Understanding Rights and Duties in Business Partnerships

1. CHAPTER 33OPERATION OF A BUSINESS ORGANIZATION DAVIDSON, KNOWLES & FORSYTHE Business Law: Cases and Principles in the Legal Environment (8th Ed.)

2. OPERATION OF A PARTNERSHIP • Terms of a partnership agreement control the partners’ rights. • If there is no agreement, each partner is considered a manager, an agent, and principal of other partners. • Each partner is a fiduciary of the other partners.

3. RIGHTS OF THE PARTNERS • Person who enters a partnership acquires certain rights. • Rights of partners vary depending on agreement and whether Uniform Partnership Act (UPA) governs. • Examine rights imposed by operation of law.

4. RIGHTS OF THE PARTNERS • Management. • Each partner has equal voice in management. • Partners can define equal. • Majority votes control ordinary partnership decisions. • Unanimous decisions required to authorize extraordinary transactions. • Partnership agreements define management voice of each partner.

5. RIGHTS OF THE PARTNERS • Reimbursement. • Partners entitled to repayment for money spent to further interests of partnership. • Partners entitled to interest on advances or payments made. • Partners are entitled to return of their capital contribution when partnership ends if there are sufficient funds.

6. RIGHTS OF THE PARTNERS • Profits and Losses. • Partners are entitled to equal share of profits. • Partners are not entitled to salaries. • Books and Records. • Each partner is entitled to review the partnership’s books and records.

7. RIGHTS OF THE PARTNERS • Partnership Property. • Partners are co-owners of any property owned by partnership. • This ownership referred to as tenancy in partnership. • Partner cannot possess partnership property for personal use. • Tenancy carries right of survivorship.

8. RIGHTS OF THE PARTNERS • Right to an Account. • Partner may demand accounting of partnership’s business transactions. • Any partner is entitled to an account.

9. DUTIES OF THE PARTNERS • Agency Duties. • Each partner is agent of the partnership. • Assumed any conduct apparently authorized is binding on corporation. • Partner is personally liable for partnership debts and required to account for profits. • Creating financial hazard for partners.

10. DUTIES OF THE PARTNERS • Agency Duties. • UPA restricts five specific agency acts to reduce danger reckless partner can present: • Assignment for benefit of creditors. • Selling or disposing of the goodwill of partnership. • Performing any act that makes it impossible for business operate. • Confessing judgment against partnership. • Submitting claim or liability to arbitrator.

11. DUTIES OF THE PARTNERS • Fiduciary Duties. • Requires certain responsibilities and duties. • Each partner is required to: • Account for or • Surrender to the firm • Any profits derived from the business or from the use of business assets • Partner is not permitted to: • Engage in transactions that may involve a conflict of interest.

12. RIGHTS OF THIRD PERSONS WHO DEAL WITH PARTNERSHIPS • Third party who deals with partnership must rely on appearances so courts provide third party rights.

13. RIGHTS OF THIRD PERSONS WHO DEAL WITH PARTNERSHIPS • Contracts. • Third party entitled to rely on partner’s apparent authority to enter contracts. • If there is no authority, partner may be personally liable to third party. • Apparent authority determined by whether partnership is trading or non-trading partnership. • Trading partners have broader powers.

14. RIGHTS OF THIRD PERSONS WHO DEAL WITH PARTNERSHIPS • Borrowing in the Partnership Name. • Most important area where courts apply trading-versus-non-trading distinction is in borrowing money. • Non-trading partnership, the need for money less obvious. • Courts less likely to impose liability on the firm for loan made to a single partner.

15. RIGHTS OF THIRD PERSONS WHO DEAL WITH PARTNERSHIPS • Torts and Crimes. • Third party injured by partner’s tort, partnership may be liable for partner’s tort under doctrine of respondeat superior. • If injured person can establish partner was performing in the course and scope of employment. • Tort willful and malicious firm not liable. • Partner commits crime other partners not liable unless aid and abet.

16. OPERATION OF A LIMITED PARTNERSHIP • Limited partners are “passive”. • Limited partners cannot manage the LP or they will be treated as general partners with personal liability. • Limited partners do have the right to inspect the LP books.

17. OPERATION OF AN LLC • Nine states have adopted the Uniform LLC Act. • All states have an LLC statute. • Many of the principles of corporations can be applied to the operational aspects of LLC’s.

18. OPERATION OF A CORPORATION • Officers and board of directors responsible for day-to-day business of a corporation and establishing overall policies of the corporation. • Managers answer to shareholders. • Stock certificates signify ownership interests of shareholders.

19. RIGHTS OF THE SHAREHOLDERS • Stock Certificates. • Shareholders exert indirect control over corporation by ownership of stocks. • The more they own the more power they have. • Ownership evidenced by stock certificates.

20. RIGHTS OF THE SHAREHOLDERS • Type of Stock Owned. • Common stock: • Allows shareholder to receive dividends. • Vote on corporate issues. • Receive property upon liquidation. • Preferred stock: • Confers priority to dividends, voting, or liquidation rights.

21. RIGHTS OF THE SHAREHOLDERS • Shareholders’ Meetings. • Notice: must be notice before shareholder meeting. • Quorum: state statutes and corporate bylaws state percentage of outstanding shares. • Election and Removal of Directors: shareholders elect and remove directors. • Amendment of the Bylaws: shareholders retain inherent power to amend/repeal bylaws.

22. RIGHTS OF THE SHAREHOLDERS • Shareholders’ Meetings. • Voting: shareholders can vote by proxy, straight voting is one vote per share, cumulative voting ensures some minority representation on the board, majority vote is required to bind corporation.

23. RIGHTS OF THE SHAREHOLDERS • Dividends. • Board of directors has power to decide whether to declare dividends. • If dividends are declared, shareholders are entitled to them. • Preferred stockholders are paid first.

24. RIGHTS OF THE SHAREHOLDERS • Preemptive Stock Rights. • If corporation issues new stock, it must make new shares available to current stockholders. • Inspection of Corporate Books and Records. • Shareholders are entitled to inspect a corporation’s books and records, but only on a showing that it’s for a “proper purpose.” • Right arises from common law doctrines and express statutory provisions.

25. RIGHTS OF THE SHAREHOLDERS • Transfer of Shares. • Shareholders are free to sale or give their shares to someone else. • Unless shareholders are subject to limitations placed on stock. • Such as giving current shareholders right of first refusal to purchase shares.

26. LIABILITIES OF SHAREHOLDERS • In some instances shareholders can be liable for corporate obligations. • Watered Stock. • If stock is issued as fully paid but has not been paid, shareholder owns watered stock and is liable for deficiency. • Stock Subscriptions. • Agreements by investors to purchase shares. • Corporation can enforce them by requiring subscriber to pay subscription price.

27. LIABILITIES OF SHAREHOLDERS • Illegal Dividends. • If dividend that impairs original capital structure of corporation. • Shareholder receiving it are absolutely liable to repay it to the corporation. • Dissolution. • Controlling shareholders have duty to minority shareholders and may be liable for dissolution agreement if it prejudices minority shareholders.

28. RIGHTS AND DUTIES OF MANAGEMENT • Board of Directors. • Number and Qualifications: articles usually specify number and qualifications of those who serve on board. • Term of Office: specified in state statutes, unless bylaws limit shorter period. • Meetings: statutes specify meeting requirements.

29. RIGHTS AND DUTIES OF MANAGEMENT • Board of Directors. • Delegation of Duties: board delegates managerial authority to officers. • Compensation: specified in bylaws and based on quasi-contractual grounds, directors determine salary of officers. • Liabilities: directors may be held liable to corporation if they breach duties. • Other Rights: directors may agree about how they will vote as directors, inspect corporate records.

30. RIGHTS AND DUTIES OF MANAGEMENT • Officers. • Selection/removal of officers is a managerial function of the board. • Officers carry out the management goals delegated to them by the directors. • Qualifications: officers are agents of the corporation and must fulfill fiduciary duties placed on agents. • Terms of Office: officers serve at the pleasure of the board.

31. RIGHTS AND DUTIES OF MANAGEMENT • Officers. • Compensation: to be lawful should be reasonable and not waste corporate assets. • Agency Law: officers are agents of corporation, have authority to bind the corporation. • Liabilities: officers who attempt to contract on behalf of corporation without authority may be personally liable to other contracting party.

32. RIGHTS AND DUTIES OF MANAGEMENT • Fiduciary Duties Owed to the Corporation. • Directors, officers, and controlling shareholders owe fiduciary duties of: • Obedience: restrict actions to lawful pursuits. • Diligence: perform duties with due care and reasonable prudent person standard. • Loyalty: act in good faith and in best interest of corporation and shareholders.