Chapter 3 General Partnerships

An Introduction to General Partnerships Partnerships-(1) an association of two or more people (2) to carry on (3) as co-owners of (4) a business (5) for profit. Five elements General partnership-a typical partnership in which all partners are general partners

(1) association of two or more persons Includes individuals, partnerships, corps. & other associations Any individual or entity with capacity to enter into a K can be a partner (2) carry on Partners must actively carry on the partnership business together

(3) co-owners (4) business Business must be a single business entity owned by more than one person The partners have a right to participate in the management of the partnership and to share in the profits (and losses) of the partnership (4) business Includes every trade, occupation or profession

(5) for profit The intention of the partnership Earning profit must be objective even if the partnership does not earn a profit Nonprofit organizations cannot be partnerships.

Uniform Partnership Act O.C.G.A. Chapter 14-8 (UPA) See Cleland v. Thiron Prior to 1914, partnerships governed by states statutes that codified the common law and civil law. Common law-judge-made law Civil law-law originated from ancient Rome

In 1914, the Commission on Uniform State Laws approved the Uniform Partnership Act (UPA). The UPA was designed to codify existing statutory and common law. The ABA approved the UPA in 1915. The UPA has been adopted by most states. In 1994, a revised UPA was approved by the ABA House of Delegates.

The newer version is called the Revised Uniform Partnership Act (RUPA). Partnerships are governed by the UPA or RUPA as modified by the state of domicile, the partnership agreement, and common law. Exhibit 3-2 –summarizes partnership law in the U.S.

Aggregate theory vs. entity theory Extension of individual vs. separate entity State statutes and common law are the final authority on whether a partnership is considered a separate entity or an aggregate of its partners in a particular state UPA recognized a partnership as a separate entity for certain purposes. See page 58 RUPA states “[a] partnership is an entity distinct from its partners.”

The Relationship between Partners and Others The partnership must act through its partners when dealing with outside parties. Partners as Agents Partners are the agents of the other partners and of the partnership Acts of one partner are binding on the partnership as long as the partner’s act is apparently undertaken for the purpose of carrying on the ordinary course of the partnership business or businesses of the kind carried on by the partnership.

Acts requiring unanimous consent of the partners See example on page 59 The act of a partner can bind the partnership even if the partner is not acting in good faith. Acts requiring unanimous consent of the partners Acts not w/in the normal course of business require unanimous consent of the partners Can be outlined in the partnership agreement See example on page 60

Statement of partnership authority Acts not binding on partnership –UPA vs. RUPA See example on page 61 See First National Bank and Trust Company of Williston v. Scherr Statement of partnership authority RUPA provides partners the option of filing a statement of authority with secretary of state or other appropriate state official

Statement should include items listed in RUPA §303. See on page 63 Outside parties may rely on the authority granted by a valid statement of authority as binding on the partnership.

Statement of Denial-statement filed for public record by a partner or other interested party to contradict the information included in a statement of authority. Can be filed at the state level

Liability of partners Joint and several liability (together and individually) Creditors can look to the individual partners for payment after the partnership’s assets have been exhausted The partner with substantial personal assets can be held responsible for the entire obligation of the partnership even if obligation arose from the wrongdoing of another partner See exception to general rule on page 64

The Relationship among Partners and between Partners and the Partnership Tenancy in partnership -under UPA, each partner was considered a co-owner with the other partners of specific partnership property. Each partner had an equal right to possess specific partnership property for partnership purposes, but had no right to possess such property for any other purpose without the consent of the other partners.

RUPA treats partnerships as separate entities. The partnership property is considered to be owned by the partnership itself, as an entity separate from the partners. This does not refer to each partner’s right to receive income or profits and losses from the partnership property. In states that follow RUPA, partners cannot transfer their entire right to the partnership property.

Partners can transfer their rights to receive income, or profits and losses from the partnership. See example on page 66. A partner’s right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners in the same property, nor is the right in specific partnership property subject to attachment or execution, except on a claim against the partnership. See example at bottom of page 66.

Whenever partners contribute real or personal property to the partnership or acquire property with funds of the partnership, it is considered partnership property. See §204 of the RUPA on page 67 See Exhibit 3-4 on page 68

Partner’s rights in dealing with each other (1) to a separate account (2) to an equal share of partnership profits (3) to repaid contributions and share equally in the surplus (4) to reimbursement (5) to participate in management (6) to access books and records (7) to wind up partnership business (8) to have one’s partnership interest purchased by remaining partners

Separate accounts Equal share Under RUPA, each partner deemed to have a separate account in an amount equal to the partner’s contributions and share of the partnership profits, less the partner’s distributions received and the partner’s share of partnership losses Equal share Under RUPA, each partner is entitled to an equal share of the partnership’s profits and is responsible for a share of the partnership losses in proportion to their share of the profits.

Participate in management Reimbursement Partners who spend their own money on behalf of partnership can be reimbursed for expenditures. Participate in management Each partner has right to participate in management Partnership agreement may appoint a managing partner or a managing partnership committee

Access books and records Books and records must be kept at principal place of business or chief executive office Books and records must be available to each partner and each partner’s agent and attorneys Wind up partnership Partners who have not caused a wrongful dissolution or dissociation of the partnership have the right to wind up the partnership business.

Partners’ duties in dealing with each other (1) to contribute to partnership losses (2) to work without remuneration (3) to submit to a vote of the majority (4) to render information (5) fiduciary duties to partnership and other partners

Advantages of Doing Business as a General Partnership (1) participation and flexibility in management (2) minimal formalities and regulatory and reporting requirements (3) low cost of organization (4) income tax benefits (5) diversified capital resources

Disadvantages of Doing Business as a General Partnership (1) unlimited liability (2) loosely structured management (3) lack of business continuity (4) difficulty in transferring partnership interest (5) limited ability to raise capital (6) legal and organizational expenses (7) tax disadvantages

Organization and Management of a General Partnership (1) Management and control (2) Oral partnership agreements (3) Partnership agreements

Management and control All partners have equal rights to manage the partnership Managing partner-partner delegated to oversee the management of the partnership Oral partnership agreement Partnership agreement may be oral

See pages 80-89 for sample clauses. Partnership agreements Name and addresses of partners Name of partnership Purpose of partnership Address of principal place of doing business Term of partnership agreement Contribution of partners Additional contribution requirements Assets of partnership

Goodwill evaluation to be considered on distribution of assets Liability Distribution of profits and losses Indemnity provisions Duties of partners Powers of partners and limitations thereon Compensation and benefits for partners Management and control of business

Partnership accounting and financial management Change in partners Death of partner Sale or purchase of partnership interest Arbitration of differences Termination of partnership Dissolution and winding up Date of agreement and signature of partners

Financial Structure of a General Partnership Partnership capital No minimal capital contribution Capital may be in the form of cash, real property, or personal property. Partners may provide capital to partnership in the form of a loan that can be reimbursed Partners have right to accounting Partners have right to partnership records

Profits and losses Partners share the profits and losses of the partnership equally Partners may set their own formula for sharing in the profits

Dissolution, Dissociation, Winding Up, & Termination of the General Partnership Dissociation-the event that occurs when a partner withdraws or otherwise ceases to be associated in the carrying on of the partnership business Dissolution-the termination of a corporation, partnership, or other business entity’s existence

Events causing partner’s dissociation RUPA § 801 See page 91-93 A partner’s dissociation can be caused by agreement, statute or wrongfully.

Wrongful dissociation A dissociation that is contrary to the partnership agreement A dissociation can also be considered wrongful if the dissociation occurs prior to the expiration of any set term for the partnership or prior to the completion of any pre-established task See events on page 93

Effect of partner’s dissociation The partner’s rights to participate in the management and conduct of the partnership business terminate. The dissociated partner will no longer be able to act on behalf of the partnership except to wind up the affairs of a dissolving partnership. The dissociated partner’s duty of loyalty and duty of care continue with regard to matters arising and events occurring before the partner’s dissociation, unless the partner participates in winding up the partnership’s business.

Effect of partner’s dissociation when partnership continues Dissociating partner has the right to have his or her interest in the partnership purchased for a buyout price as set forth in the partnership agreement or by statute. Statement of dissociation Statement may be filed in states that have adopted the RUPA by the dissociated partner or the partnership

Events causing dissolution and winding up of partnership business §31 of the UPA See page 94-95 In states that have adopted the RUPA, see page 95. Exhibit 3-8

Dissolution agreement Notice to third parties Winding up –process by which the accounts of the partnership are settled and the assets are liquidated to make distribution of the net assets of the partnership to the partners and dissolve the partnership Distribution of assets UPA rules for distribution of assets (see page 97) See Exhibit 3-9

Other Types of Partnerships Limited partnership –partnership formed by general partners and limited partners General partners-run the business and have liability for all partnership debts Limited partners-partly or fully finance the business, take no part in running it, and have no liability for partnership debts beyond the money they put in or promise to put in

Limited liability partnerships-a partnership in which the partners have less than full liability for the actions of other partners, but full liability for their own actions

Joint ventures –the relationship created when two or more persons combine jointly in a business enterprise with the understanding that they will share in the profits or losses and that each will have a voice in its management.

The Paralegal’s Role List of tasks can be found on page 100-101 See Corporate paralegal profile See ethical consideration

Resources State statutes UPA and RUPA Legal form books and partnership forms Secretaries of state offices Federal and state tax information