Chapter 36 Partnerships and Special Business Forms

Introduction Partnerships are governed both by common law and by statutory laws. Agency Concepts and Partnership Law: Each partner is deemed to be an agent of the other. There may be imputation of liability. Each partner is a fiduciary of the other.

§1: Law Governing Partnerships Partners are agents and fiduciaries of one another, but differ from agents in that they are also co-owners and share in profits and losses. Sources of Law: State common law. Uniform Partnership Act (UPA), adopted by all states in some form. Revised Uniform Partnership Act (RUPA): adopted by some states.

§ 2: Definition of Partnership Partnership is created when two or more persons agree to carry on business for profit as co-owners with equal right to manage and share profits (UPA). Case 36.1: Cap Care Group Inc. v. McDonald (2002).

Definition of Partnership Advantages Disadvantages Easy to create and maintain Partners are personally liable for all torts/contracts Flexible, informal Dissolved upon death Partners share profits and losses equally Difficult to raise financing

Definition of Partnership If a commercial enterprise shares profits and losses a partnership will be inferred. Exceptions: Partnership not be inferred if profits received as payment in the following situations: Debt by installments of interest on a loan. Wages of an employee. Rent to a landlord. Annuity to a widow or representative of a deceased partner. Sale of good will.

§ 3: The Nature of Partnerships At common law, the partnership was not a separate legal entity from its owners. Today, partnership law in many states recognizes a partnership as an independent entity for some purposes.

Partnership as an Entity [1] 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.

Partnership as an Entity [2] 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.

Partnership as an Entity [3] Partnerships are recognized as separate legal entities (cont’d): For “marshalling of assets.” Federal Bankruptcy changes marshaling of assets. To keep its own books. File its own federal/state tax returns. Aggregate Theory of Partnership. Partnership pays no federal income tax.

§ 4: Partnership Formation Duration of Partnership. Partnership for a term. Partnership at will. Partnership agreements can be oral unless Statute of Frauds requires a written agreement. Practically, agreements should be in writing. Capacity. Partners must have legal capacity. Corporations. UPA permits corporations to be a partner.

Partnership by Estoppel Occurs when a person who is not a partner holds himself out to 3rd Parties and the 3rd Party relies to her detriment. Two Aspects of Liability: Person who mis-represents he is a partner is liable. Any person consenting to the misrepresentation is also liable.

Partnership by Estoppel When real partnership exists: A partner represents a non-partner is in fact a partner, The non-partner is an agent whose acts are binding on the partner only, not the partnership. Remember: Partnership by estoppel requires third party reasonably rely on the representation to her detriment.

§ 5: Partnership Operations Rights of Partners: In the absence of a partnership agreement (oral or written) state statutes govern the partner rights: Management: equal, each one vote, majority wins; need unanimous consent for some actions. Partnership Interest: equal profits, losses shared as profits shared.

Rights of Partners [1] Rights among partners (cont’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. Property Rights 

Rights of Partners [2] 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.

Rights of Partners [3] Each Partner has right to equally share partnership interest: A proportionate share of the profits earned and a return of capital on the partnership's termination. A partner may assign his interest. A partner’s interest is susceptible to a creditor’s lien. Creditors may attach and get a “charging order.” Assignment or charging order do not dissolve the firm.

Rights of Partners [4] Partner Has a Right to Partnership Property: (cont’d) What she originally brought into the partnership, or Acquired on account of the partnership, or Purchased with partnership funds. Partners are tenants in partnership of all firm property = other partners have rights of survival if one dies and then they account to the deceased partner’s estate for the value of his interest. (*but see RUPA)

Rights of Partners [5] Partner cannot sell, assign or take a particular item of partnership property, nor can individual partner’s creditors seize the property. Creditors can get a charging order against the partnership for the partner’s interest in the partnership.

Duties, Powers and Liabilities of Partners [1] Fiduciary Duties. Partners are fiduciaries and general agents of one another and the partnership. General Agency Powers. Partners have implied authority to conduct ordinary partnership business but need unanimous consent to sell assets or donate to charity. Case 36.2: Helpinstill v. Regions Bank (2000).

Duties, Powers and Liabilities of Partners [2] Authorized vs. Unauthorized Actions. Liability depends on the scope of authority. Joint Liability for Contracts. If Partner is sued for Partnership debt, Partner has right to insist that other partners be sued with her.

Duties, Powers and Liabilities of Partners [3] Joint and Several Liability for Torts. JSL means 3rd party can sue either one or all partners. 3rd party may collect against personal assets of all partners. Liability of Incoming Partner & Outgoing Partner. New admitted partner has no personal liability for existing partnership debts and obligations.

§ 6: Partnership Termination The termination of a partnership occurs in two stages: Dissolution (is the legal “death” of the partnership), and Winding up. (collecting and distributing partnership assets).

Dissolution [1] 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. A transfer of a partner’s interest. Although the transferee does not become a partner. By assignment or attachment by creditor.

Dissolution [2] By Operation of Law: Death of a partner. Bankruptcy of a partner. Bankruptcy of partnership. Illegality.

Dissolution [3] By Judicial Decree: Insanity. Incapacity. Business Impracticality. Improper Conduct. Other Circumstances (personal dissension).

Notice of Dissolution To avoid liability for apparent authority, apply the agency rules by giving: Actual notice. Constructive notice.

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. Case 36.3: Creel v. Lilly (1999).

Winding Up [2] If partner has violated the partnership agreement, he: Must pay damages. May not participate in winding up. But other partners may choose to continue. If partner dies: Other partners act as fiduciaries. Accounting to deceased partner’s estate. Survivors get paid for their services.

Distribution of Assets 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.

Distribution of Assets [2] If liabilities are greater than assets partners bear losses in proportion in which they shared profits, unless agreed otherwise. If one partner does not contribute, other partners are liable for his share and they have the right of contribution against that partner who didn’t pay.

Partnership Buy-Sell Agreements Partners can agree in advance that, in the event of the death of one of the partners or some other event, what occurs: e.g., how much the deceased partner or her estate will get for interest, or whether the other partners can acquire the partnership interest. Partnership can buys life insurance to cover this accounting on partner’s death.

§ 7: Special Business Forms Joint Venture: two or more entities combine efforts or property for a single transaction or project. Unless agreed otherwise, JV’s share profits and losses equally. Common in international transactions when U.S. companies wish to expand overseas.

JV Characteristics Resembles a partnership and is taxed like a partnership. However, a JV is limited in time and scope, whereas a partnership is an ongoing business. Other differences: JV members has less implied and apparent authority than partners. Death of JV member does not terminate JV. JV members can specify duration. If not, then JV terminates when purpose is accomplished.

JV Rights and Liabilities JV members owe a fiduciary duty to each other (loyalty, no conflicts of interest). JV members have equal right to manage the business.

Other Entities Syndicate (Investment Group): group of individuals getting together to finance a particular project. Joint Stock Company is a hybrid of partnership and corporation: (1) ownership represented by shares of stock; (2)managed by directors and officers of the company; and (3) can have a perpetual existence.

Other Entities [2] Business Trust is created by a written agreement setting forth the interests of the beneficiaries and obligations and powers of trustees. Legal ownership and management of property remains with trustees and profits distributed to the beneficiaries. Cooperative is an association organized to provide a not-for-profit service to members.

Law on the Web Small Business Administration’s Web Site. Law Firm of Reinhart et al. for information on business organizations. Legal Research Exercises on the Web.