§1 : Basic Partnership Concepts

2. §1: Basic Partnership Concepts • Partnerships are governed both by common law and by statutory laws. • Agency Concepts and Partnership Law: • Each partner is deemed to be an agent of the other. • There may be imputation of liability. • Each partner is a fiduciary of the other.

3. Uniform Partnership Law • Partners are agents and fiduciaries of one another, but differ from agents in that they are also co-owners and share in profits and losses. • In the absence of a partnership agreement, the Uniform Partnership Act, as adopted by most states, governs the partnership.

4. Definition of Partnership • Partnership is created when two or more persons agree to carry on business for profit as co-owners with equal right to manage and share profits (UPA). • Case 36.1:Cap Care Group Inc. v. McDonald (2002).

5. Definition of Partnership

6. Definition of Partnership • If a commercial enterprise shares profits and losses a partnership will be inferred. • Exceptions: Partnership not inferred if profits received as payment in the following situations: • Debt by installments of interest on a loan. • Wages of an employee. • Rent to a landlord. • Annuity to a widow or representative of a deceased partner. • Sale of good will.

7. Joint Partnership Ownership and Partnership Status • At common law, the partnership was not a separate legal entity from its owners. • Today, many states recognize the partnership as a separate legal entity for the following purposes: • To sue and be sued (for federal questions, yes; for state questions, differs). • To have judgments collected against it’s assets, and individual partners’ assets.

8. Partnership as an Entity • Partnerships are recognized as separate legal entities (cont’d): • To own partnership property. • To convey partnership property. • At common law -- property owned in tenancy in partnership, all partners had to be named and sign the conveyance. • Under UPA partnership property can be held and sold in firm name.

9. Entity vs. Aggregate • Partnerships are recognized as separate legal entities (cont’d): • For “marshaling of assets.” • Federal Bankruptcy changes marshaling of assets. • To keep its own books. • File its own federal/state tax returns. • Aggregate Theory of Partnership. • Partnership pays no federal income tax.

10. § 2: Partnership Formation • Duration of Partnership. • Partnership for a term. • Partnership at will. Partnership agreements can be oral unless Statute of Frauds requires a written agreement. Practically, agreements should be in writing. • Capacity. Partners must have legal capacity. • Corporations. UPA permits corporations to be a partner.

11. Partnership by Estoppel • Occurs when a person who is not a partner holds himself out to 3rd Parties and the 3rd Party relies to her detriment. • Two Aspects of Liability: • Person who misrepresents he is a partner is liable. • Any person consenting to the misrepresentation is also liable.

12. Partnership by Estoppel • When real partnership exists: • A partner represents a non-partner is in fact a partner, • The non-partner is an agent whose acts are binding on the partner only, not the partnership. • Remember: Partnership by estoppel requires third party reasonably rely on the representation to her detriment.

13. § 3: Partnership Operations • Rights of Partners: In the absence of a partnership agreement (oral or written) state statutes govern the partner rights: • Management: equal, each one vote, majority wins; need unanimous consent for some actions. • Partnership Interest: equal profits, losses shared as profits shared.

14. Rights of Partners • Rights among partners (cont’d): • Compensation: none. • Inspection of the Books: always and also by rep. of deceased partner. • Accounting: when other partner(s) committing fraud, embezzlement, wrongful exclusion, or anytime it is just and reasonable. • Property Rights 

15. Rights of Partners • Each partner has a property right, which includes: • An interest in the partnership. • A right in specific partnership property. • A right to participate in the management of the partnership, as mentioned above.

16. Rights of Partners • Each Partner has right to equally share partnership interest: • A proportionate share of the profits earned and a return of capital on the partnership's termination. • A partner may assign his interest. • A partner’s interest is susceptible to a creditor’s lien. Creditors may attach and get a “charging order.” • Assignment or charging order does not dissolve the firm.

17. Rights of Partners • Partner Has a Right to Partnership Property: (cont’d) • What she originally brought into the partnership, or • Acquired on account of the partnership, or • Purchased with partnership funds. • Partners are tenants in partnership of all firm property = other partners have rights of survival if one dies and then they account to the deceased partner’s estate for the value of his interest. (*but see RUPA)

18. Rights of Partners • Partner cannot sell, assign or take a particular item of partnership property, nor can individual partner’s creditors seize the property. • Creditors can get a charging order against the partnership for the partner’s interest in the partnership.

19. Duties and Liabilities of Partners • Fiduciary Duties. Partners are fiduciaries and general agents of one another and the partnership. • General Agency Powers. Partners have implied authority to conduct ordinary partnership business but need unanimous consent to sell assets or donate to charity.

20. Duties and Liabilities of Partners • Authorized vs. Unauthorized Actions. • Liability depends on the scope of authority. • Joint Liability for Contracts. If Partner is sued for Partnership debt, Partner has right to insist that other partners be sued with her.

21. Duties and Liabilities of Partners • Joint and Several Liability for Torts. • JSL means 3rd party can sue either one or all partners. 3rd party may collect against personal assets of all partners. • Case 36.2: Moren v. Jax Restaurant (2004). • Liability of Incoming Partner & Outgoing Partner. New admitted partner has no personal liability for existing partnership debts and obligations.

22. § 4: Partnership Dissociation • Dissociation occurs when one partner ceases to be associated in the partnership business. • Allows partner to have her interest purchased by the partnership. • Terminates her voting interest in the partnership. • Events causing dissociation: • Notice. • Triggering Event. • Unanimous Vote.

23. Partnership Dissociation • Wrongful Dissociation. • Dissociating partner breaches partnership agreement. • Dissociating partner files bankruptcy. • May be liable for costs. • Effects of Dissociation. • Rights and Duties. • Liability to Third Parties. Partnership bound for two years by acts of outgoing partner, unless proper notice given.

24. § 5: Partnership Termination • The termination of a partnership occurs in two stages: • Dissolution (is the legal “death” of the partnership), and • Winding up and Distribution of Assets (collecting and distributing partnership assets).

25. Dissolution • By Acts of the Partners: • Partners can agree to Agreement. • Partner’s Withdrawal. • Partnership for term – breach. • No term -- no breach. • Admission of a new partner. • A transfer of a partner’s interest. • Although the transferee does not become a partner. • By assignment or attachment by creditor.

26. Dissolution • By Operation of Law: • Death of a partner. • Bankruptcy of a partner. • Bankruptcy of partnership. • Illegality.

27. Dissolution • By Judicial Decree: • Insanity. • Incapacity. • Business Impracticality. • Improper Conduct. • Other Circumstances (personal dissension).

28. Notice of Dissolution • To avoid liability for apparent authority, apply the agency rules by giving: • Actual notice. • Constructive notice.

29. Winding Up and Distribution of Assets • Partners have no authority after dissolution occurs except to: • Complete transactions already begun. • Wind up by collecting and preserving partnership assets, discharging liabilities, and accounting to each partner for the value of his share.

30. Winding Up and Distribution of Assets • If partner has violated the partnership agreement, he: • Must pay damages. • May not participate in winding up. • But other partners may choose to continue. • If partner dies: • Other partners act as fiduciaries. • Accounting to deceased partner’s estate. • Survivors get paid for their services.

31. Distribution of Assets • Partnership obligations are paid in the following order: • First, 3rd party creditors. • Second, partner loans to partnership. • Third, return of capital contributions. • Fourth, distribution of the balance, if any to partners.

32. Distribution of Assets • If liabilities are greater than assets partners bear losses in proportion in which they shared profits, unless agreed otherwise. • If one partner does not contribute, other partners are liable for his share and they have the right of contribution against the partner who didn’t pay.

33. Partnership Buy-Sell Agreements Partners can agree in advance that, in the event of the death of one of the partners or some other event, what occurs: e.g., how much the deceased partner or her estate will get for interest, or whether the other partners can acquire the partnership interest. Partnership can buy life insurance to cover this accounting on partner’s death.

34. § 6: Limited Liability Partnerships • Creature of state statute designed for professionals who normally do business as a partnership (lawyers and accountants). • LLP allows partnership to limit personal liability of the partners but allows “pass through” tax advantages.

35. Liability in an LLP • Recall that partnership law makes all partners jointly and severally liable for another partner’s tort, including personal assets. • The LLP allows professionals to avoid personal liability for the malpractice of other partners. • Supervising Partner is also liable for acts of subordinate.

36. Family Limited Liability Partnerships • FLLP is a limited liability partnership in which the majority of the partners are related to each other. • Used frequently for agriculture.

37. § 7: Limited Partnerships • Entity that limits the liability of some of its owners (the limited partners). • Creature of state statute. Filing a certificate with the Secretary of State is required. • Agreement between at least one general partner and one limited partner to carry on a business for profit.

38. Limited Partnerships • Only General Partners can manage, but they have a fiduciary obligation to LP’s. • LP’s enjoy limited liability as long as they do not engage in management functions. • An LP will be liable to a 3rd party if the 3rd party believes, based on conduct, that the LP is a general partner.

39. Rights and Liabilities of Partners • The General partner assumes all management and personal liability. • Limited Partner contributes cash but has no management rights. Liability is limited to the amount of investment. A limited partner can forfeit this “veil” of immunity by taking part in the management of the LP. • Case 36.3: Smith v. Fairfax Realty, Inc. (2003).

40. Rights and Liabilities of Partners • General partners are personally liable to 3rd parties for breach of contract and tort liability. However, a corporation (or an LLC) can be a general partner and have limited liability. • Limited partners have the right to inspect the LP’s books and be informed of the LP’s business.

41. Dissolution of the LP • On dissolution, the limited partner is entitled to return of capital contributions. • LP interests are considered securities and regulated by both federal and state securities laws. • Limited partners’ liability is limited to the capital investment.

42. Dissolution of the LP • Dissolved in much the same way as a general partnership (Chapter 36). • Retirement, withdrawal, death, bankruptcy or mental incompetence of a general partner will trigger dissolution unless the remaining GP’s consent to continue. • Creditors are paid first then partners.

43. LLLP’s • Limited Liability Limited Partnership is a type of limited partnership. • Difference between LP and LLLP is that the general partner has limited liability, like a limited partner, up to the amount of investment. • Most states do not allow for LLLP’s.