Comprehensive Volume, 18 th Edition Chapter 44: Creation and Termination of Partnerships

Definition A partnership is a relationship: created by the voluntary association of two or more persons to carry on as co-owners a business for profit.

Partnership Agreement A partnership agreement governs the partnership during its existence and may also contain provisions relating to dissolution. The partnership agreement will generally be in writing; this may be required by the statute of frauds. The existence of a partnership may be found from the existence of shared control in the running of the business and the fact that the parties share profits and losses. The sharing of gross returns, as opposed to profits, is very slight evidence of a partnership.

Partnership Property Partners hold title to firm property by tenancy in partnership. A creditor of a partner cannot proceed against any specific item of partnership property but must obtain a charging order to seize the debtor-partner’s share of the profits. An assignee of a partner’s interest does not become a partner without the consent of the other partners and is entitled only to a share of the profits and the assignor’s interest upon dissolution.

Dissolution of Partnership A partnership may be dissolved by the parties themselves in accordance with the terms of the partnership agreement, by the expulsion of a partner, by the withdrawal of a partner, or by the bankruptcy of the firm or one of the partners. A court may order dissolution of a partnership upon the petition of a partner because of the insanity, incapacity, or major misconduct of a partner.

Dissolution (cont’d) Dissolution may be decreed because of lack of success, impracticability, or other circumstances that equitably call for dissolution. Dissolution ends the right of the partnership to exist as a going concern. Notice of dissolution, except dissolution by operation of law, must be given.

Winding Up Dissolution is followed by a winding-up period and the distribution of assets. After the firm’s liabilities to nonpartners have been paid, the assets are distributed among the partners as follows: (1) refund of advances, (2) return of contributions to capital, and (3) division of remaining assets in accordance with the partnership agreement or, if no agreement is stated, division of net assets equally among the partners.