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Chapter 42 PARTNERSHIPS

Chapter 42 PARTNERSHIPS. Nature of a Partnership. A partnership is a relationship: created by the voluntary association of two or more persons, to carry on as co-owners a business for profit. Partnership consists of: Voluntary relationships. Capital or in-kind contributions.

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Chapter 42 PARTNERSHIPS

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  1. Chapter 42PARTNERSHIPS

  2. Nature of a Partnership • A partnership is a relationship: • created by the voluntary association of two or more persons, • to carry on as co-owners a business for profit. • Partnership consists of: • Voluntary relationships. • Capital or in-kind contributions. • If no profit intended, then an unincorporated association.

  3. Existence of a Partnership • 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.

  4. Partnership Agreement • The partnership agreement governs the partnership during its existence and may also contain provisions relating to dissolution. • The partnership agreement will generally be in writing; this may be required by the statute of frauds.

  5. Partnership Property • Partners hold title to firm property by tenancy in partnership. Surviving partners receive property. • 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.

  6. Authority of Partners • Scope of authority is determined by partnership agreement. • Majority of partners prevails. • Individual partners may have express authority under agency theory. • Implied powers as co-owner of business. • Partnership may be bound by act of partner with third party if third party did not know of limitations.

  7. Authority of Partners Make contracts. Adjust claims for or against the partnership. Execute commercial paper in the name of the firm. An individual partner can: Sell goods in the regular course of business. Purchase items needed by the business. Buy insurance. Hire employees. Borrow money for the firm’s purposes.

  8. Limitations on Authority of Partner to Bind Partnership Law of Agency Individual partners, acting in anapparently proper way, have authority to bind the firm. IndividualPartner ThirdPerson Business Transactions Prohibited Transactions Cessation of business, suretyship,agreement to arbitrate, confession ofjudgement, assignment for creditors.

  9. Prohibited Transactions • Certain transactions a partner cannot undertake without express approval: • Cessation of business. • Suretyship. • Arbitration. • Confession of judgment (admission). • Assignment of partnership property. • Personal obligations.

  10. Duties, Rights and Liabilities of Partners • Duties (general agency law): • Loyalty and good faith. • Obedience. • Rights: • Management. • Inspection of Books. • Share of Profits. • Contribution and Indemnity.

  11. Liability of Partners • Partnership Contracts: Partners are jointly liable. • Partnership Torts: Partners are jointly and severally liable for torts within scope of business. • Partner who has paid has right to contribution. • Liability of New Partners.

  12. Dissolution and Termination • 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. • 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.

  13. Dissolution (cont’d) • Dissolution may be decreed because of lack of success, impracticability, or other circumstances that equitably call for dissolution. • Dissolution ends the right of the partnership to exist as a going concern. • Notice of dissolution, except dissolution by operation of law, must be given.

  14. Winding Up • Dissolution is followed by a winding-up period and the distribution of assets. • Distribution of Assets. 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.

  15. Rights and Liabilities of Partners

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