Business Law Chapter 37

Partnership Termination

- Dissolves upon material change: * Partner dead * Partner withdraws - Winding up: time from dissolve to termination - Termination: * Pay outside creditors * Pay inside creditors * Pay capital contributions * If anything left, pay surplus to partners

Formation of an LP

- Formation of a limited partnership is a public and formal proceeding in which partners must strictly follow statutory requirements. - The partners must also sign a certificate of limited partnership.

Events That Cause Dissociation

- Voluntary "Express will to withdraw" - Occurrence of an event agreed to in partnership agreement - Unanimous vote of other partners under certain circumstances - Order of a court or arbitrator - Partner's declaring bankruptcy

Events that cause dissociation

- Voluntary "Express will to withdraw" - Retirement, death, mental incompentance - Partner's declaring bankruptcy (only if it causes bankruptcy of the firm)

Nonpartner as Agent

-A partnership by estoppel may also be imposed when a partner represents, expressly or impliedly, that a non-partner is a member of the firm. -Non partner may be regarded as an agent whose acts are binding on the partnership

Tax Treatment of Partnerships

-Aggregate (instead of entity) only for tax purposes -Federal (and most state) tax laws treat a partnership as a "pass through" entity, with profits, losses, and taxes attributed on a pro-rata basis to the partners. (entity's income is passed through to owners, who pay income taxes on it) -The partnership itself pays no taxes and is responsible only for filing an information return with the IRS.

The Partnership Agreement

-Agreements to form a partnership can be oral, written, or implied by conduct (Some agreements such as one authorizing partners to transfer interests in real property, must be in writing to be legally enforced)

Partnerships

-An association of two or more persons to carry on a business as co-owners for a profit -A voluntary association of individuals and formed by agreement of the partners

Duties and Liabilities of Partners

-Each partner is an agent of every other partner and acts as both a principal and an agent in any business transaction within the scope of the partnership agreement

Interest in the Partnership

-Each partner is entitled to the proportion of business profits and losses that is specified in the partnership agreement -If agreement doesn't apportion profits/losses, UPA provides that profits/losses will be shared equally

Liabilities of Partners in a Limited Partnership

-General partners are personally liable to the partnership's creditors. -Limited partners enjoy limited liability as long as they do not participate in management.

Management Rights

-In a general partnership, all partners have equal rights in managing partnership - Unless partners agree otherwise, each partner has one vote in management matters regardless of proportional size of their interest in firm

Joint Property Ownership

-Joint ownership of property does not in and of itself create a partnership -Intent is the key

Rights of Partners

-Management -Interest in the partnership -Compensation -Inspection of books -Accounting -Property

Limited Partnerships

-Organized by written agreement and must file a certificate of limited partnership to be recognized by state law -Limits liability of some of its owners -Consists of at least one general partner and one or more limited partners

Liability of Partners

-Partners are personally liable for the debts of the partnership -In most states, the liability is essentially unlimited

Inspection of Books

-Partnership books and records must be kept accessible to all partners -Books must be kept at firm's principal business office (unless partner agrees otherwise)

Property Rights

-Property acquired by a partnership is the property of the partnership and not of the partners individually -Includes all property originally contributed to partnership and anything later purchased -A partner may use/possess partnership property only on behalf of partnership (partner is not a co-owner and has no right to sell, mortgage, or transfer partnership property to another) -Property cannot be used to satisfy personal debts of individual partners (A partner's creditor can petition court for a charging order to attach a partner's interest in the partnership to satisfy an obligation)

Accounting of Partnership Assets or Profits

-Required to determine the value of each partner's share in partnership -Can be performed voluntarily or be compelled by court order -Under UPA 405(b), a partner has the right to bring an action for an accounting during the term of the partnership, as well as on the partnership's dissolution

Fiduciary Duties

-The duties of obedience, care, and loyalty owed by directors and officers to their corporation and its shareholders -Duty of care (limited to refraining from "grossly negligent/reckless conduct, intentional misconduct, or knowing violation of law") A partner is not liable to the partnership for simple negligence or honest errors in judgment in conducting partnership business -Duty of Loyalty: requires partner to account to partnership for "any property, profit, or benefit" derived by partner in conduct of partnership's business or from use of its property. Partner must also refrain from competing with partnership in business/dealing with the firm as an adverse party Duty of loyalty can be breached by self-dealing, misusing partnership property, disclosing trade secrets, or usurping a partnership business opportunity

Entity versus Aggregate

-Today, most states follow the UPA and treat a partnership as an entity for most purposes. Example: A partnership can sue/be sued, collect judgments, have accounting performed in name of partnership. -Partnership may hold title to real/personal property in its name rather than individual partners

Indemnification

-With joint and several liability, a partner who commits a tort can be required to indemnify (reimburse) the partnership for any damages it pays -Indemnification will typically be granted unless the tort was committed in the ordinary course of the partnership's business

Duration of the Partnership

1) At will: when there is no agreement regarding duration at outset, dissolved whenever partners agree 2) Defined term: when partnership is explicitly for a specified term or undertaking

A court will not presume that a partnership exists, if shared profits were received as payment of any of the following:

1. A debt by installments or interest on a loan 2. Wages of an employee or for the services of an independent contractor 3. Rent to a landlord 4. An annuity to a surviving spouse or representative of a deceased partner 5. A sale of the goodwill of a business/property

Essential Elements of a Partnership

1. A sharing of profits or losses 2. A joint ownership of the business 3. An equal right to be involved in the management of the business

Dissociation and Dissolution

A general partner has the power to voluntarily dissociate/withdraw from a limited partnership unless the partnership agreement specifies otherwise

Limited Liability Partnerships (LLP)

A hybrid form of business designed mostly for professionals who normally do business as partners in a partnership -Major advantage of the LLP is it allows a partnership to continue as a pass-through entity for tax purposes but limits personal liability of partners

Joint and Several Liability

A legal concept that makes each partner in a partnership legally liable for all the debts of the partnership. (A third party has the option of suing all of the partners together or one or more of the partners separately

Family Limited Liability Partnerships

A limited liability partnership in which the partners are related to each other

Liability of Incoming Partners

A new admitted partner has no personal liability for existing partnership debts and obligations (obligations that incurred before the person became a partner)

Waiver of Fiduciary Duties

A partner's fiduciary duties may not be waived or eliminated in the partnership agreement

Limitations on Authority

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

Limited Liability Limited Partnership

A type of limited partnership permissible in some states in which the general partners have less than full liability for the actions of other general partners.

Buyouts

After a partner's dissociation, the partnership must purchase his or her partnership interest according to the rule in UPA 701

Liability in an LLP

An LLP allows professionals (attorneys, accountants) to avoid personal liability for malpractice of other partners

Articles of Partnership

Can include almost any terms that the parties wish, unless they are illegal or contrary to public policy or statute (Articles of Partnership = Partnership)

Partnerships are governed by:

Common Law and Statutory Law

Partnership Buy-Sell Agreements

Contract that determines in advance of an 'event', how remaining partners will buy-out partners' interest.

Compensation

Devoting time, skill, energy to partnership business is a partner's duty and generally is not a compensable service, rather, a partner's income from partnership takes form of a distribution of profits (Partners can change this though if they want to)

Effects of Dissociation

Dissociation (rightful or wrongful) terminates some of the rights of the dissociated partner, requires that the partnership purchase his or her interest, and alters the liability of the parties to third parties.

Rights and Duties in a Limited Partnership

Except for right to participate in management, limited and general partners have essentially the same rights. Limited partners have the right to inspect the LP's books and be informed of the LP's business. Both general and limited partners owe each other a fiduciary duty.

Liability to Third Parties

For two years after partner dissociates from continuing partnership, the partnership may be bound by acts of dissociated partner based on apparent authority

General VS. Limited partners

General - assumes management responsiblities for the partnership and has full responsibility for partnership and its debt Limited - contributes cash/other property and owns interest in firm but not involved in management responsibilities, also not liable for partnership debts beyond amount of their investment

Uniform Partnership Act (UPA)

Governs the operation of partnerships in the absence of express agreement and has done much to reduce controversies in the law relating to partnerships

National Conference of Commissioners on Uniform State Laws

Have drafted uniform laws for partnerships and have been widely adopted by the states

Wrongful Dissociation

If the partnership (or other) agreement has an obligation to continue as a partner, the dissociating partner may be liable for breach of contract and damages.

The Scope of Implied Powers

In an ordinary partnership, the partners can exercise all implied powers reasonably necessary and customary to carry on that particular business.

Joint Liability

In the event of a lawsuit, all the partners must be sued together

Formation of an LLP

LLPs must be formed/operated in compliance with states statues, many of which include provisions of the UPA. Must fill out form with a central state agency and an annual report with state to remain qualified.

Dissociation

Occurs when a partner ceases to be associated in the carrying on of the partnership business

Rights and Duties

On a partner's dissociation, his or her right to participate in the management and conduct of the partnership business terminates.

Distribution of Assets

On dissolution, creditors' claims take priority. After that, partners and former partners receive unpaid distributions of partnership assets.

Authority of Partners

UPA affirms general principles of agency law. Partner may be able to subject partnership to tort liability. Partner has apparent authority when carrying out partnership business.

Partnership by Estoppel

When a third person has reasonably and detrimentally relied on the representation that a non partner was part of a partnership (Courts may impose liability, but not partnership rights, on the alleged partner)

Liability outside the State of Formation

When an LLP formed in one state wants to do business in another state, it may be required to file a statement of foreign qualification in second state. Most states apply the law of the state in which the LLP was formed

Agency Concepts and Partnership Law

• Partnerships are governed by common law and statutory laws. • Partners are agents and fiduciaries of each other. • In the absence of a partnership agreement state statutes govern the partner rights • Each partner has an ownership interest in the firm