Lecture Dynamic business law, the essentials (2/e) - Chapter 21: Partnerships

Lecture Dynamic business law, the essentials (2/e) - Chapter 21: Partnerships. After studying this chapter you will be able to understand: What are the steps in the termination of a partnership? How is a limited partnership formed? What are the rights and privileges of a limited partner and a general partner?

Chapter 21

Partnerships

Uniform Partnership Act Definition:

“Association of two or more persons to carry

on as co-owners a business for profit”

Characteristics of Partnership

• Voluntary and consensual relationship

• Between two or more individuals, partnerships,

corporations, or other forms of business

organization

• Engaged in numerous business transactions

over period of time

• Partners share profits and management of

business

Situations Where No Partnership:

• Employer shares profits with employee as payment for

work

• Landlord accepts share of profits for payment of rent

• Party receives share of profits for payment of debt

• Party receives share of profits for payment of annuity to

widow/representative of deceased partner

• Party receives share of profits for payment from sale of

goodwill of business/other property

• Party receives share of profits for payment of interest on a

Formation of Partnership

Partnership agreement (“articles of

partnership”) should include:

• Name of each partner

• Name of partnership

• Duration of partnership

• How profits/losses divided

• Division of management responsibilities

• Contributions from each partner

Partnership Duties

• Duty of Loyalty

• Duty of Obedience

• Duty of Care

Partnership Rights

• Right to Share in Management

• Right to Share in Profits

• Right to Compensation

• Rights to Partnership Property

• Right to Inspect Books

• Right to an Accounting

Circumstances “Triggering” Partner’s

Right to an Accounting

• Whenever partnership agreement provides for an

accounting

• Whenever co-partners wrongfully exclude partner from

partnership/from access to partnership books

• Whenever partner fails to disclose profit/benefit from

partnership (breach of “fiduciary duty”)

• Whenever circumstances render accounting “just and

reasonable”

Interactions Between Partners and Third

Parties

• If partnership has liability, each partner has unlimited personal

liability (“joint and several” liability)

-“Joint and several” liability: Third party can choose to sue

partners separately, or all partners jointly in one action;

partners are collectively, as well as individually, liable for

partnership debts

• All partners jointly and severally liable for commission of tort by

any partner

• Implied liability of partners when purchases made to

perpetuate partnership’s business

The Revised Uniform Partnership Act

(RUPA)

Revised version of Uniform Partnership Act

(UPA); use of RUPA varies from state to state

Partnership Termination

• Begins when partnership dissolves

• Once partnership dissolved and assets liquidated and distributed (“winding up”), partnership

terminated

Partnership Dissolution

• Definition: Partnership cessation

• Partnership dissolution can result from:

-Partner actions

-Operation of law

-Court action

Events Resulting in Partnership

• Partner withdraws from “partnership at will” (partnership

that does not specify objective/duration of partnership)

• Partner withdraws in accordance with partnership

agreement

• Partner expelled from partnership in accordance with

partnership agreement

Examples of Partnership Dissolution By

“Operation of Law”

• Partner dies

• Partner adjudicated bankrupt

• Partnership engages in illegal activity

Examples of Partnership Dissolution By

“Court Action”

• Partner adjudicated insane

• Impractical to continue partnership business

• Partner incapable of fulfilling his/her duties established

by partnership agreement

• Partner disagreement as to how to conduct

partnership business

“Winding Up” of Partnership

Definition: Activity of completing unfinished

partnership business, collecting and paying

debts, collecting partnership assets, and taking

inventory

Order of Distribution of Partnership

Assets (Upon “Winding Up”)

• Payment to partnership creditors

• Payment of refunds/loans to partners for loans made

to partnership

• Payment of partners for invested capital

• Payment of profits distributed to partners per terms

of partnership agreement

Limited Partnership

• Definition: Agreement between at least one

general partner and at least one limited partner

• Allows investor (limited partner) to share in profits

of partnership

• Limited partner’s liability limited to amount he/she

invests in business

Requirements for Limited Liability (of

Limited Partner)

• Limited partner has complied in good faith with

certificate of limited partnership filing requirement

• Limited partner does not participate in control of

business

• Limited partner’s surname is not part of partnership

name

Comparison of General Partners and

Limited Partners

General Partner

– Has all rights associated

with controlling business

– Has unlimited personal

liability for all partnership

of business

– Liability limited to amount of capital partner has contributed to

business

– Is not an agent of the

Reasons For Dissolution of Limited