Chapter 34
General Partnership
. A person cannot be forced to be a partner or to accept another person as a partner.
General partnerships
A BLANK 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. This way, the government tax authorities can trace whether partners are reporting their income or losses correctly.
general partnership
A BLANK is a voluntary association of two or more persons. 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.
sole proprietorship
A BLANK is the simplest form of business organization.
indemnification
A general partner who is made to pay more than his or her proportionate share of contract liability may seek BLANKKK from the partnership and from those partners who have not paid their share of the loss.
Name of the General Partnership
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. (doing business as)—with the appropriate government agency to operate under a trade name. The general partnership usually must publish a notice of the use of the trade name in a newspaper of general circulation where the partnership does business. The name selected by the partnership cannot indicate that it is a corporation (e.g., it cannot contain the term Inc.) and cannot be similar to the name used by any existing business entity.
General partnership
A general partnership, commonly referred as a partnership, is a voluntary association of two or more persons for carrying on a business as co-owners for profit.
Taxation of a Sole Proprietorship
A sole proprietorship is not a separate legal entity, so it does not pay taxes at the business level. Instead, the earnings and losses from a sole proprietorship are reported on each sole proprietor's personal income tax filing.
Co-ownership
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.
Competing with the partnership
Example A partner of a general partnership that operates an automobile dealership cannot open a competing automobile dealership without his or her co-partners' permission.
(antecedent debts)
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.
The duty of obedience
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.
The right to share profits
Example Maude, George, Hillary, and Michael form a general partnership. Capital is contributed to the partnership in the following amounts: Maude, 30 percent; George, 5 percent; Hillary, 50 percent; and Michael, 15 percent. The partnership makes $100,000 profit for the year. Although the capital contributions of the partners differ significantly, each of the four partners share equally in the profits of the business—each receives $25,000.
Disadvantages of being a sole proprietor
For example, a sole proprietors' 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.
Taxation of a Sole Proprietorship
For federal income tax purposes, a sole proprietor must prepare a personal income tax Form 1040 U.S. Individual Income Tax Return and report the income or loss from the sole proprietorship on his or her personal income tax form. The income or loss from the sole proprietorship is reported on Schedule C (Profit or Loss from Business), which must be attached to the taxpayer's Form 1040.
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 BLANK 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.
Taxation of General Partnerships
General partnerships do not pay federal income taxes. Instead, the income and losses of partnership flow onto and have to be reported on the individual partners' personal income tax returns.
Statute of Frauds
General partnerships that exist for more than one year or are authorized to deal in real estate must have their general partnership agreement in writing under the BLANK.
Usurping a partnership opportunity.
If a third party offers a business opportunity to a general partner in his or her partnership status, the partner cannot BLANKKKKK for oneself before offering it to the partnership. If the partnership rejects the opportunity, the partner is free to pursue the opportunity.
partnership agreement in writing
It is good practice for partners to put their BLANK . A written document is important evidence of the terms of the agreement, particularly if a dispute arises among the partners.
The major forms for conducting businesses and professions are as follows:
Sole proprietorship General partnership Limited partnership Limited liability partnership Limited liability company Corporation
Uniform Partnership Act (UPA)
The UPA covers most problems that arise in the formation, operation, and dissolution of general partnerships. Other rules of law or equity govern if there is no applicable provision of the UPA [UPA Section 5]. The UPA forms the basis of the study of general partnerships in this chapter.
A Revised Uniform Partnership Act (RUPA)
The UPA has been adopted in whole or in part by most states, the District of Columbia, Guam, and the Virgin Islands. BLANK has been issued by the National Conference of Commissioners on Uniform State Laws, but it has not been adopted by many states.
Liability of Outgoing Partners
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(s).
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. T he partners are not liable for honest errors in judgment.
sole proprietor
There is only one owner of the business, who is called the BLANK.
General partners
are in a fiduciary relationship with one another. As such, they owe each other a duty of loyalty.
General partnerships
do not pay federal income taxes. Instead, the income and losses of partnership flow onto and have to be reported on the individual partners' personal income tax returns. This is called flow-through taxation
reasonable care
A general partner must use and skill in transacting partnership business.
Right of information
Each general partner has the right to demand true and full information from any other partner of all things affecting the partnership [UPA Section 20]. The corollary to this rule is that each partner has a duty to provide such information on the receipt of a reasonable demand. The partnership books (e.g., financial records, tax records) must be kept at the partnership's principal place of business [UPA Section 19]. The partners have an absolute right to inspect and copy these records.
Making secret profits.
General partners may not make secret profits from partnership business (e.g., taking bribes).
Right to the return of capital
On 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)].
indemnification
Partners sometimes incur personal travel, business, and other expenses on behalf of the partnership. A general partner is entitled to BLANK (i.e., reimbursement) for such expenditures if they are reasonably incurred in the ordinary and proper conduct of the business [UPA Section 18(b)].
Liability of Outgoing Partners
The dissolution of a general partnership does not of itself discharge the liability of an outgoing partner for existing partnership debts and obligations. If a general partnership is dissolved, each general partner is personally liable for debts and obligations of the partnership that exist at the time of dissolution.
Tort Liability of General Partners; tort liability
The partnership and partners who are made to pay BLANKKKKK may seek indemnification from the partner who committed the wrongful act. A release of one partner does not discharge the liability of other partners.
Sole proprietorships
There is only one owner of the business, who is called the sole proprietor. There is no separate legal entity.
As such, they owe each other a duty of loyalty.
This duty is imposed by law and cannot be waived. If there is a conflict between partnership interests and personal interests, the partner must choose the interest of the partnership. Some basic forms of breach of loyalty involve the following:
The right to compensation
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].
Self-dealing.
Undisclosed BLANK 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.
Sole proprietorships
are the most common form of business organization in the United States. Many small businesses—and a few large ones—operate in this way.
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.
General partners
must deal with third parties in conducting partnership business. This often includes entering into contracts with third parties on behalf of the partnership. Partners, employees, and agents of the partnership sometimes injure third parties while conducting partnership business.
The duty of obedience
requires general 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.
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.
An action for an accounting
(1) review the partnership and the partners' transactions and (2) award each partner his or her share of the partnership assets [UPA Section 24]. An action results in a money judgment for or against partners, according to the balance struck.
General partnership
, or ordinary partnership, has been recognized since ancient times. The English common law of partnerships governed early U.S. partnerships. The individual states expanded the body of partnership law.
Competing with the partnership
. A general partner may not BLANKKK without the permission of the other partners.
This is called flow-through taxation
. A general partnership 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. This way, the government tax authorities can trace whether partners are reporting their income or losses correctly.
sole proprietor
A BLANK bears the risk of loss of the business; that is, the owner will lose his or her entire capital contribution if the business fails. In addition, the sole proprietor has unlimited personal liability (see Exhibit 34.1). Therefore, creditors may recover claims against the business from the sole proprietors' personal assets (e.g., home, automobile, bank accounts).
In order to qualify as a general partnership
A business must meet four criteria to qualify as a BLANK under the UPA [UPA Section 6(1)]. It must be (1) an association of two or more persons (2) carrying on a business (3) as co-owners (4) for profit.
duty of loyalty
A general partner who breaches the BLANKKKK must disgorge any profits made from the breach to the partnership. In addition, the partner is liable for any damages caused by the breach.
(antecedent debts)
A new partner who is admitted to a general partnership is liable for the existing debts and obligations BLANKKKKK 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.
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)]. A partner is also entitled to receive interest from the date of the loan.
Taxation of a Sole Proprietorship
A sole proprietorship business earns income and pays expenses during the course of operating the business. A sole proprietor has to file tax returns and pay taxes to state and federal governments.
general partnership agreement
A written agreement is called a BLANK, articles of general partnership, or articles of partnership. The parties can agree to almost any terms in their partnership agreement, except terms that are illegal. The articles of partnership can be short and simple or long and complex. 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.
Entrepreneur
An BLANK is a person who forms and operates a business. An entrepreneur may start a business by him- or herself or may co - found a business with others. Most businesses started by BLANK are small, although some grow into substantial organizations.
unlimited personal liability for contracts of the partnership.
As a legal entity, a general partnership must act through its agents—that is, its partners and employees. Contracts entered into with suppliers, customers, lenders, or others on the partnership's behalf are binding on the partnership. General partners have BLANKKKKKK
An action for an accounting
BBLANKKKKK is a formal judicial proceeding in which the court is authorized to
Creating a sole proprietorship
BLANK is easy. There are no formalities, and no federal or state government approval is required. Some local governments require all businesses, including BLANK, to obtain licenses to do business within the local jurisdiction. If no other form of business organization is chosen, the business is by default a BLANK. The following feature discusses the requirement for businesses to file for a trade name under certain circumstances.
The duty of care
BLANKKKK calls for the partners to use the same level of care and skill that a reasonable business manager in the same position would use in the same circumstances.
This is called imputed knowledge.
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. Knowledge is also imputed regarding information acquired in the role of partner that affects the partnership and should have been communicated to the other partners [UPA Section 12].
Making secret profits.
Example A partner who takes a kickback from a supplier has made a secret profit. The secret profit belongs to the partnership.
Self-dealing.
Example Dan is a partner in a general partnership that is looking for a piece of real property on which to build a new store. Dan owns a desirable piece of property. To sell the property to the partnership, Dan must first disclose his ownership interest and receive his partners' consent.
Usurping a partnership opportunity.
Example Ike, Ida, and Iodine are general partners who own the general partnership Real Estate Development Associates, which develops and builds commercial real estate projects such as office buildings, warehouses, and such. One day, a person who owns a piece of vacant real estate goes to Ike and offers to sell the real estate to the general partnership. Ike sees that that it is an excellent price, so he purchases the real estate for himself and does not bring the opportunity to the partnership. He has usurped a partnership opportunity.
Right to Participate in Management
Example Maude, George, Hillary, and Michael form a general partnership. Two hundred thousand dollars capital is contributed to the partnership in the following amounts: Maude, $60,000 (30 percent); George, $10,000 (5 percent); Hillary, $100,000 (50 percent); and Michael, $30,000 (15 percent). Although the capital contributions of the partners differ significantly, each of the four partners has an equal say in the business. The partners can, by agreement, modify the UPA's majority rule by delegating management responsibility to a committee of partners or to a managing partner.
sole proprietor
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. 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. Nathan, the sole proprietor, is personally liable to pay the bank and all the debts of the sole proprietorship from his personal assets.
Tort Liability of General Partners
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.
Partnership agreements can provide that profits and losses are to be allocated in proportion to the partners' capital contributions or in any other manner.
Example Partners with high incomes from other sources can benefit the most by having the losses generated by a partnership allocated in a greater portion to them.
Duty to inform
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.
Breach of confidentiality.
Example Trade secrets, customer lists, and other secret information are confidential. A partner who misuses this information—either him- or herself or by transferring the information to someone else—has breached confidentiality.
Entrepreneur
Examples Bill Gates and Paul Allen started Microsoft Corporation, which grew into a giant software company. Mark Zuckerberg and others founded Facebook, Inc., an extremely successful social networking service. David Filo and Jerry Yang founded Yahoo!, which is a leader in providing Internet services. Jack Ma and others founded Alibaba Group, an online services and business to business platform in China. Jack Dorsey, Evan Williams and others started Twitter, Inc., an online social networking and microblogging service. Jeremy Stoppelman and Russel Simmons founded Yelp, Inc., an online urban guide and business review site. Reid Hoffman and others started Linkedin Corporation, which operates a professional networking service.
Duty of care
Examples 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.
An action for an accounting
General partners are not permitted to sue the partnership or other partners at law. Instead, they are given the right to bring an action for an accounting against other partners. Example If a partner suspects that another partner is committing fraud by stealing partnership assets, the partner can bring an action for an accounting.
duty to inform
General partners owe a BLANKKKKK their co-partners of all information they possess that is relevant to the affairs of the partnership [UPA Section 20].
Misuse of partnership property.
General partners owe a duty not to use partnership property for personal use. If a general partner uses partnership property for personal use, it constitutes a misuse of partnership property.
Breach of confidentiality.
General partners owe a duty to keep partnership information confidential (e.g., trade secrets). Failure to do so is a BLANKKKK.
Liability of Outgoing Partners
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.
Uniform State Laws,
In 1914, the National Conference of Commissioners on BLANK which is a group of lawyers, judges, and legal scholars, promulgated the BLANK. The UPA is a model act that codifies general partnership law.
Right to Participate in Management
In the absence of an agreement to the contrary, all general partners have an equal right to participate in the management of the general partnership business. In other words, each partner has one vote, regardless of the proportional size of his or her capital contribution or share in the partnership's profits. Under the UPA, a simple majority decides most ordinary partnership matters [UPA Section 18]. If the vote is tied, the action being voted on is considered to be defeated.
fictitious business name statement
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 BLANK (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.
UPA General Partnership
The UPA's definition of person who may be a general partner includes natural persons, partnerships (including limited partnerships), corporations, and other associations. A business—a trade, an occupation, or a profession—must be carried on. The organization or venture must have a profit motive in order to qualify as a partnership, even though the business does not actually have to make a profit.
In order to truly qualify as 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 partnership
The formation of a BLANK creates certain rights and duties among partners and between the partners and third parties. These rights and duties are established in the partnership agreement and by law. General partners, or partners, are personally liable for the debts and obligations of the partnership
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. General partners have unlimited personal liability for the debts and obligations of the partnership.
Under the UPA, general partners have joint liability for the contracts and debts of the partnership [UPA Section 15(b)].
This means that a third party who sues to recover on a partnership contract or debt must name all the general partners in the lawsuit. If such a lawsuit is successful, the plaintiff can collect the entire amount of the judgment against any or all of the partners. 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. Some states provide that general partners are jointly and severally liable for the contracts of the general partnership.
Under the UPA, general partners have joint liability for the contracts and debts of the partnership [UPA Section 15(b)].
Under the UPA, general partners have joint liability for the contracts and debts of the partnership [UPA Section 15(b)].
Tort Liability of General Partners; joint and several liability
Under the UPA, general partners haveB:ANKKKKKKfor 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.
general partner; right to share in the profits
Unless otherwise agreed, the UPA mandates that a BLANKKKK has the right to an equal share in the partnership's profits and losses [UPA Section 18(a)]. The BLANK of the partnership is considered to be the right to share in the earnings from the investment of capital.
The right to compensation
Unless otherwise agreed, the UPA provides that no general partner is entitled to remuneration for his or her performance in the partnership's business [UPA Section 18(f)]. Under this rule, partners are not entitled to receive a salary for providing services to the partnership unless agreed to by the partners.
The right to share profits
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.
