McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 21 Partnerships

21-2 Partnership Uniform Partnership Act Definition: “Association of two or more persons to carry on as co-owners a business for profit”

21-3 Characteristics of Partnership Voluntary and consensual relationship Between two or more individuals, partnerships, corporations, or other forms of business organization Engaged in numerous business transactions over period of time Partners share profits and management of business

21-4 Situations Where No Partnership: Employer shares profits with employee as payment for work Landlord accepts share of profits for payment of rent Party receives share of profits for payment of debt Party receives share of profits for payment of annuity to widow/representative of deceased partner Party receives share of profits for payment from sale of goodwill of business/other property Party receives share of profits for payment of interest on a loan

21-5 Formation of Partnership Partnership agreement (“articles of partnership”) should include: Name of each partner Name of partnership Duration of partnership How profits/losses divided Division of management responsibilities Contributions from each partner

21-6 Partnership Duties Duty of Loyalty Duty of Obedience Duty of Care

21-7 Partnership Rights Right to Share in Management Right to Share in Profits Right to Compensation Rights to Partnership Property Right to Inspect Books Right to an Accounting

21-8 Circumstances “Triggering” Partner’s Right to an Accounting Whenever partnership agreement provides for an accounting Whenever co-partners wrongfully exclude partner from partnership/from access to partnership books Whenever partner fails to disclose profit/benefit from partnership (breach of “fiduciary duty”) Whenever circumstances render accounting “just and reasonable”

21-9 Interactions Between Partners and Third Parties If partnership has liability, each partner has unlimited personal liability (“joint and several” liability) -“Joint and several” liability: Third party can choose to sue partners separately, or all partners jointly in one action; partners are collectively, as well as individually, liable for partnership debts All partners jointly and severally liable for commission of tort by any partner Implied liability of partners when purchases made to perpetuate partnership’s business

21-10 The Revised Uniform Partnership Act (RUPA) Revised version of Uniform Partnership Act (UPA); use of RUPA varies from state to state

21-11 Partnership Termination Begins when partnership dissolves Once partnership dissolved and assets liquidated and distributed (“winding up”), partnership terminated

21-12 Partnership Dissolution Definition: Partnership cessation Partnership dissolution can result from: -Partner actions -Operation of law -Court action

21-13 Events Resulting in Partnership Dissolution Expiration of term (time period) stated in partnership agreement Fulfillment of established (agreed-upon) partnership objective Partner withdraws from “partnership at will” (partnership that does not specify objective/duration of partnership) Partner withdraws in accordance with partnership agreement Partner expelled from partnership in accordance with partnership agreement

21-14 Examples of Partnership Dissolution By “Operation of Law” Partner dies Partner adjudicated bankrupt Partnership engages in illegal activity

21-15 Examples of Partnership Dissolution By “Court Action” Partner adjudicated insane Impractical to continue partnership business Partner incapable of fulfilling his/her duties established by partnership agreement Partner disagreement as to how to conduct partnership business

21-16 “Winding Up” of Partnership Definition: Activity of completing unfinished partnership business, collecting and paying debts, collecting partnership assets, and taking inventory

21-17 Order of Distribution of Partnership Assets (Upon “Winding Up”) Payment to partnership creditors Payment of refunds/loans to partners for loans made to partnership Payment of partners for invested capital Payment of profits distributed to partners per terms of partnership agreement

21-18 Limited Partnership Definition: Agreement between at least one general partner and at least one limited partner Allows investor (limited partner) to share in profits of partnership Limited partner’s liability limited to amount he/she invests in business

21-19 Requirements for Limited Liability (of Limited Partner) Limited partner has complied in good faith with certificate of limited partnership filing requirement Limited partner does not participate in control of business Limited partner’s surname is not part of partnership name

21-20 Comparison of General Partners and Limited Partners General Partner –Has all rights associated with controlling business –Has unlimited personal liability for all partnership debts –Acts as agent of partnership Limited Partner –Has no right to participate in management and control of business –Liability limited to amount of capital partner has contributed to business –Is not an agent of the partnership

21-21 Reasons For Dissolution of Limited Partnership Expiration of term established in certificate of limited partnership Completion of objective established in certificate of limited partnership Unanimous written consent of all partners (limited and general) Withdrawal of general partner (unless certificate establishes that other general partners will continue operation of business) Court action