Question

Jack and Mari decided to open a new bakery and pastry shop in Encino. On 10 January 2000 they entered into a written agreement providing that each of them would contribute $50,000 to the capital of the business. Jack and Mari agreed to work full-time for the partnership. It was agreed that both Jack and Mari would have authority to buy and sell property on behalf of the business; they would also have the authority to borrow money for the partnership. They agreed that profits would be shared equally. The business was to be called “Romulus Bakery and Pastry Partnership”.

On 11 January 2000 Jack and Mari made an arrangement with Rob for Rob to become the pastry chef of Romulus. Rob did not sign the partnership agreement; however Jack, Mari and Rob agreed in writing that Rob would work at least 40 hours per week at Romulus. The agreement also provided that Rob was to be paid the minimum hourly wage plus an additional $15 per hour; in addition to this he was to receive 10% of any profits which Romulus might make.

On 12 January 2000 Jack and Mari made an arrangement with Lulu to use a building which Lulu owned as a location for the bakery and pastry shop. The written agreement between Jack, Mari and Lulu provided that Romulus would be allowed to occupy the building for at least one year. Jack and Mari also agreed that Lulu would be paid $500 per month and also 10% of any profits that Romulus might make.

Jack and Mari needed more capital to establish the business. Ned, a friend of Jack’s, said: “I will invest $50,000 in your business, but I don’t want to be a partner.” Jack said: “That’s fine – you will not be a partner but you will get 10% of all profits of the business”.   On 2 February 2000 Ned gave Jack and Mari a check for $50,000. At the same time they each signed a document that stated: “Jack and Mari hereby acknowledge that Ned has invested $50,000 in Romulus Bakery and Pastry Partnership. Ned shall be entitled to 10% of the profits of Romulus Partnership. It is hereby agreed that Ned shall not be a partner in Romulus Bakery and Pastry Partnership.”   

On 1 March 2000 Jack negotiated a written agreement with Santa Rita Bank; the bank loaned $50,000 to Romulus Bakery and Pastry Partnership.

Jack and Mari needed still more capital for the operation of the business. Mari discussed the situation with her old friend Mr. Moneybags (a multi-billionaire). On 20 May 2000 Mr. Moneybags said: “If you have trouble borrowing money, you can always tell people that I am your partner”. On 21 May 2000 Jack and Mari approached Morris, an officer at the Bank of Money, about the possibility of borrowing money from the Bank. Mari said: “Mr. Moneybags is our new partner”. Morris replied: “We will lend you $100,000”.

Romulus was not successful. About 18 months after it began doing business, the bakery and pastry shop closed. Romulus still owed $49,000 to the Santa Rita Bank and $99,000 to the Bank of Money. The Santa Rita Bank and the Bank of Money each brought lawsuits against Romulus, Jack, Mari, Rob, Lulu, Ned and Mr. Moneybags in an attempt to recover payment for the loans that they had made to Romulus Partnership. What would the result of those suits be? Explain.

Answer 1

A partnership and a sole proprietorship business unlike companies do not have separate legal identity. Thus the partners and owners of the business respectively are treated as one. Thus, liabilities and assets of the business is as much that of the business as these are of the partners and owners. In case of debt and liabilities of partnership thus, if the assets of the business fall short then the partners are personally liable to repay the liabilities of the business. In this case after the closure of Romulus, its partners shall be personally liable to repay the debt of the business. Thus, $49,000 and $99,000 that Romulus owed to Santa Rita Bank and Bank of Money respectively will have to be repaid by the business and in case the business fails to repay the debt then the partners of the business shall be personally liable. Hence, in this case only the partners of the business, i.e. Jack, Mari, Rob, Lulu and Mr Moneybag shall be personally liable to repay the loan if Romulus, i.e. the business fails to repay the loan. Hence, the petition filed by the Banks will be successful however, Ned will not be liable to repay the loan as he was not a partner of the business.