Chapter 3 Partnership 1 Concept Concept 2 Creation, alteration and termination Creation, alteration and terminationCreation, alteration and termination 3 Capacity and competence Capacity and competenceCapacity and competence

1 Concept For-profit association lawfully established within China pursuant to partnership agreement concluded by all partners, whereby the partners jointly contribute capital, jointly operate the business, jointly share in the incomes and the risks, and are jointly and severally liable for the debts of the partnership.

PartnershipLegal person Legal person status ╳ √ Perpetual existence ╳ √ Ownership of propertyPartnersLegal person Member’s liabilityUnlimited joint & several liabilityLimited liability ScaleSmallBig Partnership and legal person

2 Creation, alteration and termination 2.1 Creation Sufficient partners

(1)partnership name and address of its principal place of operation (2) the purpose and business scope of the partnership (3) the names and domiciles of the partners (4) the method for, amount of, and time limit for, making capital contribution by each partner (5) the method for profit distribution and loss allocation (6) execution of partnership affairs (7) participation and withdrawal from the partnership (8) dissolution and liquidation of the partnership (9) liability for breach of contract No illegal agreement: Illustration: Everet v Williams (1725) Two highwaymen conspired together to rob coach and share proceeds. One sued the other for his share. Court decision: N. Illegal purpose Written partnership agreement

2.1.3 Actual capital contribution Like legal person, the property jointly contributed by partners is the material foundation of the partnership without which partnership cannot conduct its business. The partners are duty bound to contribute their share of capital to the partnership as per partnership agreement (Art.12, Partnership Law). In comparison with legal person, there is no minimal capital requirement for partnership and not necessarily all of them are paid in cash. Partners may make capital contribution in cash, tangible goods, land use rights, IP, or other property rights. The value of an item of capital contribution may be determined pursuant to agreement by partners, or submit to appraisal by legally designated appraisal agency appointed by all the partners. If partners have consensus, they may make capital contribution in the form of service (Art.11, Partnership Law).

2.1.4 Partnership name The word “partnership”: must No “limited” or “limited liability” No passing offIllustration: Premises and the necessary conditions for operation Day & Martin, well-known boot polish maker. Two people called “Day” and “Martin” set up as partners making the same product intending to divert business from the former well-known maker. The established firm applied for injunction. Court decision: Injunction was granted.

2.2 Alteration Admitting new partners Partner alteration Consent of all the existing partners Written partnership admission agreement Withdrawal: declared, statutory and compulsory withdrawal (1) Partnership with term, partners may withdraw: (a)withdrawal causes prescribed in the partnership agreement has occurred; (b) withdrawal is consented by all partners; (c) cause rendering the partner's continued participation in the partnership difficult has occurred; (d) other partners have seriously breached their duties prescribed in the partnership agreement.

(3) Compulsory withdrawal: (a)partners fail to fulfill their obligations in respect of making capital contribution; (b) partners have caused loss to the partnership due to their willful misconduct or gross negligence; (c) partners engage in improper conduct while conducting partnership affairs; (d) other causes specified in the partnership agreement. (2) Partnership without term, partners may withdraw: (a) death or declaration of death of partners; (b) declaration incompetent of partners; (c) partners become personally insolvent; (d) all of the partner's share of property in partnership has been enforced by the people's courts.

2.2.2 Partnership form alteration change of the number of partners convert partnership into sole proprietorship or LLC or CLS Other alterations in partnership agreement scope of business, manners of partnership business execution, methods and amount of capital contribution, and methods of risks and profits sharing 2.3 Termination

2.3.1 Causes for dissolution: (1)The partnership term prescribed by the partnership greement has expired and the partners are unwilling to continue the peration of the partnership; (2) Dissolution causes stipulated in the partnership has occurred; (3) All partners decide to dissolve the partnership; (4) The number of partners no longer meets legal requirement; (5) The partnership purpose prescribed by partnership agreement has been accomplished, or is not capable of being accomplished; (6) The business license of the partnership is revoked in accordance with the law; (7) Any other cause for dissolution of the partnership as stipulated by law or administrative regulations has occurred Liquidation is a must for dissolution

3 Capacity and competence 3.1 Concept Scope of partnership capacity and competence: the same. 3.2 Property basis Partnership property: material foundation. Such properties: capital contribution + income received They are common property of the partners and subject to joint management

3.3 Exercise of partnership competence Each partner enjoy equal rights with respect to the conduct of partnership affairs Partnership affairs: jointly by all partners, or one or more partners so appointed Unanimous agreement, must: (1) disposition of any real property of the partnership; (2) change of partnership name; (3) transfer or disposal of IP or other property rights of partnership; (4) application to the enterprise registration authority for alteration registration; (5) provision of security for others in the name of the partnership; (6) appointment of non-partners as managerial personnel; (7) the relevant matters set forth in the partnership agreement.

3.4 Liability Illustration Illustration: Zhong Hong’s claim of limited liability rejected In August 1990, four persons i.e. Zhang Gui, Ding Bao, Lu Quan and Zhao Hong executed a partnership agreement, in which the former three persons were participating partners each contributing RMB2000 to the partnership and Zhao Hong was non-participating partner contributing RMB30000 to the partnership. All partners should equally share the profits, but only the former three should equally assume the loss of the firm, and Zhang Hong’s maximum liability toward the firm was confined to his total contribution in the firm. In July 1991 the firm ran very well and each partner obtained their respective share of profits. From August 1991 the firm owed Li Xingguo RMB1200 and was unable to repay it due to heavy losses resulting from a plague. Li Xingguo requested the former three partners to repay the debt and recovered nothing from them since they were unable to pay. Later on Li Xingguo found that Zhao Hong was also the partner, thus asked him to repay the debt. Zhao Hong refused to pay claiming that his liability was limited to his contribution and he should not be personally liable for the firm’s liability. Li Xingguo sued before the court, which held that Zhao Hong as the firm’s partner should be personally liable for the firm’s debt, thus ordered him to repay such debt. Partnership property and partner’s property: bear partnership liability. All partners are jointly and severally liable for partnership liability.