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Chapter 43 Creation and Termination of Partnership

Chapter 43 Creation and Termination of Partnership. Twomey, Business Law and the Regulatory Environment (14th Ed.). Nature of Partnership [43-1]. Partnership Voluntary association; Two or more partners; Partners carry on as co-owners a business for profit. Partner. Partner. Partner.

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Chapter 43 Creation and Termination of Partnership

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  1. Chapter 43Creation and Termination of Partnership Twomey, Business Law and the Regulatory Environment (14th Ed.)

  2. Nature of Partnership[43-1] Partnership Voluntary association; Two or more partners; Partners carry on as co-owners a business for profit Partner Partner Partner Agents of partnership; Agents of each other for partnership matters; Not employees of partnership Chapter 43

  3. Partnership Interests and Transfers [43-2] Alan Bradley Corina- ABC Partnership. 1. Bradley assigns his interest to Delva. Delva has the rights to profits, but is not a partner. A B C D 2. Bradley sells his interest to Delva. Delva asks to become a partner. Can do so only if A and B agree. Chapter 43

  4. Dissolution Problem [43-3] Assume that partner A makes a capital contribution of $12,000, partner B makes a contribution of $6,500 and services, and partner C makes no monetary contribution, but agrees to devote knowledge and skill to the business. Assume that the partners agree to divide the partnership profits equally. When dissolution occurs, after completion of the winding up, the partners find that the partnership has paid all of its debts except $2,800 to creditor X, $800 to creditor Y, $200 to creditor Z, and $1,700 to partner A, who had lent (interest free) that amount to the business. The firm has no money or property to meet these obligations. How will the partnership accounts be settled? Chapter 43

  5. Dissolution Solution [43-4] a. Obligations of the firm: To X $2,800 To Y 800 To Z 200 To A (loan) 1,700 To A (cap) 12,000 To B (cap) 6,500 To C (cap) 0 $24,000 b. $24,000 3 = $8,000 owed by each partner Chapter 43

  6. Dissolution Solution (cont’d) [43-5] c. Contributions now required and payments made: By A Capital $12,000 Loss -8,000 Bal. Due A $ 4,000 By B Capital $ 6,500 Loss -8,000 Due from B $ 1,500 By C Capital $ 0 Loss -8,000 Due from C $ 8,000 $1,500 from B + $8,000 from C = $9,500 to be paid: Creditor X $2,800 Creditor Y 800 Creditor Z 200 Loan by A 1,700 Capital due A 4,000 $9,500 Chapter 43

  7. Chapter 43 Summary A partnership is a relationship created by the voluntary association of two or more persons to carry on as co-owners of a business for profit. Chapter 43

  8. Chapter 43 Summary[2] A partnership agreement governs the partnership during its existence and may also contain provisions relating to dissolution. The partnership agreement will generally be in writing, and this may be required by the statute of frauds. The existence of a partnership may be found from the existence of shared control in the running of the business and the fact that the parties share profits and losses. The sharing of gross returns, as opposed to profits, is very slight evidence of a partnership. Chapter 43

  9. Chapter 43 Summary[3] Partners hold title to firm property by tenancy in partnership. A creditor of a partner cannot proceed against any specific item of partnership property but must obtain a charging order to seize the debtor-partner’s share of the profits. An assignee of a partner’s interest does not become a partner without the consent of the other partners and is entitled only to a share of the profits and the assignor’s interest upon dissolution. Chapter 43

  10. Chapter 43 Summary[4] Dissolution ends the right of the partnership to exist as a going concern. Dissolution is followed by a winding-up period and the distribution of assets. A partnership may be dissolved by the parties themselves in accordance with the terms of the partnership agreement, by the expulsion of a partner, by the withdrawal of a partner, or by the bankruptcy of the firm or one of the partners. Chapter 43

  11. Chapter 43 Summary[5] A court may order dissolution of a partnership upon the petition of a partner because of the insanity, incapacity, or major misconduct of a partner. Dissolution may be decreed because of lack of success, impracticability, or other circumstances that equitably call for dissolution. Notice of dissolution, except dissolution by operation of law, must be given. Actual notice must be given to those who have dealt with the firm as a partnership. Chapter 43

  12. Chapter 43 Summary[6] All partners generally have a right to participate in the winding up of the business. After the firm’s liabilities to non-partners have been paid, the assets are distributed among the partners as follows: (1) refund of advances, (2) return of contributions to capital, and (3) division of remaining assets in accordance with the partnership agreement or, if no agreement is stated, division of net assets equally among the partners. Chapter 43

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