1. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning Chapter 42 Partnerships Twomey Jennings Anderson’s Business Law and the Legal Environment, Comprehensive 20e Anderson’s Business Law and the Legal Environment, Standard 20e Business Law: Principles for Today’s Commercial Environment 2e

2. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 2 Nature of a Partnership 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 consists of: –Voluntary relationships. –Capital or in-kind contributions. If no profit intended, then an unincorporated association.

3. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 3 Characteristics of a Partnership 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.

4. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 4 Partnership Agreement The 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.

5. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 5 Partners hold title to firm property by tenancy in partnership. Surviving partners receive property. 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. Partnership Property

6. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 6 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. Partnership Property

7. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 7 Authority of Partners Scope of authority is determined by partnership agreement. Majority of partners prevails. Individual partners may have express authority under agency theory. –Implied powers as co-owner of business. –Partnership may be bound by act of partner with third party if third party did not know of limitations.

8. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 8 Make contracts. Sell goods in the regular course of business. Purchase items needed by the business. Borrow money for the firm’s purposes. Buy insurance. Hire employees. Adjust claims for or against the partnership. Execute commercial paper in the name of the firm. An individual partner can: Partners as to Third Parties

9. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 9 Prohibited Transactions Cessation of business, suretyship, agreement to arbitrate, confession of judgement, assignment for creditors. Law of Agency Individual partners, acting in an apparently proper way, have authority to bind the firm. Business Transactions Individual Partner Third Person Limitations on Authority of Partner to Bind Partnership

10. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 10 Prohibited Transactions Certain transactions a partner cannot undertake without express approval: –Cessation of business. –Suretyship. –Arbitration. –Confession of judgment (admission). –Assignment of partnership property. –Personal obligations.

11. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 11 Duties, Rights, and Liabilities of Partners Duties (general agency law): –Loyalty and good faith. –Obedience. Rights: –Management. –Inspection of Books. –Share of Profits. –Contribution and Indemnity.

12. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 12 Liability of Partners Partnership Contracts: Partners are jointly liable. Partnership Torts: Partners are jointly and severally liable for torts within scope of business. –Partner who has paid has right to contribution. Liability of New Partners.

13. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 13 Rights and Liabilities of Partners

14. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 14 Dissolution and Termination 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.

15. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 15 Dissolution (cont’d) 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.

16. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 16 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.

17. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 17 Winding Up Dissolution is followed by a winding-up period and the distribution of assets. Distribution of Assets. After the firm’s liabilities to non-partners have been paid, the assets are distributed among the partners as follows: –(1) refund of advances,

18. Copyright © 2008 by West Legal Studies in Business A Division of Thomson Learning 18 Winding Up Winding Up (cont’d): –(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.