Write up to 2 pages: Background Reading: Partnership and Limited Partnerships A
ID: 428127 • Letter: W
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Write up to 2 pages:
Background Reading:
Partnership and Limited Partnerships
A business partnership has many similarities to a marriage – easy to form, usually with friends, confusing to dissolve, acrimonious during the dissolution, resulting in legal liability for someone else’s contractual actions and negligence. In a partnership, the individuals don’t own anything separately, instead partnership property is owned by the entity – the partnership. Moreover, in a partnership the individuals do not own any specific items of property, only the right to get the value of the property after third parties are paid.
One of the main concepts to understand about partnerships is the fact that partnership law is not particularly intuitive. The partnership is a separate legal entity with a "flow-through" aspect. For example, if a partnership is unable to meet its obligations, the partnership's liabilities are passed through to the individual partners, resulting in the partners becoming separately and jointly liable.
Another example of the "flow-through" nature of a partnership is illustrated by examining the income tax treatment of partnerships. For tax purposes, the partnership only files an informational tax return. Individual partners pay taxes on their share of the partnership profits.
The "flow-through" nature of a partnership can also be seen when examining how profits are handled by the partnership. Although a partnership collects proceeds from business activities, profits actually belong to the partners. The partnership agreement should therefore contain a profit-sharing agreement indicating how partners will divide partnership profits.
The creation of a partnership is a consensual relationship. No one can force a “partner” on anyone. No one may force an existing partner to remain a partner if he/she wishes to leave.
A partnership agreement governs the partnership relationship. If the partnership agreement does not address an issue, the Uniform Partnership Act applies. In addition, agency law (which was discussed in an earlier chapter) also applies to partnership relationships.
Another aspect of this area of the law is that the parties' intent to create a legal partnership is not conclusive in determining whether a partnership exists. The court evaluates whether there is an association of two or more persons carrying on as co-owners, sharing profits and losses in joint ownership with equal management rights. The intent to associate is a critical factor in determining whether a partnership exists.
In evaluating whether a partnership exists, a critical issue is usually whether the parties are co-owners of the business. Co-ownership means that each partner has a unilateral right to manage the business (even though they may relinquish that right, they must at least come to the table with it). When deciding whether a partnership exists, the court looks at the substance over the process. In other words, entering into what looks like a perfect partnership agreement does not necessarily result in a partnership.
Partnership Termination
Partnerships can disband based on (1) terms of the partnership agreement; (2) voluntary or involuntary withdrawal, the addition of new partners, death of a partner, bankruptcy of the partner or partnership, judicial degree. Dissolution requires express or implied notice to each partner. In addition, partnerships must provide actual notice to third party creditors of the partnership and actual or constructive notice to any other third party affected by the dissolution.
For a dissolution to be formalized, either express or implied notice must be given to each partner and the partnership must give actual notice to any third party creditor of the partnership and actual or constructive notice to any other third party affected by the dissolution. Following the formal dissolution and notice to partners and affected third parties, partners are only authorized to complete pending transactions and wind up partnership affairs.
Once the partnership terminates, partnership assets are distributed in the following order. First, third party debts and partners’ loans or advances to the partnership are paid. Next, each partner’s capital contribution is paid. Finally, there is a distribution of profits to the partners in proportion to their pre-termination share of profits, unless otherwise agreed.
Limited Partnerships
A limited partnership is an entity composed of at least one general partner and at least one limited partner. A general partner manages the business and is personally liable for partnership obligations, while a limited partner contributes assets to the partnership but does not participate in the management of the partnership.
In regard to limited partnerships, it is critical to understand that the only way to be a limited partner is to file articles of limited partnership with the Secretary of State and list all of the limited partners in that document. The fact that a partner is a “silent partner” has no legal meaning if the formal document is not filed and his/her name is not on that document. The other important point is that once a person is a limited partner, if he/she begins to act like a general partner by managing or helping to manage the partnership business, the limited partner will then be treated as a general partner during the period of time that the limited partner assumes general partner duties and will therefore have unlimited personal liability for partnership debts. Again, substance over form!!
Consider the following scenario. Assume you are a partner and your partnership sells a defective product resulting in injury during the time that you were a partner. A lawsuit is filed after you retire from the partnership. Although you are no longer in the partnership at the time the lawsuit is filed, you will still have unlimited personal liability for the partnership debt. You CANNOT get rid of it in regard to the injured third party; even if you had the remaining partners sign a “hold harmless” agreement with you when you retired. What will happen is your personal assets will be available to the third party and you will have a legal right to sue the partners for their pro-rata contribution for what you lost. The only way to avoid such future liability is to die BEFORE such a lawsuit is filed. If you die after the lawsuit is filed, your estate will be tied up until the lawsuit is settled.
Facts:
Walid Elkhatib, an Arab American, bought a Dunkin- Donuts franchise in Illinois. Ten years later, Dunkin' Donuts began offering breakfast sandwiches with bacon, ham, or sausage through its franchises. Elkhatib refused to sell these items at his store on the ground that his religion forbade the handling of pork. Elkhatib then opened a second franchise, at which he also refused to sell pork products.
The next year, at both locations, Elkhatib began selling meatless sandwiches. He also opened a third franchise. When he proposed to relocate this franchise, Dunkin' Donuts refused to approve the new location. The company also informed him that it would not renew any of his franchise agreements because he did not carry the full sandwich line. Elkhatib filed a lawsuit against Dunkin' Donuts.
Questions
Assume that you represent Elkhatib. Present an argument demonstrating that Dunkin' Donuts wrongfully terminated Elkhatib's franchise. Use the chapter 36 concepts related to a franchise termination in arguing Elkhatib's case.
Assume that you represent Dunkin' Donuts. Use the chapter 36 concepts to argue that Dunkin' Donuts decision to terminate the franchise was justifiable. Use the chapter 36 concepts related to a franchise termination in defending Dunkin' Donuts decision to terminate the franchise.
In your opinion, did Dunkin Donuts act in good faith in its relationship with Elkhatib? Consider whether Dunkin' Donuts should be required to accommodate Elkhatib's religious beliefs and allow him to refuse to serve pork in these three franchise locations.
Should Elkhatib rethink his decision to operate the business as a franchise and consider alternate forms of business operation? Why or why not? Explain. What other forms of business operation should Elkhatib explore?
For Elkhatib, what are the advantages and disadvantages of operating a donut shop as a Dunkin' Donuts franchise?
Explanation / Answer
The franchisor can terminate the franchise if the frachisee commits material breach of terms and conditions such as financial irregularities / misrepresentation of profits, works against the laws, fails to share the royalties with franchisor etc,loses the licence or files for bankruptcy. The franchisor should ask the frachisee to correct the irregularities with prior notice and the action can only be taken if the franchosee does not comply with it. IN this case, there was no obligation to serve the complete line of items at a frachise, and no notice was served in this regard. Hence the decision of termination of agreement is illegal.
Companies like Dunkin Donuts, the global fast food giants are known for the uniform standards of products,service and customer experience at their outlets. Provision of complete line of items and being in line with the standards practiced globally is naturally expected from a franchise holder. A franchisee not complying to the regulations is not only hampering the profitability of the company outlets, but also violates the global standards of the company, hence is liable for termination.
Dunkin Donuts did not act in good faith. It did not comunicate with the holder for finding out a mutualy amicable solution to the problem. Neither did it try to find alternatives. It was a one sided decision where the company did not deem it right to involve the franchise holder. It should have started a communication with the holder to find out alternatives, termination being the last resort if nothing worked.
The company should allow the holder to operate the franchise without selling pork, branding it as a special outlet that acoomodates the religious beiefs of certain section of the society. It might attract the members from those societies who might not be visiting Dunkin Donuts due to their beliefs. The vegetarian outlet can attract vegans and communities like some Hindus who don't consume meat and are reluctant to visit an establishment serving meat. Though such outlet will lose business from some segments. they ae sure to gain from the others also, making it profitable.
Entikhan should communicate with company and share his idea of speciality outlets. It will open up a new market for the company, without violating religious sentiments of a community.
While a donut shop can be opened with little investment as compare to a full scale franchise store, it will cater to limited number fo custoemrs, hence the limited revenue.On positive side he will not be required to handle any pork item and there will be no controversy with the parent company.
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