Which of the following is the correct order of priority?

(1) creditors (who are not partners), (2) creditor-partners, (3) capital contributions and (4) profits
(1) all creditors, (2) capital contributions, and (3) profits
(1) profits, (2) capital contributions, (3) creditor-partners, and (4) creditors (who are not partners)

Answer 25

a

The correct order of priorities is creditors, creditor-partners, capital contributions and profits.

Question 26

In Vohland v. Sweet, the question was whether Mr. Vohland and Mr. Sweet were partners. What was the decision of the court?

The court concluded that Vohland and Sweet were actual partners.

The court concluded that Vohland and Sweet were partners by estoppel.

Neither of the options above is correct.

Answer 26

a

The court concluded that Bohland and Sweet were actual partners. The case involved a contest between the two “partners” and thus a claim of an estoppel (by a misinformed third person) did not come into play.

Question 27

Which of the following requires a written agreement to come into effect?

sole proprietorship

partnership

Both require a written agreement.

Neither requires a written agreement.

Answer 27

d

Neither a sole proprietorship nor a partnership require a written agreement to come into effect. These business forms may be created by simply engaging in business.

Question 28

Candace and Yuri are partners and their employee, Oliver, negligently injures a third person (Sam) in the amount of $20,000. Oliver has no assets. Which of the following is correct about the liability of Candace and Yuri?

Sam may only collect $10,000 from Candace and only $10,000 from Yuri.

Sam has the choice to collect all $20,000 from Candace.

Sam has the choice to collect all $20,000 from Yuri.

Both options b and c are correct.

Answer 28

d

Partners are jointly and severally liable for the debts of their partnership. Thus, Sam can collect the entire amount from either partner or parts of the amount from each partner.

Question 29

A letter is received from “Jose Dominguez DBA Sunshine Investments.” Which of the following is the most correct?

Mr. Dominguez works for a partnership.

Mr. Dominguez works for a corporation.

Mr. Dominguez is a sole proprietor.

Answer 29

c

The letters “DBA” mean “doing business as.” This suggests that Mr. Dominguez is a sole proprietor doing business as Sunshine Investments and that Sunshine Investments is a fictitious name.

Question 30

A partnership dissolves when a partner withdraws. Which of the following is correct regarding partnership dissolution because of partner withdrawal?

A partner must have the consent of the other partners to withdraw.

A partner has the power to withdraw only if that is allowed by the partnership agreement.

A partner has the power to withdraw even if it is not allowed by the partnership agreement.

Two of the options above are correct.

Answer 30

c

Simply put, a partner always has the power to withdraw, even if withdrawal is not allowed by the partnership agreement.

Question 31

Which of the following meet the definition of a partnership?

Jake and Zena go into business as Jake and Zena’s Hot Dogs; they are successful and make a profit of $30,000 in their first year of operation.

Jake and Zena go into business as Jake and Zena’s Hot Dogs; they are not successful and lose $30,000 in their first year of operation.

Both options a and b meet the definition of a partnership.

Answer 31

c

The question is whether making a profit was their purpose and the fact that in one case they failed to make a profit is not relevant.

Question 32

Which of the following is considered a weakness of the partnership form of business?

a double tax

difficulty in organizing the partnership

liability of partners

Options a and c are both considered weaknesses.

Answer 32

c

The potential liability of partners is a major weakness of a partnership. On the other hand, a double tax is experienced with a corporation. A partnership is simple to organize.

Question 33

Suppose that in Vohland v. Sweet, Mr. Vohland and Mr. Sweet were not partners. However, Mr. Vohland was attempting to qualify for a business loan from Arthur’s Bank and he persuaded Sweet to tell Arthur that Vohland and Sweet were partners. Arthur loaned the money but thereafter Vohland went broke. If Arthur sued Vohland and Sweet and won, which of the following would be correct?

The court would conclude that Vohland and Sweet were actual partners.

The court would conclude that Vohland and Sweet were partners by estoppels.

Neither of the options above is correct.

Answer 33

b

Although Vohland and Sweet were not actual partners they cooperated in falsely representing to Arthur (a third person) that they were partners. If two people falsely represent to a third person that they are partners and that third person justifiably relies on that representation, the two persons are liable for the loss they caused.