1. Copyright © 2004 by Prentice-Hall. All rights reserved. PowerPoint Slides to Accompany BUSINESS LAW E-Commerce and Digital Law International Law and Ethics 5 th Edition by Henry R. Cheeseman Slides developed by Les Wiletzky Wiletzky and Associates, Puyallup, WA Chapter 32 General Partnerships Chapter 32 General Partnerships

2. 32 - 2Copyright © 2004 by Prentice-Hall. All rights reserved. Entrepreneurial Forms of Conducting Business Sole Proprietorship General Partnership Limited Partnership Limited Liability Partnership Limited Liability Company Corporation

3. 32 - 3Copyright © 2004 by Prentice-Hall. All rights reserved. Uniform Partnership Act (UPA)  Model act that codifies partnership law.  Most states have adopted the UPA in whole or part. Georgia and Louisiana have not adopted the UPA. Georgia and Louisiana have not adopted the UPA.  The UPA covers most problems that arise in the formation, operation, and dissolution of ordinary partnerships.

4. 32 - 4Copyright © 2004 by Prentice-Hall. All rights reserved. General Partnership  Entity Theory of Partnerships – the UPA considers partnerships as separate legal entities.  Partnerships can: Hold title to personal and real property Hold title to personal and real property Transact business in the partnership name Transact business in the partnership name Sue in the partnership name Sue in the partnership name

5. 32 - 5Copyright © 2004 by Prentice-Hall. All rights reserved. General Partnership (continued)  General partners, or partners are personally liable for the debts and obligations of the partnership.

6. 32 - 6Copyright © 2004 by Prentice-Hall. All rights reserved. General Partnership (continued) Third Party Debt or obligation owed General Partnership Capital investment Personal liability for partnership’s debts and obligations General Partner

7. 32 - 7Copyright © 2004 by Prentice-Hall. All rights reserved. Requirements for a General Partnership  A business must meet four criteria to qualify as a general partnership under the UPA.  It must be: 1. An association of two or more persons 2. Carrying on a business 3. As co-owners 4. For profit

8. 32 - 8Copyright © 2004 by Prentice-Hall. All rights reserved. Requirements for a General Partnership (continued)  A partnership is a voluntary association.  A person cannot be forced to be a partner or to accept another person as a partner.  The UPA definition of person includes natural persons, partnerships, corporations, and other associations.

9. 32 - 9Copyright © 2004 by Prentice-Hall. All rights reserved. Creation of a General Partnership  Express Partnership – General partnership created by words, either verbal or written.  Implied Partnership – General partnership implied from the conduct of the parties.  Certificate of Partnership – A document that a partnership must file with the appropriate state government agency (in some states) to acknowledge that the partnership exists.

10. 32 - 10Copyright © 2004 by Prentice-Hall. All rights reserved. Creation of a General Partnership (continued)  Partnership Capital – Money and property contributed by partners for the permanent use of the partnership.  Partnership for a Term – A partnership with a fixed duration.  Partnership at Will – A partnership with no fixed duration.

11. 32 - 11Copyright © 2004 by Prentice-Hall. All rights reserved. Creation of a General Partnership (continued)  Articles of Partnership – A written partnership agreement that the partners sign.  Although oral partnership agreements are enforceable, it is better practice for the partners to have a written partnership agreement

12. 32 - 12Copyright © 2004 by Prentice-Hall. All rights reserved. The partnership agreement should contain the following information: (1 of 3)  The firm name  The names and addresses of the partners  The principal office of the partnership  The nature and scope of the partnership business  The duration of the partnership  The capital contributions of each partner  The division of profits and losses among the partners  The firm name  The names and addresses of the partners  The principal office of the partnership  The nature and scope of the partnership business  The duration of the partnership  The capital contributions of each partner  The division of profits and losses among the partners

13. 32 - 13Copyright © 2004 by Prentice-Hall. All rights reserved. The partnership agreement should contain the following information: (2 of 3)  The salaries (if any) to be paid to partners  The duties of the partners regarding the management of the partnership  Limitations (if any) on the authority of partners to bind the partnership  Provisions for the admission and withdrawal of partners from the firm and the terms, conditions, and notices required for withdrawal  The salaries (if any) to be paid to partners  The duties of the partners regarding the management of the partnership  Limitations (if any) on the authority of partners to bind the partnership  Provisions for the admission and withdrawal of partners from the firm and the terms, conditions, and notices required for withdrawal

14. 32 - 14Copyright © 2004 by Prentice-Hall. All rights reserved. The partnership agreement should contain the following information: (3 of 3)  Provisions for continuing the partnership upon the withdrawal of a partner, death of a partner, or other dissolution of the partnership  Any other provisions deemed relevant by the partners  Provisions for continuing the partnership upon the withdrawal of a partner, death of a partner, or other dissolution of the partnership  Any other provisions deemed relevant by the partners

15. 32 - 15Copyright © 2004 by Prentice-Hall. All rights reserved. Federal Income Tax Liability of a General Partnership  A general partnership is not a separate tax- paying entity for federal tax purposes.  The partnership’s income and losses “flow through” to the personal income tax returns of the partners.  A general partnership must file an informational return with the IRS.

16. 32 - 16Copyright © 2004 by Prentice-Hall. All rights reserved. Partnership by Estoppel  Arises when a person who is not a partner either makes a representation or consents to a partner’s representation that he or she is a partner.  The non-partner (or ostensible partner) is liable to any person who reasonably relied on the representation when deciding to extend credit to the partnership.

17. 32 - 17Copyright © 2004 by Prentice-Hall. All rights reserved. Property Rights of the Partnership and the Partners  Partnership Property – Property that is originally brought into the partnership on account of the partnership.  Property that is subsequently acquired by purchase or otherwise on account of the partnership or with partnership funds is also partnership property.

18. 32 - 18Copyright © 2004 by Prentice-Hall. All rights reserved. Property Rights of the Partnership and the Partners (continued)  Partner’s Interest – A partner’s share of profits and surplus of the partnership.  A partner may voluntarily assign his or her partnership interest to a third party. The assignee does not become a partner of the partnership. The assignee does not become a partner of the partnership. The assigning partner remains a partner with all the rights and duties of a partner. The assigning partner remains a partner with all the rights and duties of a partner.

19. 32 - 19Copyright © 2004 by Prentice-Hall. All rights reserved. Rights Among Partners  Right to Participate in Management – Unless otherwise agreed, each partner: Has a right to participate in the management of the partnership, and Has a right to participate in the management of the partnership, and Has an equal vote on partnership matters. Has an equal vote on partnership matters.  Under the UPA, a simple majority decides most ordinary partnership matters.

20. 32 - 20Copyright © 2004 by Prentice-Hall. All rights reserved. Rights Among Partners (continued)  Right to an Accounting – A formal judicial proceeding in which the court is authorized to: Review the partnership and the partners’ transactions, and Review the partnership and the partners’ transactions, and Award each partner his or her share of the partnership assets Award each partner his or her share of the partnership assets

21. 32 - 21Copyright © 2004 by Prentice-Hall. All rights reserved. Other Rights of Partners Right to Compensation Right of Indemnification Right to Return of Advances Right to Return of Capital Right to Information

22. 32 - 22Copyright © 2004 by Prentice-Hall. All rights reserved. Duties Among Partners Duty of Loyalty Duty of Obedience Duty of Care Duty to Inform

23. 32 - 23Copyright © 2004 by Prentice-Hall. All rights reserved. Duty of Loyalty  A duty that a partner owes not to act adversely to the interests of the partnership.  This duty is imposed by law and cannot be waived.  If there is a conflict between partnership interests and personal interests, the partner must choose the interest of the partnership.

24. 32 - 24Copyright © 2004 by Prentice-Hall. All rights reserved. Partners breach their duty of loyalty if they: 1.Self-deal with the partner- ship without permission 2.Usurp a partnership opportunity 3.Compete with the partner- ship without permission 4.Make secret profits from partnership business 1.Self-deal with the partner- ship without permission 2.Usurp a partnership opportunity 3.Compete with the partner- ship without permission 4.Make secret profits from partnership business 5.Disclose confidential partnership information 6.Misuse partnership property 7.Make other breaches of their fiduciary duty 5.Disclose confidential partnership information 6.Misuse partnership property 7.Make other breaches of their fiduciary duty

25. 32 - 25Copyright © 2004 by Prentice-Hall. All rights reserved. Duty of Obedience  A duty that partners must adhere to the provisions of the partnership agreement and the decisions of the partnership.  A partner who breaches this duty is liable to the partnership for any damages caused by the breach.

26. 32 - 26Copyright © 2004 by Prentice-Hall. All rights reserved. Duty of Care  The obligation partners owe to use the same level of care and skill that a reasonable person in the same position would use in the same circumstances.  A breach of the duty of care is negligence.  A partner is liable to the partnership for any damages caused by his or her negligence.

27. 32 - 27Copyright © 2004 by Prentice-Hall. All rights reserved. Duty to Inform  A duty a partner owes to inform his or her co- partners of all information he or she possesses that is relevant to the affairs of the partnership.

28. 32 - 28Copyright © 2004 by Prentice-Hall. All rights reserved. Contract Liability of Partnerships and Partners  General partners are personally liable for contract liability of their partnership.  Partners are jointly liable for contracts and debts of the partnership. A plaintiff must name the partnership and all of the partners as defendants in a lawsuit. A plaintiff must name the partnership and all of the partners as defendants in a lawsuit.

29. 32 - 29Copyright © 2004 by Prentice-Hall. All rights reserved. Tort Liability of Partnerships and Partners  The partnership is liable if the tortious act of a partner or an employee or agent of the partnership is committed while the person is acting within the ordinary course of partnership business or with the authority of his or her co-partners.

30. 32 - 30Copyright © 2004 by Prentice-Hall. All rights reserved. Joint and Several Tort Liability of Partners  Partners are jointly and severally liable for tort liability of the partnership. i.e., the plaintiff can sue one or more of the partners separately. i.e., the plaintiff can sue one or more of the partners separately. If successful, the plaintiff can recover the entire amount of the judgment from any or all of the defendant-partners. If successful, the plaintiff can recover the entire amount of the judgment from any or all of the defendant-partners.

31. 32 - 31Copyright © 2004 by Prentice-Hall. All rights reserved. Liability of Incoming Partners  A new partner who is admitted to the partnership is liable for the existing debts and obligations (antecedent debts) of the partnership only to the extent of his or her capital contribution.  The new partner is personally liable for debts and obligations incurred by the partnership after becoming a partner.

32. 32 - 32Copyright © 2004 by Prentice-Hall. All rights reserved. Summary: Personal Liability of General Partners Issue Joint Liability Joint and Several Liability Type of lawsuit Contract action Tort action Defendants Plaintiff must name all partners as defendants Plaintiff can sue partners individually Recovery If successful, the plaintiff can recover the judgment against all or any of the defendants If successful, the plaintiff can recover the judgment against all or any of the named defendants Indemnification Partner who pays judgment can recover contribution from other partners for their share of the judgment

33. 32 - 33Copyright © 2004 by Prentice-Hall. All rights reserved. Termination of Partnerships  General partnerships are dissolved and terminated in three stages: 1.Dissolution 2.Winding-up 3.Termination

34. 32 - 34Copyright © 2004 by Prentice-Hall. All rights reserved. Dissolution by Acts of the Partners  Termination at a stated time or upon accomplishment of the stated purpose of the partnership  Withdrawal of a partner  Expulsion of a partner  Addition of a partner  Mutual agreement of the partners

35. 32 - 35Copyright © 2004 by Prentice-Hall. All rights reserved. Wrongful Dissolution  When a partner withdraws from a partnership without having the right to do so at that time.  The partner is liable for damages caused by the wrongful dissolution of the partnership.

36. 32 - 36Copyright © 2004 by Prentice-Hall. All rights reserved. Dissolution by Operation of Law  Death of any partner  Bankruptcy of any partner or the partnership  Illegality

37. 32 - 37Copyright © 2004 by Prentice-Hall. All rights reserved. Dissolution by Judicial Decree  Partner is adjudicated insane  Partner is incapable of performing his or her partnership duties  Partner is guilty of improper conduct that prejudices his or her ability to perform partnership business or persistently breaches the partnership agreement.  The partnership can be carried on only at a loss.

38. 32 - 38Copyright © 2004 by Prentice-Hall. All rights reserved. Winding-Up  Process of liquidating the partnership’s assets and distributing the proceeds to satisfy claims against the partnership.  The surviving or remaining partners have the right to wind-up the partnership.  A bankrupt partner cannot participate in the winding-up of a partnership.

39. 32 - 39Copyright © 2004 by Prentice-Hall. All rights reserved. Distribution of Assets Upon the winding-up of a dissolved partnership, the assets of the partnership are distributed in the following order [UPA § 40(b)]: 1.Creditors (except partners who are creditors) 2.Creditor-partners 3.Capital contributions 4.Profits

40. 32 - 40Copyright © 2004 by Prentice-Hall. All rights reserved. Termination  After the proceeds are distributed, the partnership automatically terminates.  Termination ends the legal existence of the partnership.