1.

Introduction

Read the overview below and complete the activities that follow.

Before beginning this activity, read LO 21-1 and 21-4 in Chapter 21 in your text. Pay attention to the major types of business organizations such as sole proprietorships, partnerships, companies, and limited liability companies. It is also important to understand how these forms of businesses are created and ended. This activity helps illustrate some of the factors people must consider when they form business organizations.

CONCEPT REVIEW:

Choosing the form of business to create is one of the most important decisions an enterprise makes. The extent of liability and control the owner will have depends on the form of the business organization created.

Mini-Case:

Read the case and answer the questions that follow.

After graduation, four college fraternity brothers decide they want to form a business together. They want to open a sports bar on some property that recently was put up for sale adjacent to the local stadium. The fraternity brothers are not yet sure whether they want to make equal investments and have equal control over the partnership. However, each brother is able to invest a maximum of $20,000. The fraternity brothers are open to considering any of the different forms of business organization frameworks available to them.

1.Because there are multiple people interested in creating a business organization, the fraternity brothers cannot form which of the following?

Multiple Choice

• All of these
• Corporation
• Limited liability company
• Sole proprietorship

2.Suppose the fraternity brothers are considering forming a partnership. What would be one major disadvantage of this option?

Multiple Choice

• As partners they would be personally liable for the firm's debts.
• Income from the business would not be personal income.
• Creation would be difficult.
• Business losses could not be deducted from taxes.
• Corporate income would be taxed twice.

3.Suppose that the fraternity brothers decide they indeed want to form a partnership. If all the partners agree that they want to share the management responsibilities and profits equally and accept equal personal liability, they should form a ___________________.

Multiple Choice

• franchise
• limited partnership
• business trust
• corporation
• general partnership

4.Suppose that instead of a partnership, the brothers decide to consider a corporation. Which of the following is an advantage of a corporation that they might find tempting?

Multiple Choice

• Corporate income is not taxed.
• It is easy to raise capital by issuing stock.
• No formalities are required to establish a corporation.
• Corporations are taxed like partnerships.
• Corporations are taxed like sole proprietorships.

5.What is one major disadvantage of a corporation that the fraternity brothers might face should they decide to incorporate?

Multiple Choice

• Corporate income is taxed twice.
• The corporation is dissolved when shareholders die.
• It is difficult to raise capital.
• Shareholders have full liability.
• All of these

6.Suppose the fraternity brothers want to combine the tax advantages and management flexibility of a partnership with the limited liability of a corporation. What type of business organization should they form?

Multiple Choice

• Cooperative
• S corporation
• Limited liability company
• Franchise
• Limited partnership

7.Ultimately, the fraternity brothers decide to form a limited liability company (LLC). Under this form of business organization, what is the magnitude of liability each partner would face?

Multiple Choice

• $0
• $80,000
• $24,000
• $20,000
• $100,000

8.Forms of Business Organization-But What If...

Martha Harner created a Dairy Queen franchise beside her local sandwich restaurant, Martie's Sandies. The franchisor, Dairy Queen, and Martha Harner signed a written contract establishing that Martha would be responsible for covering all costs related to keeping the new franchise in business except for costs related to local advertising. Specifically, Dairy Queen agreed to provide funding for advertising that involved the use of physical signs or television commercials. A year later, however, Dairy Queen sought to terminate its agreement with Martha because she had failed to make the franchise highly profitable. In response, Martha sued Dairy Queen for wrongful termination of a franchise. In support of her argument, Martha's attorneys argued that Dairy Queen had agreed to provide advertising-related funding, but had failed to do so when such funding was requested. According to Martha, this lack of funding had had a significant impact in her franchise's underperformance. The court ruled in favor of Martha, finding that Dairy Queen did not have sufficient reason to terminate its contract with Martha.

But what if the facts of the case were different?Select each set of facts below that could change the outcome of the case.

Check All That Apply

• Martha had not complied with several stipulations in the franchise agreement, and Dairy Queen had cautioned Martha several times that their contract could be terminated if she continued to ignore her end of the agreement. It was only after several warnings that Dairy Queen decided to cut its advertising-related funding.
• Martha had not complied with several stipulations in the franchise agreement, and Dairy Queen had cautioned Martha several times that their contract could be terminated if she continued to ignore her end of the agreement. It was only after several warnings that Dairy Queen decided to cut its advertising-related funding.
• Dairy Queen provided no reason for terminating the franchise Martha had opened.
• Dairy Queen provided no reason for terminating the franchise Martha had opened.
• Rather than being written in the contract, the stipulation that Dairy Queen pay for advertising costs had been orally agreed to. Additionally, the written contract stated, "this written contract constitutes the entire agreement of the parties, and no other oral understandings relate to the subject matter of this agreement."
• Rather than being written in the contract, the stipulation that Dairy Queen pay for advertising costs had been orally agreed to. Additionally, the written contract stated, "this written contract constitutes the entire agreement of the parties, and no other oral understandings relate to the subject matter of this agreement."
• The franchise was sustainable, although making low profits. Dairy Queen, however, realized it would be more profitable as a franchisor if Martha's franchise were terminated. Consequently, Dairy Queen sent a notice of termination to Martha without providing any previous warnings.
• The franchise was sustainable, although making low profits. Dairy Queen, however, realized it would be more profitable as a franchisor if Martha's franchise were terminated. Consequently, Dairy Queen sent a notice of termination to Martha without providing any previous warnings.

9.Rights and Duties of Partners

Introduction

Read the overview below and complete the activities that follow.

In this activity, you will be evaluating a conflict of interest and the duties that partners are responsible for. Before beginning, please review partnerships in Chapter 21. Pay special attention to the different rights and duties that partners have both in and outside of the partnership.

CONCEPT REVIEW:

The operation of the partnership encompasses two types of interactions: those between the partners and those between the partnership and third parties. The partners have certain rights and duties within each type.

Mini-Case:

Read the case below. Then answer the accompanying questions.

Five realtors, Aaron, Barend, and their three friends form a partnership through a partnership agreement to make a real estate brokerage firm. Each of the partners shares equally in the liability and management of the partnership. One of the partners, Aaron, has been placed in charge of a major account to sell a piece of lakefront property. It is the company's biggest potential sale. In the course of the dealings to sell the land, however, Aaron becomes involved with one of the potential buyers of the property. This potential buyer happens to be his uncle's business firm. He becomes involved in a way that constitutes a conflict of interest to the partnership. He then gives preferential treatment to the potential buyer, thus harming the financial status of the partnership. He falsifies statements regarding the purchase of the lakefront property, and tampers with the numbers to give the client a better tax break and better deal because the client is his uncle. He does so without Barend and/or the other partners' permission. Barend finds out about the secret actions of Aaron, and is rightfully unhappy. He wants to investigate whether Aaron was in violation of his duties to the partnership.

The most important type of duty partners have toward one another is

Multiple Choice

• fiduciary duty.
• right to share in management.
• duty to report.
• property rights.
• duty of care.

10.In the scenario in the case, who violated his fiduciary duty?

Multiple Choice

• Aaron did with his conflict of interest.
• Barend for not stopping Aaron.
• No one.
• The three other partners for not exercising their duty of care to make sure their partner was acting properly.
• Aaron for the conflict of interest and Barend for not stopping him from engaging in those actions.

11.Suppose Aaron did not engage in preferential treatment, but was guilty of only an honest mistake regarding the financial statements and tax breaks. Is Aaron liable?

Multiple Choice

• Aaron will be held liable because he violated his fiduciary duty.
• Aaron will be held liable because he violated the partnership agreement.
• Aaron will be held liable because he violated his duty of care.
• Aaron will not be held liable because it was an accident.
• Aaron will not be held liable because of the right of survivorship.

12.Suppose Aaron did just make an honest mistake and was not violating his fiduciary duty. However, the partners are naturally upset that Aaron made a mistake regarding the bookkeeping. The partners want to meet to alter their partnership agreement to kick Aaron out of the partnership for his ineptitude. How many people would it take to alter the agreement to terminate Aaron's position in the partnership?

Multiple Choice

• One
• Two
• Four
• Three
• Five

13.So suppose Aaron is not voted out of the partnership, but the partners are still skeptical about whether he is truly dedicated to the partnership. What right do the other partners have to make sure he is following the standards of the partnership?

Multiple Choice

• Right to inspect books to make sure Aaron is not tampering with the numbers again.
• Right to inspect Aaron's personal financial documents.
• Right to terminate Aaron from the partnership for any reason.
• Right to reduce Aaron's profits in the company without reason.
• The partners have no rights to ensure Aaron is following the standards of the partnership.

14.Suppose the partnership adds an additional partner to the agreement after the situation with Aaron arose. To what extent will the new partner be liable for Aaron's actions if they are inappropriate?

Multiple Choice

• The new partner assumes no liability for anything that happened before he was added.
• The new partner assumes full liability for any obligations that occurred before he was added.
• The new partner assumes limited liability for any obligations that occurred before he was added.
• The new partner assumes no liability ever for anything that happened before or after he joined.
• The new partner assumes liability for the partnership, but not for Aaron's actions.

15.Read the overview below and complete the activities that follow.

Recall from Chapter 21 that a partnership is a specialized form of business organization. A partnership is a voluntary association between two or more persons who co-own a business for profit. With few exceptions, a partnership is generally not considered a separate legal entity. The Uniform Partnership Act governs partnerships in most states in the absence of an express agreement.

CONCEPT REVIEW:

In the activity below, you will be expected to outline a strategy for determining whether a partnership could exist between these hypothetical companies. Before beginning this interactive, review Chapter 21. Pay special attention to how a partnership is formed through a partnership agreement or by estoppel.

Mini-Case:

Read the case below. Then answer the questions to outline a strategy for determining whether a partnership could exist.

Two corporations both carry on a number of businesses both directly and through various subsidiaries. Each has a subsidiary, Speedy Truck Rental [not a real company] and We-Haul [not a real company] in the same line of business. The two corporate groups have determined that Speedy Truck Rental and We-Haul should be merged because there are competitive advantages in joining forces rather than carrying on independently. They want to merge by creating a partnership. To create the partnership, Speedy Truck and We-Haul would enter into a partnership agreement that identifies the assets and liabilities each will contribute and sets out the way profits and losses will be shared and how the partnership business will be governed. Because each of the corporate groups in our scenario would want to take part in the management of the partnership, a general partnership would probably be used.

Recall that the definition of a partnership has four distinct parts. Walk through the four different steps of the definition of a partnership, and determine whether the business relationship described in the case above would qualify as a partnership under the Uniform Partnership Act (UPA).

According to UPA Section 6, a partnership is _____________________________.

Multiple Choice

• a legal entity formed by selling shares of stock to investors, who then become shareholders
• an agreement between at least one general partner and at least one limited partner
• an association of two or more persons to carry on as co-owners of a business for profit

16.What does "association" mean in the definition of a partnership?

Multiple Choice

• The partners have filed an official articles of association with the state.
• The two partners are associated with one another as business partners.
• The partnership is a voluntary and consensual relationship.

17.Do the individuals discussed in the case qualify as forming an "association?"

Multiple Choice

• No, the relationship was not consensual.
• Yes, every situation involving two partners is always an association.
• Yes, the relationship was voluntary and consensual.

18.A partnership requires "two or more persons." Does the situation involved in the case involve "two or more persons?"

Multiple Choice

• No, no individual persons are actually discussed in the case.
• Yes, the partnership involves two different partnerships.
• No, the entities that want to form the partnership are two partnerships.

19.Does the situation in the case involve a business being carried on for profit?

Multiple Choice

• No, the truck companies are just consolidating for ease of management, not for profit.
• Yes, the trucking companies wish to gain competitive advantage.
• It depends whether the new partnership would actually earn a profit.

20.What does it mean when we say the partners must be co-owners?

Multiple Choice

• No one can have any more ownership than the others in the business. Everyone must be equal.
• They must share the profits or losses of the business.
• They must share its profits or losses as well as share in the management of the business.

21.Does the situation described meet all four elements of the definition of a partnership? In other words, based on this information, could the two corporations form a partnership?

Multiple Choice

• No, because the association is not between two or more legal persons.
• Yes.
• No, because the situation does not qualify under the definition of "for profit."

22.Partnerships: Nature, Formation, and Operation-But What If...

Ryan Collins has ten years of experience working in the marketing program for Google. Bored with his job, he decides to start his own advertising company. He meets with an old college roommate, Braxton Manning, who has his own private firm in the marketing field, and they decide to pursue a joint business venture as partners. Two years after the launching of Collins and Manning Advertising Partnership, three more partnersJoe Ali, Mohammad Abraham, and Tito Paezjoin Collins and Manning. One day, Tito Paez is called by the Carpet World, which desires Collins and Manning Advertising's services. Tito Paez creates a contract with Carpet World, agreeing to consult with Carpet World to increase the public relations and visibility of the firm. A month later, while reviewing the partnership's budget for the previous month, Collins notices that a payment was never recorded for Paez's work with Carpet World.

Collins has been suspicious of Paez ever since Paez was established as a partner; Paez had rubbed Collins the wrong way, but Manning loved Paez's attitude and immediately desired that Paez join the partnership. However, per the partnership contract, both Manning and Collins have the ability to autonomously expel any of the partners, excluding Collins and Manning, for good reason. Consequently, Collins expels Paez,alleging that Paez pocketed the money from his work with Carpet World and, therefore, did not record the payment from Carpet World in themonthly budget to avoid sharing the profits. Paez sues Collins in court for breach of fiduciary duty. Specifically, Paez claims that he was improperly expelled. Collins claims that Paez breached fiduciary duty to the partners by failing to report Carpet World's payment to the firm. The court disagrees, and finds Collins liable.

But what if the facts of the case were different? Select each set of facts below that could change the outcome of the case.

Check All That Apply

• The court deemed that Paez's being expelled resolved a "fundamental schism."
• The court deemed that Paez's being expelled resolved a "fundamental schism."
• Paez's not documenting Carpet World's payment on the monthly budget was an honest mistake.
• Paez's not documenting Carpet World's payment on the monthly budget was an honest mistake.
• Paez chose not to disclose Carpet World's payment even though the partnership contract stated that all material facts relating to Collins and Manning Advertising should be disclosed to all partners.
• Paez chose not to disclose Carpet World's payment even though the partnership contract stated that all material facts relating to Collins and Manning Advertising should be disclosed to all partners.
• Paez had received a letter from Collins and Manning, as revealed in an email 2 months prior to Paez's dealing with Carpet World, stating that Collins and Manning had decided to allow Paez to reap all of the profits from the Carpet World project, and that Paez should simply not report the payments received from Carpet World on the monthly budget.
• Paez had received a letter from Collins and Manning, as revealed in an email 2 months prior to Paez's dealing with Carpet World, stating that Collins and Manning had decided to allow Paez to reap all of the profits from the Carpet World project, and that Paez should simply not report the payments received from Carpet World on the monthly budget.