Chapter 17

Business Organizations

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 Chapter Objectives

By the end of this chapter, you should be able to:

• Explain how sole proprietorships differ from other forms of
business entities.
• List the requirements needed to form a partnership.
• Identify the duties, rights, and liabilities of partners in a business.
• List the various ways that a partnership can be dissolved.
• Explain the principal’s control of the agency relationship.
• Explain how a limited liability company is formed.

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 Why Do Business Organizations Matter?

Scenario: Jason, a fitness entrepreneur, is planning to open a gym in

his community. What kind of business structure should he use for his
enterprise?
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 Sole Proprietorships

Advantages
• Proprietor owns entire business
• Right to receive all profits
• Ease of formation
• Less costly
• Few legal formalities are involved
• Flexibility
• Personal income tax only
Disadvantages
• Alone bears burdens of losses or liabilities (unlimited liability)
• Creditors can go after personal assets
• Lacking continuity on the death of proprietor
• Raising capital is limited
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 Port Orchard Airport, Inc. v. Wagner
Polling Question

Suppose that instead of Wagner, Misenar had pursued the claim in the
case against Port Orchard. Would the result have been different?
 Yes
 No

Explain your reasoning to another person or classmate.

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 Partnerships

Agency Concepts and Partnership Law

Essential Elements of a Partnership
1. Sharing profits and losses
2. Joint ownership of business
3. Equal right to be involved in the management of business
• Example 17.2 Chiang and Burke
Entity versus Aggregate Theory of Partnerships
Tax Treatment of Partnerships
• Pass-through entity
• Information return

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 Knowledge Check 1

The simplest form of business organization is a sole proprietorship.

 True
 False

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 Partnership Formation

• Articles of Partnership
– Duration of partnership
– Partnership by estoppel
– Case Example 17.4 Sanitation District No. 1

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 Rights of Partners

• Management Rights
• Interest in the Partnership
• Compensation
• Inspection of Books
• Accounting of Partnership Assets or Profits
• Property Rights

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 Duties and Liabilities of Partners

• Fiduciary Duties
• Authority of Partners
• Liability of Partners
– Joint liability of partners
– Joint and several liability of partners
– Example 17.7 Nathan

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 Partner’s Dissociation

Events That Cause Dissociation

1. By partner’s voluntarily giving notice of an “express will to withdraw”
2. By occurrence of event agreed to in partnership agreement
3. By unanimous vote of other partners under certain circumstances
4. By order of court (or arbitrator) if partner engaged in wrongful conduct
5. By partner’s declaring bankruptcy, incapacitation, or death
Wrongful Dissociation
• Example 17.8 Jenson & Burke
Effects of Dissociation
• Buyout price
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 Knowledge Check 2

Which of the following are the rights of partners?

A. Management Rights
B. Compensation and Inspection of Books
C. Property Rights
D. All of the above

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 Partnership Termination

Dissolution
• Case Example 17.10 Will Sukenik
Winding Up
1. Payment of debts, including those owed to partner and nonpartner
creditors.
2. Return of capital contributions, and distribution of profits to partners.
Buy-Sell Agreement or Buyout Agreement

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 Guenther v. Ryerson
Polling Question

Could the partnership have avoided the liquidation of its assets during
the winding up process?
 Yes
 No

Share your answer and explain your reasoning to another person or

classmate.

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 Limited Liability Partnerships

Pass-Through Entity
Family Limited Liability Partnership (FLLP)
Formation of an LLP
• Compliance with state statutes
Liability in an LLP
• Allows professionals to avoid personal liability for malpractice

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 Limited Partnerships (LP)

• Limits the liability of only some owners

• Revised Uniform Limited Partnership Act (RULPA)
• General Partner and Limited Partner
Formation of an LP – public and formal proceeding
– Certificate of Limited Partnership
Liabilities of Partners in an LP – personally liable to partnership’s creditors
Dissociation and Dissolution in an LP
– Events that Cause Dissociation and Dissolution
– Distribution of Assets

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 Limited Liability Companies

Hybrid form of business enterprise that offers the limited liability of the
corporation and the tax advantages of a partnership
Formation of an LP – articles of organization (secretary of state)
– Owner of LLC is called a member
Jurisdictional Requirements
• Example 17.12 Jen
Limited Liability of LLC Members
– Events that Cause Dissociation and Dissolution
– Distribution of Assets
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 Nesset, Inc. v. Jones
Polling Question
Did the state intermediate appellate court reverse the trial court’s ruling
on the question of Jones’s personal liability for his LLC’s debt?
 Yes
 No

Explain your reasoning to another person or classmate.

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 Types of Franchises

• Distributorships
– Example 17.16 Black Rain Beer Company

• Chain-Style Business Operations

• Manufacturing or Processing-Plant Arrangements

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 Laws Governing Franchising

Federal Regulation of Franchising

• Industry-Specific Standards
• The Franchise Rule
State Regulation of Franchising
• State Disclosures
• Requirements for Termination

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 The Franchise Contract

• Payment for the Franchise

• Business Premises
• Location of the Franchise and Territorial Rights
• Quality Control by the Franchisor

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 Termination of the Franchise

• Grounds for Termination Set by the Franchise Contract

• Wrongful Termination
• The Importance of Good Faith and Fair Dealing

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 Group Breakout Discussion
Cybersecurity and the Law
Data Breaches and Franchises
Suppose that a franchisor has two choices when it comes to
cybersecurity provisions in its FDD. The franchisor can either (a) assume
control and responsibility for a franchisee’s privacy security system, or
(b) avoid this control and responsibility, leaving point-of-sale security in
the hands of the franchisee. Which is the better choice, and why?

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Knowledge Check Video: Dissolution

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 Knowledge Check Video Question

The operating agreement may give the member leaving the LLC the right
to be bought out.
 True
 False

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 Video Debrief: Dissolution

If Finn (having 20% membership in the LLC) decides to leave Dalilah and
Abdullah (who both have 40% membership), what would Finn have to do?

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 Self-Assessment

1. What concepts did you find difficult, and thus need to review?
2. How might the topics in this chapter come up in the future in your
personal (or work) life?
3. How can you use your personal (or work) experience to contribute for
a class discussion on the topics in this chapter?
4. Which topics would you like to learn more about independently?

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copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Summary

Now that the lesson has ended, you should have learned how to:
• Explain how sole proprietorships differ from other forms of business
entities. 
• List the requirements needed to form a partnership. 
• Identify the duties, rights, and liabilities of partners in a business.  
• List the various ways that a partnership can be dissolved. 
• Explain the principal’s control of the agency relationship.
• Explain how a limited liability company is formed.

Miller, The Legal Environment Today, 10th Edition. © 2022 Cengage. All Rights Reserved. May not be scanned,
copied or duplicated, or posted to a publicly accessible website, in whole or in part.