Sole proprietorships, personal guarantees, and business liability ethics

¶ … sole proprietorship is a legally binding business term that refers to a single individual as the only owner and representative of a business entity. There are tax obligations related to a sole proprietorship in addition to legal obligations. The main attributes of a sole proprietorship is that an individual, although just a person, is treated like a corporate entity. Additionally, a sole proprietorship always consists of only one person.

Barr certainly did not act ethically in denying responsibility for the Stone Scone's pecuniary obligations. In fact, she acted unethically in this particular example. Since she was the sole individual involved in the corporate entity known as Stone Scone (via a sole proprietorship), all business, financial, taxation, and legal obligations of that company pertained to her. It little matters that she changed the status of that corporate entity after she had accrued a substantial debt. Doing so was merely an unethical attempt on her part to avoid her financial responsibility. Ethical behavior would have involved acknowledging the financial burden and attempting to pay it off accordingly.

Sole proprietors are held personally liable to the debts of their business due to the specifications of a sole proprietorship. Specifically, this status exists as a way for single people to function in and engage in business dealings. There is no one else who can assume responsibility for such a corporate and legal entity. The personal responsibility of a sole proprietorship is one of the boons associated with this entity. As such, no one else can take responsibility for it. Therefore, all people who have sole proprietorships are personally responsible for everything that proprietorship is involved in.

A personal guarantee is a guarantee of payment. It ensures one party that another party will pay it. Frequently, the person who signs the guarantee is affiliated with, but is not actually the other party. For example, Donald Peterson was the person who signed the guarantee agreement in the transaction that eventually led to Chrysler Credit Corporation v. Peterson. It is key to note that a personal guarantee is always based on an individual's assent to do something, as opposed to a corporate entity. That personal guarantee is legally binding, and can serve as the means to successfully pursue legal action against a person on behalf of a transaction that actually involved a corporation.

In some respects Peterson acted ethically; in other respects, he did not. It was ethical of Peterson to take on the responsibility of guaranteeing the remuneration of the financial transaction that involved Chrysler and Metro Dodge. However, if he had truly acted ethically he would have either remunerated, or came up with terms to remunerate, Chrysler without legal action occurring. It is one thing to state that you will guarantee someone something, it is another thing to actually do it. Peterson was ethical for doing the former, and was not as ethical as he could have been in the circumstances pertaining to the latter.

It is possible that Chrysler can recover against Peterson's limited partnership interests. Since he had signed a personal guarantee, his interests in his limited partnerships apply to him personally. Therefore, it is distinctly possible that Chrysler can recover from these external entities involving Peterson and his assets, since these involve him directly as an individual.

The most salient facts that the Supreme Court of Ohio based its decision on in the matter of Edward A. Kemmler Memorial Foundation v. Mitchell is that Mitchell and Davis entered into a general partnership. As such, the actions of one of the partners, when done on behalf of the partnership, effectively bind the other partner. This fact is the nature of virtually all general partnerships -- there is a degree of equity in the responsibilities of the corporate entity on behalf of both partners. Moreover, the Supreme Court also based its decision on the fact that the promissory note to the foundation was signed by Mitchell expressly as a partner. Finally, the Foundation had no knowledge of the separate agreement that the partners entered into that stated that only Davis was responsible for any monetary obligations. Since the partners did not make the Foundation aware of this fact, both men were liable for the money owed to it.

Had the partners truly wanted to create a situation in which Davis alone, and not Mitchell, was liable for the funds owed to the foundation, the pair should have made this point known to the Foundation prior to signing the promissory note. They can not simply tell one another that only one of them is responsible for finances when they are in a general partnership. They must tell this fact to the other entity into which they are doing business, which, in this case, was the foundation. Lastly, the Davis should not have signed the promissory note with the final word of partner. Doing so reinforced the fact that he was signing on behalf of his partnership.

Liability of general partners certainly affects the way that business is conducted in the United States. At best, it holds that the financial responsibility that one partner incurs as part of his or her partnership applies to all involved in the partnership. Thus, financial burdens can be shared and are not as onerous as they could be. At worst, the liability of general partners can make individuals who were not directly responsible for something liable for actions that their partners did independently.