P A R T P A R T Partnerships Introduction to Forms of Business and Formation of Partnerships Operation of Partnerships Dissolution & Winding Up Limited Liability Companies & Limited Partnerships 9 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

INTRODUCTION TO FORMS OF BUSINESS AND FORMATION OF PARTNERSHIPS PA E TR HC 37 “It sounds boring, but anything is easy to start – starting a novel, starting a business…it’s keeping the thing going that is difficult.” Prue Leith, author and executive, quoted in The Adventure Capitalists (Grout and Curry, 1998)

Learning Objectives  Choosing a form of business  Creation of partnership  Purported partners  Partnership capital and property  Partnership interests

 Choosing a form of business is important because the business owner’s liability and control of the business vary greatly among the many forms of business Overview What you choose depends on where you want to go

 Sole proprietorship  Partnership  General, limited, limited liability, or limited liability limited partnership  Corporation  Regular “C”, Subchapter “S”, nonprofit, professional  Limited liability company  Including professional form Basic Forms

 A sole proprietorship has only one owner and is an extension of its owner  It is not a legal entity and cannot sue or be sued, so creditors/claimants sue the owner  Advantages : no formalities, taxes flow to owner, owner takes all profit and control  Disadvantage : owner bears all risk of loss Sole Proprietorship

 A partnership has two or more owners or partners and includes several forms: general, limited (LP), limited liability (LLP), limited liability limited (LLLP), or professional  Though a legal entity, a partnership is not a federal tax-paying entity, thus all income or loss must be reported on the individual partner’s federal income tax return whether or not distributed or allocated to partners Partnership

 Advantages : relatively easy to create, has a legal entity but individual taxation, partners control the business, partners take all gain, flexible structure  Disadvantages : partners bear all risk of loss jointly and severally, different levels of liability to partners depending on sub-form Partnership

 A corporation is owned by shareholders who elect a board of directors to manage the business, thus ownership and management of a corporation may be separate  Shareholders have limited liability for the obligations of the corporation  The corporation is a legal and tax-paying entity for federal income tax purposes  Exception: Subchapter S corporations Corporation

 Advantages : shareholders enjoy limited liability for corporate obligations, perpetual existence, ability to raise large amounts of capital  Disadvantages : greater formality required for formation and operation, double-taxation, complexity of structure Corporation

 A limited liability company (LLC) combines the nontax advantages of corporations with favorable tax treatment of partnerships  An LLC is owned by members, who may manage themselves or retain a manager to run the business  Members have limited liability for the obligations of the LLC Limited Liability Company

 Many nations share similar forms of business, including partnership and corporation, though details vary widely Business Forms Worldwide Venice, Italy, where the limited partnership probably originated.

 Every state has enacted partnership laws  The Revised Uniform Partnership Act (RUPA) of 1994, with the 1997 amendments, is a model partnership statute The General Partnership

 RUPA defines partnership as an “association of two or more persons to carry on as co- owners a business for profit.”  Partners share profit and loss  A partnership is a voluntary and consensual relationship and may exist by law even if the parties entered it inadvertently, without considering whether they had created a partnership Partnership Creation

 Several musicians agree to form a band and share profits  Two students stand in line for hours to buy 10 concert tickets. They sell 8 tickets for a $5 fee per ticket and splitting the profits. Partnership Creation -- Examples

 Unlike an ordinary partnership, creating a limited liability partnership (LLP) must comply with a state’s limited liability partnership statute  Formation of an LLP requires filing a form with the secretary of state, paying an annual fee, and using proper terminology  Registered Limited Liability Partnership, RLLP, Limited Liability Partnership, LLP Partnership Creation – The LLP

 If a third person deals with two or more people who seem to be partners and is harmed, the third person may sue to recover damages from both of the apparent partners  RUPA Section 308(e): “persons who are not partners as to each other are not liable as partners to other persons.” Non-Partners Not Liable to Third Parties

 However, under the doctrine of purported partners, if the third party proves that one apparent partner misled him to believe that the two (or more) people were partners, the third party may sue the partner that caused the deception for damages suffered when the apparent partnership failed to perform as agreed Purported Partners

 Facts:  Palmer sued attorney Claydon for malpractice for legal services  Palmer also sued Lawler alleging Lawler was a purported partner of Claydon Palmer v. Claydon

 Legal Reasoning and Holding:  The court reviewed evidence indicating Lawler and Claydon might be partners, a matter for a jury to decide precluding summary judgment  Evidence: expense and office sharing, both names on office sign and stationery, Claydon’s comments…  But Palmer released her claims against Claydon before Lawler’s appeal, so her claims against Lawler were also released Palmer v. Claydon

 When a partnership or limited liability partnership is formed, partners contribute cash or other property – partnership capital – to the partnership  Belongs to partnership as an entity  Tangible and intangible property acquired by a partnership presumptively belongs to the partnership as an entity rather than individual partners Partners and Ownership

 As owner of a partnership or LLP, a partner has an ownership interest in the partnership  The partnership interest includes partner’s: 1. Transferable interest  Partner’s share of profits and losses and right to receive partnership distributions 2. Management and other rights A Partner’s Partnership Interest

 Generally, partnership law applies to joint ventures, but a court may distinguish the two if the business purpose is limited to a single project rather than series of related transactions  Reason: joint venturers usually held to have less implied and apparent authority than partners due to limited scope of the enterprise Partnership or Joint Venture?

Southex Exhibitions v. Rhode Island Builders Assoc.  Facts :  1974: RIBA and show producer SEM entered a 5- year contract; RIBA agreed to sponsor and endorse only SEM shows with net show profits shared 55% to SEM and 45% to RIBA  During negotiations, SEM and RIBA discussed agreement’s use of the term “partners” and SEM’s president claimed “no ownership”  1994: Southex acquired SEM’s interest in the agreement and RIBA contracted with another show producer

Southex Exhibitions v. Rhode Island Builders Assoc.  Procedural History and Legal Reasoning :  Southex sued RIBA to enjoin the 2000 home show claiming the 1974 agreement established a partnership and RIBA breached fiduciary duties by wrongful dissolution  Trial court found for RIBA and Southex appealed  Appellate court reviewed partnership law basics and noted first that the 1974 agreement simply titled “Agreement” rather than “Partnership Agreement”

Southex Exhibitions v. Rhode Island Builders Assoc.  Legal Reasoning and Holding :  Court noted that the agreement was for a limited term and, more interesting, plaintiff Southex entered contracts with third parties “in its own name, rather than in the name of the putative partnership.”  Court concluded partnership did not exist and affirmed the judgment for RIBA

Test Your Knowledge  True=A, False = B  The Revised Uniform Partnership Act (RUPA) is a model partnership statute.  Partnership is an “association of two or more persons to carry on as co-owners a business for profit.”  Partnership capital belongs to the individual partners in equal shares

Test Your Knowledge  Multiple Choice  The partnership interest includes a partner’s :  (a) Management and other rights participation  (b) Share of profits and losses and right to receive partnership distributions  (c) Ownership interest in partnership capital  (d) both A and B  (e) none of the above

Thought Questions  Do you want to start a business? If you wanted to start a business (snowboards, for example), would you choose partnership as the form of business?