Fundamentals of Business Law

Business

Quiz 23 :

Sole Proprietorships, Partnerships, and Limited Liability Companies

Quiz 23 :

Sole Proprietorships, Partnerships, and Limited Liability Companies

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The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions: What is meant by joint and several liability? Why is this often considered to be a disadvantage of doing business as a general partnership?
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Partnership:
Partnership can be understood as agreement between two or more person in order to carry on business to earn profit. Partners are considered as joint owners and have equal controlling rights over its management. Profits are shared as per partnership deed and in absence of deed profit is signed equally.
Joint and several Liabilities of partners:
Joint and several Liabilities of partners mean that third party can sue all the partners of the firms either jointly (together) or individually. All the partners can be held liable regardless of the fact that the respective partner has not participated in conduct nor have knowledge of conduct.
It has been considered as disadvantage as third part has right to sue firm and all the partners whether they are involved in conduct or not.

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What is meant by joint and several liability? Why is this often considered to be a disadvantage of doing business as a general partnership?
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Partnership:
Partnership can be understood as agreement between two or more person in order to carry on business to earn profit. Partners are considered as joint owners and have equal controlling rights over its management. Profits are shared as per partnership deed and in absence of deed profit is signed equally.
Joint and several Liabilities of partners:
Joint and several Liabilities of partners mean that third party can sue all the partners of the firms either jointly (together) or individually. All the partners can be held liable regardless of the fact that the respective partner has not participated in conduct nor have knowledge of conduct.
It has been considered as disadvantage as third part has right to sue firm and all the partners whether they are involved in conduct or not.

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What advantages do limited liability partnerships offer to entrepreneurs that are not offered by general partnerships?
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Limited partnership:
A limited liability is one of the forms of business organization which consist of at least one general partner and more limited partner. Here general partner is necessary for the managing the firm and is held personally liable for all the debts of firms while limited partner only contribute capital to the firm and is not held personally liable for the debts of the firm beyond the amount of investment.
Advantage of limited partnership over general partnership:
1. Limited liability
The major advantage of the limited partnership is limited liability which means that partners can be held liable only to the extent of their amount contributed. In this business structure, partners not personally liable.
2. Flexibility:
Another advantage of limited partnership is that it provides flexibility to the firms regarding management and tax.

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Question with Sample Answer Dorinda, Luis, and Elizabeth form a limited partnership. Dorinda is a general partner, and Luis and Elizabeth are limited partners. Consider each of the separate events below, and discuss fully which would constitute a dissolution of the limited partnership. 1 Luis assigns his partnership interest to Ashley. 2 Elizabeth is petitioned into involuntary bankruptcy. 3 Dorinda dies.
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LLC Operation. After Hurricane Katrina, James Williford, Patricia Mosser, Marquetta Smith, and Michael Floyd formed Bluewater Logistics, LLC, to bid on construction contracts. Under Mississippi law, every member of a member-managed LLC is entitled to participate in managing the business. The operating agreement provided for a "super majority" 75 percent vote to remove a member "under any other circumstances that would jeopardize the company status" as a contractor. After Bluewater had completed more than $5 million in contracts, Smith told Williford that she, Mosser, and Floyd were exercising their "super majority" vote to fire him. No reason was provided. Williford sued Bluewater and the other members. Did Smith, Mosser, and Floyd breach the state LLC statute, their fiduciary duties, or the Bluewater operating agreements? Discuss. [ Bluewater Logistics, LLC v. Williford, 55 So.3d 148 (Miss. 2011)] (See Limited Liability Companies.)
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Sole Proprietorship Julie Anne Gaskill is an oral and maxillofacial surgeon in Bowling Green, Kentucky. Her medical practice is a sole proprietorship that consists of Gaskill as the sole surgeon and an office staff. She sees every patient, exercises all professional judgment and skill, and manages the business. When Gaskill and her spouse, John Robbins, initiated divorce proceedings in a Kentucky state court, her accountant estimated the value of the practice at $221,610, excluding goodwill. Robbins's accountant estimated the value at $669,075, including goodwill. (Goodwill is the ability or reputation of a business to draw customers, get them to return, and contribute to future profitability.) How can a sole proprietor's reputation, skill, and relationships with customers be valued? Could these qualities be divided into "personal" and "enterprise" goodwill, with some goodwill associated with the business and some solely due to the personal qualities of the proprietor? If so, what might comprise each type? Is this an effective method for valuing Gaskill's practice? Discuss. [ Gaskill v. Robbins , 282 S.W.3d 306 (Ky. 2009)]
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ISSUE SPOTTERS Gomer, Harry, and Ida are members of Jeweled Watches, LLC. What are their options with respect to the management of their firm? (See page 558.)
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The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions: What are the key differences between the rights and liabilities of general partners and those of limited partners?
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What advantages and disadvantages are associated with the sole proprietorship?
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What are the key differences between the rights and liabilities of general partners and those of limited partners?
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LLC Dissolution. Walter Van Houten and John King formed 1545 Ocean Avenue, LLC, with each managing 50 percent of the business. Its purpose was to renovate an existing building and build a new commercial building. Van Houten and King quarreled over many aspects of the work on the properties. King claimed that Van Houten paid contractors too much for the work performed. As the project neared completion, King demanded that the LLC be dissolved and that Van Houten agree to a buyout. Because the parties could not agree on a buyout, King sued for dissolution. The trial court prevented further work on the project while the dispute was settled. As the ground for dissolution, King cited the fights over management decisions. There was no claim of fraud or frustration of purpose. The trial court ordered that the LLC be dissolved. Van Houten appealed. Should either of the owners be forced to dissolve the LLC before completion of its purpose-that is, finishing the building projects? Discuss. [ In re 1545 Ocean Avenue , LLC , 893 N.Y.S.2d 590 (N.Y.A.D. 2 Dept. 2010)]
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The LLC Operating Agreement. John, Lesa, and Trevor form a limited liability company. John contributes 60 percent of the capital, and Lesa and Trevor each contribute 20 percent. Nothing is decided about how profits will be divided. John assumes that he will be entitled to 60 percent of the profits, in accordance with his contribution. Lesa and Trevor, however, assume that the profits will be divided equally. A dispute over the profits arises, and ultimately a court has to decide the issue. What law will the court apply? In most states, what will result? How could this dispute have been avoided in the first place? Discuss fully. (See Limited Liability Companies.)
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A bridge on a prominent public roadway in the city of Papagos, Arizona, was deteriorating and in need of repair. The city posted notices seeking proposals for an artistic bridge design and reconstruction. Davidson Masonry, LLC, which was owned and managed by Carl Davidson and his wife, Marilyn Rowe, submitted a bid for a decorative concrete project that incorporated artistic metalwork. They contacted Shana Lafayette, a local sculptor who specialized in large-scale metal forms, to help them design the bridge. The city selected their bridge design and awarded them the contract for a commission of $184,000. Davidson Masonry and Lafayette then entered into an agreement to work together on the bridge project. Davidson Masonry agreed to install and pay for concrete and structural work, and Lafayette agreed to install the metalwork at her expense. They agreed that overall profits would be split, with 25 percent going to Lafayette and 75 percent going to Davidson Masonry. Lafayette designed numerous metal sculptures of salmon that were incorporated into colorful decorative concrete forms designed by Rowe, while Davidson performed the structural engineering. Using the information presented in the chapter, answer the following question. Would Davidson Masonry automatically be taxed as a partnership or a corporation? Explain.
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Partnership Formation. Daniel is the owner of a chain of shoe stores. He hires Rubya to be the manager of a new store, which is to open in Grand Rapids, Michigan. Daniel, by written contract, agrees to pay Rubya a monthly salary and 20 percent of the profits. Without Daniel's knowledge, Rubya represents himself to Classen as Daniel's partner, showing Classen the agreement to share profits. Classen extends credit to Rubya. Rubya defaults. Discuss whether Classen can hold Daniel liable as a partner. (See Partnerships.)
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Darnell and Eliana are partners in D E Designs, an architectural firm. When Darnell dies, his widow claims that as Darnell's heir, she is entitled to take his place as Eliana's partner or to receive a share of the firm's assets. Is she right? Why or why not? (See Partnerships.)
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The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions: How are limited liability companies formed, and who decides how they will be managed and operated?
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How are limited liability companies formed, and who decides how they will be managed and operated?
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Fiduciary Duties of Partners. Karl Horvath, Hein Rusen, and Carl Thomas formed a partnership, HRT Enterprises, to buy a vacant manufacturing plant and an annex building on eleven acres in Detroit, Michigan. HRT leased the plant to companies owned by the partners, including Horvath's Canadian-American Steel. When Horvath's firm missed three payments under its lease, HRT evicted it from the plant. Horvath objected but remained an HRT partner. Later, Rusen and Thomas leased the entire plant to their company, Merkur Steel. Merkur then sublet the premises to City Steel and Merkur Technical Services-both of which were owned (or substantially owned) by Rusen and Thomas. The rent these companies paid to Merkur was higher than the rent Merkur paid to HRT, which meant that Merkur profited from the arrangement. Rusen and Thomas did not tell Horvath about the subleases. When Horvath learned of the deals, he filed a suit in a Michigan state court against HRT and the other partners for an accounting of their actions. Did Rusen and Thomas breach their fiduciary duty to HRT and Horvath? Discuss. [ Horvath v. HRT Enterprises , 489 Mich. 992, 800 N.W.2d 595 (2011)]
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The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions: What advantages do limited liability partnerships offer to entrepreneurs that are not offered by general partnerships?
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The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions: What advantages and disadvantages are associated with the sole proprietorship?
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