Business Law Chapter 31

Three elements of a partnership

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

Articles of Partnership

A written agreement that sets forth each partners rights and obligations with respect to the partnership

how do the common law agency concepts apply?

Because each partner is deemed to be the agent of the partners and of the partnership. -also because they are bound by fiduciary ties just as agents are

dissolution

the formal disbanding of the partnership, and it ceases to do business -winding up process (make sure all creditors have been paid so no joint and several liability)

Rights of a partner in a general partnership

-management rights -interest in the partnership -compensation -inspection of books -accounting of profits and assets -property rights

5 ways that a general partner can be dissociated from the firm

1. . By the partner's voluntarily giving notice of an "express will to withdraw." 2. occurrence of an event agreed to in the partnership agreement 3. unanimous vote of other partners under certain circumstances such as when a partner transfers all or substantially all of his/her interest in the partnership 4. By order of a court or arbitrator if the partner has engaged in wrongful conduct that affects the partnership business 5. By partner declaring bankruptcy, assigning his or her interest in the partnership for the benefit of creditors, becoming physically or mentally incapacitated, or by the partner's death.

pass-through entity

A business entity that has no tax liability. The entity's income is passed through to the owners, and they pay taxes on the income. -general partnership only has to file info return with IRS, profits and losses of the firm are reported on individual tax returns of the general partners

how is partnership law distinct from agency law?

A partner-ship is based on a voluntary contract between two or more competent persons who agree to commit financial capital, labor, and skill to a business with the understanding that profits and losses will be shared. -an agent usually does not have an ownership in the business, and is not obliged to bear a portion of the ordinary business losses.

A partnership for a term

A partnership with a fixed duration.

wage garnishment

A process that requires an employer to withhold a portion of an employee's paycheck to pay a court-ordered debt settlement. -can be tricky -creditor and employer must be careful and comply with terms of applicable statute.

Why did the common law treat a general partnership this way?

A sole proprietor is personally liable to the creditors of the firm if the assets of the firm are not sufficient to satisfy a debt. -A general partner's personal assets are also available to creditors of the business to satisfy the debts of the business

What is the difference between the Articles of Partnership and a Partnership Agreement?

Agreements to form a partnership can be oral, written or implied by conduct. Articles are written

compensation

Devoting time, skill and energy to partnership business generally is not a compensable service. The partners income takes the form of the distribution of the profits from the business (lawyer gets salary & own profits)

intrest in partnership

Each partner is entitled to the proportion of business profits and losses designated in the partnership agreement. -If agreement does not say how the profits will be shared, UPA provides that profits will be shared equally. If the agreement does not apportion losses, losses will be shared in the same ratio as profits

If all partners are sued in a general partnership, how are assets used to satisfy debt?

If all partners are sued: -the general partnership assets must be used first to satisfy the debt. If the general partnership assets are not sufficient to satisfy the deb: the partner's personal assets can be used to satisfy the debt. -However, each general partner can be held liable for the full amount.

What is the right of a general partner to the profits and losses of the firm?

Interest in the partnership

tax treatment

Modern law treats a partnership as an aggregate of the individual partners rather than as a separate legal entity in one situation —for federal income tax purposes. The partnership is a pass-through entity and not a taxpaying entity. -no double taxation

Must all Partnership Agreements be in "writing?"

No, only those that need to be written to be legally enforceable under there Statute of Frauds

inspection of books

Partnership books and records must be accessible to all partners. -Each partner has the right to receive full and complete info on the conduct of all aspects of partnership business

What is the definition in the UPA of a general partnership?

The UPA defines a general partnership as an association of two or more persons to carry on as co-owners of a business for profit.

Why would a partner be interested in a proportionate share of the losses from the business?

The partner can pass the losses from the business through to his/her personal tax return and use the losses to shelter other income from taxation

Partnership by Estoppel

When a third person has reasonably and detrimentally relied on a representation that a non-partner was part of a partnership -court may impose liability on the alleged partner

A partnership at will

a partnership created with no fixed duration -can be dissolved in accordance with the terms of the partnership agreement or the terms of the state UPA.

dissociation

a severance of the relationship between a partner and the partnership

joint liability

a third party (creditor) must sue all of the partners as a group, but each partner can be held liable for the full amount.

how did common law courts first recognize a partnership?

an aggregate of the individuals who made up the partnership -basically they viewed the general partnership as a group of sole proprietors who have come together to operate a business. -general partnership was not a separate legal entity from its owners. -could not sue or hold property in its own name

partnership

arises from an agreement, express or implied, between two or more persons to carry on a business for profit.

partners

co-owners of a business that have joint control over over its operation and the right to share it's profits.

who are partnerships governed by?

common law concepts (particularly those relating to agency) and by statutory law.

Fiduciary Duties of Partners

duty of care and duty of loyalty

The Uniform Partnership Act

governs the operation of partnerships in the absence of an express agreement. -reduces controversies concerning the law relating to partnerships. - partners are free to establish rules for their partnership that differ from those stated in the UPA. -drafted by The Conference of Commissioners on Uniform State Laws -All states have adopted some form of the UPA

what is the one thing that the UPA did not change?

joint and several liability.

how does a partnership make an agreement on something? (management rights)

majority rules. each partner has one vote in management matters regardless of one's interest in the firm, unless partnership agreement says otherwise.

general partnership

original type of business organization -recognized at common law (parties who wished to adopt this form of business organization didn't need states permission)

property rights

property acquired by the partnership is the property of the partnership. -includes all property originally contributed to the partnership -A partner may use or possess partnership property only on behalf of the partnership -a partner may not sell for transfer it bc they are not a co-owner -(different than common law rule on aggregate partners)

duty of care

refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law

accounting of profits and assets

required to determine the value of each partner's share in the partnership. -often in small partnerships w fam members

duty of loyalty

requires a partner to account to the partnership for "any property, profit or benefit", derived by the partner from the partnership's business or the use of its property -partner must also refrain from competing w partnership

how can duty of loyalty be breached?

self-dealing, misusing partnership property, disclosing trade secrets, or usurping a partnership business opportunity

important change made by the UPA

the adoption of the entity theory of general partnership law. -the general partnership is considered a separate legal entity from the general partners. Therefore it can own property in its' own name, contract in its' own name and sue or be sued in its' own name.

joint and several liability

third party has the option of suing all of the partners together (jointly) or one or more of the partners separately (severally) -Those not sued in the first action may be sued subsequently, unless the court in the first action held that the partnership was not liable.