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Summary chapter 19 BT2109 Business Law
- Instelling
- Erasmus Universiteit Rotterdam (EUR)
Summary of chapter 19 of the book Managers and the legal environment: strategies for business. Business Law .
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BUSINESS LAW SUMMARYCh. 19
Forms of business enterprises:
● Sole Proprietorships
○ In a sole proprietorship, one individual owns all the assets of the business and
is solely and personally liable for all of its debts, contract obligations, and tort
liabilities.
○ If, however, the business operates under a fictitious business name—that is, a
name other than the name of the owner—then that name must be registered
with the state.
○ Advantages of a sole proprietorship:
■ The flexibility afforded by having one person in complete control of
the business.
■ It is the easiest and least costly form of business organization to set up.
■ Sole proprietorships pay only one level of income tax—the proprietor
reports income and losses from the business on his or her personal tax
returns.
■ The proprietor receives all of the profits generated by the business.
○ Disadvantages:
■ If the business loses money, however, the proprietor alone bears
liability for the losses, and all of his or her assets are therefore at risk.
■ It is more difficult for sole proprietorships to raise capital. A sole
proprietor can only tap personal funds and borrow money.
● General Partnerships
○ An association of two or more persons to carry on as co-owners a business for
profit.
○ Each partner has some control over the business, and each may have the
authority to bind the partnership with respect to third parties. Its members
share not only the benefits of the relationship but the burdens as well.
○ Two types of general partnerships:
■ 1) term partnerships
● The partners have agreed to remain partners for a definite term
or until the completion of a particular undertaking, the
expiration of the term or the completion of the undertaking will
result in dissolution.
■ 2) at-will partnerships.
● If a partner in an at-will partnership gives notice of his or her
express will to withdraw as a partner, the partnership is
technically dissolved and its business must be wound up
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, ■ The partnership agreement and the type of partnership determine what
happens upon a partner’s death, bankruptcy, willing withdrawal, or
expulsion
○ Advantages:
■ It allows for a wide variety of operational and profit-sharing
arrangements.
■ The advantage of being subject to only one level of tax.
■ The profit earned (or loss incurred) by the partnership (whether
distributed or not) “passes through” to the individual partners, who
report it as income (or loss) on their individual returns. Thus, a
partnership is a pass-through entity.
○ Disadvantage:
■ If the partnership is unable to pay its debts, honor its contracts, or
satisfy its tort liabilities, the creditors of the partnership have claims
against the assets of individual partners.
● Joint Ventures
○ A joint venture is a one-time term partnership of two or more parties for a
specific purpose and it terminates when the project is completed.
○ It requires that the parties:
■ (1) share a community of interest;
■ (2) have the mutual right to direct and govern;
■ (3) share the partnership’s profits and losses;
■ (4) combine their property, money, effort, skill, or knowledge in the
undertaking.
● Limited Liability Partnerships
○ The limited liability partnership (LLP) is designed primarily for groups of
professionals, such as law firms and accounting firms.
○ The main function of an LLP is to insulate its partners from vicarious liability
for certain partnership obligations, such as liability arising from the
malpractice, or negligent or wrongful conduct, of another partner.
○ Partners in an LLP usually have unlimited liability for their own malpractice.
● Limited Partnerships
○ General partners of a limited partnership remain jointly and severally liable
for partnership obligations (just like partners in a general partnership), and
they are responsible for the management of the partnership.
○ Limited partners assume no liability for partnership debts beyond the amount
of capital they have contributed, and they have no right to participate in the
management of the partnership.
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