P A R T P A R T 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 Operation of Partnerships Dissolution & Winding Up Limited Liability Companies & Limited Partnerships

Operation of Partnership and Related Forms PA E TR HC 38 “It is not the individual but the team that is the instrument of sustained and enduring success in management.” Anthony Jay, quoted in Management Teams – Why They Succeed (R. Meredith Belbin, 1984)

Learning Objectives  Duties of partners to the partnership and each other  Compensation of partners  Management powers of partners  Liability for torts and crimes  Lawsuits by and against partnerships and partners

 Under RUPA, partners owe partnership and each other the highest degree of loyalty and the obligation of good faith and fair dealing  A fiduciary relationship  General duties: to serve, account for use or disposal of partnership funds, act within actual authority, avoid interests adverse to partnership, disclose material information, maintain confidentiality Duties of Partners

 Each partner owes a duty of care in doing partnership business  Partner isn’t liable to partnership for honest errors in judgment (negligence)  Partner liable for losses resulting from gross negligence, reckless conduct, intentional misconduct, or a knowing violation of law  Partnership agreement may alter duty of care, but may not eliminate the duty Duty of Care

 Partner not entitled to salary or wages, but compensation is share of business profits offset by shared losses  Shared equally unless otherwise agreed  Generally, management decisions in the ordinary course of partnership business are by majority rule, one vote per partner  Unless otherwise expressed by agreement Compensation & Management

 Every partner in a partnership or LLP is a general manager of the business  Thus, by implied authority, a partner binds partnership and partners for acts within ordinary course of business  By unanimous agreement, partners may modify management rules to expand or limit authority, delegate powers, or alter voting rights Management Powers

 Individual partner may transfer real property owned by partnership and bind the firm if expressly, impliedly, apparently authorized, or ratified by partnership  Partner may not borrow money in name of partnership without express, implied, or apparent authority  Partner with authority to borrow has authority to issue negotiable instruments (e.g., promissory notes) for that purpose Partner Authority

 Under RUPA, a general partnership may sue or be sued in its own name and partners also may be sued (jointly and severally) for contract or tort partnership obligations  Partnership, partners liable jointly, severally  LLP only is liable for contract obligations  LLP and tortfeasor partner liable for torts  Innocent LLP partner bears no tort liability Liability for Torts & Crimes

 If general partnership and individual partners sued, any judgment must first be satisfied from partnership assets, then from personal assets of the partners sued  LLP partners have no personal liability for debts of the business, such as an invoice, leases, or loans Liability for Legal Claims

Test Your Knowledge  True=A, False = B  Partners owe to the partnership and each other an ordinary degree of loyalty  Partners may compete with the partnership as long as it does not harm the partnership.  A partner is liable to the partnership for losses resulting from gross negligence or reckless conduct.  A partnership may sue in its own name

Test Your Knowledge  True=A, False = B  In general, management decisions in a partnership are decided by majority rule.  A general partnership is liable for a partner’s negligence.  For contract obligations of an LLP, only the partners are liable.  A partner with authority to borrow money has authority to issue negotiable instruments

Test Your Knowledge  Multiple Choice  Two accountants formed Caine & Able, LLP. The partnership and each partner were sued for Able’s alleged negligence. Who might be liable?  (a) Only Able due to his negligence  (b) Only the partnership, Caine & Able  (c) The partnership and Able  (d) The partnership and either partner, jointly or severally

Test Your Knowledge  Multiple Choice  A partner in a trading partnership (one with inventory) has what type(s) of authority for borrowing money?  (a) Express authority  (b) Implied and apparent authority  (c) Actual authority  (d) Implied authority  (e) All of the above

Thought Questions  Do you think the result in the Moren v. JAX Restaurant case was correct? Would you have handled things differently?