CH 37: All Forms of Partnerships

A partnership arises from an:

agreement, express or implied, between two or more persons to carry on a business for a profit

Are co-owners of the business; Have joint control (management) over its operation; Have the right to share in its profits

Partners

Types of partnerships include:

Ordinary (general) partnerships
Special forms of partnerships (limited partnerships and limited liability partnerships)

Partnerships are governed both by:

Common law concepts (particularly those related to agency)
Statutory law

The ___ has drafted uniform laws for partnerships, which have been widely adopted by the states.

National Conference of Commissioners on Uniform State Law

governs the operation of partnerships in the absence of express agreement.

Uniform Partnership Act (UPA)

Each partner is deemed to be the agent of the __ and _.

other partners and partnership itself

Agency concepts apply—specifically, the ___ .

imputation of knowledge of, and responsibility for, acts carried out within the scope of the partnership relationship

In their relationships with one another, partners—like agents—are bound by ___ ties

fiduciary

Partnership law differs from agency law in one important way:

a partner in a partnership has an ownership interest in the firm

The partners agree to commit funds or other assets, labor, and skills to the business with the understanding that ___ . In a nonpartnership agency relationship, the agent usually does not have an ownership interest in the business and is not obligated to bear a portion of ordinary business losses.

profits and losses will be shared

An agreement by two or more persons to carry on, as co-owners, a business for profit.

partnership

T/F: The U P A’s definition of “person” includes corporations.

T

The intent to associate is a key element of a partnership, and one cannot join a partnership unless:

all other partners consent

If there is no formal written partnership agreement, courts will determine whether a partnership actually exists by looking for the following three essential elements, which are implicit in the U P A’s definition:

A joint ownership of the business
A sharing of profits or losses
An equal right to be involved in the management of the business

At common law, a partnership was treated only as an aggregate of individuals and never as a separate legal entity. Meaning A lawsuit could never be brought by or against the firm in its own name. Instead:

Each individual partner had to sue or be sued

Today, a majority of the states follow the U P A and treat a partnership as an entity for most purposes. Meaning:

 A partnership usually can sue or be sued, collect judgments, and have all accounting

performed in the name of the partnership entity.

 As an entity, a partnership may hold the title to real or personal property in its name

rather than in the names of the individual partners.

The partnership itself can be sued

Modern law does treat a partnership as an ___ rather than a separate legal entity in one situation—for federal income tax purposes.

aggregate of the individual partners

a business entity that has no tax liability (The entity’s income is passed to the owners and they pay taxes on the income)

pass through entity

A partnership itself is responsible only for filing an ___ with the IRS. The partnership itself does not pay taxes on the income

information return

a tax return submitted by a partnership that reports the business’s income and losses.

information return

Each partner’s share of profit, whether ___, is taxed as individual income to the partner.

distributed or not

Partners can deduct a share of the ___ on their individual tax returns (in proportion to their partnership interests).

partnership’s losses

a voluntary association of individuals.

partnership

As a general rule, agreements to form a partnership can be either:

Oral
Written
Implied by conduct

Some partnership agreements must be in ___to be legally enforceable.

writing

The rights and duties of partners are governed largely by the specific terms of their partnership agreement.

In the absence of provisions to the contrary in the partnership agreement:

state law imposes certain rights and duties

What are the provisions commonly included in partnership agreement? (5 Main Areas)

Basic Structure of Partnership
Capital Contributions
Sharing of Profits and Losses
Management and Control
Dissociation and Dissolution

What is typically included in the partnership agreement under the BASIC STRUCTURES provision? (5)

Name of the partnership
Names of the partners.
Location of the business
State law under which the partnership is organized.
Purpose and duration of the partnership.

What is typically included in the partnership agreement under the CAPITAL CONTRIBUTIONS provision? (3)

Amount of capital that each partner is contributing.
Agreed-on value of any real or personal property that is contributed instead of cash.
How losses and gains on contributed capital will be allocated, and whether contributions will earn interest.

What is typically included in the partnership agreement under the SHARING OF PROFITS AND LOSSES provision? (2)

Percent of the profits and losses of the business that each partner will receive
When distributions of profit will be made and how net profit will be calculated

What is typically included in the partnership agreement under the MANAGEMENT AND CONTROL provision?

How management responsibilities will be divided among the partners.
Name(s) of the managing partner(s)
Whether other partners have voting rights.

What is typically included in the partnership agreement under the DISSOCIATION AND DISSOLUTION provision? (4)

Events that will cause the dissociation of a partner or dissolve the firm (such as the retirement, death, or incapacity of any partner)
How partnership property will be valued and apportioned on dissociation and dissolution
Whether an arbitrator will determine the value of partnership property on dissociation and dissolution
Whether that arbitrator determination will be binding

If the partnership agreement specifies the duration of the partnership by stating that it will continue until a designated date or until the completion of a particular project, the partnership is called a ___.

partnership for a term

Generally, withdrawing before the expiration date of a partnership for a term, it is considered a:

breach of agreement

Generally, withdrawing from a partnership for a term prematurely (before the expiration date) constitutes a breach of the agreement, and the responsible partner can be held liable for:

any resulting losses

If no fixed duration is specified, the partnership is a ___, which can be dissolved at any time without liability.

partnership at will

The rights of partners in a partnership relate to the following areas:

Management
Interest in the partnership
Compensation
Inspection of books
Accounting
Property

In a general partnership, the partners have ___ in managing the partnership meaning that unless the partners agree otherwise, each partner has ___ in management matters regardless of the proportional size of their interest in the firms

equal rights
one vote

A ___ vote controls decisions on ordinary matters connected with the partnership business, unless otherwise specified in the agreement. BUT decisions that significantly change the nature of the partnership or that are outside the ordinary course of the partnership business require the ___ of the partners.

Majority
Unanimous consent

Each partner is entitled to the proportion of business profits and losses that is specified in the partnership agreement. If the agreement does not apportion profits (indicate how the profits will be shared), the UPA provides that profits will be ___. If the agreement does not apportion losses, losses will be shared in the ___.

Shared equally
Same ratio as profits

A partners income from the partnership takes the form of a ___ of profits according to the partner’s share in the business unless they agree otherwise

distribution

Rights of Inspection of the Books:

Each partner has the right to receive full and complete information concerning the conduct of all aspects of partnership business.

Partners have a duty to provide the information to the firm, which has a duty to preserve it and to keep accurate records.

The partnership books must be kept ___ (unless the partners agree otherwise).

Every partner is entitled to ___.

at the firm’s principal business office
inspect all books and records on demand and can make copies of the materials

Rights of Accounting of Partnership Assets or Profits:

An accounting of partnership assets or profits is required to determine the value of each partner’s share in the partnership.

− An accounting can be either performed ___ or ___.

− A partner has the right to bring an action for an accounting during the term of the partnership, as well as on the partnership’s dissolution.

Voluntarily
Compelled by court order

Property Rights:

Property acquired by a partnership is the property of the partnership and not of the partners individually.

−Except in rare circumstances, partnership property includes: (2)

Originally contributed property
Property purchased by the partnership or in the partnership’s name

What are the rights of a partner? A partner:
May___ (1)
Is not ___(1)
May not___ (2)

Use or possess partnership property (only on behalf of pship)
A co-owner of partnership property
Sell, mortgage, or transfer partnership property to another
Use the property to satisfy personal debts

A partner cannot use the property to satisfy personal debts. A partner’s creditor, however, can petition a court for a ___ .

charging order

An order granted by a court to a judgment creditor that entitles the creditor to attach a partner’s interest in the partnership.

A partner’s interest in the partnership includes their proportionate share of any profits that are distributed.

charging order

The duties and liabilities of partners are derived from agency law.

Each partner is:

An agent of every other partner and acts as both a principal and an agent in any business transaction within the scope of the partnership agreement

A general agent of the partnership in carrying out the usual business of the firm “or business of the kind carried on by the partnership”

Every act of a partner concerning partnership business and “business of the kind” and every contract signed in the partnership’s name bind ___.

the firm

The fiduciary duties that a partner owes to the partnership and to the other partners are:

Care
Loyalty

A partner’s ___ is limited to refraining from “grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law”

duty of care

Under the duty of care: A partner is not liable to the partnership for:

Simple negligence
Honest errors in judgment in conducting partnership business

A partner must account for “any property, profit, or benefit” derived by the partner in the conduct of the partnership’s business or from the use of its property.

A partner must refrain from competing with the partnership in business or dealing with the firm as an adverse party.

duty of trust

The duty of loyalty can be breached by: (4)

Self-dealing
Misusing partnership property
Disclosing trade secrets
Usurping a partnership business opportunity

A partner’s fiduciary duties may not be waived or eliminated in the ___

partnership agreement

In fulfilling fiduciary duties, each partner must act consistently with the obligation of good faith and fair dealing.

The partnership agreement can specify acts that the partners agree will violate a fiduciary duty.

However, A partner may pursue their own interests without automatically violating these duties as long as:

the partner has disclosed the interest to the other partners

The U P A affirms general principles of agency law that pertain to a ___ to bind a partnership in contract.

partner’s authority

If a partner acts ___ , the partnership is legally bound to honor the partner’s commitments to third parties.

within the scope of their authority

A partner may subject the partnership to ___ liability under agency principles.

When a partner is carrying on partnership business with third parties in the usual way, apparent authority exists, and both the partner and the firm share liability.

tort

One significant disadvantage associated with a general partnership is that the partners are personally liable for the

debts of the partnership

In most states, the partnership liability is essentially ___, because the acts of one partner in the ordinary course of business subject the other partners to personal liability.

Meaning each partner in a partnership is ___ for the partnership’s obligations.

unlimited
jointly liable

A doctrine in which a plaintiff must sue all of the partners as a group, but each partner can be held liable for the full amount.

joint liability

The severance of the relationship between a partner and a partnership.

dissociation

Dissociation normally terminates the partner’s actual authority to act for the partnership and to participate in running its business.

Once dissociation occurs, the partnership may continue to:

do business without the dissociated partner.

Once dissociation occurs, the partnership may continue to do business without the dissociated partner.

In that case, the partnership ___.

Unless, the partners no longer wish to (or are unable to) continue the business, then the partnership may be terminated (dissolved).

purchases the dissociated partner’s interest in the business

A partner can be dissociated from a partnership in several ways.

−The most common way is by the partner’s ___

 When a partner gives notice, the remaining partners must decide whether to continue the partnership business.

 If they decide not to continue, the voluntary dissociation of a partner will dissolve the firm.

voluntarily giving notice of an “express will to withdraw”

After a partner’s dissociation and assuming the partnership continues, his or her interest in the partnership must be:

purchased by the partnership

The amount payable to a partner on his or her dissociation from a partnership is normally based on the amount that would have been distributed to that partner if the partnership had been terminated on that date.

buyout price

The formal disbanding of a partnership, corporation, or other business entity.

dissolution

The second of two stages in the termination of a partnership or corporation, in which the firm’s assets are collected, liquidated, and distributed, and liabilities are discharged.

winding up

Any partnership (including one for a fixed term) can be dissolved by the partners’ agreement.

If the partnership agreement states it will dissolve on a certain event, such as a partner’s death or bankruptcy, the occurrence of that event will:

dissolve the partnership

A partnership for a fixed term or a particular undertaking is dissolved by ___ at the expiration of the term or completion of the undertaking.

operation of law

After dissolution, the partnership continues for the limited purpose of winding up the business.
During this time the partners cannot create new obligations and they have authority only to:

Complete transactions begun but not finished at the time of dissolution
Wind up the business of the partnership

An express agreement made at the time of partnership formation for one or more of the partners to buy out the other or others should the situation warrant.

Alternatively, the agreement may specify that one or more partners will determine the value of the interest being sold and that the other or others will decide whether to buy or sell.

Buy sell agreement

A hybrid form of business organization that is used mainly by professionals who normally do business in a partnership

Limited Liability Partnership (LLP)

What are the benefits of the LLP

An LLP is a pass-through entity for tax purposes.
A partner’s personal liability for the malpractice of other partners is limited.
The LLP is especially attractive for professional service firms and family businesses.

A partnership consisting of one or more general partners and one or more limited partners. It is a hybrid partnership consisting of one or more general partner(s) and one or more limited partner(s).

Limited Partnership (LP)

A partner who assumes responsibility for the management of the partnership and has full liability for all partnership debts.

General partner

A partner who contributes capital to the partnership but has no right to participate in its management and has no liability for partnership debts beyond the amount of their investment.

Limited partner