Chapter 3: General Partnership
General Partnerships UPA & RUPA
The Uniform Partnership Act (UPA) specifies the terms which govern the relationship of the general partners where they have no agreement or have not agreed upon or anticipated a particular situation; the UPA has been adopted in 48 states and the District of Columbia.
General Partnerships: In general
The Uniform Partnership Act UPA defines a partnership as: "an association of two or more persons to carry on, as co-owners, a business for profit
Partner Relationship
The relationship is consensual and usually contractual. A partnership is treated as an entity for litigation, holding title to property and bankruptcy proceedings. Partnerships are created by agreement or by acts of the partners. It can be created even if the partners do not realize that they are forming such an enterprise. How a partnership is operated & managed depends on the partnership agreement and the UPA/RUPA. These affect management decisions, sharing of partnership profits and losses, and partnership property. Think of UPA/RUPA as a default mechanism comes in to explain the issue.
Legal Entity
A significant difference between a partnership is the extent to which, the business is a legal entity. Is a person or group that the law recognizes as having legal rights, such as the right to own and dispose of property, to sue and be sued, and to enter into contracts;
Partner's rights and duties
Partner's rights and duties: Each partner is to have a capital account presenting the amount of that partner's contributions to the partnership, net of any liabilities, and the partner's share of the partnership profits or losses, less any distributions. Partner's transferable interest in the partnership: A partner is not a co-owner of any partnership property. Partner's dissociation: A partner's dissociation means that the partner can no longer act on behalf of the partnership.
Entity Characteristics of a Partnership
Under RUPA, then, a partnership has entity characteristics, but the partners remain guarantors of partnership obligations, as always—that is the partners' joint and several liability. This is a very important point and a primary weakness of the partnership form: all partners are, and each one of them is, ultimately personally liable for the obligations of the partnership, without limit, which includes personal and unlimited liability.
Commission on Partnership Act ULC
The Uniform Partnership Act (UPA), completed in 1914, and the Uniform Limited Partnership Act (ULPA), completed in 1916, were the basis of partnership law for many decades. UPA and ULPA were adopted by all states except Louisiana.
What are financial statements?
The summarized results of your business financial transactions over a designated period of time. They will show total income, expenses, cash balances, level of debt, and much more. But where does this information come from?
Limited Life
-Corporations have unlimited life. -Partnerships do not. A partnership may be ended voluntarily at any time through the acceptance of a new partner or the withdrawal of a partner. It may be ended involuntarily by the death or incapacity of a partner. Partnership dissolution occurs whenever a partner withdraws or a new partner is admitted. Dissolution does not necessarily mean that the business ends. If the continuing partners agree, operations can continue without interruption by forming a new partnership.
Unlimited Liability
-Each partner is personally and individually liable for all partnership liabilities. -Creditors' claims attach first to partnership assets. If these are insufficient, the claims then attach to the personal resources of any partner, irrespective of that partner's equity in the partnership. Because each partner is responsible for all the debts of the partnership, each partner is said to have unlimited liability.
Mutual Agency: Recap
-Mutual agency means that each partner acts on behalf of the partnership when engaging in partnership business. -The act of any partner is binding on all other partners. This is true even when partners act beyond the scope of their authority, so long as the act appears to be appropriate for the partnership. For example, a partner of a grocery store who purchases a delivery truck creates a binding contract in the name of the partnership, even if the partnership agreement denies this authority. On the other hand, if a partner in a law firm purchased a snowmobile for the partnership, such an act would not be binding on the partnership. The purchase is clearly outside the scope of partnership business.
Partner as an Agent
-Partnership as a separate entity: The entity concept means that a partnership can sue or be sued and that partnership property belongs to the partnership and not to any individual partner -Each general partner is an agent for the firm and other partners for partnership affairs. As an agent of the firm, a partner can bind the firm contractually and/or may commit torts for which the firm is liable. The personal assets of the general partners are subject to claims against the partnership. Each general partner can be held personally responsible to pay third parties the entire amount of the firm's debts. However, each partner has a right of contribution against the other partners; this is an equitable right to force the other partners to pay their fair share of the firm's debts where one partner has paid more than his/her fair share. (which case?)
Drafting A Partnership Contract
A good business practice requires the partnership contract in writing. The followings are a few important points to be covered in a written contract for a LLP: The formation date and the planned duration of the partnership; the names of the partners, and the name and business activities of the partnership. The assets to be invested by each partner, the procedure for valuing noncash investments, and the penalties for a partner's failure to invest and maintain the agreed amount of capital. The authority, the rights and the duties of each partner. The accounting period to be used, the nature of accounting records, financial statements and audits by independent public accountants. The net income (loss) sharing plans. The drawings allowed to each partner. Insurance on the lives of partners Provision for arbitration of disputes. Provision for liquidation of the partnership at the end of the term specified in the contract or at the death or retirement of a partner.
Formation: Profit sharing
A person receiving a share or profits establishes a rebuttable presumption of a partnership, UNLESS RUPA § 202 (c )(3) 1. Received for payment of debt 2. Wages for employment 3. Rent 4. Retirement benefit 5. For sale of property 6. Interest charge on loan, even if varies with profits of business
Accounts
Accounts are the categories into which the effects of transactions are recorded, and from which financial reports are created. 5 major account categories:
Accounting Matters & Considerations
At the formation of a partnership: Assign a proper value to the non-cash assets and liabilities contributed Distinguish between capital contributions and loans made to the partnership by individual partners Distinguish between tangible assets owned by the partnership and those specific assets that are owned by individual partners but are used by the partnership.
Sole Proprietorship
Is the form of business where one person owns all of the assets and is responsible for all of the debts, in contrast to a partnership or a corporation. The income is reported on the individual's Form 1040.
Partnership: Entity Considerations
Partner's liability is joint and several: All partners are liable jointly and severally for all obligations of the partnership unless otherwise provided by law. UPA§ 9 and RUPA § 301 liability in contract; UPA §§13-14 and RUPA § 305 liability in tort. Liability of Incoming Partner & Outgoing Partner. New admitted partner has no personal liability for existing partnership debts and obligations. Exhaustion Doctrine. Normal course of business v. extraordinary: practical solutions for two partner situation: 1. make a partnership agreement and delegate authority 2. appoint a tie breaker 3. dissolve partnership
Property and Co-Ownership
Partners jointly own partnership assets. If the partnership is dissolved, each partner has a claim on total assets equal to the balance in his or her respective capital account. This claim does not attach to specific assets that an individual partner contributed to the firm. Similarly, if a partner invests a building in the partnership valued at $100,000 and the building is later sold at a gain of $20,000, the partners all share in the gain. Partnership net income (or net loss) is also co-owned. If the partnership contract does not specify to the contrary, all net income or net loss is shared equally by the partners. As you will see later, though, partners may agree to unequal sharing of net income or net loss.
Income Statement: Loss/Profit
Shows the performance of your business over a period of time Resets at the beginning of each new accounting period Summarizes all revenue generated by the business Summarizes all expenses incurred by the business (by category) Calculates the net profit or loss, or "bottom line" = Income - Expenses Tells you how well your business is operated
RUPA
The Revised Act is largely a series of 'default rules' that govern the relations among partners in situations they have not addressed in a partnership agreement. The primary focus of RUPA is the small, often informal, partnership. Larger partnerships generally have a partnership agreement addressing, and often modifying, many of the provisions of the partnership act."
Requirements for General Partnerships
To carry on as co-owners - Each partner has the apparent authority, unless restricted by the partnership agreement, to act as an agent of the partnership for transactions in the ordinary course of business. Business for profit - The partnership must attempt to make a profit; therefore, not-for-profit entities, such as fraternal groups, may not organize as partnerships.
UPA Partnership Guidelines
Under the UPA, the partners must have equal management authority and share equally in profits and losses. 9 and 18(e) ("ordinary business transactions, see National v. Stroud) They have an equal obligation to contribute their time, energy and skill without compensation to the partnership business. Each partner has unlimited personal liability to the creditors of the partnership, and all partners are liable for wrongful acts and breaches of trust by any partner. No legal formalities are required to form a general partnership; however, a fictitious name statute may require the firm name to be registered to prevent confusion and/or fraud. they do file "information returns" with the IRS to report each partner's share of profits and thereby establish the amount of income from the partnership which the partner must declare as regular income