Innovation and Competitive Advantage on Changi.docx

Innovation and Competitive Advantage on Changing
Environments
Any business need to create ways to have competitive
advantages as this is the only way it can remain relevant and
competitive despite the strong competition in the sector of
specialization. According to Hisrich (2014), “working towards
achieving a competitive advantage should be the core goal
within the management philosophy.” The more reason is that
lack of competitive advantages exposes a business to even
slightest competition and the business can be easily locked out
of business. In the present world, there are a high number of
companies that have succeeded in boosting their competitive
advantages. As a matter of reality, such companies have
managed to be ahead of competition and competition sees them
as roles models to the point of trying to copy their operation
strategies.
One of such companies is the General Motors Company which is
the global leader in the automotive industry. Over the years,
General Motors has managed to increase its global market share
due to the enormous competitive advantages that the company
has managed to build and maintain. The main focus of this essay
shall be to explore the General Motors competitive advantages
and how the company manages to retain them. Secondly, the
essay shall review General Motors organizational leadership

philosophy on innovation applied by the company as well as
activities that the company takes an active part in to sustain its
competitive advantage. Lastly, the essay shall review the
research and development initiatives that are employed for
long-term competitive advantage.
General Motors was established in 1908 under the leadership of
Billy Durant. The company was formed as a consolidation of
several motor vehicle companies namely Buick, Oldsmobile,
Cadillac, Oakland, Ewing, Marquette, and other autos as well as
Reliance and Rapid trucks. General Motors headquarters is in
Detroit, Michigan, United States but currently, the company has
a lot of subsidiaries and outlets all over the world. This is to
mean that the company products are sold across the board by
different General Motors dealers and offices as they are
established in almost all countries.
Since General Motors establishment it has had different
individuals taking leadership positions. However, the initial
founders developed an innovation philosophy that is applied by
all leaders heading the company outlets in different locations
across the globe. This innovative philosophy is that the world is
an ever-changing thing and that people need quality, stylish,
and modern motor vehicles (Greer, 2012). Hence, the company
believes that for it to remain competitive in the automobile
industry, it must offer the market with the most unique, high-
quality, durable, and diverse motor vehicles. The company
embraces innovation as this is the only way that new design of
products that are unique and meets the clients’ needs can be
developed (Hisrich, 2014). The leadership also has an
innovation philosophy of supporting creative and innovative
ideas from employees and develops a complete innovative idea.
This is to mean that employees have always been encouraged to
come up with ideas that they believe can be molded and become
a great competitive product.
General Motors is aware that the environment both internal
and external is important when it comes to promoting and
maintaining the competitive advantage. The company takes an

active part in improving its internal and external environments
hence making it suitable for company operations. for instance,
the company management across the globe ensures that the
employees have good working conditions and that the
employees have the relevant tools and machinery to offer
quality results (Greer, 2012). With a good working
environment, accidents and incidences are avoided thus not
interfering with the innovative levels and becoming highly
recognized as a good employer. Moreover, the fact that
employees have what it takes to offer the market creative and
unique products makes the company to be perceived as reliable
and trustworthy.
Externally, the company takes part in corporate
affairs like supporting the society in different ways. Apart from
selling the products at a cost-effective price, making the
products accessible, and getting to know the needs of the
clients, the company supports different projects for instance
development projects and sports (Nieuwenhuis, 2017). This way
the company demonstrates to the public that the welfare of the
people is one of the greatest company concerns and by doing so
the company has been able to build a strong and reliable
relationship with the people (Hisrich, 2014). Additionally, the
company has an active way of interacting and engaging with the
consumers to know what they want, how they feel about the
products, and professionally deal with complaints.
From time to time, the company offers discounted products
where the clients can access the products at far much lower
price thereby making the products affordable to a much higher
number of people. Again, the products have different designs
and sizes which mean that there is a product for every client.
Lastly, the products are highly durable and this is a competitive
advantage that has made the company last as long as it has. The
reason is that the clients can feel the value for the money they
spent buying the product thereby promoting customer loyalty.
General Motors is aware that the automobile sector is an ever-
changing sector and research and development initiatives have

been highly applied to retain a company’s competitive
advantages on long-term basis (Greer, 2012). The company has
a strong and reliable research and development team that plays
the role of researching the market extensively and advising the
company on clients’ needs. This is to mean that the company is
always informed about competition and genera client’s needs at
every time. It is for this reason that the company offers the
exact products that the consumer need every time. the research
and development initiatives also guides the company on
products to reduce in production to avoid instances of dead
stock that can destabilize company’s financial stability (Hisrich,
2014). The result of such, is that the company has a way of
maintaining a stable finance position. Again, the research and
development team gathers information on other vital factors in
different countries for instance political and economic stability
and surety and this information is used by the management to
make vital decisions that retains competitiveness on long-term
basis. It is also the research and development that searches and
recommends the market to venture into and how to handle
upcoming competition.
Competitive advantages are important for any business as they
keep the business afloat even in the most difficult times.
General Motors is the leading company in the automobile sector
globally. This is because the company has embraced strategies
that builds and sustains its competitive advantages thereby
making it hard for competitors to take over the market.
References
Greer, I., & Hauptmeier, M. (2012). Identity work: Sustaining
transnational collective action at General Motors Europe.
Industrial Relations: A Journal of Economy and Society, 51(2),
275-299.

Hisrich, R. D., & Kearney, C. (2014). Managing Innovation and
Entrepreneurship. Retrieved from
https://phoenix.vitalsource.com/#/books/9781483322667/cfi/6/2
8!/4/52/[email protected]:64.1
Nieuwenhuis, P., Vergragt, P., & Wells, P. (2017). The business
of sustainable mobility: from vision to reality. Routledge.
Week 1 - Assignment
Legal Underpinnings of Business Law
Imagine that you own each of the following businesses:
Tinker’s Home Security Service (sole proprietorship)
Tinker & Tailor’s Home Security Service (general partnership)
Tinker & Tailor’s Home Security Service (LP)
Tinker & Tailor’s Home Security Service, Inc. (corporation)
Tinker & Tailor’s Home Security Service, LLC (LLC)
· The businesses are being sued for breach of contract. Create a
matrix that lists each business and compare and contrast your
personal liability exposure as an owner as a result of the
lawsuit.
· For each business entity, analyze how you might limit your
liability exposure as an owner.
· Describe a business that you may own some day or that you
currently own. (Even if you never plan to own a business,
pretend as if you will do so for the purposes of this
assignment.) Examine the best business organizational form for
the business that you have described, including in your
examination personal liability exposure, management, taxation,
and ease of formation.
Submit a four- to five-page paper (not including title and
reference pages). Your paper must be formatted according to
APA style as outlined in the approved APA style guide and you
must cite at least three scholarly sourcesin addition to the
textbook.

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Law and the Business Person
Chapter 1
The Civil Law and Common Law Traditions
Why should a business student study law? After all, you
are not going to law school, and if you ever have a legal
problem, you can always consult an
attorney. Perhaps you have never sued anyone, been sued
yourself, been arrested, or written a contract. If all this is
true, the law probably seems like some
foreign country that you have never been to and have no
desire to visit. The truth is, as a businessperson, you can
no longer view the law from a distance.
Your life and the law, whether you like it or not, will be
intertwined, and having a basic understanding of the law’s
scope, application, and in�luence will
serve you well, both in business and in your personal
life.
If you are a manager, business owner, employee, or
entrepreneur, the law will impact your daily decision
making and have far-reaching consequences in all
your business activities. Believe it or not, a law course is
an integral part of your education. This will become
clearer to you as you read cases and witness
for yourself the unfortunate situations that people have
gotten themselves into.

Whereas larger companies have in-house legal departments
or have access to the expertise of large
law �irms, small businesses often operate with little
knowledge of the law and minimal access to
legal counsel, making a legal background even more
valuable in the marketplace. Regardless of size,
any business can bene�it greatly from employing people
at all levels who have at least a basic
understanding of the law and a solid grasp of essential
legal principles so that they can recognize
potential legal problems and refer them to legal counsel
before they become costly matters that
threaten the health of a business. This is especially true
in the United States, which has no uni�ied
legal system but rather an overlay of federal, state, and
local laws. Further, the trend toward more
global commerce and trade, governed by international
treaties such as the North American Free
Trade Agreement, has implications for businesses of all
sizes and types. Today, many business
transactions involve two or more states and may even
include parties separated by the full
continent, so a much greater amount of business is
conducted by various means across state lines.
While no textbook can become a comprehensive hands-on
guide to American law (the legal
encyclopedias that attempt to do so run tens of thousands
of pages and still do not cover all
aspects of the law), it is the purpose of this text to
provide an accurate, easy-to-understand, useful
guide to some areas of the law that have the greatest
impact on business. Business law, as well as
the legal environment of business and legal studies
courses, will provide students with the skills to

recognize and apply the proverbial ounce of prevention to
their business careers and personal
lives. This can prove more useful to employers and to
themselves than pounds of competent, costly
legal advice obtained too late to remedy a problem that
could have been avoided.
Although this course will not "make you a lawyer," it
will provide you with a number of advantages. First, you
will better be able to recognize legal problems
before they happen, a topic often referred to as preventive
law. If you can prevent a situation or con�lict from
developing into a lawsuit, you may save your
business money and the embarrassment of a lawsuit, as
well as maintain a lawful and ethical work environment.
Second, in the event that you are involved
in a controversy, you may be able to resolve the dispute
outside of court through "alternative dispute resolution"
techniques such as negotiations, mediation,
or arbitration. You will learn about each of these and
their advantages and disadvantages. If you do have to deal
with a lawyer, this course will teach you
many legal concepts and the vocabulary to effectively
communicate with legal counsel. You will also learn how
to hire an attorney, manage legal counsel, and
deal with the legal profession.
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Photodisc/Thinkstock
The United States Capitol in Washington, D.C.,
is the meeting place of
Congress, the nation's federal legislative body.
1.1 Law: Its Scope and Origins
No single course or textbook can address all of the
complexities of law. If you stop to think about it, law—
and legal systems—have been in effect since early
civilization began. Thus, there have been many forms of
law and legal systems, too many to enumerate. Suf�ice it
to say that people need rules to maintain
order; otherwise, society would revert to barbarism.
Throughout the ages, philosophers, jurists, political
scientists, political leaders, and common people
from all walks of life have de�ined law in a number of
ways. Cicero viewed law as "nothing but a correct
principle drawn from the inspiration of the gods,
commanding what is honest, and forbidding the contrary."
For the eminent British jurist William Blackstone, law
could be de�ined as "a rule of civil conduct,
prescribed by the supreme power in a state, commanding
what is right and prohibiting what is wrong." Saint
Thomas Aquinas, on the other hand, de�ined
law as "an ordinance of reason for the common good,
made by him who has care of the community." Whatever
our working de�inition, law is often what
Justice Felix Frankfurter described as "all we have
standing between us and the tyranny of mere will." We
will see that this is true and, even more so, come
to appreciate that law also allows us to conduct business,
enter into formal relationships, depend on some
predictability in our affairs, and create order in
our lives.

At its simplest, law comprises rules of behavior that a
government imposes on its
people for the bene�it of society as a whole. As such, it
represents the governing
body’s subjective views of what is best for that society,
combined with precedent and
tradition. And even though most legal systems attempt to
protect society and promote
the common good, there can be radical differences in the
law from one country to
another, and even in different regions within countries, the
50 United States being a
prime example. Although federal and constitutional law
serve to balance and put a
check on state and local law, for example, and in turn,
the federal government is
limited in its powers to legislate and must give states the
power to regulate certain
matters, there is no "one" law, as in a country whose
legal system is based on civil law
(codi�ied statutes alone). Unlike the U.S. common law
system, a civil law system, such
as prevails in Europe and South America, is more
ef�icient and stable, leaving little
room for judicial interpretation and lawyers. Trial by jury
is not an option, so judges
apply the law in a highly predictable, relatively swift
proceeding, and the law itself is
slow to change. In common law jurisdictions like the
United Kingdom and the United
States, however, there is much more litigation, so you
need to be prepared.
One of the reasons that studying law is dif�icult is that
the numerous "factions" that

constitute our legal system are all operating at the same
time. There is state and federal law, statutory law,
administrative law, local law, and so on. For
example, each of the 50 states has a legislative body that
passes state statutes. Each of the states also has a state
court system ruling on cases and making
state "case or judicial law." Operating at the same time is
the federal legislative body—Congress, which makes federal
statutes—and the federal courts,
which make federal case law. These are just a few of the
"places" making law. As you can imagine, there are
thousands of volumes and treatises dealing with
questions about what is the law and legal history, as well
as reporting on all of the new law being made every day.
The law is vast and complicated, no
doubt, but understanding how it works and how the layers
of lawmaking bodies �it together into the larger scheme
is an essential part of your education.
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1.2 Sources of Law
Table 1.1 lists the four major sources of law in the
United States: judicial, statutory, constitutional, and
administrative. Note that each source of law has both
a federal and state component.
Table 1.1: The foundations of the American legal
system

Judicial Law
Federal case law
State case law
Statutory Law
Federal statutes
State statutes
Constitutional Law
U.S. Constitution
State constitutions
Administrative Law
Federal administrative agencies
State administrative agencies
Judicial (Case) Law
The phrase judicial law is used interchangeably with case
law. Judicial law is law made in courts, by judges,
when they rule on a case and write an opinion;
it had its origins in what is called the common law.
When the early pilgrims immigrated to America, they
brought with them their legal system, along with
customs, traditions, and values that helped to shape our
legal system. It is in the nature of common law, however,
that it adapts to the local customs,
traditions, and needs of a people. Thus, despite its
English roots, American law has evolved to �it the needs
of our federalist system and re�lects regional
differences and values. As a result, law in the United
States today resembles more the early English common

law system, with its regional differences based
on local customs and traditions, than it does the relatively
uni�ied law of the modern-day United Kingdom.
Before a judge can "make law," there �irst must be a
controversy brought to the courtroom for a decision. Such
a controversy involves two parties: the
plaintiff, or the person bringing the lawsuit, and the
defendant, or the person being sued. A civil lawsuit is
one in which the plaintiff is seeking money, or
restitution. (This should be contrasted with a criminal
action, which is being brought to punish and possibly
incarcerate the defendant.) As more and more
cases are decided, they form a body of law. These cases
become precedent for cases that follow, building one upon
the other. Judges rely on previous cases
to form their opinions and so on down the line.
When a judge decides a case in court, the judge will
often write an opinion that is published in case books, or
compendiums of court opinions. In that way,
others can look up and read the decisions to determine
what the law is and how a judge ruled on a speci�ic
topic. Figure 1.1 provides an example of a case
as it appears in a case book.
Figure 1.1: Example of a case
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Judicial Law
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StareDecisis and Precedent
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Yet another name for a case or an opinion is precedent.
Precedent also means a previous case. If you look at the
case in Figure 1.1, you will see in the last
paragraph a series of citations that begin like this:
Ciofalo v. Vic Tanney Gyms, supra, 10 N.Y.2d
297, 220 N.Y.S.2d 962, 177 N.E.2d 925;
The judge is using each of these cases to decide in the
current case. Each one of these cases is precedent. The
actual use of the case to form a decision in the
current controversy is called staredecisis, which is Latin
for "standing on previous decisions." Stare decisis is a
fundamental principle of both English and

American legal systems. The stability of common law
depends on judges following legal precedent guided by the
doctrine of stare decisis. This stability
allows legal practitioners to predict how a given case will
be decided by examining how similar cases were decided
in the past. Judges don’t "invent" or
"make up" the law, depending on whim; for the most
part, they rely heavily on previous cases to write their
opinions. Under the principle of stare decisis, a
court should follow established legal precedent unless there
is a compelling reason not to do so. This principle is
crucial to common law; if judges did not
follow established precedent, there would be little
predictability to the legal system. Attorneys would have
no solid guidelines upon which to base their
advice to clients and no stable guideposts on which to
base legal arguments and chart legal strategies for arguing
cases in court.
Changing Precedent
Sometimes, however, the judge will reject a previous
decision and refuse to follow it. Recall, for example, the
U.S. Supreme Court decision of Roe v. Wade,
which struck down state laws limiting abortion and held
that abortion is legal. In doing so, the Court rejected
previous cases that stated abortion was illegal.
When do courts reject stare decisis? The decisions of a
state’s highest court are binding on that state’s lower
courts, which must follow it, but are only
persuasive precedent on the courts of other states, which
are free to follow or ignore such precedent. This means
that if a case is being heard in New York
and the attorney attempts to use a Pennsylvania case as
precedent, the judge can refuse to recognize the
Pennsylvania case. Thus, managers should be

aware that state law is binding only within that state, and
the law varies greatly from one state to another. This is
important to you as a business manager
because there may be instances in which "law" from
another state is brought to your attention but does not
apply to you at all. Thus, the doctrine of stare
decisis is limited to decisions within the same jurisdiction,
state, or region.
Another reason that stare decisis is not always followed
is the result of a change in the political climate of the
country. Sometimes opinion around an issue
changes so much that the courts re�lect a change in
attitude and reject well-established doctrine. Consider racial
discrimination in the United States, which
at one time was legal and upheld as constitutional by the
U.S. Supreme Court. Over time, both the law and cases
have changed to re�lect a different
philosophy. This was true in 1954, when the Supreme
Court found racial discrimination illegal in the case of
Brown v. Board of Education. Until that time, the
doctrine of "separate but equal" accommodations for blacks
and whites had been applied by the courts. The Brown
decision eradicated the doctrine and
replaced it with a new "law." Here was an example of
social mores changing to such a degree that the Court
refused to follow previous cases.
In summary, case or judicial law is made in courts by
judges rendering an opinion. Each state has at least one
state court that is hearing controversies and
rendering opinions. Thousands of opinions are being
written each day from all of these states. All of these
state court opinions form a body of law called
case or judicial law because they are based on cases, or
controversies between people. Thus, when you wonder,

"What is the law?" remember that only one
aspect of law includes state court opinions.
Statutory Law
Another key site for lawmaking is in both state and
federal legislatures, which are governing bodies whose job
is to make new laws. Law made by a
legislature is called a statute. Legislatures gain consensus
from their members to pass the bills making new laws,
after which the bills are signed by the
governor (for the state) or the president (for Congress).
At any time in the United States, there are 50 state
legislatures passing state statutes and a federal
legislature (Congress) passing federal laws.
Federal
At the federal level, Congress can legislate over a broad
range of areas through the exercise of its constitutionally
granted powers. These powers are set out
in the federal (U.S.) Constitution in Article I, Section
8. Whenever Congress legislates within its area of
constitutionally granted power, the resulting
legislation has the force of law, although its legality can
be challenged in federal court, as will be discussed later
on. Federal law is not some remote or
arcane academic exercise; it affects each of us on a daily
basis. This is especially true for people involved in
business. As a manager, you will deal with many
important federal laws. For example, the Americans with
Disabilities Act of 1990 spells out how employers must
accommodate disabled workers. This is a
federal law that applies to all businesses, as opposed to a
state law that applies only to businesses within that
particular state. Other examples of federal

statutory law include the Civil Rights Acts of 1964, which
prohibits discrimination on the basis of race, and the Age
Discrimination in Employment Act of
1967, which describes the rules for hiring and �iring
employees above the age of 40. The Senate also plays a
role in international agreements, or treaties, as
it is empowered to ratify treaties negotiated by the
president. These treaties (e.g., the North American Free
Trade Agreement, or NAFTA, approved in 1994)
impact businesses in all 50 states if they engage in
international commerce. See also Timeline of Major Legal
Developments That Affect Modern Businesses.
Figure 1.2 provides an example of a federal statute.
Notice that a federal statute looks completely different
than a case. Federal statutes do not have parties,
nor do they involve a controversy between people. Instead,
they are a pronouncement of the law and therefore are
sometimes much shorter and terse than
a case, which involves people, a speci�ic controversy, and
an explanation of events. Note the citation for where to
�ind the statute in the U.S. Code books.
Figure 1.2: Example of a federal statute
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A Closer Look: Finding the Law on the Internet
During the course of your work, you may have occasion

to research laws. Since you will most likely be accessing
legal materials via the
Internet, an excellent site that is free to all users is the
Cornell University Law School Legal Information Institute
(LII), which can be found at
Cornell Law (http://www.law.cornell.edu/) . One advantage
of online research is that you do not need an actual
citation. For example, if you go
to this website and type in "age discrimination law," the
appropriate statute will appear. Please note the extensive
legal materials that are
available online for free.
Many times, �inding federal statutes is not useful because
their language is overly complex and dif�icult to
understand. In that case, be aware
that there are many resources that will explain or interpret
what a statute actually means in down-to-earth language
along with the
underlying reasons for passage of the law. For example,
the Congressional Research Service located at Federation of
American Scientists
(http://www.fas.org/sgp/crs/misc/97-589.pdf) explains many
complicated federal statutes.
Suppose, for example, that your supervisor asked you to
rewrite part of the employee handbook pertaining to
discrimination. Many reliable
websites exist that can explain the law, from the more
basic aspects to detailed and legally sophisticated
information. While these do not
take the place of utilizing an attorney, there are many
daily tasks that you will perform as a manager for which
access to law sites will be
informative and helpful to your work.

State
Every state has its own legislature, which is usually
patterned after Congress, with two chambers (often, house
and senate) comprising elected members
from the two main political parties, one of which forms a
majority. These legislatures enact state laws in a wide
range of areas, including civil and criminal
law and procedure, business regulation, and, of course,
taxation. The power of state legislatures to regulate both
business and private conduct is far greater
than that of the federal government, since most states
reserve to themselves in their state constitutions broad
powers to legislate in all areas touching on
the welfare of their citizens. In addition, the Founding
Fathers explicitly limited the powers of the federal
government to regulate state matters. In general,
states have the right to regulate all areas of private or
public life as long as they do not infringe on any right
protected by the U.S. Constitution (see Table
1.2).
State and local legislation that does not infringe on a
constitutionally protected right is valid as long as it can
pass a relatively �lexible rationalrelationship
test, which simply means that any state law that is
rationally related to the preservation of a valid societal
interest is valid. This litmus test of
constitutionality is a simple one to pass, since nearly any
law can be rationally justi�ied as serving some valid
purpose. The test is somewhat more stringent,
however, when a vital interest or suspect classi�ication is
involved; in such instances, the state must pass a strict
scrutiny test of constitutionality, wherein
the courts weigh the state’s interest against the
infringement of protected rights in determining the validity

of a statute. For purposes of the strict scrutiny
test, a vital interest can be de�ined as any
constitutionally protected right, such as the rights
enumerated under the Bill of Rights. A suspect
classi�ication
would include a law that makes distinctions based on
race, sex, color, religion, or national origin.
Figure 1.3 provides an example of what a state statute
"looks like." Notice that it begins with a number, in this
case 28-1381, which is a typical way to
recognize that this is statutory law. Next, note that it has
a title, in this case the sentence beginning with "Driving .
. ." Notice that there are differences
between the format of a case and a statute. Remember
that cases begin with the name of the parties and are the
result of a controversy between two
people, whereas a statute is passed by a legislative body.
Figure 1.3: Example of a state statute
http://www.law.cornell.edu/
http://www.fas.org/sgp/crs/misc/97-589.pdf
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Local
In addition to state and federal legislatures, "local"
legislative bodies (e.g., city councils and various town
boards and planning commissions) have the power

to legislate in areas allowed them by their local charters.
These local ordinances also carry the weight of law and
form a part of the state’s statutory law.
Often when doing business, these local laws are the �irst
place to check when a question about the legality of a
certain action arises, such as zoning. Local
laws are frequently restrictive and much more narrow in
scope and intent than either state or federal laws.
Constitutional Law
In addition to judicial and statutory law, 51 constitutions
play a signi�icant role in formulating "the law." There
are 51 constitutions because each state has a
constitution (50) and there is one federal constitution, the
U.S. Constitution. A country or state’s constitution is the
most fundamental source of law. It
delineates in general terms the sovereign state’s form of
government and provides the basic framework for its laws.
Article VI, Section 2, of the U.S.
Constitution speci�ically sets the U.S. Constitution as the
"supreme law of the land" (see Appendix A: The
Constitution of the United States of
America
(http://content.thuzelearning.com/books/AUBUS670.12.2/sectio
ns/appa#appA) ). As such, no other law passed by a state
or the federal government can con�lict
with it; any law that does can be found by the courts to
be unconstitutional and void.
Constitutions are necessarily broad documents. In the
United States, the job of interpreting the federal
constitution and that of every state is left to the
courts. Both state and federal courts have the power to
interpret the U.S. Constitution, but the �inal word on the
analysis of the federal constitution is

reserved to the U.S. Supreme Court, whose interpretation
of the Constitution is �inal and represents binding
precedent on all lower courts, state and federal.
The U.S. Constitution serves as an important source of
law in the areas of governmental power. It empowers
states and the federal government to pass and
enforce laws that regulate people’s interactions with one
another and with their government while limiting the
government’s ability to legislate in certain
areas.
Under our Constitution, the federal government is one of
limited powers. Congress has the power to legislate only
in areas that it has been speci�ically
granted the power to regulate by the U.S. Constitution.
The powers of Congress are enumerated in Article I,
Section 8 (see Table 1.2).
Table 1.2: Powers of Congress listed in Article
I, Section 8, of the U.S.
Constitution
Collect taxes and import duties, pay debts, and provide
for the common defense and
general welfare of the United States
Borrow money
Regulate commerce with foreign nations, among the states,
and with the Indian tribes
Establish rules for naturalization and bankruptcy
Coin money, regulate its value, and �ix a standard of
weights and measures

Punish counterfeiting
Establish post of�ices and post roads
Issue patents and copyrights
Set up federal courts inferior to the U.S. Supreme Court
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De�ine and punish crimes on the high seas and crimes
against the United States
Declare war, grant letters of marque and reprisal, and
make rules regarding the seizure of
property under letters of marque and reprisal
Raise and support armies
Create a navy
Regulate the armed forces
Exercise control over the territory encompassing the seat
of government
Under the U.S. Constitution, states are free to create

legislation to regulate any area not speci�ically
reserved to the federal government. Thus, states
can adopt
any laws they wish within their borders as long as they
do not con�lict with a duly enacted federal law or
transgress upon any right guaranteed by the U.S.
Constitution, as interpreted in the courts.
While the Constitution gives broad regulatory powers to
states and the federal government, it also preserves the
rights of the individual in the Bill of Rights.
The most signi�icant body of constitutional law concerns
itself with the prohibitions on governmental powers
enumerated in the Constitution—in particular,
the guarantees provided to individuals by the Bill of
Rights (the �irst 10 amendments to the U.S. Constitution),
the Fourteenth Amendment, and the U.S.
Supreme Court’s interpretation of the broad language in
which they are framed.
But even the U.S. Constitution is not static. Under Article
V of the Constitution, Congress may propose a
constitutional amendment by a two-thirds vote by
the House of Representatives and the Senate. If a
proposed amendment is approved by Congress, it then goes
to all the states’ legislatures. If three-quarters
of the states’ legislatures approve the amendment, it
becomes part of the Constitution and the preeminent law
of the land. States may also propose
amendments to the Constitution to Congress on their own
initiative by votes for such a proposal in two-thirds of
the states’ legislatures. If the states make
the initiative, Congress must decide whether to allow
rati�ication by constitutional conventions in three-quarters
of the states; the change is then rati�ied
upon its approval by three-quarters of the states’

legislatures, by a constitutional convention in three-quarters
of the states, or by a vote for rati�ication by
three-quarters of the states’ legislatures.
Other than the right to each state’s equal representation in
the Senate, there is no limit to what changes can be
written into the Constitution. To date, the
Constitution has been amended 27 times. In the case of
the Eighteenth Amendment (1919) (better known as
Prohibition), which outlawed the
manufacturing, sale, or transportation of intoxicating
liquors in the United States, Congress changed its mind
and repealed Prohibition in the Twenty-First
Amendment (1933), leaving it up to the individual states
to prohibit the sale of alcoholic beverages as they saw
�it.
Administrative Law
One of the least visible entities that "makes law" is the
state or federal administrative agency, whose members
are appointed by government leaders but
who operate quasi-independently, reporting to Congress and
the public. When Congress decided to regulate nuclear
energy, for example, it created the
Nuclear Regulatory Commission and empowered it with the
ability to both create and enforce rules for the safe civil
use of nuclear energy. Although
Congress could have created and enforced these rules
itself, individual members of Congress have neither the
necessary expertise nor time to engage in such
micromanagement of the regulatory environment. The same
holds true for other agencies whose primary purpose is
the regulation of business and industry,
including the Federal Aviation Administration, the
Securities and Exchange Commission, the National Labor

Relations Board, the Federal Trade Commission,
and the Federal Communications Commission, among many
others.
At the state level, state legislatures and governors also set
up administrative agencies to help them regulate business
and carry out other important
governmental functions. Taken together, the rules that all
federal and state agencies promulgate are quasi-judicial
and quasi-legislative. That is, they have
the force of law and form the most important component
of administrative law. Like statutes, however, most
administrative rules and many administrative
agency decisions are subject to judicial review, the
process whereby statutes, administrative rules, and
administrative agency decisions are reviewed by
courts when challenged. (See Chapter 5, Administrative
Law
(http://content.thuzelearning.com/books/AUBUS670.12.2/s
ections/sec5.1#sec5.1) , for a fuller
discussion.)
All agencies have this in common: a need to regulate a
highly technical industry or business environment in order
to ensure safety and fair practices.
Administrative agencies are empowered by either the
executive or legislative branches of the state or federal
government to assist them in carrying out
necessary governmental functions that they lack either the
time or expertise to carry out themselves.
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Wikimedia Commons/Public Domain
John Marshall was the �irstchiefjustice to enact
the
power of judicial review.
1.3 The Three Branches of Government and the
Balance of Power
The U.S. government comprises three branches: judicial,
executive, and legislative. These branches were
designed to balance each other so that one cannot become
too powerful. For example, the courts can
review the actions by the legislative and executive
branches.
No matter how clear the language of a statute or how
plain its import, it is generally impossible in a
common law jurisdiction to interpret a statute, or the
federal or state constitutions, at face value.
Ultimately, the validity of any statute is determined by
the courts, as is its meaning. A case in point is
the Second Amendment to the U.S. Constitution, which
reads: "A well-regulated militia being necessary
to the security of a free state, the right of the people to
keep and bear arms shall not be infringed." Any
reasonable interpretation of that amendment that looks at
the plain meaning of the language used,
particularly when viewed with its revolutionary framers’
inherent distrust of government, leads one to
believe that the U.S. Constitution guarantees the right of
citizens to own and bear guns. Nevertheless,

the amendment has been interpreted to mean only that
individual states can raise their own militias
(e.g., national guards) if they so choose.
Regardless of the wisdom of such an interpretation, one
message is clear: any statute, including the U.S.
Constitution, means only what the courts ultimately decide
it means. This has been the case ever since
Marbury v. Madison (5 U.S. 137 [1803]), when Chief
Justice John Marshall �irst announced the power of
judicial review (the power of courts to declare the acts
of legislative bodies, including the U.S.
Congress, void if they violate the courts’ interpretation of
the Constitution). In what is arguably the
greatest act of judicial activism in the history of U.S.
jurisprudence, Chief Justice Marshall argued, "It is a
proposition too plain to be contested that the Constitution
controls any legislative act repugnant to it, or
that the legislature may not alter the Constitution by an
ordinary act. . . ." This novel proposition was
not challenged. The power of the courts generally, and
ultimately of the U.S. Supreme Court, to declare any act
of the U.S. Congress or any federal or state
law unconstitutional has now been well established by
more than 200 years of legal precedent. Nothing in the
U.S. Constitution itself explicitly reserves this
right to the courts, and British courts did not historically
enjoy a similar privilege (only the king, queen, or
Parliament itself could invalidate a royal edict or
Act of Parliament). Arguably, the chief justice could have
been successfully impeached for overstepping his bounds
and infringing on congressional legislative
privilege. By not challenging the decision, Congress left
the courts as the ultimate authority on the Constitution,
empowering the judicial branch of
government to curb the actions of legislative and executive

branches when these, in its view, transgressed the U.S.
Constitution.
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Key Terms
Click on each key term to see the de�inition.
administrative agency
ns/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.12.
2/sections/fm/books/AUBUS670.12.2/section
A governmental entity established to regulate a particularly
complex, technical area of business or industry (e.g.,
nuclear power, communications,
securities exchanges) that relies on special expertise.
administrative law
Law made by a state or federal administrative agency.
Bill of Rights

The �irst 10 amendments to the U.S. Constitution,
enumerating the individual rights and powers of citizens.
case law
Law made by a judge (or panel of judges) as the result
of a controversy between two parties. Also called judicial
law.
citation
The abbreviations following legal sources that tell the
reader where to �ind the original text of the law.
common law
The name given to the body of law established by the
English and brought to the United States as the �irst law
established in the colonies. Can also
mean caselaw or the aggregate body of case law.
Congress

The federal legislative body that enacts federal statutes.
controversy
A dispute between two or more parties that may be
decided in court.
federal (U.S.) Constitution
The "supreme law of the land" to whose standards all
laws must be submitted.
federal statute
A law passed by Congress and signed into law by the
president.
judicial law
See case law.
judicial review

The power of courts to declare the acts of legislative
bodies, including the U.S. Congress, void if they violate
the courts’ interpretation of the U.S.
Constitution.
lawsuit
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12.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AU
BUS670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/b
ooks/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/secti
ons/fm/books/AUBUS670.12.2/sections/fm/books/AUBUS670.1
2.2/sections/fm/books/AUBUS670.12.2/sections/fm/books/AUB
US670.12.2/sections/fm/books/AUBUS670.12.2/sections/fm/boo
ks/AUBUS670.12.2/sections/fm/books/AUBUS670.12.2/sections
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A controversy brought to court by litigants: the plaintiff
and defendant.
litigation
The act of suing someone in court; a plaintiff bringing a
lawsuit against a defendant.
precedent
A previous case or body of cases that holds sway over
current legal decisions in a common law system.
quasi-judicial
In the context of administrative agencies, describes the
process of adjudicating disputes over agency rules or their
application in hearings similar to

trials, presided over by administrative law judges—that is,
when an agency acts "like a court."
quasi-legislative
Describes the process of creating one’s own rules (such as
when an administrative agency exercises a legislative
power).
stare decisis
The use by a judge of previous decisions (precedent) to
make a legal decision or ruling.
state constitution
Each state’s governing document that sets the standard for
all laws within its borders. State constitutions are
established, written, and amended by
the state legislature.
state statute
A law passed by a state legislature and signed into law

by the governor.
statute
A law passed by either a state or federal legislature.
U.S. Code(U.S.C.)
The set of books that contains all the federal statutes
passed by Congress.
Chapter 1 Flashcards

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Critical Thinking and Discussion Questions
1. Why do business managers and others need to
understand the foundations, origins, and scope of the law?
2. What is the advantage to the American legal system of
using stare decisis?
3. How does the concept of judicial review empower the
court system?
4. Locate the website for your state’s legislature. Find a
recent law passed by your state legislature and give the
citation for the statute as well as a brief
summary of the legislation.
5. Locate a case on the Internet. What is the citation for
the case? What happened in the case? How did you go
about �inding the case? Does the case use
stare decisis in its decision, and if so, how?
6. Why were administrative agencies created? Find the
website for an administrative agency and explain what
types of issues the agency deals with and
whether it holds hearings. If the agency does hold
hearings, describe the types of opinions it issues.
7. Suppose that Judge Harrison is hearing a case in her
court and that the attorneys present her with two disparate
cases to use in her decision. Based on
the concept of stare decisis, how would the judge go
about making her decision? Does Judge Harrison have to
use previous cases to make a ruling in the
current case?
A governmental entity established to regulate a particularly

complex, technical area of business or
industry (e.g., nuclear power, communications, securities
exchanges) that relies on special expertise.
C l i c k c a rd t o s e e t e r m �
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Chapter 28
Sole Proprietorships and Partnerships
Beginning with this chapter, we will explore the most common
forms of business organization in order to understand their
fundamental makeup and
examine the bene�its and liabilities of structuring a business
under each distinct form of business organization. One of the
�irst decisions that must be made
by anyone seeking to establish a new business is what
organizational form to choose. The most common types of
business organizations are:
1. Sole proprietorships;
2. Partnerships;

3. Limited partnerships;
4. Corporations; and
5. Limited liability companies (LLCs).
As we will see, each type of business organization offers
certain bene�its as well as drawbacks that should be carefully
weighed before deciding which form
is best suited to the new venture. Table 28.1 provides a
comparison of the different types of business entities. The
requirements for starting a business
under each of the available forms of business organization vary
widely. For example, individuals who start a business under
their own name alone or in
traditional partnerships will have very few organizational
formalities, whereas those who wish to organize a new business
as a limited partnership,
corporation, or limited liability company (LLC) will need to
strictly follow the requirements of their state's limited
partnership, corporation, or LLC acts.
Consult the of�ice of the secretary of state in your location
for registration requirements.
Table 28.1:Business entity comparison
SoleProprietorship General Partnership Limited
Partnership
TYPE OF
ENTITY
SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION
DEFINED A business owned and run by one

person.
An association of two or more people
for a pro�it.
An entity that is created by permission
of the state whose ownership is
represented by shares of stock.
ADVANTAGES No meetings; run the business by
yourself; no disagreements with others
about how to run the business; liable
only for own mistakes.
Have two or more people to help in
running the business and share the
liability. Have others to discuss the
business plan with and share ideas for
the business.
Limited liability of the owners and tax
advantages.
DISADVANTAGES Taxed on income like regular income;
have all of the liability; have no one else
to contribute ideas.
Taxes. The pro�its of the partnership are
taxed as personal income on each
partner's individual tax return, but the
entity must �ile Form 1065 with the IRS.
Expensive and complicated to create;
must follow state rules and comply with
state and federal �iling laws.

WHO OWNS The sole proprietor. The partners. The
shareholders.
HOW FORMED Many states require a business
certi�icate to be �iled at the county
clerk's of�ice; some also require an EIN
(federal) number.
Many states require a business
certi�icate to be �iled at the county
clerk's of�ice; as between the partners,
the agreement can be informal and oral.
Preincorporators must �ile Articles of
Incorporation with the secretary of
state; state must issue charter. Other
forms required. If public, must comply
with federal and state law regarding the
initial issuance of shares of stock.
WHO OPERATES The sole proprietor. The general
partners, but they can turn
over day-to-day management to a
managing partner.
The corporate of�icers.
LIABILITY OF
OWNERS
The sole proprietor's assets, personal
and business-related, are all subject to a
lawsuit.
All the partner's assets (personal and
business) are subject to a lawsuit.

Liability is limited to one's investment
(i.e., in shares of stock).
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HOW TAXED As personal income on Form 1040. Income is
reported on Form 1040 as
personal income and paid at the
personal rate, but the partnership also
has to �ile Form 1065.
At the state's corporate rate.
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28.1 Sole Proprietorships
The oldest and simplest form of business organization is the
sole proprietorship. Under this form of business organization,
the owner of a business
personally operates and is solely responsible for all aspects of
the enterprise. A sole proprietor who is hired by another to
perform services may also be an
independent contractor. An independent contractor usually

performs one job and works at his or her own discretion. Thus,
if ABC Corporation hired Fisher
Painting, a sole proprietorship owned by Martha Fisher, Martha
would be both a sole proprietor and an independent contractor.
(For other employment
issues relating to sole proprietorships, see Chapter 21
ections/ch21#ch21) , Establishing the
Employment Relationship, and Chapter 27
ections/ch27#ch27) , Principal–Agency Law.)
Formationof a Sole Proprietorship
The greatest bene�it of the sole proprietorship form of business
organization is that few formalities are required for its
formation. To a certain extent,
people wishing to go into business for themselves in a business
that carries their own name can start the enterprise at any time
without the need to seek
state or local approval.
Creating a Tax Entity
The �irst step in starting a sole proprietorship is to open a bank
account so that the business can receive money and pay debts,
either with checks or
electronically. To open a business account, the bank will
require a federal tax identi�ication number (TIN). This
nine-digit number could be the
proprietor's Social Security number or an employer
identi�ication number (EIN) that the IRS assigns the business
(in the format 12-3456789) and is used
for �iling tax returns. (All the information to obtain the federal
tax number can be found at GovServices (http://www.taxid-
gov.us) .)

All sole proprietors do not need to set up an EIN. If a sole
proprietorship does not have employees, it is not required to
have an EIN. In fact, the IRS
generally prefers that sole proprietors use their Social Security
number. However, employers with one or more part-time or
full-time employees, no matter
how small their business, must have one. Also, if they plan to
use an EIN to differentiate between personal and business
�inances, they should have an EIN
before applying for business permits. In addition, if they pay
subcontractors or others for services valued at more than $600
in a calendar year, they may
need to get an EIN. Anyone who registers as a limited liability
company, corporation, partnership, or joint venture must have
an EIN.
Before a sole proprietor can collect any money from sales, the
state tax division will require that the business register for
permission to collect sales tax.
This process may take months, so planning ahead is essential.
Once the federal TIN and state tax collection permission have
been acquired, there are no
other formalities to go through before business can begin.
Licensing
Some types of businesses require licenses to do business, such
as bars (liquor license) or real estate �irms. So a sole
proprietorship must comply with all
state and federal regulations applicable to business concerns.
While there may be few formalities for actually forming the
business, it is not as simple as
simply setting up a lemonade stand.
Doing Business As

Persons who wish to do business under an assumed name
must apply for a permit from the appropriate state of�ice
in their state (typically the secretary of
state's of�ice) and pay a nominal fee for the privilege of doing
business under a trade name. The primary purpose of this
requirement is to prevent different
persons from doing business under the same name in the same
area, which might cause consumers confusion, and to have on
record the names and
addresses of the owners of these businesses so that they may be
readily found and held accountable for any civil or criminal
transgressions. Thus, Rick
Carpenter generally needs no special permission to start a
carpentry business under the name Rick Carpenter or Rick
Carpenter's Carpentry Service, but he
would need to get what is commonly termed a Doing
Business As (DBA) certi�icate from the appropriate
of�ice in his state if he wanted to call his business
Good Homes Carpentry, Expert Carpentry Works, or any other
assumed name.
Benefits of Sole Proprietorships
As already discussed, there are few formalities to launch a sole
proprietorship, and as a result, persons starting a business often
choose this form to begin
with. Other types of businesses, such as limited partnerships,
corporations, and LLCs, require the drafting and �iling of
speci�ic forms and approval from
government of�icials before the business can get off the
ground—a process that requires an investment of time and
money to complete.
Autonomy

If you ask a sole proprietor what the other greatest advantage is
to this form of business, he or she will most likely reply that it
is not having to share the
management with anyone else. The sole proprietor does not
have to ask for anyone's permission, wait for votes or meetings,
or seek others' approval.
Business decisions can occur quickly. Partnerships and
corporations, on the other hand, require the members to reach a
consensus and, in the case of
corporations, sometimes onerous formalities before major
business decisions (e.g., the sale of substantial portions of the
assets of the business or the
acquisition of business property) can be made. These processes
can interfere with the smooth operation of some businesses and
make instituting major
changes slow and often tedious.
Freedom From Vicarious Liability of Co-Owners
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Just as important as the autonomy that the sole proprietorship
permits the business owner is the freedom from liability for the
negligent acts or bad
business decisions of others. General partners in a partnership

are deemed to be agents of the partnership and of one another
under the common law of
partnership (see Chapter 27
ections/ch27#ch27) for a full treatment of principal–agency
law). Thus, if
there are partners A, B, and C, and only C is negligent, A and
B will also be liable. In a corporation (discussed in Chapter 30
ns/ch30#ch30) ), directors and of�icers of a corporation are
deemed to be agents of the
corporation they serve.
Under the law of agency, principals can be bound by the
authorized acts of their agents and are liable for the negligent
acts of their agents committed
during the course of the agency. Thus, partners in a partnership
can be held liable for contracts entered into on behalf of the
partnership by any other
partner as well as for the negligent acts of any partner that
injures a third party. Likewise, a corporation can be held liable
for the authorized acts of its
of�icers and directors, as well as their negligence. Sole
proprietors, however, need never worry about being responsible
for the bad judgment, negligence, or
bad faith of a co-owner, since they are the only owners; they are
responsible only for their own acts and for the acts of their
agents.
Cost Savings
There are signi�icant �inancial advantages for the sole
proprietorship in terms of tax savings and lower administrative
costs. Unlike most corporations, the
sole proprietorship does not pay federal, state, or local income
taxes as a business entity; instead, all income earned by the

business is taxed as simple
income to the owner. This means that if the business makes
$250,000, then that �igure is reported on the sole proprietor's
tax return as income (on a
Schedule C form). Because bookkeeping and legal formalities
for the business are simpli�ied, the administrative costs are
usually lower than for other forms
of business organization. For example, the sole proprietorship
often has less need for legal and accounting services compared
with other business
organizations.
Drawbacks of Sole Proprietorships
While there are many bene�its rooted in the simplicity of the
sole proprietorship, a number of tangible drawbacks stem from
this form of business
organization. Chief among these is the unlimited personal
liability of the sole proprietor for all debts incurred by
the business. The sole proprietorship is
not recognized as a separate entity from its owner; as a
consequence, the debts of the business are deemed to be the
personal debts of the owner, and the
sole proprietor has unlimited personal liability for all the debts,
contractual obligations, and legal judgments the business incurs.
If the business fails, its
owner not only can lose the capital invested in the business but
can also face the prospect of having his or her personal assets
raided to satisfy business
debts if the business assets are insuf�icient to cover business
debts. Consequently, the business failure of a sole
proprietorship often means personal
bankruptcy.
Another downside of the sole proprietorship is that the owner
must rely solely on his or her own assets and expertise in

running the business, including
dealing with pro�its and losses. While the business owner
need not share pro�its or consult with others on business
decisions, neither can the sole
proprietor count on others to lend their expertise, share
business losses, or shoulder part of the responsibilities for the
business's daily operation. Such
assistance can be obtained in the form of hiring employees, but
individuals who draw a salary are seldom as committed to the
enterprise or as motivated to
ensure its success as those whose fortunes are tied directly to
the success or failure of the business. Further, the lack of co-
owners of a business enterprise
can be a particularly important drawback when the business
owner needs to raise capital to expand or to cover extraordinary
expenses.
Property Status and Transferability of Sole
Proprietorships
A sole proprietorship is considered personal property (see also
Chapter 19
ections/ch19#ch19) ). As
such, it can be transferred in whole or in part at any time by its
owner through sale or testamentary gift (through a will). If a
business concern that is
organized as a sole proprietorship is sold or otherwise
transferred by its owner, its nature can change, depending on
both the terms of its transfer and the
wishes of the new owners. A sole proprietorship transferred to
a single person who continues to run the business as a sole
proprietor, for example, retains
its previous status, whereas one transferred to two or more
persons as joint owners becomes a partnership. A sole
proprietorship can also be reorganized

as a corporation if its new owner so desires. The type of
business organization can also be changed by a present owner
by reorganizing the business from a
sole proprietorship to a partnership, corporation, or any other
business organization recognized by the state.
Termination of the Sole Proprietorship
If there are few formalities for starting a sole proprietorship,
there are none for ending one. The sole proprietorship can
terminate as a business concern at
any time at the will of its owner. Alternatively, it can end by
operation of law—upon the death, incapacity, or bankruptcy of
the owner. Consistent with this
business form, when the business ends, its owner will remain
personally liable for the completion of any outstanding
contracts and for meeting any other
outstanding business obligations. If the business ends owing to
the death or incapacity of its owner, the owner's estate or
guardian will be responsible for
paying creditors out of estate funds.
7#ch27
0#ch30
9#ch19
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28.2 Partnerships
When two or more people wish to start a business together, the
sole proprietorship is not a viable entity, and they must
consider another form. One of the
more popular (and less expensive) businesses to begin is a
partnership. There are two types of partnerships: general
partnerships (discussed here) and
limited partnerships (discussed in Chapter 29
ections/ch29#ch29) ).
Partnership law differs from state to state, but all states have
adopted (in one form or another) the Uniform Partnership
Act (UPA). Because there are 50
different states, you need to consult individual state law to
ascertain the most current version. If you wish to see samples
of the act, the following websites
will give you the �lavor of the rules: Click here
(http://www.law.fsu.edu/journals/lawreview/issues/232/lar
son.html) (Florida) and here
(http://codes.lp.�indlaw.com/cacode/CORP/1/2/5.5)
(California). Other states' laws can be accessed on the
Internet. All states de�ine partnership as "an
association of two or more persons to carry on as co-owners a
business for pro�it. . . ." (§ 101(6) Uniform Partnership Act
(1997)). Any time that two or
more individuals are engaged in a business as co-owners with
the intent to make a pro�it, a partnership arises automatically
(de jure, or by law), and the
rights and responsibilities of each partner will be dictated by
the law of partnership in the state where the partnership was
formed.
The contractual provisions contained in the agreement de�ine
the relationship as well as the rights and responsibilities the
partners owe to one another. In

the absence of a partnership agreement, or in cases in which the
partnership agreement fails to de�ine key rights and
responsibilities, the state's common
law of partnership (and, where applicable, the state's
partnership act) will de�ine these rights and obligations.
Formationof a Partnership
Like the sole proprietorship, the partnership form of business
organization does not require speci�ic formalities for its
creation. Oral and written agreements
to enter into a partnership are generally equally binding. A
partnership can also arise by operation of law even absent a
speci�ic agreement: Any voluntary
association by two or more persons to conduct a business for
pro�it as joint owners automatically results in the creation of a
partnership by operation of
law, whether or not the joint owners speci�ically intended it.
This holds true if two people start to sell a product but decide
between themselves that they
are not partners or they don't consider themselves a partnership.
One would think that people contemplating going into business
together would want to put their understanding in writing. That
way, if any disputes or
misunderstandings arose, the agreement could serve as a guide.
In far too many cases, however, partners do not execute a
written partnership agreement.
This may be because of the cost of hiring an attorney, or mere
laziness or aversion to discussing the minutiae of the
agreement. It may also result from the
partnership being a close family relation or friend with whom
they don't foresee con�lict. Whatever the reason, it is a poor
excuse, because forming an
agreement is easy and the forms are available online. For an
example, click here

(http://lergp.cce.cornell.edu/Business_Management/Sample%20
Partnership%20Agreement_110410.pdf) . The consequences
of not setting forth the terms of the
partnership can be dire—the loss of the business, personal debt,
and damaged personal relationships. It pays to be ready for the
worst (dissolution, divorce,
creditors, and personal problems of a partner) in order to
protect the interests of all parties involved. See Figure 28.1 for
a sample partnership agreement.
Figure 28.1: Sample partnership agreement
9#ch29
http://www.law.fsu.edu/journals/lawreview/issues/232/larson.ht
ml
http://codes.lp.findlaw.com/cacode/CORP/1/2/5.5
http://lergp.cce.cornell.edu/Business_Management/Sample%20P
artnership%20Agreement_110410.pdf
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Agency Rights and Duties of Partners
When partners act within the scope of their authority, they are
agents of the partnership and of each other. As such, they bind
the partnership to any
contracts they enter into on the partnership's behalf within the
regular course of business. As is true of all agents, partners
have �iduciaryduties to the
partnership and to each other. As co-owners of the business,
partners also have the interests of principals in the enterprise;
since each partner is both an
agent and a principal of the partnership, each partner also owes
every other partner the duties of a �iduciary. As such, partners
must place partnership
interests above their own personal gain and must execute their
duties as partners with the utmost good faith. (See Chapter 27
ns/ch27#ch27) for a list of �iduciary duties of agents and
principals.) Table 28.2 illustrates these
relationships.
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Table 28.2:Partnership relationships
PARTNER 1 PARTNER 2 PARTNER 3
Principal of 2 and 3 Principal of 1 and 3 Principal of 1
and 2
Agent of 2 and 3 Agent of 1 and 3 Agent of 1 and 2
The general duties owed by agents to their principals, discussed
in Chapter 27, apply to each partner in the partnership. Thus,
partners owe the partnership
and one another:
The duty of loyalty;
The duty of obedience (they must carry out the rightful requests
of the majority of the partners);
The duty to exercise reasonable care and diligence in the
exercise of their partnership duties;
The duty to notify the partnership of any facts learned that are
relevant to the partnership; and
The duty to make an accounting to the partnership of any
bene�its derived from conducting partnership business as well
as any expenses incurred on
the partnership's behalf.
By the same token, the partnership owes each individual
partner:
The duty of reimbursement and indemni�ication; and

The duty of cooperation.
Contractual Rights and Duties of Partners
Although all partners are duty bound as agent and principal,
they are generally free to control the nature of their relationship
to one another and the duties
they owe one another and the partnership by drafting the
partnership agreement. This is true as long as they do not
violate the law or the public policy of
the states in which they do business. Unless there are
provisions to the contrary in the partnership agreement,
partners have an equal right to manage the
business and to share in its pro�its. The mere fact that one
partner makes a greater capital contribution to the partnership
will not give that partner a
greater voice in the management of the business or a greater
share in its pro�its unless it is provided in the partnership
agreement. Similarly, partners must
share in the losses of the business in accordance with the share
of pro�its they receive from it. Thus, if partners share pro�its
equally, they will also share
losses equally. If, however, the partners adopt a formula for
the unequal allocation of pro�its among themselves, the same
formula will apply to the (unequal)
sharing of losses between the partners unless they agree
otherwise.
Limitations on Partners' Ability to Define Their
Rights and Obligations
Although partners are generally free to de�ine their obligations
to each other and to the partnership in the partnership
agreement, some acts are speci�ically
forbidden by law. The Uniform Partnership Act (UPA) prohibits

several activities by partners:
Engaging in certain activities that include unreasonably
restricting the right of partners to access partnership books and
records;
Eliminating the duty of loyalty (though partners may de�ine
what types of activities are not considered a violation of the
duty of loyalty, as long as these
are reasonable);
Eliminating the duty of care or the obligation of good faith
owed by each partner to the partnership;
Restricting the rights of third parties under the act; and
Unilaterally binding the partnership to a contract that assigns
the partnership property for the bene�it of creditors, disposes
of the partnership's
goodwill, or confesses a judgment.
Each of these is discussed in more detail below.
Limitations of Partners' Ability to Bind the
Partnership
Because they are agents, partners can individually bind the
partnership to contracts entered into on its behalf during the
regular course of business. The
same rules of agency apply: there must be express, implied, or
apparent authority. Therefore, if the partner is authorized, and
he or she orders of�ice
equipment from a store in the name of the partnership, the
partnership is legally obligated to pay the bill. There are
certain acts, however, for which the
unanimous consent of all partners is required. The reason for

this is that these acts are so dangerous for the partnership that
every single partner's consent
is needed. These acts include assigning partnership
property for the bene�it of creditors, disposing of
the partnership's goodwill, and confessing a
judgment (Uniform Partnership Act § 9(3)(a–e)).
Assigning Partnership Property for the Bene�it of
Creditors
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Generally, assigning partnership property means that to resolve
a debt with a creditor, the partnership transfers its interest in
speci�ic partnership property.
In such a secured transaction, if the partnership does not pay
the debt, the creditor may keep the property. The UPA
prohibits one partner from assigning
partnership property to a third party without the permission of
all the other partners. This rule makes sense because, as a
partner, you would not want one
of the other partners assigning property interests without your
permission; otherwise, the property of the partnership could be
pledged to another without
your knowledge.
Disposing of the Partnership's Goodwill
Goodwill is the intangible "name recognition" of a business
that has meaning to customers, and in some cases, may be

worth a great deal of money. In this
case, the partnership would be selling its name or goodwill to a
third party. The UPA prohibits one partner from selling the
goodwill of the business without
the permission of the other partners. Again, this is an essential
asset of the business: that all partners should have a say in
assigning property to someone
outside of the business.
Confessing a Judgment
A judgment occurs at the conclusion of a civil trial, when the
jury or judge pronounces a "winner." In the case of confessing a
judgment, however, the debtor
is agreeing that he or she owes the creditor money without
going to court. For a partnership to confess a debt, all the
partners must be in agreement; one
partner cannot sign a "confession" that binds the other partners.
Acts That Interfere With the Partnership's Business
Submitting a partnership claim to arbitration or doing any other
act that would make it impossible to carry out the ordinary
business of the partnership is
likewise prohibited by the UPA.
Limitation on Partners' Right of Compensation
Students are often surprised to learn that partners do not
automatically, or even customarily, receive a salary. In fact,
partners serve without compensation
for their services unless the partnership agreement provides
otherwise. Instead, partners are paid their respective share of
the pro�its by taking a draw,
meaning that they take from the partnership's account their
share of the pro�its. According to the Revised Uniform

Partnership Act (RUPA), a partner is
also entitled to reasonable compensation for winding up
the business after the dissolution of the partnership (RUPA
(1997) § 401(h)).
Partners' Capital Contributions
In the event that a partner dies or withdraws from the
partnership, that person is entitled to the repayment of his or
her capital contribution. Recall that
this was the seed money each partner contributed to fund the
start of the partnership. Additionally, suppose that a partner
made a loan to the partnership
or paid a partnership bill out of personal funds. If so,
payments or advances to the partnership by any partner above
and beyond the agreed-upon initial
capital contribution will earn interest for the partner as of the
date it is made.
Admission of New Partners
Admission of new partners into an existing partnership
agreement can be made only with the unanimous consent of all
partners (RUPA (1997) § 401(i)).
Partners' Right to Inspect Partnership's Books
Every partner has the right to inspect the partnership books
at any time. The books must be kept at the principal
of�ice of the partnership and made
available to every partner, at all times, for inspection and
copying. RUPA also gives the right to inspect to other
interested parties: a partner's agents and
attorneys as well as former partners, their agents, and
attorneys, pertaining to the period during which they were
partners (RUPA (1997) § 403(b)). While

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