Comprehensive Volume, 18 th Edition Chapter 45: Partnerships, Limited Partnerships and Limited Liability Companies

Authority A partner’s authority to act for the firm is similar to that of an agent to act for a principal. When there are more than two partners in a firm, the decisions of the majority prevail on ordinary matters relating to the firm’s business unless the decisions are contrary to the partnership agreement.

Types of Authority A partner may have express authority to act as set forth in the partnership agreement or as agreed to by a sufficient number of partners. A partner has the customary or implied power to make contracts, to sell goods in the regular course of business, to make purchases within the scope of the business, and to borrow money for firm purposes. Further, a partner may purchase insurance, hire employees, and adjust claims for and against the firm.

Customary Authority of Partners Make contracts. Sell goods in the regular course of business. Purchase items needed by the business. Borrow money for the firm’s purposes. Buy insurance. Hire employees. Adjust claims for or against the partnership. Execute commercial paper in the name of the firm. An individual partner can:

Limits on Authority A partner may not bind the firm by a contract that makes it impossible for the firm to conduct its business. In the absence of express authority from the firm, an individual partner cannot enter into a suretyship contract or an agreement to submit a partnership dispute to arbitration. Nor can a partner confess judgment against the firm, make an assignment of the firm’s assets, or discharge personal obligations of the partner by paying them with obligations of the firm.

Limitations on Authority of Partner to Bind Partnership Prohibited Transactions Cessation of business, suretyship, agreement to arbitrate, confession of judgement, assignment for creditors. Law of Agency Individual partners, acting in an apparently proper way, have authority to bind the firm. Business Transactions Individual Partner Third Person

Duties of a Partner A partner’s duties are the same as those of an agent. These duties include loyalty and good faith, obedience, reasonable care, the provision of full information on all matters affecting the firm, and the keeping of proper and correct records.

Management Rights If there is no contrary agreement, each partner in a general partnership has the right to take an equal part in the management of the business, to inspect the books, to share in the profits, and, after payment of all of the firm’s debts and the return of capital, to share in the firm’s property or surplus upon dissolution.

Liability of Partners Partners have unlimited personal liability for partnership liabilities. Partners are jointly liable on all firm contracts. They are jointly and severally liable for all torts committed by one of the partners or by a firm employee within the scope of the partnership’s business.

Other Liability Issues A partner remains liable after dissolution unless expressly released by creditors. An incoming partner is not liable for the existing debts of the partnership unless the new partner expressly assumes those debts.

Duties, Rights, & Liabilities of Partners

Limited Partnerships A limited partnership consists of one or more limited partners, and one or more general partners. Limited partners contribute assets or services with no liability for loss beyond their investment, but do not manage the business General partners manage the business and have unlimited personal liability. A certificate must be properly executed and filed when a limited partnership is formed.

Limited Liability Company A limited liability company is a hybrid form of business organization that combines the tax advantages of a partnership with the limited liability feature of the corporation.

Limited Liability Partnership A limited liability partnership is a new form of business organization that allows existing partnerships to convert to this new form without major renegotiation of the underlying partnership agreement. Innocent partners in a limited liability partnership are not personally liable for the torts of other partners beyond their investment in the firm.

Comparison of Business Forms