BUS-107 Contemporary Business Law Ch. 26

Constructive Notice

Consists of publishing a notice of dissolution in a newspaper of general circulation serving the area where the business of the partnership was regularly conducted.

duty of loyalty

General partners are in a fiduciary relationship with one another. A duty that a partner owes not to act adversely to the interests of the partnership. This duty is imposed by law and cannot be waived.

winding up

The process of liquidating a partnership's assets and distributing the proceeds to satisfy claims against the partnership. Unless a partnership is continued, the winding up of the partnership follows its dissolution. If a surviving partner performs the winding up, he or she is entitled to reasonable compensation for his or her services. In a limited partnership, a limited partner has the right to wind up the partnership if no general partner has the right to do so or refuses to do so.

notice of dissolution

must be given to certain third parties upon the dissolution of a partnership. Third parties who have actually dealt with the partnership must be given ACTUAL NOTICE (verbal or written) of dissolution. Third parties who have not dealt with the partnership but have knowledge of it and third parties who have not dealt with the partnership and do not have knowledge of it must be given CONSTRUCTIVE NOTICE of the partnership's dissolution.

What are the four qualifications for a General Partnership?

(1) an association of two or more persons (2) carrying on a business (3) as co-owners (4) for profit

limited partnership agreement (articles of limited partnership)

(not required by law) A document that sets forth the rights and duties of general and limited partners; the terms and conditions regarding the operation, termination, and dissolution of a partnership; and so on. Where there is no such agreement, the certificate of limited partnership serves as the articles of limited partnership. General and limited partners may be given unequal voting rights.

sole proprietorship

A form of business in which the owner is actually the business; the business is not a separate legal entity.

Uniform Limited Partnership Act (2001)

A new model act that permits a new form of entity called a limited liability limited partnership (LLLP).

partnership for a term

A partnership created for a fixed duration.

general partners of a limited partnership

Partners in a limited partnership who invest capital, manage the business, and are personally liable for partnership debts.

continuation agreement

The surviving or remaining general partners of a general or limited partnership have the right to continue a partnership after its dissolution. It is good practice for the partners of a partnership to enter into a continuation agreement that expressly sets forth the events that allow for continuation of the partnership, the amount to be paid to outgoing partners, and other details. Thus, a partnership is not dissolved upon the withdrawal of a general partner if the certificate of partnership permits the business to be carried on by the remaining general partner or partners. When a partnership is continued, the old partnership is dissolved, and a new partner- ship is created. The new partnership is composed of the remaining partners and any new partners admitted to the partnership. The creditors of the old partnership become creditors of the new partnership and have equal status with the creditors of the new partnership.

joint and several liability

Under the UPA general partners have joint and several liability for torts and breaches of trust [UPA Section 15(a)]. This is so even if a partner did not participate in the commission of the act. This type of liability permits a third party to sue one or more of the general partners separately. Judgment can be collected only against the partners who are sued. EXAMPLE: Nicole, Jim, and Maureen form a general partnership. Jim, while on partnership business, causes an automobile accident that injures Catherine, a pedestrian. Catherine suffers $100,000 in injuries. Catherine, at her option, can sue Nicole, Jim, or Maureen separately, or any two of them, or all of them.

imputed knowledge

information that is learned by a general partner and is assumed to be known by their other general partners whether or not they actually were informed. EXAMPLE: Ted and Diane are partners. Ted knows that a piece of property owned by their general partnership contains dangerous toxic wastes but fails to inform Diane of this fact. Even though Diane does not have actual knowledge of this fact, it is imputed to her.

What are the major advantages of a sole proprietorship?

• Forming a sole proprietorship is easy and does not cost a lot. • The owner has the right to make all management decisions concerning the business, including those involving hiring and firing employees. • The sole proprietor owns all of the business and has the right to receive all of the business's profits. • A sole proprietorship can be easily transferred or sold if and when the owner desires to do so; no other approval (e.g., from partners or shareholders) is necessary.

List the major legal forms of businesses.

• Sole proprietorship • General partnership • Limited partnership • Limited liability partnership • Limited liability company • Corporation

wrongful dissolution

A situation in which a partner with- draws from a partnership without having the right to do so at that time.

Termination

Ends the legal existence of the partnership. Happens after the proceeds are distributed.

unlimited liability of general partners of a limited partnership

General partners are personally liable for the debts and obligations of a limited partnership.

defective formation

Occurs when (1) a certificate of limited partnership is not properly filed, (2) there are defects in a certificate that is filed, or (3) some other statutory requirement for the creation of a limited partnership is not met. If there is a substantial defect in the creation of a limited partnership, persons who thought they were limited partners can find themselves liable as general partners. Partners who erroneously but in good faith believe they have become limited partners can escape liability as general partners by either (1) causing the appropriate certificate of limited partnership (or certificate of amendment) to be filed or (2) withdrawing from any future equity participation in the enterprise and causing a certificate showing this withdrawal to be filed. The limited partner remains liable to any third party who transacts business with the enterprise before either certificate is filed if the third person believed in good faith that the partner was a general partner at the time of the transaction

tort liability of General Partners

The general partnership is liable if the act is committed while the person is acting within the ordinary course of partnership business or with the authority of his or her co-partners for example: embezzlement from a customer's account, negligent act, defamation, fraud, or another intentional tort. The partnership and partners who are made to pay tort liability may seek indemnification from the partner who committed the wrongful act. A release of one partner does not discharge the liability of other partners.

control rule

Under the RULPA, a limited partner is liable as a general partner if his or her participation in the control of the business is substantially the same as that of a general partner, but the limited partner is liable only to persons who reasonably believed him or her to be a general partner [RULPA Section 303(a)]. EXAMPLE: Laura is an investor limited partner in a limited partnership. At some time after she becomes a limited partner, Laura thinks that the general partners are not doing a very good job managing the affairs of the limited partnership, so she participates in the management of the limited partnership. While she is doing so, a bank loans $1 million to the limited partnership, believing that Laura is a general partner because of her involvement in the management of the limited partnership. If the limited partnership defaults on the $1 million loan owed to the bank, Laura will be treated as a general partner and will be held personally liable for the loan, along with the general partners of the limited partnership. The RULPA permits a limited partner to engage in the management of the partnership's affairs without losing his or her limited liability if the limited partner has been formally hired by the partnership to be an executive of the partnership [RULPA Sections 303(b), 303(c)]. EXAMPLE: The general partners of the limited partnership vote to make Laura, a limited partner, president of the limited partnership. Laura therefore has two distinct relationships with the limited partnership: first as an investor limited partner and second as a manager (president) of the limited partnership. In this case, Laura can lawfully participate in the management of the limited partnership without losing the limited liability shield granted by her limited partner status.

right to share in profits

Unless otherwise agreed, the UPA mandates that a general partner has the right to an equal share in the partnership's profits and losses. The UPA also specifies where a partnership agreement provides for the sharing of profits but is silent as to how losses are to be shared, losses are shared in the same proportion as profits. The reverse is not true, however. If a partnership agreement provides for the sharing of losses but is silent as to how profits are to be shared, profits are shared equally.

certificate of cancellation

Upon the dissolution and the commencement of the winding up of a partnership, a certificate of cancellation must be filed by the partnership with the secretary of state of the state in which a partnership is organized.

Liability of outgoing Partners

-If a general partnership is dissolved, each general partner is personally liable for debts and obligations of the partner- ship that exist at the time of dissolution. -If a general partnership is dissolved because a general partner leaves the partnership and the partnership is continued by the remaining partners, the outgoing partner is personally liable for the debts and obligations of the partnership at the time of dissolution. The outgoing partner is not liable for any new debts and obligations incurred by the general partnership after the dissolution, as long as proper notification of his or her withdrawal from the partnership has been given to the creditor.

What are the rules for distribution of assets during the winding up of a partnership?

1. Distribution of assets of a general partnership. After a general partnership's assets have been liquidated and reduced to cash, the proceeds are distributed to satisfy claims against the partnership. The ULPA provides the following order of distribution of partnership assets upon the winding up of a general partnership: (1) creditors (except partners who are creditors), (2) creditor-partners, (3) partner's capital contributions, and (4) the remainder of the proceeds [UPA Section 40(b)]. 2. Distribution of assets of a limited partnership. After the assets of a limited partnership have been liquidated, the proceeds must be distributed. The RULPA provides the following order of distribution of partnership assets upon the winding up of a limited partnership: (1) creditors of the limited partnership, including partners who are creditors, (2) partner's capital contributions, and (3) the remainder of the proceeds [RULPA Section 804].

Uniform Partnership Act (UPA)

1914 National Conference of Commissioners on Uniform State Laws created a model act that codifies partner- ship law. Most states have adopted the UPA in whole or in part. There is a A Revised Uniform Partnership Act (RUPA) but it has not been adopted by many states.

d.b.a.

A designation for a business that is operating under a trade name; it means "doing business as." a.k.a. trade name. Operating under a trade name is commonly designated as d.b.a. (doing business as) (e.g., Henry R. Cheeseman, doing business as "The Big Cheese"). Most states require all businesses—including sole proprietorships, general and limited partnerships, limited liability companies and limited liability partnerships, and corporations—that operate under a trade name to file a fictitious business name statement (or certificate of trade name) with the appropriate government agency. The statement must contain the name and address of the applicant, the trade name, and the address of the business. Most states also require notice of the trade name to be published in a newspaper of general circulation serving the area in which the applicant does business. These requirements are intended to disclose the real owner's name to the public. Noncompliance can result in a fine. Some states prohibit violators from maintaining lawsuits in the state's courts.

certificate of limited partnership

A document that two or more persons must execute and sign that makes a limited partnership legal and binding. The creation of a limited partnership is formal and requires public disclosure. The entity must comply with the statutory requirements of the RULPA or other state statutes. Under the RULPA, two or more persons must execute and sign a certificate of limited partnership. The certificate of limited partnership must be filed with the secretary of state of the appropriate state and, if required by state law, with the county recorder in the county or counties in which the limited partnership carries on business. The limited partnership is formed when the certificate of limited partnership is filed. The certificate of limited partnership may be amended to reflect the addition or withdrawal of a partner and other matters.

duty to inform

A duty a general partner owes to inform his or her co-partners of all information he or she possesses that is relevant to the affairs of the partnership. Even if a partner fails to do so, the other partners are imputed with knowledge of all notices concerning any matters relating to partnership affairs.

duty of obedience

A duty that requires partners to adhere to the provisions of the partnership agreement and the decisions of the partnership. A partner who breaches this duty is liable to the partnership for any damages caused by the breach. EXAMPLE: Jodie, Bart, and Denise form a general partnership to develop real property. Their partnership agreement specifies that acts of the partners are limited to those necessary to accomplish the partnership's purpose. Suppose Bart, acting alone, loses $100,000 of partnership funds in commodities trading. Bart is personally liable to the partnership for the lost funds because he breached the partnership agreement.

tenant in partnership

A general partner is a co-owner with the other partners of the specific partnership property as a tenant in partnership. This is a special legal status that exists in a general partnership.

liability of incoming General Partners

A new partner who is admitted to a general partnership is liable for the existing debts and obligations (antecedent debts) of the partnership only to the extent of his or her capital contribution. The incoming partner is personally liable for debts and obligations incurred by the general partnership after becoming a partner. EXAMPLE: Bubble.com is a general partnership with four partners. On May 1, Frederick is admitted as a new general partner by investing a $100,000 capital contribution. As of May 1, Bubble.com owes $800,000 of preexisting debt. After Frederick becomes a partner, the general partnership borrows $1 million of new debt. If the general partnership goes bankrupt and out of business still owing both debts, Frederick's capital contribution of $100,000 will go toward paying the $800,000 of existing debt owed by the partnership when he joined the partnership, but he is not personally liable for this debt. However, Frederick is personally liable for the $1 million of unpaid debt that the partnership borrowed after he became a partner.

partnership at will

A partnership created with no fixed duration.

Revised Uniform Limited Partnership Act (RULPA)

A revision of the ULPA that provides a comprehensive law for the formation, operation, and dissolution of limited partnerships.

right of survivorship

A rule that provides that upon the death of a general partner, the deceased partner's right in specific partnership property vests in the remaining partner or partners; the value of the deceased general partner's interest in the partnership passes to his or her beneficiaries or heirs. Upon the death of the last surviving partner, the rights in specific partnership property vest in the deceased partner's legal representative. EXAMPLE: Jennifer, Harold, Shou-Ju, and Jesus form a general partnership to operate a new restaurant. After their first restaurant is successful, they expand until the partnership owns 100 restaurants. At that time, Jennifer dies. None of the partnership assets transfer to Jennifer's heirs. For example, her heirs do not get 25 of the restaurants. Instead, under the right of survivorship, they inherit Jennifer's ownership interest, and her heirs now have the right to receive Jennifer's one-quarter of the partnership's profits and other partnership distributions.

right to participate in management

A situation in which, unless otherwise agreed, each all general partners have a right to participate in the management of a partnership and have an equal vote on partnership matters.

What are some disadvantages to a sole proprietorship?

A sole proprietor's access to the capital is limited to personal funds plus any loans he or she can obtain, and a sole proprietor is legally responsible for the business's contracts and the torts he or she or any of his or her employees commit in the course of employment...i.o.w. unlimited liability. Therefore, creditors may recover claims against the business from the sole proprietor's personal assets (e.g., home, automobile, bank accounts). EXAMPLE: Nathan opens a clothing store called "The Clothing Store" and operates it as a sole proprietorship. Nathan files the proper statement and publishes the necessary notice of the use of the trade name. Nathan contributes $25,000 of his personal funds to the business and borrows $100,000 from a bank in the name of the business. Assume that after several months, Nathan closes the business because it is unsuccessful. At the time it is closed, the business has no assets, owes the bank $100,000, and owes other debts of $25,000. Here, Nathan, the sole proprietor, is personally liable to pay the bank and all the debts of the sole proprietorship from his personal assets.

limited liability limited partnership (LLLP)

A special type of limited partnership that has both general partners and limited partners, where both the general and limited partners have limited liability and are not person- ally liable for the debts of the LLLP.

limited partnership or special partnership

A type of partnership that has two types of partners: (1) general partners - invest capital, manage the business, and are personally liable for partnership debts and (2) limited partners - invest capital but do not participate in management and are not personally liable for partnership debts beyond their capital contributions A limited partnership must have one or more general partners and one or more limited partners. There are no upper limits on the number of general or limited partners allowed in a limited partnership. Any person—including natural persons, partnerships, limited partnerships, trusts, estates, associations, and corporations—may be a general or limited partner. A person may be both a general partner and a limited partner in the same limited partnership. Once a limited partnership has been formed, a new limited partner can be added only upon the written consent of all partners, unless the limited partnership agreement provides otherwise. New general partners can be admitted only with the specific written consent of each partner. A limited partnership agreement cannot waive the right of partners to approve the admission of new general partners. The admission is effective when an amendment of the certificate of limited partnership reflecting that fact is filed. Under the RULPA, the capital contributions of general and limited partners may be in cash, property, services rendered, or promissory notes or other obligations to contribute cash or property or to perform services [RULPA Section 501]. A partner or creditor of a limited partnership may bring a lawsuit to enforce a partner's promise to make a contribution [RULPA Section 502(a)]. The RULPA permits a corporation or limited liability company to be a general partner or the sole general partner of a limited partnership. Where this is permissible, this type of general partner is liable for the debts and obligations of the limited partnership only to the extent of its capital contribution to the partnership.

general partnership agreement (articles of general partnership or articles of partnership)

A written agreement that partners sign to form a general partnership. The agreement to form a general partnership may be oral, written, or implied from the conduct of the parties. It may even be created inadvertently. No formalities are necessary, although a few states require general partnerships to file certificates of partnership with an appropriate government agency. General partnerships that exist for more than one year or are authorized to deal in real estate must be in writing under the Statute of Frauds. If an agreement fails to provide for an essential term or contingency, the provisions of the UPA apply. Thus, the UPA acts as a gap-filling device to the partners' agreement.

general partnership (ordinary partnership)

An association of two or more persons to carry on as co-owners of a business for profit [UPA Section 6(1)]. General partners, or partners, are personally liable for the debts and obligations of the partnership. The UPA covers most problems that arise in the formation, operation, and dissolution of general partnerships. All partners must agree to the participation of each co-partner. A person cannot be forced to be a partner or to accept another person as a partner. The UPA's definition of person who may be a general partner includes natural persons, partnerships (including limited partnerships), corporations, and other associations. A general partnership may be formed with little or no formality. Co-ownership of a business is essential to create a partnership. The most important factor in determining co- ownership is whether the parties share the business's profits and management responsibility. Receipt of a share of business profits is prima facie evidence of a general partnership because nonpartners usually are not given the right to share in a business's profits. No inference of the existence of a general partnership is drawn if profits are received in payment of (1) a debt owed to a creditor in installments or otherwise; (2) wages owed to an employee; (3) rent owed to a landlord; (4) an annuity owed to a widow, widower, or representative of a deceased partner; (5) interest owed on a loan; or (6) consideration for the sale of goodwill of a business [UPA Section 7]. An agreement to share losses of a business is strong evidence of a general partnership. The right to participate in the management of a business is important evidence for determining the existence of a general partnership, but it is not conclusive evidence because the right to participate in management is sometimes given to employees, creditors, and others. It is compelling evidence of the existence of a general partnership if a person is given the right to share in profits, losses, and management of a business. A general partnership can operate under the names of any one or more of the partners or under a fictitious business name. A general partnership must file a fictitious business name statement—d.b.a.

action for an accounting

General partners are not permitted to sue the partnership or other partners at law. Instead an action for an accounting which is a formal judicial proceeding in which the court is authorized to (1) review the partnership and the partners' transactions and (2) award each partner his or her share of the partnership assets. EXAMPLE: If a partner suspects that another partner is committing fraud by stealing partnership assets, the partner can bring an action for an accounting.

apparent authority

If proper notice is not given to a required third party after the dissolution of a partnership, and a general partner enters into a contract with the third party, liability may be imposed on the previous partners on the grounds of apparent authority.

Share of Profits and losses for limited partnerships

If there is no partnership agreement that specifies this, RULPA provides that profits and losses from a limited partnership are shared on the basis of the value of each partner's capital contribution. EXAMPLE: There are four general partners, each of whom contributes $50,000 in capital to the limited partnership, and four limited partners, each of whom contributes $200,000 capital. The total amount of contributed capital is $1 million. The limited partnership agreement does not stipulate how profits and losses are to be allocated. Assume that the limited partnership makes $3 million in profits. Under the RULPA, each general partner would receive $150,000 in profit, and each limited partner would receive $600,000 in profit.

joint liability

Liability of general partners for contracts and debts of the partnership. A plaintiff must name the partnership and all of the partners as defendants in a lawsuit. If the third party's suit does not name all the general partners, the judgment cannot be collected against any of the partners or the partnership assets. Similarly, releasing any general partner from the lawsuit releases them all. A general partner who is made to pay more than his or her proportionate share of contract liability may seek indemnification from the partnership and from those partners who have not paid their share of the loss.

liability of General and limited Partners of an lllP

Like a limited partnership, an LLLP requires at least one general partner and at least one limited partner. However the general partners are not jointly and severally personally liable for the debts and obligations of the LLLP. Neither the general partners nor the limited partners have personal liability for the debts and obligations of the LLLP. The debts of an LLLP are solely the responsibility of the partnership

limited liability of limited partners of a limited partnership

Limited partners are liable only for the debts and obligations of a limited partnership up to their capital contribution, and are not personally liable for the debts and obligations of a limited partnership. EXAMPLE: Gertrude and Gerald are the general partners of a limited partnership called Real Estate Development, Ltd., who have each invested $50,000 in the limited partnership. Lin, Leopold, Lonnie, and Lawrence are limited partners of the limited partnership and have each invested $50,000 in the limited partnership. Real Estate Development, Ltd., borrows $2 million from City Bank. After two years, the limited partnership has spent all of its capital, has no assets, and goes bankrupt, still owing City Bank $2 million of unpaid debt. In this case, the four limited partners each lose their $50,000 capital investment but are not personally liable for the $2 million debt owed by the limited partnership to City Bank. The two general partners each lose their $50,000 investment and are each personally liable to City Bank for the limited partnership's unpaid $2 million loan to City Bank.

limited partners

Partners in a limited partnership who invest capital but do not participate in management and are not personally liable for partnership debts beyond their capital contributions. For limited liability, limited partners give up their right to participate in the control and management of the limited partnership. This means, in part, that limited partners have no right to bind the partnership to contracts or other obligations. Under the RULPA, a limited partner is liable as a general partner if his or her participation in the control of the business is substantially the same as that of a general partner, but the limited partner is liable only to persons who reasonably believed him or her to be a general partner [RULPA Section 303(a)]. This is called the control rule.

What are the rights of a general partner unless otherwise specified?

Right to compensation - Under this rule, partners are not entitled to receive a salary for providing services to the partnership unless agreed to by the partners. Under the UPA, it is implied that general partners will devote full time and service to the partnership. Thus, unless otherwise agreed, income earned by partners from providing services elsewhere belongs to the partnership [UPA Section 21]. Right to indemnification - Partners sometimes incur personal travel, business, and other expenses on behalf of the partnership. A general partner is entitled to indemnification (i.e., reimbursement) for such expenditures if they are reasonably incurred in the ordinary and proper conduct of the business [UPA Section 18(b)]. Right to return of loans - A partner who makes a loan to the partnership becomes a creditor of the partnership. The partner is entitled to repayment of the loan, but this right is subordinated to the claims of creditors who are not partners [UPA Section 40(b)]. The partner is also entitled to receive interest from the date of the loan. Right to return of capital - Upon termination of a general partnership, the partners are entitled to have their capital contributions returned to them [UPA Section 18(a)]. However, this right is subordinated to the rights of creditors, who must be paid their claims first [UPA Section 40(b)]. Right to information

What are some forms of breaches of loyalty?

Self-dealing - Undisclosed self-dealing occurs when a partner deals personally with the general partnership, such as buying or selling goods or property to the partnership. Such actions are permitted only if full disclosure is made and consent of the other partners is obtained. Usurping a partnership opportunity -If the partnership rejects the opportunity, the partner is free to pursue the opportunity. Competing with the partnership -A general partner may not compete with the partnership without the permission of the other partners. Making secret profits -General partners may not make secret profits from partnership business (e.g., taking bribes). Breach of confidentiality - i.e. giving away trade secrets Misuse of partnership property -General partners owe a duty not to use partnership property for personal use. **A general partner who breaches the duty of loyalty must disgorge any profits made from the breach to the partnership. In addition, the partner is liable for any damages caused by the breach.

dissolution

The change in the relationship of partners in a partnership caused by any partner ceasing to be associated in the carrying on of the business. Dissolution of a general or limited partnership occurs automatically when a stated term or undertaking has been accomplished. Any general partner of a partnership at will (i.e., one without a stated time or purpose) may rightfully withdraw and dissolve the partnership at any time. A partnership may be dissolved by the written consent of all general partners of a general partnership and all general and limited partners of a limited partnership. A general partner in a partnership for a term has the POWER to withdraw and dissolve the partnership at any time but does not have the RIGHT to do so. A partner who withdraws from a partnership for a term prior to the expiration of the term has caused a wrongful dissolution of the partnership and is liable for damages caused to the partnership. The dissolution of a general or limited partnership terminates the partners' actual authority to enter into contracts or otherwise act on behalf of the partnership. However, a notice of dis- solution must be given to certain third parties.

duty of care

The obligation general partners owe to use the same level of care and skill that a reasonable person in the same position would use in the same circumstances. A breach of the duty of care is negligence. A general partner is liable to the partnership for any damages caused by his or her negligence. The partners are not liable for honest errors in judgment. EXAMPLE: Tina, Eric, and Brian form a general partnership to sell automobiles. Tina, who is responsible for ordering inventory, orders large expensive sport-utility vehicles (SUVs) that use large quantities of gasoline. A war breaks out in the Middle East that interrupts the supply of oil to the United States. The demand for large SUVs drops substantially, and the partnership cannot sell its inventory. Tina is not liable because the duty of care was not breached.

flow-through taxation

When the income and losses of partnership flow onto and have to be reported on the individual partners' personal income tax returns. A general partnership also has to file an information return with the government, telling the government how much income was earned or the amount of losses incurred by the partnership.