Theory to Practice - Chapter 13 (p. 461) Facts: Demuth is a sole proprietor of a business that specializes in designing and manufacturing custom-made medical instruments for health care professionals. Several hospitals and physician practice groups approach Demuth and ask him to design and produce a highly specialized surgical instrument that is currently unavailable in the market from larger manufacturers. Demuth, unable to finance the research and development costs, convinces Warren, a private investor, to fund the project. Demuth also recruits Oakley, a physician, to lend her medical expertise. Demuth drafted a letter to Warren and Oakley thanking them for their confidence in the project and setting out certain terms for the venture. The letter was very brief and stated that the parties were equal participants in the business venture intending to develop and manufacture a certain surgical instrument. Demuth would contribute his expertise, laboratory workspace, and manufacturing facilities to the project. Warren would contribute $100,000 as a capital contribution, and Oakley would contribute medical expertise, research knowledge, and $10,000 in capital. The letter ended with a statement that the business venture would last for five years unless the parties mutually agreed on extending the term. Profits or losses would be calculated annually and each party was to be paid in equal shares for any profits or bear equal losses. Warren and Oakley each wrote Agreed and signed the letter on the bottom along with the date. Demuth then went on to hire a top engineer and purchased equipment to work on the DemuthWarrenOakley project. After a year of slow progress on the project, Demuth was concerned that the initial capital contribution was not going to be sufficient to carry the venture into its second year. Demuth approached Warren for an additional $100,000. Warren, who was disgruntled about the slow progress, refused. Demuth, now anxious about keeping the venture afloat, negotiates a loan on behalf of the business with Strand, another private investor. Without the knowledge of the other principals, Demuth signs the promissory note: DemuthOakleyWarren Partnership, by Demuth, Partner.

1. What form of entity has Demuth, Warren, and Oakley formed?

a. Sole proprietorship. b. General partnership. c. Limited partnership. d. Limited liability partnership. e. Joint venture.

2. If the business becomes insolvent (runs out of money to pay its regular monthly bills) and Demuth files for personal bankruptcy, Warren and Oakley will be individually and personally liable for which of the following.

a. One-third of the debts and obligations of the business. b. None of the debts and obligations of the business. c. Their remaining capital in the business. d. All of the debts and obligations owed to Strand. e. All of the debts and obligations of the business.

3. Assume that when Oakley found out about the loan to Strand, she was so angered that she gave notice to Demuth that she was withdrawing from the partnership before the agreed upon five-year period.

a. Her dissociation is rightful, because they formed a partnership-at-will. b. Her liability to Strand is extinguished because she withdrew from the partnership. c. She is liable for one-third of the debts and obligations of the partnership as of the date of her dissociation. d. Her dissociation is wrongful, and she is liable to the partnership creditors for existing liabilities of the venture, to the other partners for damages caused by the dissociation, and to Strand for the amount borrowed via the promissory note signed by Demuth. e. None of the above.

4. In Question 3 above, suppose that Demuth and Warren decide they cannot continue without Oakley's expertise and they dissolve the partnership. In the process, they are forced to breach several contracts with their vendors. What is Oakley's post-dissociation liability to Demuth and Warren for any damages suffered by breaching the vendor contracts?

a. Oakleys dissociation is rightful, and she has no liability to the partnership for the contracts breached because of Demuth and Warrens decision to dissolve. b. Oakleys dissociation is rightful and she has the right to the return of her capital in the partnership within 120 days of her written demand. c. Oakleys dissociation is wrongful, and she is liable to the partnership for the additional damages incurred by the partnership for the contracts breached by Demuth and Warrens decision to dissolve. d. Oakleys dissociation is wrongful, but she is not liable to the partnership for the additional damages incurred by the partnership for the contracts breached by Demuth and Warrens decision to dissolve, because those losses were not foreseeable. e. None of the above.

5. Suppose that instead of the conflict that developed, the parties ended up being profitable on the venture and they were eager to continue the business. What are the factors that the parties should consider when choosing a business entity that suits the company's needs now and in the future?

a. Ease of formation. b. Personal liability for business debts and obligations. c. Capitalization and taxation. d. Management/operation of the venture. e. All of the above.