Partnerships and limited liability partners
limitations on authority
"Statement of Partnership Authority": may limit a partner's capacity to act as the firm agent or transfer property on its behalf -normally are effective with respect to third parties who are notified of the limitation (exception is made in real estate transactions)
inspection of the books
- must be kept accessible to partners - all partners have the right to receive information concerning the partnership's business - firms retain books for recording and securing information - partners contribute information, and a book keeper has the duty to preserve it - they can inspect all books/records on demand and make copies of it. * personal representative of a deceased partner's estate has the same right of access that the decedent would have had
creditors claim:
-creditors of a partnership and creditors of the individual partners can make claims on the partnership's asset * partnership creditors generally share proportionately with individual creditors in the partners assets. Assets are distributed according to the following: 1) payment of debts, those owned to partner and non partner creditor 2) return of capital contributions and distribution of profits to partners * liabilities are greater than its assets, partners bear losses
uniform partnership act (UPA)
-governs the operation of partnerships in the absence of express agreement - reduces controversy in the law relating to partnerships - Most recent version of UPA: provides limited liability for partners in a limited liability partnership
Important Elements of a Partnership
1) sharing of profits or losses 2) joint ownership of business 3) equal right to be involved in management of business - no formal, written partnership agreement
Buy Outs
after dissociation interest in the partnership must be purchased according to rules in UPA -"Buyout price" : based on the amount that would have been distributed to the partner if the partnership had been wound up on the date of dissociation
non-partner agreements
when a partnership by estoppel is deemed to exist, the non-partner is regarded as an agent whose acts are binding on the partnership
Liabilities of Partners in a Limited Partnership
- General partners are personally liable to the partnership's creditors - at least one general partner is necessary in a limited partnership so that someone has personal liability
winding up and distribution
- after dissolution the partnership continues for the limited purpose of winding up the business. the partners cannot create new obligations on behalf of the partnership - they have authority only to complete transactions begun but not finished at the time of dissolution and to wind up the business of the partnership
Management rights
- all partners have equal right in managing - each partner has one vote in management matters, regardless of firm size - Large partnerships often delegate daily management responsibilities to a management committee made up of one or more of the partners * Majority rule controls decisions connected with partnership business, unless specified in the agreement "unanimous consent of the partners"= significantly affect partnership nature or outside of ordinary course of the partnership business
liability of incoming partners
- new partners are not personally liable for any partnership obligations incurred before they became a partner. - new partners are only liable to their capital contribution
Valuation of Assets
how the partnership assets should be valued and distributed and whether the business should be sold
1) Limited Liability Partnerships (LLP)
hybrid form of business designed mostly for professionals who normally do business as partners in a partnership -allows partnership to continue as a pass-through entity for tax purposes but limits personal liability of the partners (attractive for professional service firms and family business) - "Big Four" accounting firms- the four largest international accountancy and professional services firms are organized as LLP's
rights of partners
related areas: management, interest in partnership,, compensation, inspection of books, accounting, and property
partnership law
two or more persons agree to do business as partners - each partner is an agent - bound by fiduciary ties - partners commit funds, other assets, labor, and skills to business - profits and losses are shared
Liability from state to state
- LLP from one state want to do business in another it may be required to register in the second state= Statement of Foreign Qualification * most states apply law of the state in which the LLP was formed, even if the firm does business in another state
Entity vs. aggregate (collection of individuals)
- a lawsuit could never be brought by or against the firm in its own name. -Each individual partner had to sue or be sued - In UPA a partnership is treated as an Entity - As an entity a partnership may hold the title to real or personal property in its name. Rather than in the names of the individual partners. - Partnerships must be treated as an entity in suits in federal courts and bankruptcy proceedings
accounting of partnership assets or profits
- assets or profits is required to determine the value of each partner's share - can be performed voluntarily or compelled by court order
Formation of a Limited Partnership
- is a public and formal proceeding that must follow statutory requirements - partners must sign a "Certificate of Limited Partnerships": must include the name, mailing address, capital contribution, of each general and limited partner. Must be filed with designated state official under RUPLA, the secretary of state. Certificate is open to public inspection
Breach and Waiver of fiduciary duties
- partners duties may not be waived or eliminated in the partnership agreement - each partner must act consistently with obligations of good faith and fair dealing - partner can pursue his or her own interest without automatically violating duties THE KEY IS: disclose the interest to other parties
Good Faith
- partners must exercise good faith when dissolving a partnership - some state statues allow partners injured by another partner's bad faith to file a tort claim for wrongful dissolution of a partnership
Liability of partners
- significant disadvantage with a traditional partnership is that the partners are personally liable for the debts of the partnership
joint property ownership
- does not and of itself create a partnership - INTENTIONS are Key
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
Illegality or impracticality
- any event that makes it unlawful for the partnership to continue its business will result in dissolution - under UPA a court may order dissolution when it becomes obviously impractical for the firm to continue (if the business can only be operated as a lost) - even if one partner has brought a court action seeking to dissolve a partnership continues to exist until it is legally dissolved by the court or by the parties agreement
Authority of Partners
- apparent authority exist when a partner is doing business with third parties. Both partner and the firm are liable - if partner acts within scope of authority, the partnership is legally bound to honor the partners commitments to third parties
definition of a partnership
- association of two or more persons to carry on as co-owners of a business for profit (UPA's definition of a 'person' includes corporation, so a corporation can be a partnership ) - the INTENT to associate is a key element of a partnership, and one can not join a partnership unless all other partners consent
sharing profits and losses
- creates a presumption that a partnership exists Reasons a court will not presume a partnership exists: 1) 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 of representative of a deceased partner 5) a sale of the goodwill of a business or property
Duties and Liabilities of Partners
- derived from agency law - each partner is an agent of each other - acts as both a principal and an agent in any business transaction within scope of agreement -each partner are also a general agent of the partnership in carrying out the usual business of the firm or by the partnership
Scope of implied powers
- extent to applied authority is broader for partners than for ordinary agents - can exercise all implied powers necessary to carry on that business - some implied powers include the authority to make warranties on goods in the sales business and enter into contracts consistent with the firm's regular course of business
Formation of an LLP
- formed and operated in compliance with statutes and provisions of UPA - Form must be filed with a central state agency, usually the secretary of state's office, and the business name must include either "Limited Liability Partnership of LLP" - must file an annual report with the state to remain qualified as an LLP in that state (it is easy to convert from a traditional partnership into an LLP because the organizational structure stays the same - statues are amendments to a states existing partnership law
duties and compensation
- includes collecting and preserving partnership assets, discharging liabilities and accounting to each partner for the value of his or her interest in the partnership - partners are entitled to compensation for services in winding up partnership affairs above and apart from his or her share in the partnership profits. May also receive reimbursement for expenses incurred in the process
Rights and Duties in a Limited Partnership
- limited partners have rights of access to the partnership's books and to information regarding partnerships business - on a Dissolution of the partnership, limited partners are entitled to a return of their contributions in accordance with the partnership certificate - limited partners can sue an outside party on behalf of the firm if the general partners with authority to do so have refusd to file suit
Wrongful Dissociation
- partner has the power to dissociate from a partnership at any time, but if they lack the right to dissociate, the the dissociation is considered wrongful under the law.
Duties of partnership
- specify duration of the partnership (it will continue until a designated date or completion of a project)
compesentation
- their duties is not a compensable service - partners income from the partnership takes the form of a distribution of profits according to the partner's share in the business
Sharing Liability Among Partners
-some states provided for proportionate liability, that is for separate determinations of the negligence of the partners
Reasons to require Unanimous consent :
1) alter the nature of the partnership agreement 2) change capital structure of partnership 3) amend (change) the terms of the partnership agreement 4) admit a new partner 5) engage in a completely new business 6) assgining partnership property to a trust for the benefit of creditors without legal consent 7) dispose of the partnerships good will 8) submit partnership claims to arbitration 9) any act that will make the partnership impossible
Events that cause Dissociation
1) partners voluntarily giving notice of an express will to withdraw (the remaining partners must decide whether to continue the partnership business) if they decided not to continue the voluntary dissociation of a partner will dissolve the firm 2) occurrence of an event 3)unanimous vote. a partner transfers substantially all of her or his interest in the partnership, or when it becomes unlawful to carry on partnership 4) order of a court if the partner has engaged in wrongful conduct: breach contract, violate duty owed 5) partners declaring bankruptcy,
Formation of a partnership: - General rule: partnership agreements can be oral,written, or implied by conduct (TRANSFER IN REAL PROPERTY, MUST BE IN WRITING TO BE LEGALLY ENFORCEABLE )
Articles of Partnership: any term that the parties wish, unless they are illegal or contrary to public policy or statues (rights and duties of partners are governed)
partnership for a term
designated date or completion of a project
partnership at will
no fixed duration is specified (partnership can dissolve at anytime)
Dissociation and Dissolution
- General partner has the power to voluntarily dissociate, withdraw from a limited partnership unless the partnership agreement specifies otherwise - Limited partnership can withdraw from the partnership by giving six months notice unless the partnership agreement specifies a term (some states have laws prohibiting the withdrawal of LP's ) Events that cause dissociation: - general partners voluntary dissociation from the firm will lead to dissolution, unless all partners agree to continue the business. bankruptcy, retirement,death, mental capacity of a general partner will cause dissociation of that partner and dissolution an LP - Bankruptcy does not dissolve a limited partner unless it causes bankruptcy of the firm. Death or an assignment of interest does not dissolve it. - it can be dissolved by court decree
"Joint and Several Liability"
- a third party has the option of suing all of the partners together (jointly) or one or more of the partners separately (severally) - everyone can be held liable even if a particular partner did not participate in the cause of action - a partnership assets must be exhausted before a creditor can enforce a judgment against a partner's separate assets -judgment against one partner severally does not extinguish the others liability * if a plaintiff is successful in a suit against a partner or partners, they may collect on the judgement only against the assets of those partners named as defendants
Liability in an LLP
- allows professionals to avoid personal liability for the malpractice of other partners. - one is still liable for his or her wrongful acts, such as negligence example: Delaware law protects each innocent partner from the debts and obligations of the partnership arising from negligence
Effects of Dissociation
- dissociation rightful or wrongful terminates some of the rights of the dissociated partner, requires that the partnership purchase their interest and alters the liability of the parties to the third parties *Rights and Duties*: on a partner's dissociation his or her right to participate in the management and conduct of the partnership business terminates. - the partner's duty of loyalty also ends. partner's duty of care continues only with respect to events that occurred before dissociation, unless the partner participates in the winding up the partnership's business
Fiduciary duties
- duty that a partner owes to their partnership and the other partners are the duty of care and duty of loyalty * Duty Of Care: refrain from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law - partner is not liable to the partnership for simple negligence or honest errors in judgement in conducting partnership business * Duty Of Loyalty: a partner to account to the partnership for any property, profit, or benefit derived by the partner in the conduct of the partnership's business or from the use of its property - partner must refrain from competing with the partnership - can be breached by self dealings, misusing property, disclosed trade secrets..
interest in the partnership
- each partner is entitled to the proportion of business profits and losses - if the agreement does not apportion profits the UPA will indicate how profits will be equally shared - if the agreement does not apportion losses, losses will be shared in the same ratio as profits
Tax treatment of partnerships
- is a pass-through entity & not a taxpaying entity * Pass-Through Entity: a business entity that has no tax liability. the entity's income is passed through to the owners of the entity, who pay income taxes on it -passed through and attributed to the partners on their individual tax returns - The partnership itself pays no taxes and is responsible only for filing an INFORMATION RETURN with the internal revenue services - A partners profit is taxed as an individual income to the individual partner - Partners can deduct a share of the partnership's losses on their individual tax returns
2) Limited Partnership (LP)
- limits some of its owner liability (everyone is trying to limit their personal liability) *Consists of ONE general partner and ONE or MORE limited partners* - General Partnership: assumes management responsibility (has full responsibility for the partnership and for all its debts) (ends by retirement or death) -Limited Partnership: contributes cash or other property and owns an interest in the firm (not involved in management responsibilities )(not liable for debts beyond the amount of their investment) - A limited partner can forfeit limited liability by taking part in the management of the business (only liable for the extent of their investments as long as he doesn't participate in management)(death doesn't an entity)
dissociation of a partner
- occurs when a partner ceases to be associated in the carrying on of the partnership business - a partner always has the power to dissociate from a firm, but may not have the right to dissociate -normally the partner should have his or her interest purchased by the partnership - it also terminates the partner's actual authority to act for the partnership and to participate in running its business - the partnership may continue to do business without the dissociated partner
Buy Sell Agreement (Buyout agreement)
- one or more partners to buy out the other or others, should the situation warrant - agreeing beforehand on who buys what, under what circumstances, and if possible, at what price may eliminate costly negotiations or litigation later. - the agreement may specify that one or more partners will determine the value of the interest being sold and that the other or others will decide whether to buy or sell (can not be inherited) - *Under UPA if a partner's dissociation does not result from a dissolution of the partnership, a buyout of the partner's interest is mandatory* -* a withdrawing partner receives the same amount through a buyout that he or she would receive if the business were winding up *
property rights
- property acquired by a partnership is property of the partnership not partners individually - includes things originally contributed and things purchased later - one may use or posses partnership property only on behalf of the partnership - a partner is not a CO-OWNER of partnership property and has no right to sell, mortgage ,or transfer partnership property to another - property is owned as an entity - property can not be used to satisfy the partner's obligation *CHARGING ORDER*: attach the partner's interest in the partnership to satisfy the partner's obligation - partner's interest in the partnership includes her or his proportionate share of profits and losses and the right to receive distribution
Liability to Third Party
- two year after a partner dissociates from a continuing partnership, the partnership may be bound by the acts of dissociated partner based on apparent authority - if a third party reasonably believed at the time of a transaction that the dissociated partner was still a partner, the partnership may be liable. - a dissociated partner may be liable for partnership obligations entered into during a two-year period. - To avoid this possible liability a partnership should notify its creditors, customers, and clients of a partner's dissociation - either the partner or the dissociated partner can file a statement of dissociation in the appropriate state office to limit the dissociated partner's authority to ninety days after the filing - it helps to minimize the firms potential liability for the former partner and vice versa
partnership by estoppel
- when a third person has reasonably relied on the representation that a non-partner was part of a partnership, a court may conclude that : partnership by estoppel: exist and impose liability, but not partnership rights on the alleged partner. - partnership by estoppel may be imposed when a partner represents, expressly or impliedly that a non-partner i s a member of the firm
"Joint Liability":
means that a third party must sue all of the partners as a group, but each partner can be held liable for the full amount - the partnership's assets must be exhausted before creditors can reach the partners individual assets
Partnership Termination
termination= dissolution - Dissolution: commencement of the winding up process -Winding up: the actual process of collecting,liquidating, and distributing the partnership assets -dissolution can be brought about by acts of the partners, by operation of law or by judicial decree *any partnership can be dissolved by the partner's agreement* - if the partnership agreement states that it will dissolve on a certain event, such as a partner's death or bankruptcy, then the occurrence of that event will dissolve the partnership - can be dissolved by expiration of the term or completion of the undertaking
in a non-partnership agency relationship:
the agent usually does not have an ownership interest in the business and is not obligated to bear a portion of ordinary business losses
