Business Organization Structures

 

Eric Forman formed a limited partnership with his father-in-law, Bob Pinciotti, to open a fondue

restaurant in the town of Point Place. Eric was the general partner and owned 75% of the

business. Mr. Pinciotti, with 25% ownership, was the limited partner and invested $100,000.

After one year, difficulties in the restaurant’s operation caused business to drop off, and Eric

called Mr. Pinciotti for advice.

After hearing of the difficulties, Mr. Pinciotti became concerned with the security of his

investment. He took off of work and spent two days observing the restaurant operations. The

two partners then decided to launch a large and expensive television ad campaign to increase

flagging sales. Mr. Pinciotti designed the campaign with the help of Groovy Advertising, a

local ad agency.

There was an immediate increase in sales when the commercials first aired; however, volume

quickly and significantly declined once again. Finally, three months after the ad campaign was

launched, the restaurant closed its doors. The restaurant closed with debts totaling $400,000 and

assets of only $200,000. The debt included $150,000 owed to Groovy Advertising, who sought

payment directly from Mr. Pinciotti since the partnership did not have sufficient cash or other

assets to pay the debt.

Mr. Pinciotti claimed that his liability was limited to the $100,000 invested in the restaurant

and refused to pay any additional money. Groovy Advertising sued the limited partnership,

as well as Eric Forman and Bob Pinciotti individually

Questions:

1. Did Mr. Pinciotti forfeit his limited partnerstatus by hiring Groovy Advertising?

2. Is Mr. Pinciotti liable for the outstanding debts of the limited partnership?

 

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