PowerPoint Slides to Accompany
CONTEMPORARY BUSINESS AND
ONLINE COMMERCE LAW
6th Edition
by Henry R. Cheeseman
Chapter 26
Sole Proprietorships and General
and Limited Partnerships
Copyright © 2009 by Pearson Prentice Hall. All rights reserved.
Entrepreneur
A person who forms and operates
a new business either by him- or
herself or with others.
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Entrepreneurial Forms of Conducting
Business
Sole
Proprietorship
General
Partnership
Limited
Liability
Partnership
Limited
Partnership
Limited
Liability
Company
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Corporation
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Sole Proprietorship
 A form of business where the owner is
actually the business
 The business is not a separate legal
entity.
 Sole proprietorships are the most
common form of business organization in
the United States.
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Advantages of a Sole Proprietorship
(1 of 2)
 The ease and low cost of formation
 The owner’s right to make all
management decisions concerning the
business

Including those involving hiring and firing
employees
 The sole proprietor owns all of the
business and has the right to receive all of
the business’s profits.
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Advantages of a Sole Proprietorship
(2 of 2)
 A sole proprietorship can be easily
transferred or sold if and when the owner
desires to do so.

No other approval (such as from partners or
shareholders) is necessary
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Disadvantages of a
Sole Proprietorship
 The sole proprietor’s access to capital is
limited to personal funds plus any loans
he or she can obtain.
 The sole proprietor is legally responsible
for the business’s contracts and the torts
committed by the proprietor and his or her
employees in the course of employment.
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Creation of a Sole Proprietorship
(1 of 2)
 There are no formalities
 No federal or state government approval
is required
 Some local governments require all
businesses (including sole
proprietorships) to obtain a license to do
business within the city.
 A sole proprietorship can operate under
the name of the sole proprietor or a trade
name.
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26 - 8
Creation of a Sole Proprietorship
(2 of 2)
 A sole proprietorship is not a separate tax-
paying entity for federal income tax
purposes.

A sole proprietor need not file an
informational return with the Internal Revenue
Service (IRS)
 Income and losses are reported on the
sole proprietor’s personal income tax
return.
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Personal Liability of a Sole Proprietor
(1 of 2)
 The sole proprietor bears the risk of loss
of the business.
 The owner will lose his or her entire
capital contribution if the business fails.
 The sole proprietor has unlimited personal
liability.
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Personal Liability of a Sole Proprietor
(2 of 2)
 Creditors may recover claims against the
business from the sole proprietor’s
personal assets.
 The law holds that a sole proprietorship is
not a distinct legal entity.
 The sole proprietorship and the sole
proprietor are one and the same.
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Sole Proprietorship
Sole
Proprietorship
Debt or obligation
owed
Third Party
Capital investment
Sole
Proprietor
(Owner)
Personal liability for sole
proprietorship’s debts and
obligations
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General Partnership
 A voluntary association of two or more
persons for carrying on a business as coowners for profit
 Also called a partnership
 General partners, or partners are
personally liable for the debts and
obligations of the partnership.
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General Partnership
General
Partnership
Debt or obligation
owed
Third Party
Capital investment
General
Partner
General
Partner
General
Partner
Personal liability for
partnership’s debts
and obligations
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26 - 14
Uniform Partnership Act (UPA)
 Model act that codifies partnership law
 Most states have adopted the UPA in
whole or part.
 The UPA covers most problems that arise
in the formation, operation, and
dissolution of ordinary partnerships.
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Partner Rights
 Participate in management
 Share profits
 Reasonable reimbursement
 Accounting
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Partner Duties
 Loyalty
 Care
 Inform
 Obedience
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Right to Participate in Management
 Unless otherwise agreed, each partner:
 Has a right to participate in the management
of the partnership, and
 Has an equal vote on partnership matters
 Under the UPA, a simple majority decides
most ordinary partnership matters.
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26 - 18
Right to an Accounting
 A formal judicial proceeding in which the
court is authorized to:
Review the partnership and the partners’
transactions; and
 Award each partner his or her share of the
partnership assets

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Tort Liability of Partnerships
and Partners
 The partnership is liable if the tortious act
of a partner, or an employee, or agent of
the partnership is committed while the
person is acting within the ordinary course
of partnership business or with the
authority of his or her co-partners.
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Joint and Several Tort Liability
 Partners are jointly and severally liable for
tort liability of the partnership.
i.e., the plaintiff can sue one or more of the
partners separately
 If successful, the plaintiff can recover the
entire amount of the judgment from any or all
of the defendant-partners.

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26 - 21
Summary: Personal Liability of
General Partners
Issue
Joint Liability
Joint and Several Liability
Type of lawsuit Contract action.
Tort action.
Defendants
Plaintiff must name all
partners as defendants.
Plaintiff can sue partners
individually.
Recovery
If successful, the plaintiff
can recover the judgment
against all or any of the
defendants.
If successful, the plaintiff can
recover the judgment against all or
any of the named defendants.
Indemnification Partner who pays judgment
can recover contribution
from other partners for their
share of the judgment.
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Partner who pays judgment can
recover contribution from other
partners for their share of the
judgment.
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Liability of Incoming Partners
 A new partner who is admitted to the
partnership is liable for the existing debts
and obligations (antecedent debts) of the
partnership only to the extent of his or her
capital contribution.
 The new partner is personally liable for
debts and obligations incurred by the
partnership after becoming a partner.
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26 - 23
Dissolution of Partnerships (1 of 3)
 Partnership for a term
 A partnership for a fixed duration
 Partnership at will
 A partnership with no fixed duration
 A partner has the power to withdraw and
dissolve the partnership at any time, but
he or she may not have the right to do so.
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Dissolution of Partnerships (2 of 3)
 Wrongful dissolution
 When a partner withdraws from a partnership without
having the right to do so at that time
 The partner is liable for damages caused by the
wrongful dissolution of the partnership
 Notice of dissolution
 Notice of dissolution must be given to certain
third parties
 The degree of notice depends on the relationship of the
third person with the partnership
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Dissolution of Partnerships (3 of 3)
 Continuation of a partnership after
dissolution

The surviving or remaining partners have the right to
continue the partnership after dissolution
 Liability of outgoing partners
 The dissolution of a partnership does not itself
discharge the liability of outgoing partners for existing
partnership debts and obligations
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26 - 26
Distribution of Partnership Assets
 1. Non-partner creditors
 2. Partner creditors
 3. Capital
 4. Profits
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Limited Partnership
 A type of partnership that has two types of
partners:
General Partners – who invest capital,
manage the business, and are personally
liable for partnership debts.
 Limited Partners – who invest capital but do
not participate in management and are not
personally liable for partnership debts beyond
their capital contribution.

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26 - 28
The Revised Uniform Limited Partnership
Act (RULPA)
Uniform Limited Partnership
Act (ULPA) of 1916
 Contained a uniform set of
provisions for the
formation, operation, and
dissolution of limited
partnerships
 Most states originally
enacted this law
Revised Uniform Limited
Partnership Act (RULPA)
 A 1976 revision of the
ULPA
 Provides a more modern
comprehensive law for the
formation, operation, and
dissolution of limited
partnerships
 A majority of states have
adopted the RULPA
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Limited Partnership
Debt or
obligation owed
Limited
Partnership
Third Party
Capital investment
Limited
Partner
Limited
Partner
General
Partner
Liability limited to
capital contribution
No personal liability for partnership’s
debts and obligations
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General
Partner
Personal liability for partnership’s
debts and obligations
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Formation of Limited
Partnerships (1 of 2)
 The creation of limited partnerships is
formal and requires public disclosure.
 The entity must comply with the statutory
requirements of the RULPA or other state
statute.
 Certificate of Limited Partnership – a
document that two or more persons must
execute and sign that makes the limited
partnership legal and binding.
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26 - 31
Formation of Limited
Partnerships (2 of 2)
 Limited Partnership Agreement – a
document that sets forth:
The rights and duties of the general and
limited partners; and
 The terms and conditions regarding the
operation, dissolution, and termination of the
limited partnership

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26 - 32
Summary: Liability of
Limited Partners
General Rule
Limited partners are not individually liable for the
obligations or conduct of the partnership beyond
the amount of their capital contribution.
Exceptions to the General
Rule
Limited partners are individually liable for the
debt, obligations, and tortious acts of the
partnership in three situations:
1. Defective Formation
2. Participation in Management
3. Personal Guarantee
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26 - 33
Defective Formation
Occurs when:
1. A certificate of limited partnership is not
properly filed,
2. There are defects in a certificate that is
filed, or
3. Some other statutory requirement for the
creation of a limited partnership is not
met
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26 - 34
Limited Liability Partnership (LLP)
(1 of 4)
 A special form of partnership where all
partners are limited partners and there are
no general partners.
 None of the partners is personally liable
for the debts and obligations of the
partnership beyond his or her capital
contribution.
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26 - 35
Limited Liability Partnership (LLP)
(2 of 4)
Limited
Liability
Partnership
(LLP)
Debt or
obligation owed
Third Party
Capital investment
Limited
Partner
Limited
Partner
Limited
Partner
Limited
Partner
Liability limited to
capital contribution
No personal liability for partnership’s
debts and obligations
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26 - 36
Limited Liability Partnership (LLP)
(3 of 4)
 The LLP is taxed as a partnership.
 Each partner’s share of the income or loss
from the partnership is reported on his or
her individual income tax return.
 The LLP is required to file an informational
income tax return with the IRS.
 LLPs are mainly used by professionals
such as accountants and lawyers.
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26 - 37
Limited Liability Partnership (LLP)
(4 of 4)
 Many state laws require LLPs to carry a
minimum of $1 million of liability insurance
that covers negligence, wrongful acts, and
misconduct by partners or employees of
the LLP.
 This requirement guarantees that injured
third parties will have compensation to
recover for their injuries.
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