Chapter 37 Partnerships: Termination and Limited Partnerships Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Exhibit 37-1: The Life of a Partnership Formation--Partnership formed either by written agreement, articles of partnership, or by estoppel Formation--Partnership formed either by written agreement, articles of partnership, or by estoppel Performance—Business conducted as partners work for benefit of partnership, in accordance with partnership agreement Performance—Business conducted as partners work for benefit of partnership, in accordance with partnership agreement Dissolution—Partnership dissolves either by act of court, act of partners, or operation of law Dissolution—Partnership dissolves either by act of court, act of partners, or operation of law Winding Up—Partners complete unfinished partnership business, collect and pay debts, collect partnership assets, and take inventory Winding Up—Partners complete unfinished partnership business, collect and pay debts, collect partnership assets, and take inventory Termination or Continuation—Partnership terminates, or continues by creation of continuation agreement Termination or Continuation—Partnership terminates, or continues by creation of continuation agreement 37-2
Partnership Termination Begins when partnership dissolves Begins when partnership dissolves Once partnership dissolved and assets liquidated and distributed (“winding up”), partnership terminated Once partnership dissolved and assets liquidated and distributed (“winding up”), partnership terminated 37-3
Partnership Dissolution Definition: Partnership cessation Definition: Partnership cessation Partnership dissolution can result from: Partnership dissolution can result from: Partner actions Partner actions Operation of law Operation of law Court action Court action 37-4
Events Resulting in Partnership Dissolution Fulfillment of established (agreed-upon) partnership objective Fulfillment of established (agreed-upon) partnership objective Expiration of term stated in partnership agreement Expiration of term stated in partnership agreement Partner withdraws from “partnership at will” (partnership that does not specify objective/duration of partnership) Partner withdraws from “partnership at will” (partnership that does not specify objective/duration of partnership) Partner withdraws in accordance with partnership agreement Partner withdraws in accordance with partnership agreement Partner expelled from partnership in accordance with partnership agreement Partner expelled from partnership in accordance with partnership agreement 37-5
Examples of Partnership Dissolution By “Operation of Law” Partner dies Partner dies Partner adjudicated bankrupt Partner adjudicated bankrupt Partnership engages in illegal activity Partnership engages in illegal activity 37-6
Examples of Partnership Dissolution By “Court Action” Partner adjudicated insane Partner adjudicated insane Impractical to continue partnership business Impractical to continue partnership business Partner incapable of fulfilling his/her duties established by partnership agreement Partner incapable of fulfilling his/her duties established by partnership agreement Partner disagreement as to how to conduct partnership business Partner disagreement as to how to conduct partnership business 37-7
“Winding Up” of Partnership (Definition): Activity of completing unfinished partnership business, collecting and paying debts, collecting partnership assets, and taking inventory 37-8
Order of Distribution of Partnership Assets (Upon “Winding Up”) Payment to partnership creditors Payment to partnership creditors Payment of refunds/loans to partners for loans made to partnership Payment of refunds/loans to partners for loans made to partnership Payment of partners for invested capital Payment of partners for invested capital Payment of profits distributed to partners per terms of partnership agreement Payment of profits distributed to partners per terms of partnership agreement 37-9
Limited Partnership Definition: Agreement between at least one general partner and at least one limited partner Definition: Agreement between at least one general partner and at least one limited partner Allows investor (limited partner) to share in profits of partnership Allows investor (limited partner) to share in profits of partnership Limited partner’s liability limited to amount he/she invests in business Limited partner’s liability limited to amount he/she invests in business 37-10
Requirements for Limited Liability (of Limited Partner) Limited partner has complied in good faith with certificate of limited partnership filing requirement Limited partner has complied in good faith with certificate of limited partnership filing requirement Limited partner does not participate in control of business Limited partner does not participate in control of business Limited partner’s surname is not part of partnership name Limited partner’s surname is not part of partnership name 37-11
Comparison of General Partners and Limited Partners General Partner: General Partner: Has all rights associated with controlling business Has all rights associated with controlling business Has unlimited personal liability for all partnership debts Has unlimited personal liability for all partnership debts Acts as agent of partnership Acts as agent of partnership Limited Partner: Limited Partner: Has no right to participate in management and control of business Has no right to participate in management and control of business Liability limited to amount of capital partner has contributed to business Liability limited to amount of capital partner has contributed to business Is not an agent of the partnership Is not an agent of the partnership 37-12
Reasons For Dissolution of Limited Partnership Expiration of term established in certificate of limited partnership Expiration of term established in certificate of limited partnership Completion of objective established in certificate of limited partnership Completion of objective established in certificate of limited partnership Unanimous written consent of all partners (limited and general) Unanimous written consent of all partners (limited and general) Withdrawal of general partner (unless certificate establishes that other general partners will continue operation of business) Withdrawal of general partner (unless certificate establishes that other general partners will continue operation of business) Court action Court action 37-13
Limited Liability Company (LLC) Similar to limited partnership, since each member has limited liability (dependent on investment he/she makes) Similar to limited partnership, since each member has limited liability (dependent on investment he/she makes) Tax advantages similar to partnership (“single taxation”) Tax advantages similar to partnership (“single taxation”) Created based on agreement between members Created based on agreement between members Each member can participate in management Each member can participate in management 37-14