Partnerships and Limited Liability Partnerships Chapter 30

Agency Concepts and Partnership Law –Partnerships are governed by common law and statutory laws. –Partners are agents and fiduciaries of each other.

Basic Partnership Concepts Uniform Partnership Act. –In the absence of a partnership agreement the UPA, as adopted by most states, governs the partnership.

Basic Partnership Concepts Definition of a Partnership. – UPA defines as “association of two or more persons to carry on a business for profit.” –Partnership presumed under UPA if: 1. Sharing of profits or losses. 2. Joint ownership of the business. 3. Equal right to be involved in the management of the business.

Basic Partnership Concepts Entity versus Aggregate. –Today, a majority of states recognize the partnership as a separate legal entity for the following purposes: (1) To sue and be sued (2) To have judgments collected against it’s assets, and individual partners’ assets. (3) To own and convey partnership property.

Basic Partnership Concepts Tax Treatment. –Under federal (and most state) tax laws, a partnership is treated as a “pass through” entity, with profits, losses, and taxes attributed on a pro-rata basis to the partners.

Basic Partnership Concepts Tax Treatment. –Under federal (and most state) tax laws, a partnership is treated as a “pass through” entity, with profits, losses, and taxes attributed on a pro-rata basis to the partners.

Partnership Formation and Operation The Partnership Agreement. –Can be written or oral, unless the Statute of Frauds requires a written agreement. Duration of the Partnership. –Partnership for a Term. –Partnership at Will.

Partnership Formation and Operation Rights of Partners. –In the absence of a partnership agreement (oral or written) state statutes govern the partner rights. –Management: equal, each one vote, majority wins; need unanimous consent for some actions. –Interest in the Partnership: equal profits, losses shared as profits shared.

Partnership Formation and Operation Rights of Partners. –Compensation: none. –Inspection of the Books: always and also by rep. of deceased partner. –Accounting: when fraud, embezzlement, wrongful exclusion, etc, it is just and reasonable.

Partnership Formation and Operation Rights of Partners. –Property Rights. Property acquired by the partnership remains partnership property. An individual partner has no right to sell, mortgage, or transfer partnership property.

Partnership Formation and Operation Rights of Partners. –Property Rights. Each partner can: Use or possess property on behalf of the partnership. Assign her right to her share of the profits to another to satisfy individual debt.

Partnership Formation and Operation Duties and Liabilities of Partners. –Liability of Partners. If Partner is sued for Partnership debt, Partner has right to insist that other partners be sued with him or her. Joint Liability: third party must sue ALL partners as a group, but each partner can be held liable for the full amount.

Dissociation of a Partner Dissociation occurs when one partner ceases to be associated in the partnership business. –Allows partner to have her interest purchased by the partnership. –Terminates her voting interest in the partnership.

Dissociation of a Partner Events That Cause Dissociation: –Notice. –Triggering Event. –Unanimous Vote. –Court or Arbitrator Order. –Partner’s bankruptcy, assignment of interest, incapacity, or death.

Dissociation of a Partner Effects of Dissociation. –Rights and Duties. –Liability to Third Parties. Partnership bound for two years by acts of outgoing partner, unless proper notice given.

Partnership Termination The termination of a partnership occurs in two stages: –Dissolution (is the legal “death” of the partnership), and –Winding up and Distribution of Assets (collecting and distributing partnership assets).

Partnership Termination Dissolution: by operation of law or judicial decree. –Partners can Agree to Dissolve. –By Operation of Law: Death of a partner. Bankruptcy of a partner. Bankruptcy of partnership. Illegality.

Partnership Termination Dissolution. –By Judicial Decree: Insanity. Incapacity. Business Impracticality. Improper Conduct. Other Circumstances (personal dissension).

Partnership Termination Winding Up and Distribution of Assets. –After dissolution, partnership continues to wind up the partnership affairs. –Creditors’ Claims: 1. Payment of debts, including those owed to partner and nonpartner creditors. 2. Return of capital contributions and distribution of profits to partners.

Partnership Termination Winding Up and Distribution of Assets. –Creditors’ Claims: 1. Payment of debts, including those owed to partner and nonpartner creditors. 2. Return of capital contributions and distribution of profits to partners. If liabilities are greater than assets partners bear losses in proportion in which they shared profits, unless agreed otherwise.

Limited Liability Partnerships Designed for professionals service firms, it allows limits on personal liability of the partners but allows “pass through” tax advantages.

Limited Liability Partnerships Liability in an LLP. –LLP allows professionals to avoid personal liability for the malpractice of other partners.

Limited Liability Partnerships Liability in an LLP. –LLP allows professionals to avoid personal liability for the malpractice of other partners. 24

Limited Partnerships Entity that limits the liability of some of its owners (the limited partners). –Consists of at least one general partner and one limited partner to carry on a business for profit.

Limited Partnerships Formation: –Creature of state statute. Liabilities of Partners. –Only General Partners can manage, but they have a fiduciary obligation to LP’s.

Limited Partnerships Liabilities of Partners. –LP’s enjoy limited liability as long as they do not engage in management functions. –General partner assumes all management and personal liability.

Limited Partnerships Liabilities of Partners. –Limited Partner has no management rights, and liability is limited to the amount of investment; however limited partner can be liable if he participates in management. –On dissolution, the limited partner is entitled to return of capital contributions.

Partnerships and Limited Liability Partnerships Chapter 30