Partners' Dissocation,Dissolution, and Termination of Partnerships & LLPS (Outline 7)

Dissociation

Any partner ceasing to be associated in the carrying on of the business.

There are three important acts or events that cause dissociation, what is the first one?(1)

Withdrawal or Expulsion of any partner

Withdrawal or expulsion of any partner?

Any partner that quits, any partner that is expelled.

There are three important acts or events that cause dissociation, what is the second one?(2)

Death or adjudicated incapacity of any partner

Death or adjudicated incapacity of any partner?

A court makes a decision that the partner is incapacitated

There are three important acts or events that cause dissociation, what is third one?(3)

Bankruptcy of any partner

Would it be dissociation if a partner transferred her partnership interest?

No, the partner is not quitting.

When a partner transfers her partnership interest what do they lose?

They lose their right to profits, but they keep their rights in management and making decisions.

There are two reasons why upon dissociation, the business is not necessarily ended: What is the first reason?

Partnership agreements often provide that upon dissociation the business shall continue with the same name, etc.

There are two reasons why upon dissociation, the business is not necessarily ended: What is the second reason?

Even if the agreement doesn’t specify the business shal continue, the remaining partners may agree to continue the business without the dissociated partner.

Can any partner who did not wrongfully dissociate force dissolution and winding up?

Yes, unless the agreements says otherwise, any partner who did not wrongfully dissociate could force a dissolution and winding up.

Dissolution

An event that marks the formal ending or disintegration of an entity.

Winding Up

A process which liquidates all assets, pays off all creditors, sells all assets, and then terminates the partnership.

Jordan, Kang, & Lusardi put up equal amounts of money and formed JKL, LLP. Over the next few years, Jordan brought in 80% of the clients and revenue of the LLP, but her share of the profits was only 1/3.

Jordan believed this was unfair, so she quit and demanded a winding up. Kang and Lusardi insisted she had no right to do that because the partnership agreement was silent about the duration of the LLP and the right of a partner to dissociate. Was Jordan’s dissociation wrongful

No, because she has the right to quit.

Default rule

Unless the partnership states a specific duration, then its a partnership at will.

Partnership at will

A partnership that arises where no fixed term has been agreed upon for a duration → a partnership may be dissolved at anytime

Will the LLP be wound up?

Yes, any partner that did not wrongfully dissociate can demand a wound up.

What is the first example of wrongful dissociation?(1)

Quitting before the term expires (when there is a fixed duration specified in the partnership)

What is the second example of wrongful dissociation?(2)

The partnership was for a particular undertaking that has not been completed. (example: halfway in a unfinished construction project partner A wants to dissociate but they can’t as its unfinished)

Is the death, incapacity, or insanity of a partner wrongful dissociation?

No, the death, incapacity, or insanity of a partner is not wrongful dissociation.

Should the partners be able to make new contracts for the LLP during the winding up phase?

No, because dissolution marks the beginning of the end of the carrying on of the business. + Partners lose authority for making contracts for new businesses, except for contracts to sell assets.

Should the partners be able to make new contracts for themselves during the winding up phase?

Yes, because they are not competing with their former partners as the company has dissolved. As long as it does not harm the corporation being taken.

Suppose A,B, & C have a partnership, then A quits and B& C continue the business without A. if their agreement is silent, B& C must pay A what?

B & C must pay A the book value of her interest.

Book value

the value of a partner’s share in the partnership, as recorded in the partnership’s books, which includes the partner’s contributions, share of profits or losses, and any withdrawals or distributions.

Partners Book value formula

Capital Contributions+Share of Profits/Losses−Withdrawals

Book Value of Partnership formula

Total Assets−Total Liabilities

Where does one find book value?

In the partnership's financial records

Is book value a good number for this purpose?

Not really as it is often a lower number and may not reflect the true market or fair value of the partnership.

Under the UPA default rule, a dissociated partner should receive going concern value or liquidation value?

A dissociated partner receives which ever value’s is highest between Going Concern Value or Liquidation Value

Going Concern Value

the value of the partnership as an ongoing entity

Liquidation value

the value of the partnership's assets if they were sold off

Why aren’t they the same number

The going concern value takes into account the business's future earning potential, goodwill, and reputation, whereas liquidation value is based on the immediate sale of assets without considering the business's potential to continue generating profits.

Do even partners who wrongfully dissociate still receive their fair value of their interest?

Yes, even partners who wrongfully dissociate still receive their fair value of their interest, minus their liability for their wrongful dissociation.

Year 1 Year 2 Year 3 |---------------------------------------|-----------------------------------|---------------------------->

ABC formed A leaves D joins

A. During years 2 & 3, what is A's liability to creditors for debts that arose back in year 1?

A is still liable for debts that arose in year 1, as long as the dissolution and notice have not taken place.

Year 1 Year 2 Year 3 |---------------------------------------|-----------------------------------|---------------------------->

ABC formed A leaves D joins

If A pays, should A get full indemnity from B and C, or just contribution and why?

If A pays the partnership's debts after dissociation, A is entitled to contribution from the remaining partners (B and C) for their respective shares of the debt.

Year 1 Year 2 Year 3 |---------------------------------------|-----------------------------------|---------------------------->

ABC formed A leaves D joins

Does A have any liability for debts that arise in years 2 and 3?

No, A does not have liability for debts that arise after A has dissociated → Once a partner dissociates from the partnership, they are no longer liable for new debts incurred by the partnership.

What type of notice does a statement of dissociation give to anyone who is aware of it 90 days after filing?

Actual notice

What type of notice does a statement of dissociation give to the whole world 90 days after filing?

Constructive notice

In who’s best interest is it to give notice after a statement of dissociation

It is in the interest of The dissociated partner, the partnership, and creditors.

When the partnership dissolves, the partners can file a statement of dissolution, which does what?

It gives notice that the partners’ authority is limited to winding up

Year 1. Year.2 Year 3 |---------------------------------------|-----------------------------------|---------------------------->

ABC formed A leaves after Year one D joins Year 3

What is D's liability to creditors for debts that arose back in years 1 and 2?

D has no liability for debts incurred prior to joining the partnership

Year 1. Year.2 Year 3 |---------------------------------------|-----------------------------------|---------------------------->

ABC formed A leaves after Year one D joins Year 3

What is D's liability to creditors for debts that arose in year 3?

D is liable for debts that arose after joining the partnership in year 3.

Distribution of Assets?

The process of distributing the remaining assets of a business, partnership, or organization after it has settled its debts, obligations, and liabilities

Distribution of Assets order:

1. Creditors, including secured creditors

2. Partners' loans to the partnership.

3. Partners' capital accounts

Luis, Miori, and Anita formed a partnership. Luis contributed $12 million in capital, Miori contributed $8 million, and Anita contributed $4 million. They agreed to share profits as follows: Luis, 60%; Miori, 30%; Anita, 10%, but the partnership agreement was silent regarding sharing losses.

The business eventually failed and was liquidated. After partnership assets were all paid out, partnership creditors were still owed $6 million. How much, if anything, will each partner pay or receive in liquidation of the partnership?

How much total capital was earned from the partnership?

12 million (Luis) + 8 million (Miori) + 4 million (Anita) = 24 million total capital

What are their partnership liabilites

They owe 6 million from creditors

What is Luis’s share and how much does he owe?

Luis owes 3.6 million (60% x 6 million= 3.6 million)

What is Miori’s share and how much does he owe?

Miori owes 1.8 million (30% x $6 million = 1.8 million)

What is Anita’s share and how much does she owe?

Anita owes 600,000 (10% x 6 miliion = 600,000)