Entrepreneurship Sole Proprietorships and General Partnerships 2007 Prentice

Entrepreneurship, Sole Proprietorships, and General Partnerships © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 1 31

Entrepreneur A person who forms and operates a new business either by him- or herself or with others. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 2 31

Entrepreneurial Forms of Conducting Business Sole Proprietorship General Partnership Limited Liability Company © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 3 31

Sole Proprietorship • Owner is actually the business. • Business is not a separate legal entity. • Most common form of business organization in the United States. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 4 31

Advantages of a Sole Proprietorship • Ease and low cost of formation. • Owner can make all management decisions. – hiring and firing employees. – No other approvals required. • Sole proprietor owns all of the business • Has the right to receive all of the business’s profits. • Easily transferred or sold © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 5 31

Disadvantages of a Sole Proprietorship • Access to capital is limited to: – personal funds plus – any loans he or she can obtain. • Legally responsible for the business’s contracts • Responsible for any torts committed in the course of employment. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 6 31

Creation of a Sole Proprietorship • No formalities. • No federal or state government approval is required. • Some local governments require a license to do business within the city. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 7 31

Personal Liability of a Sole Proprietor • The sole proprietor bears the risk of loss of the business. – Will lose his or her entire capital contribution if the business fails. • The sole proprietor has unlimited personal liability. • Creditors may recover claims against the business from the sole proprietor’s personal assets. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 8 31

Personal Liability of a Sole Proprietor (continued) Sole Proprietorsh ip Debt or obligation owed Third Party Capital investment Sole Proprieto r (Owner) Personal liability for sole proprietorship’s debts and obligations © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 9 31

General Partnership • Voluntary association • Two or more people • Carry on business for profit • Creates rights and duties between partners and with third parties • General partners personally liable for the debts and obligations of the partnership. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 10 31

General Partnership General Partnersh ip Capital investment General Partner Debt or obligation owed Personal liability for partnership’s debts and obligations Third Party General Partner © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 11 31

Duties Among Partners Duty of Loyalty Duty of Obedience Duty to Inform Duty of Care © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 12 31

Duty of Loyalty • Duty that a partner owes not to act adversely to the interests of the partnership. • Duty is imposed by law • Cannot be waived. • In case of conflict between partnership interests and personal interests, partner must choose the interest of the partnership. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 13 31

Partners breach their duty of loyalty if they: 1. Self-deal with the partner-ship without permission 2. Usurp a partnership opportunity 3. Compete with the partner-ship without permission 4. Make secret profits from partnership business 5. Disclose confidential partnership information 6. Misuse partnership property 7. Make other breaches of their fiduciary duty © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 14 31

Duty of Care • Partners must use the same level of care and skill that a reasonable person in the same position would use in the same circumstances. • A breach of the duty of care is negligence. • A partner is liable to the partnership for any damages caused by his or her negligence. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 15 31

Duty to Inform • Duty 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. • Knowledge is imputed to other partners. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 16 31

Duty of Obedience • Duty that partners must adhere to the provisions of the partnership agreement and the decisions of the partnership. • Partner who breaches this duty is liable to the partnership for any damages caused by the breach. © 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman 19 - 17 31