After reviewing this week’s chapters, prepare a 500-word synopsis of the legal, ethical, and socia

  

After reviewing this week’s chapters, prepare a 500-word synopsis of the legal, ethical, and social concepts and issues discussed in the chapters. Post this synopsis to the discussion forum by Thursday at 11:59pm.Return to the discussion forum and review the postings of classmates. Post a meaningful and insightful reflection (100 words) for three classmates by Sunday at 11:59pm.
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CHAPTER 17
GOVERNANCE AND STRUCTURE:
FORMS OF DOING BUSINESS
For up-to-date legal and ethical news, go to mariannejennings.com.
LECTURE OUTLINE
Use opening CONSIDER 17.1 to pique students’ interest.
See Exhibit 17.1 and PowerPoint Slides 17-1, 17-2, and 17-3 to help students compare the various
organizations.
17-1 Sole Proprietorships (See PowerPoint Slide 17-4)
17-1a
Formation


Done by an individual
May have a fictitious name
Example: Ralph Jones d/b/a Spuds Brewery


17-1b
No formal requirements for formation
May have to publish d/b/a name
Sources of Funding (See PowerPoint Slide 17-5)


Loans
Government help
17-1c
Liability (Full Personal Liability of Owner)
17-1d
Tax Consequences


Owner claims all income and losses
No separate filing requirement
17-1e
Management and Control (All Assets With One Person)
17-1f
Transferability of Interest (See PowerPoint Slide 17-6)


Business can be sold – property, inventory, and goodwill
Owner will usually sign a noncompete agreement
335
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
336
Part IV
Business Management and Governance
17-2 Partnerships (See PowerPoint Slide 17-7)
✓ Governed by the Uniform Partnership Act (UPA)
➢ Adopted in 49 of 50 states
➢ In absence of agreement UPA controls
➢ Revised Uniform Partnership Act (1994) – adopted in most states now
✓ Definition – Voluntary Association of Two or More Persons/Co-Owners in a Business for Profit
(See PowerPoint Slide 17-8)
17-2a
Formation

Voluntary formation: by agreement



Draw up articles of partnership
See lists in Exhibit 17.2 and PowerPoint Slide 17-9 for requirements and suggestions
Involuntary formation: partnerships by implication (See PowerPoint Slide 17-10)



Sharing of profits
Constitutes prima facie evidence that a partnership exists
Exceptions – rent, wages, annuity to widow or estate, payment for goodwill
Examples: Shopping center leases with percentage of profits (landlord is not partner),
employee profit sharing plans (they are not partners)
See PowerPoint Slide 17-11.
CASE BRIEF 17.1
Blumberg v. Ambrose
2015 WL 5604474 (E.D. Mich. 2015)
FACTS: During the summer of 2004, Roberta Blumberg (plaintiff) and Michael Ambrose (with LLC referred
to as defendants) worked together at the health clinic of Tamarack Camps. Blumberg was a registered nurse
and the Director of Health and Safety at Tamarack, while Ambrose was an undergraduate student and a clinical
assistant. Blumberg and Ambrose collaborated to create and market a for-profit web-based electronic medical
records program called “CampDoc” that would allow camps to input and access the medical records of their
campers. This program was expanded to allow parents the ability to fill out health forms and medical histories
on-line, as well as electronically submit information regarding allergies and medications. Blumberg
participated in both the design and the development of the CampDoc system, including its prototype, and
Ambrose wrote the code for the CampDoc software.
In the summer of 2009, Blumberg and Ambrose were able to pilot the software program at Tamarack. With the
success of the pilot program, the two decided to market and sell the CampDoc program to other camps across
the county.
In October 2009, Ambrose filed articles of incorporation for CampDoc as a Michigan limited liability
company and, unbeknownst to Blumberg, included himself as the sole member. As part of organizing the
company, Ambrose told Blumberg that she needed to sign several documents, including an employment
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 17
Governance and Structure: Forms of Doing Business
337
agreement, which she did in May 2010. However, Blumberg did not believe that these documents altered her
relationship as a partner with Ambrose. Ambrose also had conversations with Blumberg in 2011 about her
interest in the profits of CampDoc, and he told her that “she would receive some percentage of the profits from
the business.”
From 2010 to March 2012, Blumberg attended conferences for CampDoc. Blumberg “brought several dozen
camps on board in 2011,” but she was not paid for that work. In 2012, Blumberg quit her job “as a registered
nurse to devote [her] attention to CampDoc.” Blumberg never received compensation for her services in 2009.
Blumberg was paid $100 in 2010, $1,000 in 2011, $6,250.02 in 2012, and $18,750.06 in 2013. Ambrose
believed Blumberg’s services in 2010 and 2011 were worth more than what she actually received, and that it
was his intention to make Blumberg “a millionaire.”
In September 2012, Ambrose provided Blumberg with four more documents to sign − a consulting agreement,
a participation plan agreement, a non-compete/non-disclosure agreement, and a confidentiality agreement.
Although Blumberg claims that Ambrose considered her a “co-founder,” and called her “the heart and face of
the company,” Ambrose’s lawyers advised him that she should not be listed as an owner of CampDoc. Rather,
Ambrose suggested that Blumberg own a “phantom” interest in the company, which would be “the equivalent
of real equity.”
After reviewing the documents, Blumberg informed Ambrose that she intended to seek legal advice. Ambrose
then terminated Blumberg’s “employment” with CampDoc the following day.
Blumberg filed suit seeking to have the association between herself and Ambrose declared a partnership under
Michigan’s Uniform Partnership Act.
ISSUE: Had the parties created a partnership?
DECISION: There were enough factual issues that the court could not grant summary judgment. The parties
worked together as a team. They intended to share profits from the company. Blumberg worked without
compensation. They had formed the idea together and worked to develop it and then sell it.
Answer to Case Questions
1. If an LLC was created, how is this case about the formation of a partnership? The LLC was formed
unilaterally by Ambrose, without permission. The issue is the interest that Blumberg holds and whether
the intention was to create a partnership.
2. What are the indications that there was a partnership created? The two had talked about sharing and
making millions. Blumberg went without compensation as they built the business. They split the work
assignments between administration and selling and marketing, but they both participated equally.
3. What list of lessons could you develop for two people who are starting a business based on what happened
in this case? Put your interests in writing. Determine what type of entity you want and create it together.
Don’t do too much business before you have properly formed an entity. Watch employment agreements
and other documents between the two of you before the entity is created.
ANSWER TO CONSIDER 17.2: A partnership agreement had been executed. Income was to be split and all
final decisions were to be made by Chaiken. The three were not sharing profits, and there was no intent to
create a partnership. The Commission’s decision that there was not a partnership was upheld. Chaiken was
liable for unemployment taxes. Chaiken v. Employment Security Comm’n, 274 A.2d 707 (Del. 1971).
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
338
Part IV

Involuntary formation: partnership by estoppel (or ostensible partner) (See PowerPoint
Slide 17-12)


17-2b
Business Management and Governance
Results when someone allows the inference to be made that he/she is a partner
Allowing name to be used to get a loan
Sources of Funding (See PowerPoint Slide 17-13)



Capital contributions of partners
Loans by partners
Outside loans
ANSWER TO CONSIDER 17.3: Yes, Pope was an ostensible partner; credit was extended on that belief.
There was the appearance of a relationship. Pope v. Triangle Chemical Co., 277 S.E.2d 758 (Ga. 1981).
17-2c
Partner Liability (See PowerPoint Slide 17-14)



Mutual principals and agents
Partnership assets reachable by partnership creditors
Personal assets reachable by partnership creditors when partnership assets are exhausted
CASE BRIEF 17.2
Vrabel v. Acri
103 N.E.2d 564 (Oh. 1952)
FACTS: Stephen Vrabel and a companion went into the Acri Café in Youngstown to buy alcoholic drinks.
Without provocation, Michael Acri shot and killed the companion and seriously injured Vrabel. Michael was
convicted of murder and sentenced to a life term. Florence and Michael Acri had owned the Acri Café as
partners since 1933. From the time of their marriage in 1931 until 1946 (the shooting occurred in 1947),
Michael had been in and out of hospitals, clinics, and so on for mental disorders. Michael did beat Florence
during their arguments but had no other history of violence. He had been in exclusive control of the café at the
time of the shooting since 1946 when Florence had obtained a legal separation. Vrabel brought suit against
Florence seeking damages.
DECISION BELOW: The trial court awarded Vrabel $7,500.
ISSUE ON APPEAL: Was Florence liable as a partner to Vrabel for the injuries inflicted by Michael?
DECISION: No. The act was wrongful and malicious and not within Florence’s control since she had been
excluded from the café for some time.
Answers to Case Questions
1. What was the nature of the business? The nature of the business was a café.
2. Why was Mr. Acri not a defendant? He was in jail.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
Chapter 17
Governance and Structure: Forms of Doing Business
339
3. Explain why Mrs. Acri is or is not liable for the injuries. No, Florence is not liable because the shooting
was outside any scope of partnership responsibility.
17-2d
Tax Consequences in Partnerships (See PowerPoint Slide 17-15)



17-2e
Partnership does not pay taxes
Partnership files informational return
Partners report income and losses on their returns
Management and Control (See PowerPoint Slides 17-16 and 17-17)

Partnership authority





Unless otherwise agreed, each has equal management authority
May delegate day-to-day authority to one partner
Each partner is mutual principal and agent of the others
Borrowing – done routinely in most partnerships
Unanimous consent required for:





No compensation for work unless agreed
Partner fiduciary duties (See PowerPoint Slide 17-18)



Confession of judgment
Selling goodwill
Admission of another partner
Mutual principals and agents
Each is to act in the best interests of the partnership
Partnership property


Property contributed to the firm or purchased with partnership assets
Own property as tenants in partnership


Equal rights to possession and use for partnership purposes
Upon death of partner, rights automatically transfer to remaining partners
Example: A, B, and C are partners. B dies. A and C own property. B’s widow
has right to value of B’s interest but not the property.

Partner’s interests


Personal property
Transferable
ANSWER TO CONSIDER 17.4: The theory is a simple one – the Facebook shares were partnership property
and could not be distributed. The partnership owned the shares and they had to either be sold and the proceeds
distributed or the shares had to be allocated by investor interest. The case turned on the simple concept of
partnership property.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
340
Part IV
Business Management and Governance
An excerpt from the court opinion appears below:
The Favored LPs argue in the first instance that they had an ownership interest in the Partnership’s
underlying Facebook shares. That is wrong.
By claiming an ownership interest in particular Facebook shares, the Favored LPs are claiming an
ownership interest in specific Partnership property. By statute, a limited partnership is a separate
entity, and individual partners do not have any rights in specific partnership property. The LP Act says
just that: “A partner has no interest in specific limited partnership property”. What a partner instead
owns is a “partnership interest.” The LP Act defines that term as “a partner’s share of the profits and
losses of a limited partnership and the right to receive distributions of partnership assets”. Ownership
of a partnership interest does not carry with it any rights to specific limited partnership property.
Although clear as a matter of statutory law, the Partnership Agreement reiterated these propositions.
Section 1.4 of the Partnership Agreement, titled “Purposes, Business and Objections,” confirmed that
investors in the Partnership were not obtaining an ownership interest in Facebook shares. It stated:
The purpose of the Partnership and the business to be carried on and the objectives to be
attached by it are to invest its funds in the stock of Facebook. Notwithstanding the foregoing,
each Limited Partner hereby acknowledges and agrees that he is investing in the Partnership
and will acquire an equity interest in the Partnership, and will not, in connection with this
Agreement or related investment, own nor acquire any shares of stock in Facebook. ESG
Capital Partners II LP v. Passport Special Opportunities Master Fund LP, 2015 WL
9060982 (Ct. Chancery 2015).
17-2f
Transferability of Interests (See PowerPoint Slides 17-19 and 17-20)






17-2g
Partner’s interest is personal property
Can be pledged to creditors and transferred
Transferee does not become a partner
Admission of new partner requires unanimous consent
Transferring partner is not relieved of liability
Some partnership agreements require partners to offer it first to remaining partners
Dissolution and Termination of the Partnership (See PowerPoint Slides 17-21 and 17-22)

One partner no longer associated with the partnership
Examples: Retirement, death


Need not result in termination; can just be a change in structure or can proceed to
termination
Termination





Assets are liquidated
Distribute in this order:
contributions; profits
outside creditors; partners’ advances (loans); capital
Dissolution by agreement
Dissolution by operation of law: death of a partner, bankruptcy of partnership or partner
Dissolution by court order
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
Chapter 17
Governance and Structure: Forms of Doing Business
341
17-3 Limited Partnerships
✓ Governed by Uniform Limited Partnership Act (ULPA) (See PowerPoint Slide 17-23)
Recent revision is called Revised Uniform Limited Partnership Act (RULPA)
➢ Adopted in nearly all states
➢ Use ULPA or RULPA when no agreement
➢ RULPA has limited adopters but will see more
 ULPA was drafted at a time when limited partnerships were not popular and size was
smaller
 RULPA addresses the needs of the larger limited partnership
✓ Structure (See PowerPoint Slide 17-24)




17-3a
Must have at least one general partner
Must have at least one limited partner
Liability of limited partner is limited to capital contribution
Liability of general partner is all personal assets are subject to attachment
Formation (See PowerPoint Slides 17-25 and 17-26)


Must meet statutory requirements; if not met a general partnership is created
Must file certificate of limited partnership; see text for list of requirements and note
differences between ULPA and RULPA


17-3b
Sources of Funding (See PowerPoint Slide 17-27)




17-3c
Limited partners provide most of the financing
Limited partners can contribute services under RULPA
Loans are used – called advances when made by partners
Under RULPA, limited partners can use services already given as a contribution
Liability (See PowerPoint Slide 17-28)





Limited partners have limited liability
Cannot participate in management
Cannot use their names in partnership name
Must file correctly
Under RULPA, can do the following and still retain limited liability status:




17-3d
RULPA is much briefer
Corrections can be filed by limited partners
Can be an employee
Can consult with and advise the general partner
Can act as a surety or guarantor for the limited partnership
Can vote on amendments, dissolution, sale of property, and debt assumptions
Tax Consequences (See PowerPoint Slide 17-29)

Taxed the same as general partnerships
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.
342
Part IV



17-3e
Business Management and Governance
Partners report profits and losses on individual returns
Limited partners get direct tax benefits with limited liability
IRS scrutinizes to be certain it is a partnership and not a corporation
Management and Control (See PowerPoint Slide 17-30)
Management is responsibility of general partner

Profits and distributions




Authority belongs to general partner to make decisions here
Profits and losses are allocated on the basis of capital contributions
RULPA requires agreement for splitting profits and losses to be in writing
Partner authority (See PowerPoint Slide 17-31)



General partner has same authority as in general partnership
Can restrict by agreement
Consent of limited partners required for:




17-3f
Limited partners have right to inspect books and records
Transferability of Interests (See PowerPoint Slide 17-32)





17-3g
Admitting a new general partner
Admitting a new limited partner (can give authority in the agreement)
Extraordinary transactions (selling assets)
ULPA allows transfer of interests
May have significant restrictions on transfer to prevent liability under federal securities
laws
The more easily an interest can be transferred, the more likely the IRS is to label it a
corporation
Transfer of a limited partner’s interest does not dissolve the partnership
Under RULPA, assigning limited partner can be given the authority to make the assignee a
limited partner
Dissolution and Termination of a Limited Partnership (See PowerPoint Slide 17-33)

RULPA provides for the following means:





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