Question

Hypothetical #3: Carla Customer v. Raul’s Ice Cream Stand

Raul, a business student, decides to lease and operate an ice cream stand during his summer vacation. Because he could not afford rent payments, Owen Owner agrees to take 40% of Raul’s profits as rent and to provide the stand and the parcel of land on which it stood. Carla Customer buys an ice cream cone from Raul and gets violently ill. Testing at the hospital reveal that the ice cream Raul sold Carla had arsenic in it. Carla sues Raul and Owen.

QUESTION #11: (2 points)

Are Raul and Owen partners? Why or why not?

QUESTION #12: (3 points)

What liability, if any, does Owen have to Carla for her injuries? Explain.

QUESTION #13: (3 points)

What liability, if any, does Raul have to Carla for her injuries? Explain.

QUESTION #14: (1 point)

What would be a preferable legal entity form for this business? Be sure to support your answer with the decision criteria provided in class for choosing a legal entity.

Answer 1

11

Yes. They will be considered partners as they share the profit between them. This is because even though Raul is the key manager, Owen practically owns 40% of the business and extracts the profit from the business. This cannot be considered rent as it is not a fixed amount and a percentage of profit. This appears to be a partnership company where Raul provides labor and management skills while Owen provides capital and assets. Thus they will be considered partners.

12

Owen is one of the partners of the business and since it appears that it is not a limited liability company, the complete ownership and liability is shared by Raul and Owen. This means the liability of Owen to Carla’s injury is 40% of the damages.

13

Since Owen owns 40% of the business and Raul owns 60%, Raul will owe a liability of 60% of the damages ordered by the court.

14

In this particular scenario, we can see that there are practically two key shareholders for the company. In such situation, the smart thing to do is to reduce the liability. This can be done by either LLC/LLP or corporation. Considering that LLC can be comparatively easier to manage for a small business, the preferred legal entity for this business should be LLC.