By Richard A. Mann & Barry S. Roberts Business Law and the Regulation of Business Chapter 31: Formation and Dissolution of General Partnerships By Richard A. Mann & Barry S. Roberts

Topics Covered in this Chapter I. Choosing a Business Association A. Factors Affecting the Choice B. Forms of Business Associations II. Formation of General Partnerships A. Nature of Partnership B. Formation of a Partnership III. Dissolution of General Partnerships A. Dissolution B. Winding Up C. Continuation After Dissolution

Definition of Partnership An association of two or more persons to carry on as co-owners a business for profit.

Entity Theory Partnership as Legal Entity – an organization having a legal existence separate from that of its members; the RUPA considers a partnership a legal entity for nearly all purposes. Partnership as Legal Aggregate – a group of individuals not having a legal existence separate from that of its members; the RUPA considers a partnership a legal aggregate for few purposes.

Types of Partnerships Term Partnership – partnership for a specific term or particular undertaking. Partnership At Will – partnership in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking.

Formation Partnership Agreement – it is preferable, although not usually required, that the partners enter into a written partnership agreement. Tests of Partnership Existence – the formation of a partnership requires all of the following: Association two or more persons with legal capacity who agree to become partners Business for Profit Co-ownership includes sharing of profits and control of the business

Sample Partnership Agreement THIS PARTNERSHIP AGREEMENT is entered into this _______ day of ________________ 19_____, between the following persons whose names and addresses are set forth below: The above partners hereby agree that upon the commencement date of this partnership they shall be deemed to have become partners in business. The purposes, terms and conditions of this partnership are as follows: 1. NAME-The firm name of the partnership shall be 2. PRINCIPAL PLACE OF BUSINESS - The principal place of the partnership shall be 3. PURPOSE-The business of the partnership is set forth below and includes any other business related thereto. 4. TERM-The partnership shall commence on ____________, 19______, and shall continue for an indefinite time. 5. CAPITAL CONTRIBUTION: DISTRIBUTION OF PROFITS AND LOSSES Capital Contribution Percentage Distribution of Profit and Loss Agreed Upon Cash Valuation of Contribution Specific Contribution Name of Partner

Sample Partnership Agreement (cont.) A division of profits and losses shall be made at such time as may be agreed upon by the partners and at the close of each fiscal year. The profits and losses of the partnership shall be divided between the partners according to the above schedule of “Distribution of Profits and Losses.” 6. CONTROL-The partners shall have the exclusive control over the business of the partnership and each partner shall have equal rights in the management and conduct of the partnership business. Any differences arising as to the ordinary matters connected with the partnership business shall be decided by a numerical majority of the partners. Any act beyond the scope of this partnership agreement or any contract which may subject this partnership to liability in excess of ___________________ DOLLARS shall be subject to the prior written consent of all the partners. 7. DISSOLUTION-In the event of retirement, expulsion, bankruptcy, death, or insanity of a general partner, the remaining partners have the right to continue the business of the partnership under the same name by themselves, or in conjunction with any other persons they select. IN WITNESS WHEREOF, the parties hereto have signed this partnership agreement on the day and year first written above. ________________________________ PARTNER Source: “West’s Book of Legal Forms,” by Robert D. McNutt, Copyright  1981 by West Publishing Co. Reprinted with permission.

Formation Partnership Capital – total money and property contributed by the partners for use by the partnership. Partnership Property – sum of all of the partnership's assets, including all property acquired by the partnership. Partner’s Interest in Partnership – includes the partner’s transferable interest and all management and other rights.

Tests for Existence of a Partnership Two or more persons with capacity? No Yes Business for profit? No Partnership No Yes Co-ownership: profit sharing, loss sharing, control? No Partnership Yes

Partnership Property Compared with Partner’s Interest Definition Tenant in partnership Share of profits and surplus Possession For partnership purposes, not individual purposes Intangible, personal property right Assignability NO: unless all other partners assign their rights in the property YES: but the assignee does not become a partner Attachment YES: but only for a claim against the partnership YES: by a charging order Inheritance NO: goes to surviving partner(s) YES: passes to the personal representative

Dissociation and Dissolution of General Partnerships Under RUPA Definition of Dissociation – change in the relation of partners caused by any partner's ceasing to be associated in carrying on of the business; may be wrongful or rightful (see next 2 slides). Effect of Dissociation – terminates dissociating partner’s right to participate in the management of the partnership business and duties to partnership.

Dissociation & Dissolution under RUPA Partnership at Will Term Partnership Dissociation Dissolution Dissociation Dissolution ACTS OF THE PARTNERS Assignment of partner’s interest Accounting Withdrawal • * Bankruptcy Incapacity Death Expulsion of partner Expiration of term Event specified in agreement Unanimous agreement to dissolve *Dissolution will occur, if within 90 days of dissociation, at least half the remaining partners desire to wind up business.

Dissociation & Dissolution under RUPA Partnership at Will Term Partnership Dissociation Dissolution Dissociation Dissolution OPERATION OF LAW Illegality • COURT ORDER Judicial expulsion of partner * Judicial determination of partner’s incapacity to perform duties Judicial determination of economic frustration or impracticability Application by transferee of partner’s interest if equitable *Dissolution will occur, if within 90 days of dissociation, at least half the remaining partners desire to wind up business.

Wrongful Dissociation Wrongful Dissociation – a dissociation that breaches an express provision of the partnership agreement or in a term partnership if before the expiration of the term or the completion of the undertaking (1) the partner voluntarily withdraws by express will, (2) the partner is judicially expelled for misconduct, (3) the partner becomes a debtor in bankruptcy, or (4) the partner is an entity (other than a trust or estate) and is expelled or otherwise dissociated because its dissolution or termination was willful.

Rightful Dissociation Rightful Dissociation – all other dissociations are rightful including the death of a partner in any partnership and the withdrawal of a partner in a partnership at will.

Causes of Dissolution Dissolution by Act of the Partners – Partnership at will: withdrawal of a partner; Term partnership: (1) the term ends, (2) all partners expressly agree to dissolve, or (3) a partner’s dissociation is caused by a partner’s death or incapacity, bankruptcy or similar financial impairment, or wrongful dissociation if within 90 days after dissociation at least half of the remaining partners express their will to wind up the partnership business; Any partnership: an event occurs that was specified in the partnership agreement as resulting in dissolution.

Causes of Dissolution Dissolution by Operation of Law – a partnership is dissolved by operation of law upon the subsequent illegality of the partnership business. Dissolution by Court Order – a court will order dissolution of a partnership under certain conditions.

Effects of Dissolution Upon dissolution a partnership is not terminated but continues until the winding up is completed. Authority – a partner's actual authority to act for the partnership terminates, except so far as may be appropriate to wind up partnership affairs; apparent authority continues unless notice of the dissolution is given to a third party. Existing Liability – dissolution does not in itself discharge the existing liability of any partner; partners are liable for their share of partnership liabilities incurred after dissolution.

Causes and Effects of Dissolution Partnership Dissolution Act of Partners Operation of Law Court Order Continuation Wrongful Dissolution Expulsion Agreement of Parties Winding Up Limited Power Distribution of Assets Termination

Liability of Incoming and Retiring Partners Partnership Debts Arising: Limited Liability Unlimited Liability No Liability Admission of New Partner Notice of Retirement

Winding Up Completing unfinished business, collecting debts, and distributing assets to creditors and partners; also called liquidation. Winding Up Required – unless all of the partners, including any rightfully dissociating partner, waive the right to have the partnership’s business wound up and the partnership terminated. Participation in Winding Up – any partner who has not wrongfully dissociated may participate in winding up the partnership’s business.

Distribution of Assets The assets of the partnership include all required contributions of partners; the liabilities of a partnership are to be paid out of partnership assets in the following order: (1) amounts owing to nonpartner and partner creditors and (2) amounts owing to partners on their partners’ accounts.

Non-dissolving Dissociations Partnership at Will – a partner’s death, bankruptcy, or incapacity, the expulsion of a partner, or the termination of an entity-partner results in a dissociation of that partner but does not result in a dissolution.

Non-dissolving Dissociations Term Partnership – if within 90 days after any of following causes of dissolution occurs, fewer than half of the remaining partners express their will to wind up the partnership business, then the partnership will not dissolve: a partner’s dissociation by death, bankruptcy or incapacity, the distribution by a trust-partner of its entire partnership interest, the termination of an entity-partner, or a partner’s wrongful dissociation.

Continuation After Dissociation The remaining partners have the right to continue the partnership with a mandatory buyout of the dissociating partner; the creditors of the partnership have claims against the continued partnership.

Power to Bind the Partnership A dissociated partner's actual authority to act for the partnership terminates; apparent authority continues for two years unless notice is given to a third party. Dissociated Partner’s Liability to Third Persons – a partner’s dissociation does not of itself discharge the partner’s liability for a partnership obligation incurred before dissociation; a dissociated partner is liable for a partnership obligation incurred within two years after a partner dissociates unless notice of the dissolution is given to a third party.

Liability of Incoming and Retiring Partners Partnership Debts Arising: Limited Liability Unlimited Liability No Liability Admission of New Partner Notice of Retirement