what are the three essential elements of a partnership? what are the three essential elements of a...

• What are the three essential elements of What are the three essential elements of a partnership?a partnership?• What are the rights and duties of What are the rights and duties of

partners in an ordinary partnership?partners in an ordinary partnership?• What is meant by joint and several What is meant by joint and several

liability? Why is this often considered to liability? Why is this often considered to be a disadvantage of the partnership be a disadvantage of the partnership form of business? form of business?

© 2012 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. 2

• What advantages do limited liability What advantages do limited liability partnerships offer to businesspersons partnerships offer to businesspersons that are not offered by general that are not offered by general partnerships?partnerships?• What are the key differences between What are the key differences between

the rights and liabilities of general the rights and liabilities of general partners and those of limited partners?partners and those of limited partners?


• Agency Concepts and Partnership Agency Concepts and Partnership Law:Law:–Partnerships are governed both by

common law and by statutory laws.–Each partner is deemed to be an agent

and fiduciary of the other.–There may be imputation of liability.


• Uniform Partnership Act. Uniform Partnership Act. –In the absence of a partnership

agreement, the Uniform Partnership Act, as adopted by most states, governs the partnership.


• Definition Definition of a Partnership: created of a Partnership: created when two or more persons when two or more persons (including corporations) agree to (including corporations) agree to carry on business for profit as co-carry on business for profit as co-owners with equal right to manage owners with equal right to manage and share profits (UPA).and share profits (UPA).


• When Does a Partnership Exist? When Does a Partnership Exist? Under the UPA there is a Under the UPA there is a presumption presumption of of a partnership if:a partnership if:–1. A sharing of profits or losses. –2. A joint ownership of the business.–3. An equal right to be involved in the

management of the business.


• Entity versus Aggregate Entity versus Aggregate Theory.Theory.–At common law, a partnership was not a

separate legal entity distinct from its owners. –Today, a majority of 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). © 2012 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. 8

• Entity versus Aggregate Entity versus Aggregate (cont’d).(cont’d).–A partnership is considered a separate

legal entity (cont’d):• To have judgments collected against its assets,

and individual partners’ assets.• To own and convey partnership property.

–Tax Treatment:–Under federal tax law it is a “pass

through” entity.© 2012 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. 9

• The Partnership Agreement The Partnership Agreement can be can be written or oral, unless the Statute of written or oral, unless the Statute of Frauds requires a written agreement. Frauds requires a written agreement. • Duration Duration of Partnership.of Partnership.–Partnership for a Term. –Partnership at Will.


• Partnership by EstoppelPartnership by Estoppel. . Occurs when Occurs when a person who is not a partner holds a person who is not a partner holds himself out to third parties and the third himself out to third parties and the third party relies to her detriment. In this case party relies to her detriment. In this case the “nonpartner” is considered an agent the “nonpartner” is considered an agent whose acts are binding on the whose acts are binding on the partnership.partnership.


• Rights of PartnersRights of Partners: : In the absence of a In the absence of a partnership agreement (oral or written) state partnership agreement (oral or written) state statutes govern the partner rights. 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.


• Rights of Partners Rights of Partners ((cont’dcont’d): ): –Compensation: none.–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.


• Rights of Partners Rights of Partners ((cont’dcont’d): ): –Property Rights. Property acquired by

the partnership remains partnership property. An individual partner has no right to sell, mortgage, or transfer partnership property. • However, creditor of individual partner can petition a

court for a charging order to attach to individual partner’s property interest.


• Rights of Partners Rights of Partners ((cont’dcont’d): ): –Property Rights (cont’d). 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.


• Duties and Liabilities of Partners. Duties and Liabilities of Partners. –Fiduciary Duties. Partners are

fiduciaries and general agents of one another and the partnership. –CASE 32.1 Meinhard v. Salmon Meinhard v. Salmon (1928).

How did Salmon violate his duty of loyalty to Meinhard?


• Duties and LiabilitiesDuties and Liabilities (cont’d). (cont’d). –Authority of Partners.• UPA affirms general principles of agency

law.• Partner may be able to subject

partnership to tort liability.• Partner has apparent authority when

carrying out partnership business.


• Duties and LiabilitiesDuties and Liabilities (cont’d). (cont’d). –Authority of Partners (cont’d).• Scope of Implied Powers.• Authorized versus Unauthorized

Actions. If partner acts within scope of authority, partnership is bound. Partners generally do not have authority to make charitable contributions.


• Duties and LiabilitiesDuties and Liabilities (cont’d). (cont’d). –Liability of Partners. If Partner is sued for

Partnership debt, Partner has right to insist that other partners be sued with her.• Joint Liability: third party must sue ALL

partners as a group, but each partner can be held liable for the full amount.


• Duties and LiabilitiesDuties and Liabilities (cont’d). (cont’d). –Liability of Partners (cont’d). • Joint and Several Liability: third party can sue

either one or all partners. 3rd party may collect against personal assets of all partners.• Liability of Incoming Partner: new admitted

partner has no personal liability for existing partnership debts and obligations.


• Partner’s Dissociation.Partner’s 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.


• Partner’s DissociationPartner’s Dissociation (cont’d). (cont’d).–Events Causing Dissociation:• Notice.• Triggering Event.• Unanimous Vote.• Court or Arbitrator Order.• Partner’s bankruptcy, assignment of

interest, incapacity, or death.


• Partner’s DissociationPartner’s Dissociation (cont’d). (cont’d).–Wrongful Dissociation.• Dissociating partner breaches partnership

agreement.• Dissociating partner files bankruptcy.•May be liable for costs.


• Partner’s DissociationPartner’s Dissociation (cont’d). (cont’d).–Effects of Dissociation: rights and duties.–Liability to Third Parties. Partnership

bound for two years by acts of outgoing partner, unless proper notice given.


• The termination of a partnership The termination of a partnership occurs in two stages:occurs in two stages:–Dissolution (is the legal “death” of the

partnership), and–Winding up and Distribution of Assets

(collecting and distributing partnership assets).


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


• DissolutionDissolution: (cont’d).: (cont’d).–By Judicial Decree:• Insanity.• Incapacity.• Business Impracticality.• Improper Conduct.• Other Circumstances (personal

dissension).


• Winding UpWinding Up: after dissolution, : after dissolution, partnership continues to wind up the partnership continues to wind up the partnership affairs. Partners have no partnership affairs. Partners have no authority except to:authority except to:–Complete transactions already begun.–Collect and preserve partnership assets,

discharge liabilities, and provide an accounting.


• Winding UpWinding Up (cont’d). (cont’d).–Partnership obligations are paid in the

following order: •1. Payment of debts, including those

owed to partner and nonpartner creditors.•2. Return of capital contributions and

distribution of profits to partners.•


• Winding UpWinding Up (cont’d). (cont’d).–If liabilities are greater than assets

partners bear losses in proportion in which they shared profits, unless agreed otherwise.


• Designed for professionals service Designed for professionals service firms, it allows limits on personal firms, it allows limits on personal liability of the partners but allows liability of the partners but allows “pass through” tax advantages. “pass through” tax advantages. • Formation of an LLPFormation of an LLP. . Relatively easy to Relatively easy to

convert a partnership to an LLP. convert a partnership to an LLP.


• Liability in an LLPLiability in an LLP. Partnership law . Partnership law makes all partners jointly and makes all partners jointly and severally liable for another partner’s severally liable for another partner’s tort, including personal assets.tort, including personal assets.–LLP allows professionals to avoid

personal liability for the malpractice of other partners.


• Liability in an LLPLiability in an LLP (cont’d). (cont’d). –Liability Outside the State of

Formation? –Sharing Liability Among Partners.

• Family Limited Liability PartnershipsFamily Limited Liability Partnerships..–FLLP is a limited liability partnership in

which the majority of the partners are related to each other (agriculture).


• Entity that limits the liability of some Entity that limits the liability of some of its owners (the limited partners).of its owners (the limited partners).–Consists of at least one general partner

and one limited partner to carry on a business for profit.

• FormationFormation: : creature of state statute. creature of state statute. Certificate of limited partnership. Certificate of limited partnership.


• Liabilities of PartnersLiabilities of Partners. . –Only General Partners can manage, but

they have a fiduciary obligation to LP’s.–LP’s enjoy limited liability as long as

they do not engage in management functions.


• Liabilities of PartnersLiabilities of Partners (cont’d). (cont’d).–General partner assumes all

management and personal liability.–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.


• Rights and Duties.Rights and Duties. –Except for right to participate in

management, limited and general partners have essentially the same rights. –Limited partners have the right to

inspect the LP’s books and be informed of the LP’s business.


• Rights and Duties Rights and Duties (cont’d). (cont’d). –Both general and limited partners owe

each other a fiduciary duty.–CASE 32.2 1515 North Wells, LP v. 1515 North Wells, LP v.

1513 North Wells, LLC 1513 North Wells, LLC (2009). Did any of the parties commit an ethical violation?


• Dissociation and DissolutionDissociation and 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.


• Dissociation and DissolutionDissociation and Dissolution(cont’d).(cont’d).–Limited partners’ liability is limited to the

capital investment.–Dissolved in much the same way as a

general partnership (Chapter 36).–Retirement, withdrawal, death,

bankruptcy or mental incompetence of a general partner will trigger dissolution


• Dissociation and DissolutionDissociation and Dissolution(cont’d).(cont’d).–Creditors are paid first then partners.–CASE 32.3 In re Dissolution of In re Dissolution of

Midnight Star Enterprises, LPMidnight Star Enterprises, LP (2006). According to the court, why was a forced sale not appropriate in this case?


• Limited Liability Limited Partnerships.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.


what are the three essential elements of a partnership? what are the three essential elements of a...

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