BUS LAW CHP 37: Partnerships and LLP's
Definition of a Partnership
A partnership is an association of two or more persons to carry on as co-owners of a business for profit. Person can mean corporation, and intent to associate is a key element, as once cannot join unless all other partners consent.
Family LLP
An LLP in which the partners are related to each other. Most significant use of this form is in agriculture. an FLLP offers the same advantages of an LLP as well as additional advantages such as exemption from real estate transfer taxes when partnership real estate is transferred among partners (Iowa).
Partnership Formation and Operation
General rule - agreements to form a partnership can be oral, written, or implied by conduct. A partnership agreement can include almost any terms the parties wish, unless illegal or contrary to public policy or statute. In absence of provisions in the partnership agreement, law imposes certain rights and duties.
The Basic Partnership Concept
Partners in a partnership agree to commit funds or other assets, labor, and skills to the business with the understanding that profits and losses will be shared, thus, each partner has an ownership interest in the firm. -Entity v. Aggregate: A Partnership is treated as an entity i.e. a partnership can sue or be sued in the name of the partnership entity, or a partnership can own property or go bankrupt -Tax treatment: A partnership is a 'pass-through' entity, i.e. they have no tax liability. Owners of the entity pay income taxes on profits. File an information return with the IRS
Duration of a Partnership
The PA can specify the duration stating that it will continue until a designated date or completion of a project. Withdrawal from this kind of contract can constitute as breach of agreement, and the responsible partner can be held liable for any resulting losses. If no set duration is specified, the partnership is at will, meaning it can be dissolved at any time.
Partnership by Estoppel
This occurs when persons who are not partners, but rather those who portray themselves as partners make representations that 3rd parties rely on. When a partnership by estoppel is deemed to exist, the non partner is regarded as an agent whose acts are binding on the partnership.
Essential Elements in a Partnership
To determine whether a partnership exists, the three essential elements are 1) sharing of profit or losses, 2) joint ownership of the business, and 3) an equal right to be involved in the management of the business. Joint ownership of property does not in and of itself create a partnership, as intentions are key.
Limited Liability Limited Partnership (LLLP)
a type of limited partnership that differs from an LP in that the general partner has the same liability as a limited partner in an LP, i.e. the liability of all partners is limited to the amount of their investments in the firm.
Dissociation of a Partner
Dissociation occurs when a partner ceases to be associated in carrying on partnership business. Dissociation can be caused by: a notice of 'express will to withdraw', events specified in the partnership agreement, unanimous vote by the partners, an order by the court/arbitrator, or bankruptcy of the partner. Wrongful Dissociation: Partner must have power to dissociate, otherwise dissociation is considered wrongful under the law. If this occurs, the partner is liable to the partnership and to the other partners for damages caused by the dissociation. Dissociation terminates the rights of the dissociated partner, and requires that the partnership purchase his/her interest (buyout). Liability to third parties: for two years after dissociation, if a third party reasonably believed at the time of a transaction that the dissociated partner was still a partner, the partnership may be liable.
Duties and Liabilities of Partners
Fiduciary duties - 'duty of care' and 'duty of loyalty' to refrain from grossly negligent conduct, intentional misconduct, or knowingly violating the law, and to refrain from competing with the partnership in business or dealing with adverse parties by self dealing or misusing partnership property. Breach/Waiver of Fiduciary Duties - A partners fiduciary duties may not be waived in the partnership agreement. Authority of Partners - If a partner acts within the scope of her or his authority, the partnership is legally bound to honor the partner's commitments to third parties. A partnership may limit a partner's capacity to act as the firm's agent or transfer property on its behalf by filing a "statement of partnership authority" in a designated state office. In an ordinary partnership, the partners can exer- cise all implied powers reasonably necessary and customary to carry on that particular business. Some customarily implied powers include the authority to make warranties on goods in the sales business and the power to enter into contracts consistent with the firm's regular course of business. Liability of Partners - SIGNIFICANT DISADVANTAGE: Partners are fully liable for the debt of the partnership. In the majority of states, partners are jointly and severally liable for all partnership obligations (this means a third party can sue all of the partners or one or more separately). A partner can be required to indemnify/reimburse the partnership for any damages it pays - usually granted unless tort was committed in ordinary course of the partnerships business. Newly admitted partners are not personally liable for any obligations incurred before they became a partner.
Rights of Partners (6)
Management - Each partner has one vote regardless of ownership percentage, unless otherwise agreed upon. Unanimous consent is required for decisions outside of the ordinary course of business such as changes in the nature of the firms business, admittance of a new partner, and amending terms of the partnership agreement. All ordinary business decisions are decided by majority vote. Interest in the Partnership - Each partner is entitled to the proportion of business profits and losses that is specified in the partnership agreement. IF not specified, the UPS mandates that the profits will be shared equally. Compensation - Time, skill, and energy devoted to a partnership is the duty of the partner and not a compensable service. Inspection of Books - Books must be kept accessible to all partners, and must be kept at the firm's principal business office unless otherwise agreed upon. Accounting - this is required to determine the value of each partner's share in the partnership. Property Rights - Property acquired by the partnership is property of the partnership and not of the individual partners.Partners have no right to sell, mortgage or transfer partnership property to another.
Partnership Termination
Termination aka dissolution means the beginning of the 'winding up' process. Winding up is the process of collecting, liquidating, and distributing the partnership assets. Dissolution can be brought about by acts of the partners, operation of law, or by judicial decree. An event that makes it unlawful for the partnership to continue business will result in dissolution (illegality or impracticality concept). Partners must exercise good faith when dissolving a partnership. -Winding up: New obligations cannot be created once the winding up process has begun. Authority exists only to complete transactions that were unfinished at the time of dissolution. Distribution of Assets: A partnership's assets are distributed according to the following priorities: 1. Payment of debts, including those owed to partner and nonpartner creditors. 2. Return of capital contributions and distribution of profits to partners. If the partnership's liabilities are greater than its assets, the partners bear the losses—in the absence of a contrary agreement—in the same proportion in which they shared the profits (rather than, for example, in proportion to their contributions to the partnership's capital). -Buy-Sell Agreements: A buy- sell agreement, sometimes called simply a buyout agreement, provides for one or more partners to buy out the other or others, should the situation warrant.
Limited Liability Partnerships
These are a hybrid form of business designed for professionals who normally do business as partners in a partnership. Major advantages: An LLP is still a pass-through entity for tax purposes. and personal liability of the partners is limited. This is attractive for 'service firms' and family businesses. Example: Partner in a law firm is sued for malpractice. No other partner at the firm can be held personally liable, unless they acted as a supervisor. Only the one partner who is sued has their personal assets subject to remedying the wrong. Law: Most states apply the law of the state in which the LLP was formed even if they do business in another state. Sometimes LLP's may be required to register in multiple states. Most states provide proportionate liability if more than one partner is negligent, for example.
Limited Partnership
an LP limits the liability of some of its owners. This form consists of at least one general partner and one or more limited partners. The GP assumes management responsibility and has full responsibility for the partnership and all of its debts. Limited partners contribute cash or property and own an interest in the firm, but are not involved in management. Formation: formation of a limited partnership is a public and formal proceeding that must follow statutory requirements, unlike the informal, private, voluntary formation of a partnership. Liability: GP's are personally liable to the LP's creditors. A limited partner who participates in management can be just as liable as the GP. Rights in an LP: Limited partners essentially have the same rights as general partners. On dissolution of the partnership, limited partners are entitled to a return of their contributions in accordance with the partnership certificate. Dissociation/Dissolution: A GP has the power to voluntarily dissociate from the LP unless otherwise specified in the agreement. Limited partners can withdraw with 6-month notice, in theory.