1. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1 Chapter 27: All Forms of Partnership

2. 2 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives What are the three essential elements of a partnership? What are the rights and duties of partners in an ordinary partnership? What is meant by joint and several liability? Why is this often considered to be disadvantage of the partnership form of business?

3. 3 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives What advantages do limited liability partnerships offer to businesspersons that are not offered by general partnerships? What are the key differences between the rights and liabilities of general partners and those of limited partners?

4. 4 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Partnership arises from agreement, express or implied, between two or more persons to carry on a business together for profit. Partners are agents and fiduciaries of one another, but differ from agents in that they are also co-owners and have equal rights to manage and share in the profits and losses. If a commercial enterprise shares profits and losses, a partnership will be inferred. Law: Uniform Partnership Act. Agency Concepts and Partnership Law

5. 5 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. In the absence of an express partnership agreement (oral or written) most states have enacted the UPA to govern the rights among partners: –Management: equal, each one vote, majority wins; need unanimous consent for some actions. –Partnership Interest: equal profits, losses shared as profits shared. Uniform Partnership Act

6. 6 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. When Does a Partnership Exist? Intent to associate is a key element of a partnership, and all “partners” must consent. Three key elements: –A sharing of profits and losses, AND –A joint ownership of the business, AND –An equal right to be involved in the management of the business.

7. 7 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. When Does A Partnership Exist? No inference of partnership if merely: –Debt. –Wages. –Rent. –Annuity. –Sale of goodwill.

8. 8 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Entity versus Aggregate Theory of Partnerships At common law, partnerships were treated as an aggregate—not separate legal entities. –So, a suit at common law could never be brought by, or against, the firm in its own name; each individual partner had to sue or be sued.

9. 9 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Entity versus Aggregate Theory of Partnerships Today, many states recognize the partnership as a separate legal entity for the following purposes: –To sue and be sued (for federal questions, yes; for state questions, differs). –To have judgments collected against it’s assets, and individual partners’ assets.

10. 10 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Entity versus Aggregate Theory of Partnerships Partnerships are recognized as separate legal entities (cont’d): –To own partnership property. –To convey partnership property. At common law -- property owned in tenancy in partnership, all partners had to be named and sign the conveyance. Under UPA partnership property can be held and sold in firm name.

11. 11 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Partnership Formation Generally, agreements to form a partnership can be: –Oral. –Written, or –Implied by Conduct. Duration. –Partnership agreement can specify duration. –If limited, called “Partnership for a Term.”

12. 12 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Common Terms in a Partnership

13. 13 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Partnership Formation Partnership agreements (Articles of Partnership) should be written. Partners must have legal capacity. UPA permits corporations to be a partner. Partnership By Estoppel: parties who are not partners hold themselves out to 3rd Parties and 3rd Party relies to her detriment.

14. 14 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Rights of Partners Management: equal, each one vote, majority wins; need unanimous consent for some actions. Partnership Interest: equal profits, losses shared as profits shared. Compensation: generally, none.

15. 15 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Rights of Partners Inspection of the Books: always and also by rep. of deceased partner. Accounting: when other partner(s) committing fraud, embezzlement, wrongful exclusion, or anytime it is just and reasonable. Property Rights 

16. 16 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Rights of Partners Each partner has a property right, which includes: –An interest in the partnership. –A right in specific partnership property. –A right to participate in the management of the partnership, as mentioned above.

17. 17 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Fiduciary Duties: Partners are fiduciaries and general agents of one another and the partnership. Authority of Partners: Partners have implied authority to conduct ordinary partnership business but need unanimous consent to sell assets or donate to charity. –Scope of Implied Powers. –Authorized vs. Unauthorized Actions. Duties and Liabilities of Partners

18. 18 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Joint Liability for Contracts. If Partner is sued for Partnership debt, Partner has right to insist that other partners be sued with her. Joint and Several Liability for Torts: 3rd party can sue either one or all partners. 3rd party may collect against personal assets of all partners. Liability of Incoming Partner. Newly admitted partner has no personal liability for existing partnership debts and obligations. Liabilities of Partners

19. 19 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Partner’s Dissociation Dissociation occurs when a partner ceases to be associated with the carrying on of partnership business. Events which can cause dissociation: –Partners giving notice of withdrawal. –Occurrence of event in partnership agreement. –Unanimous vote of partners. –Order of court or arbitrator for wrongful conduct –Bankruptcy, Assignment to Creditors, Incapacity or Death.

20. 20 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Partner’s Dissociation Wrongful Dissociation occurs: –If partner lacks right to dissociate, or –When partner’s withdrawal is in breach of partnership agreement. Effects of Dissociation. –Terminates rights of partner, requires “buyout” of partnership interest, and alters liability to third parties. Case 27.1 Warnick v. Warnick. Proper calculation of buyout price of a dissociated partner do not include purely hypothetical costs of sale.

21. 21 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Partner’s Dissociation Liability to Third Parties. –Under UPA, partnership is liable to third parties for two years by acts of dissociated partner, IF third party reasonably believes dissociated partner was still a partner. –Also, dissociated partner may be personally liable to third parties for his wrongful acts. Partnership should notify all creditors, customers, and clients of a dissociation.

22. 22 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Partnership Termination: Dissolution By Acts of the Partners: –Partners can agree to Agreement. –Partner’s Withdrawal. Partnership for term – breach. No term -- no breach. –Admission of a new partner. –Not a transfer of a partner’s interest. By assignment or attachment by creditor.

23. 23 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Dissolution By Operation of Law: –Death of a partner. –Bankruptcy of a partner. –Bankruptcy of partnership. –Illegality.

24. 24 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Winding Up Partners have no authority after dissolution occurs except to: –Complete transactions already begun. –Wind up by collecting and preserving partnership assets, discharging liabilities, and accounting to each partner for the value of his share.

25. 25 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Winding Up Partnership obligations are paid in the following order: –First, 3rd party creditors. –Second, partner loans to partnership. –Third, return of capital contributions. –Fourth, distribution of the balance, if any to partners.

26. 26 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Partnerships LLP: hybrid form of business that allows for ‘pass-through’ for tax purposes, but limits personal liability from malpractice of other partners. LLP is formed under state law. Family LLP is a limited liability partnership in which the majority of the partners are related to each other. –Used frequently for agriculture.

27. 27 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Partnerships Agreement of two or more persons to carry on a business for profit with at least one general partner and one limited partner. Limits the liability of the limited partners to their investment. An LP is a creature of state statute so filing a certificate with the Secretary of State is required.

28. 28 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LP - Rights and Liabilities The General partner assumes all management and personal liability. Both general and limited partners have a fiduciary duty to each other. Case 27.2 1515 North Wells, LP v. 1513 North Wells, LLC. An LP agreement cannot contract away the fiduciary duties. So a general partner is liable for breach of fiduciary duty to limited partners.

29. 29 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LP - Rights and Liabilities General partners are personally liable to 3 rd parties for breach of contract and tort liability. A corporation (or an LLC) can be a general partner and with limited liability. Limited Partner contributes cash but has no management rights. –Liability is limited to the amount of investment. –A limited partner can forfeit this “veil” of immunity by taking part in the management of the LP. Limited partners have the right to inspect the LP’s books.

30. 30 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LP-Dissociation and Dissolution General partner has right to withdraw, but can lead to dissolution. On dissolution, the limited partner is entitled to return of capital contributions. LP interests are considered securities and regulated by both federal and state securities laws. Limited partners’ liability is limited to the capital investment.

31. 31 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LP-Dissolution Dissolved in much the same way as a general partnership. –Retirement, withdrawal, death bankruptcy or mental incompetence of a general partner will trigger dissolution unless the remaining GP’s consent to continue. Creditors are paid first then partners. Case 27.3 In re Dissolution of Midnight Star Enterprises, LP. A partner cannot force the sale of a limited partnership on the open market if the other partners want to continue the business.

32. 32 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Limited Liability Limited Partnerships Limited Liability Limited Partnership is a type of limited partnership. Difference between LP and LLLP is that the general partner has limited liability, like a limited partner, up to the amount of investment. Most states do not allow for LLLP’s.

33. 33 © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Comparison of General and Limited Partnerships