Sole Proprietorship

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QUESTION: Can these creditors collect from Nancy? Explain.

Sole Proprietorships:
The sole proprietorship is formed very easily and inexpensively which makes it the most commonly used form of business enterprise. The distinctive characteristic of a sole proprietorship is that it is owned and managed by only one person. The sole proprietor has the ultimate responsibility and authority for all decisions affecting the business. In addition, sole proprietors are personally liable for all debts incurred by the business. In Bill’s Dry Cleaning, Bill sought the assistance of Nancy, a venture capitalist to fund his business. Bill accepted Nancy’s terms and as part of the agreement Nancy wanted 12% interest on the loan to Bill or 12% of the business profits, whichever is higher. Without any paperwork filed to the Secretary of State to form an LLP, based on the agreement alone the undertaking above is expected to be treated as a general partnership.

General Partnerships:
General Partnerships are formed by two or more persons carrying on a business for profit. There are no filing requirements for forming a General Partnership. General partners have a duty to manage the business and can be held personally liable for partnership debts and obligations. Without any agreement each partner has an equal vote, profits and losses are shared equally.

The most important factor in establishing a partnership is the sharing of profits and management, in which Nancy wanted 12% distributed to her and also Nancy participated in management by reviewing accounts payable by prioritizing payments for Bill. Bill and Nancy may be seen as general partners, which would make her liable for the partnership debts, but under RUPA no partnership is made when a share of profits is received in payment of 1.) a debt or 2.) interest on a loan. Nancy is not a general partner of Bill, creditors cannot collect from Nancy.
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