BUSINESS LAW TODAY
Essentials 9th Ed.
Roger LeRoy Miller - Institute for University Studies, Arlington, Texas
Gaylord A. Jentz - University of Texas at Austin, Emeritus
Chapter
19
The Entrepreneur’s Options
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Learning Objectives
 What are some of the major forms of business
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organization used by entrepreneurs in the
United States?
What advantage and disadvantage are
associated with each major business form?
Why have limited liability companies and
limited liability partnerships come into
widespread use in recent years?
What is a joint venture? What are some other
special business organizational forms, and
why are they used?
What is a franchise, and how does a
franchising relationship arise?
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Introduction
 Entrepreneurs wishing to start a new
business must be aware of advantages
and disadvantages of various business
entities for their endeavor. Consider:
Ease of creation.
Owners’ liability.
Tax considerations.
Need for Capital.
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Sole Proprietorships
The owner is the business itself; anyone who
does business without creating a separate legal
business organization is a sole proprietorship.
Advantages
Disadvantages
Owner is in complete
control & receives all
profits
Flexibility
Owner is personally liable
for all torts/contracts
Ease of creation;
maintenance
Difficult to raise financing
Lacks continuity after
death
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Partnerships
 Partnership arises from agreement, express
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or implied, between two or more persons to
carry on a business together for profit.
Partners are agents and fiduciaries of one
another, but differ from agents in that they
are also co-owners and have equal rights to
manage and share in the profits and losses.
If a commercial enterprise shares profits and
losses, a partnership will be inferred.
Law: Uniform Partnership Act.
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Uniform Partnership Act
 In the absence of an express partnership
agreement (oral or written) most states
have enacted the UPA to govern the rights
among partners:
Management: equal, each one vote, majority
wins; need unanimous consent for some
actions.
Partnership Interest: equal profits, losses
shared as profits shared.
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When Does a Partnership Exist?
 Intent to associate is a key element of a
partnership, and all “partners” must
consent.
 Three key elements:
A sharing of profits and losses, AND
A joint ownership of the business, AND
An equal right to be involved in the
management of the business.
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Partnership Formation
 Generally, agreements to form a
partnership can be:
Oral.
Written, or
Implied by Conduct.
 Duration.
Partnership agreement can specify duration.
If limited, called “Partnership for a Term.”
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Partnership Formation
 Partnership agreements (Articles of
Partnership) should be written.
 Partners must have legal capacity. UPA
permits corporations to be a partner.
 Partnership By Estoppel: parties who
are not partners hold themselves out to
3rd Parties and 3rd Party relies to her
detriment.
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Rights of Partners
 Management: equal, each one vote,
majority wins; need unanimous consent
for some actions.
 Partnership Interest: equal profits, losses
shared as profits shared.
 Compensation: generally, none.
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Rights of Partners
 Inspection of the Books: always and also
by rep. of deceased partner.
 Accounting: when other partner(s)
committing fraud, embezzlement,
wrongful exclusion, or anytime it is just
and reasonable.
 Property Rights 
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Rights of Partners
 Each partner has a property right,
which includes:
An interest in the partnership.
A right in specific partnership property.
A right to participate in the management of the
partnership, as mentioned above.
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Duties and Liabilities of Partners
 Fiduciary Duties: Partners are fiduciaries
and general agents of one another and
the partnership.
 Authority of Partners: Partners have
implied authority to conduct ordinary
partnership business but need
unanimous consent to sell assets or
donate to charity.
Scope of Implied Powers.
Authorized vs. Unauthorized Actions.
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Liabilities of Partners
 Joint Liability for Contracts.
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If Partner is
sued for Partnership debt, Partner has right
to insist that other partners be sued with
her.
Joint and Several Liability for Torts: 3rd
party can sue either one or all partners. 3rd
party may collect against personal assets of
all partners.
Liability of Incoming Partner. Newly
admitted partner has no personal liability for
existing partnership debts and obligations.
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Limited Partnerships
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Agreement of two or more persons to
carry on a business for profit with at
least one general partner and one
limited partner.
Limits the liability of the limited
partners to their investment.
An LP is a creature of state statute so
filing a certificate with the Secretary of
State is required.
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LP - Rights and Liabilities
 The General partner assumes all
management and personal liability.
 Both general and limited partners have a
fiduciary duty to each other.
 CASE 19.1 1515 North Wells, LP v. 1513
North Wells, LLC. An LP agreement cannot
contract away the fiduciary duties. So a general
partner is liable for breach of fiduciary duty to
limited partners.
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LP - Rights and Liabilities
 General partners are personally liable to 3rd
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parties for breach of contract and tort liability.
A corporation (or an LLC) can be a general
partner and with limited liability.
Limited Partner contributes cash but has no
management rights.
Liability is limited to the amount of investment.
A limited partner can forfeit this “veil” of
immunity by taking part in the management of
the LP.
Limited partners have the right to inspect the
LP’s books.
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Corporations
 Corporation is the most widely used
business form in the United States.
 Creature of statute (must be formed by
state agency, usually secretary of state).
 Corporations are owned by
shareholders, managed by directors and
officers.
 Limits shareholder liability to investment.
 More details in Chapter 20.
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Limited Liability Companies
 LLC’s are creatures of state law, like
corporations.
 Owners are called “members” (not
shareholders) and their ownership is
called an “interest” (not shares).
 Members of an LLC enjoy limited
liability.
 LLC’s can sue and be sued by
employees or third parties.
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LLC Articles of Organization
 Articles of Organization require:
Name of Business.
Principal Address.
Name and Address of Registered Agent.
Names of the Owners; and
How the LLC will be managed.
Business name must include “LLC” or
“Limited Liability Company.”
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LLC Limited Liability
 LLC, as a legal entity, is liable for acts of
members and LLC obligations.
 However, members are not personally
liable for LLC obligations, and are only
liable up to their investments.
 CASE 19.2 Allen v. Dackman (2009).
Owner of interests in an LLC is not the legal
“owner” of real property and not personally
liable for injuries to tenants on property owned
by LLC.
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Operating an LLC
 Operating agreement is analogous to
corporation’s bylaws.
 Operating agreements may be oral and
contain provisions relating to
management, dividends, meetings,
transfer of membership interests, and
other significant issues.
 Generally, if the operating agreement is
silent, courts will apply partnership
principles.
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Management of an LLC
 There are two options for management,
generally set forth in the articles of
organization:
 Member-Managed: all of the members participate in
management, like a partnership.
 Manager-Managed: members are elected to manage
the LLC.
 If the articles are silent, statutes provide
either that each member has one vote or
votes are made based on percentage of
ownership.
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LLC - Advantages and Disadvantages
Advantages
Disadvantages
Member liability is limited to
amount of investment. (see
Case 28.3 below)
State statutes are not uniform.
Can be treated as a “pass
through” entity for tax
purposes.
Not all states recognize LLC’s.
Profits can be distributed to
members without the double
taxation of a corporation.
Members pay personal income
tax on received dividends.
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Limited Liability Partnerships
 LLP: hybrid form of business that
allows for ‘pass-through’ for tax
purposes, but limits personal liability
from malpractice of other partners.
 LLP is formed under state law.
 Family LLP is a limited liability
partnership in which the majority of the
partners are related to each other.
Used frequently for agriculture.
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Special Business Forms
 Joint Venture: two or more entities
combine efforts or property for a single
transaction or project.
Unless agreed otherwise, JV’s share profits and
losses equally.
Common in international transactions when
U.S. companies wish to expand overseas.
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JV Characteristics
 Resembles a partnership and is taxed like a
partnership. However, a JV is limited in time
and scope, whereas a partnership is an
ongoing business. Other differences:
 JV members has less implied and apparent authority
than partners.
 Death of JV member does not terminate JV.
 JV members can specify duration.
If not,
then JV terminates when purpose is
accomplished.
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Special Business Forms
 Syndicates.
Investment group of individuals/firms who
finance a project together.
 Joint Stock Companies.
Hybrid of partnership and corporation, with
many similarities of partnership.
 Business Trusts.
Created by private agreement with
beneficiaries.
 Cooperatives.
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Franchises
 Franchise is an arrangement between a
Franchisor (owner of a trademark or
trade name) and a Franchisee can sell
goods or services.
 25% of all retail sales based on franchise
merchandising.
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Types of Franchises
 Distributorship.
 Involves licensing a product and may include a
territory.
 Chain-Style Business Operation.
 Involves licensing a trademark (or brand).
 Franchisee required to followed standardized
operations and quality control.
 Sometimes franchisee may be required to buy
supplies from franchisor.
 Manufacturing or Processing Plant.
 Involves essential ingredients or formula to make a
product.
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Laws Governing Franchising
 Generally governed by contract law.
 If involves sale of goods over $500, UCC
Article 2 applies.
 Federal Regulation of Franchising.
FTC “Franchise Rule” requires certain material
disclosures.
 State Regulation.
Often involves bad faith and deceptive
practices.
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The Franchise Contract
 Key Provisions:
Payment.
Business Premises and Organization.
Location of the Franchise.
Quality Control (key issue).
Pricing Arrangements (including supplies from
franchisor).
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Termination of the Franchise
 Duration is determined by contract.
 Notice is by contract, or within a reasonable
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time.
Franchisor can give franchisee an opportunity
to “cure” an ordinary breach, but not a
material breach.
CASE 19.3 LJL Transportation, Inc. v. Pilot Air
Freight Corp. (2009). Even though a franchise
contract contains a “right-to-cure” clause, a
franchisee’s material breach of contract can justify
immediate termination of contract.
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Termination of the Franchise
 Wrongful Termination.
Favor franchisor.
Federal and state laws attempt to protect
franchisee from arbitrary and unfair actions.
 Importance of Good Faith and Fair Dealing.
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