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Rights & Duties
of Business Owners

Understand the legal rights, fiduciary duties, and liability frameworks that govern owners across sole proprietorships, partnerships, LLCs, and corporations.

CPA Regulation (REG)

What Is a Business Owner?

A business owner holds an equity interest in a business entity. Depending on the entity type, they may be called a sole proprietor, partner, member, or shareholder. Ownership creates a bundle of rights (what you can do) and duties (what you must do).

Rights
Powers to manage, profit, vote, inspect records, and transfer interest
Duties
Obligations of loyalty, care, good faith, and accounting to co-owners

Four Key Entity Types

Sole Proprietorship General Partnership LLC Corporation Owner Partners Members Shareholders Unlimited Liability ← Liability Spectrum → Limited Liability

Why Rights & Duties Matter

Understanding owner rights and duties is essential for three reasons: legal compliance, risk management, and CPA exam success. Owners who breach their duties face personal liability, even in limited liability entities.

Legal Compliance
Owners must follow statutory and fiduciary obligations or risk lawsuits
Risk Management
Knowing your exposure helps structure deals and protect assets
CPA REG Exam
Heavily tested area: expect 3-5 questions on owner rights per exam

Core Rights of Owners

1
Right to Profits: Share in profits and losses according to the agreement or statute (equal share if no agreement).
2
Right to Manage: Participate in management decisions. In partnerships, every partner has equal management rights.
3
Right to Information: Inspect books, records, and financial statements of the business.
4
Right to Transfer: Transfer economic interest (but not management rights) unless all partners consent.
5
Right to Vote: Shareholders vote on major decisions: mergers, director elections, and amendments.

Core Duties of Owners

1
Duty of Loyalty: No self-dealing, no competing with the business, no usurping business opportunities.
2
Duty of Care: Act as a reasonably prudent person would in similar circumstances. Avoid gross negligence.
3
Duty of Good Faith: Act honestly and fairly in all dealings with the business and co-owners.
4
Duty to Account: Keep accurate records of all business transactions and report to co-owners.

The Fiduciary Triangle

Loyalty Care Good Faith Fiduciary Obligation No self-dealing Honest conduct Reasonable prudence

Partners vs. Shareholders

Partners Shareholders
Management Direct (equal voice) Indirect (elect board)
Liability Unlimited (general) Limited to investment
Fiduciary Duties Owed to each other Board owes to shareholders
Transfer of Interest Economic only (default) Freely transferable
Dissolution Can trigger dissolution No effect on entity

LLC Member Rights & Duties

LLC members enjoy a flexible structure. The operating agreement is the primary governing document and can customize virtually every default rule, including profit allocation and management authority.

Member-Managed
All members share management authority equally (like a partnership)
Manager-Managed
Designated managers run daily operations; members are passive investors

How to Analyze an Exam Question

1
Identify the entity type: Is it a sole proprietorship, general partnership, limited partnership, LLC, or corporation?
2
Identify the owner's role: Are they a general partner, limited partner, member, manager, or shareholder?
3
Apply default rules: What does the statute say absent an agreement? (UPA, RUPA, ULLCA, RMBCA)
4
Check for modifications: Does the partnership agreement, operating agreement, or bylaws alter the default?
5
Determine liability exposure: Is the owner personally liable, or is liability limited to their investment?

Example: General Partnership

Scenario: Alice and Bob form a general partnership. They have no written partnership agreement. Alice secretly starts a competing business using partnership client contacts.

Alice Bob Partnership Competing Biz Breach of Loyalty

Example: Corporate Shareholder

Scenario: Dan owns 15% of XYZ Corp. He demands to inspect the company's financial records. The board refuses. Does Dan have a right to inspect?

✓ Yes, with conditions
Shareholders have a statutory right to inspect books and records if the request is for a proper purpose.
Proper Purpose
Must be reasonably related to the shareholder's interest (e.g., investigating suspected fraud or evaluating management).

Example: Limited Partnership

Scenario: Eve is a limited partner in FGH LP. She begins making daily management decisions: hiring employees, signing contracts, and negotiating with vendors. What happens?

General Partner Unlimited Liability Eve (Limited) Limited Liability Management Loses Limited Liability Protection

Shareholder Voting Rights

Corporate shareholders exercise control through voting. The type of vote required depends on the matter at hand.

Ordinary Matters
Simple majority of shares present at a meeting with a quorum
Fundamental Changes
Mergers, amendments, dissolution: typically require board approval + shareholder majority

Common Mistakes

✕ Confusing Agent with Owner
An agent acts on behalf of the principal but does not necessarily have ownership rights or fiduciary duties of an owner.
✕ Assuming All Partners Manage
In a limited partnership, only general partners have management authority. Limited partners who manage risk losing their liability shield.
✕ Ignoring the Operating Agreement
Default rules only apply when there is no agreement. Always check whether the operating or partnership agreement modifies the defaults.

Summary Comparison

Sole Prop. Gen. Partner LLC Member Shareholder
Liability Unlimited Unlimited Limited Limited
Management Full control Equal voice Per agreement Elect board
Fiduciary Duty N/A (solo) To partners Depends on mgmt Board owes to them
Transferability Full (sell biz) Economic only Per agreement Freely transferable
Dissolution Owner's choice Can trigger Per agreement No effect

Question 1 of 5

In a general partnership with no written agreement, how are profits allocated among partners?

Question 2 of 5

A limited partner in a limited partnership begins actively managing the business. What is the most likely legal consequence?

Question 3 of 5

Which of the following is not a fiduciary duty owed by a general partner to the partnership?

Question 4 of 5

A shareholder of a corporation wants to inspect the company's financial records. Under the RMBCA, what must the shareholder provide?

Question 5 of 5

In a manager-managed LLC, who owes fiduciary duties to the company and its members?