Chapter 21: Partnerships

Chapter 21PartnershipsPartnershipUniform Partnership Act Definition: “Association of two or more persons to carry on as co-owners a business for profit”Characteristics of PartnershipVoluntary and consensual relationshipBetween two or more individuals, partnerships, corporations, or other forms of business organizationEngaged in numerous business transactions over period of timePartners share profits and management of businessSituations Where No Partnership:Employer shares profits with employee as payment for workLandlord accepts share of profits for payment of rentParty receives share of profits for payment of debtParty receives share of profits for payment of annuity to widow/representative of deceased partnerParty receives share of profits for payment from sale of goodwill of business/other propertyParty receives share of profits for payment of interest on a loanFormation of PartnershipPartnership agreement (“articles of partnership”) should include: Name of each partner Name of partnership Duration of partnership How profits/losses divided Division of management responsibilities Contributions from each partnerPartnership DutiesDuty of LoyaltyDuty of ObedienceDuty of CarePartnership RightsRight to Share in ManagementRight to Share in ProfitsRight to CompensationRights to Partnership PropertyRight to Inspect BooksRight to an AccountingCircumstances “Triggering” Partner’s Right to an AccountingWhenever partnership agreement provides for an accountingWhenever co-partners wrongfully exclude partner from partnership/from access to partnership booksWhenever partner fails to disclose profit/benefit from partnership (breach of “fiduciary duty”)Whenever circumstances render accounting “just and reasonable”Interactions Between Partners and Third PartiesIf partnership has liability, each partner has unlimited personal liability (“joint and several” liability)-“Joint and several” liability: Third party can choose to sue partners separately, or all partners jointly in one action; partners are collectively, as well as individually, liable for partnership debtsAll partners jointly and severally liable for commission of tort by any partnerImplied liability of partners when purchases made to perpetuate partnership’s businessThe Revised Uniform Partnership Act (RUPA)Revised version of Uniform Partnership Act (UPA); use of RUPA varies from state to statePartnership TerminationBegins when partnership dissolvesOnce partnership dissolved and assets liquidated and distributed (“winding up”), partnership terminatedPartnership DissolutionDefinition: Partnership cessationPartnership dissolution can result from:-Partner actions-Operation of law-Court actionEvents Resulting in Partnership DissolutionExpiration of term (time period) stated in partnership agreementFulfillment of established (agreed-upon) partnership objectivePartner withdraws from “partnership at will” (partnership that does not specify objective/duration of partnership)Partner withdraws in accordance with partnership agreementPartner expelled from partnership in accordance with partnership agreementExamples of Partnership Dissolution By “Operation of Law”Partner diesPartner adjudicated bankruptPartnership engages in illegal activityExamples of Partnership Dissolution By “Court Action”Partner adjudicated insaneImpractical to continue partnership businessPartner incapable of fulfilling his/her duties established by partnership agreementPartner disagreement as to how to conduct partnership business“Winding Up” of PartnershipDefinition: Activity of completing unfinished partnership business, collecting and paying debts, collecting partnership assets, and taking inventoryOrder of Distribution of Partnership Assets (Upon “Winding Up”)Payment to partnership creditorsPayment of refunds/loans to partners for loans made to partnershipPayment of partners for invested capitalPayment of profits distributed to partners per terms of partnership agreementLimited PartnershipDefinition: Agreement between at least one general partner and at least one limited partnerAllows investor (limited partner) to share in profits of partnershipLimited partner’s liability limited to amount he/she invests in businessRequirements for Limited Liability (of Limited Partner)Limited partner has complied in good faith with certificate of limited partnership filing requirementLimited partner does not participate in control of businessLimited partner’s surname is not part of partnership nameComparison of General Partners and Limited PartnersGeneral PartnerHas all rights associated with controlling businessHas unlimited personal liability for all partnership debtsActs as agent of partnershipLimited PartnerHas no right to participate in management and control of businessLiability limited to amount of capital partner has contributed to businessIs not an agent of the partnershipReasons For Dissolution of Limited PartnershipExpiration of term established in certificate of limited partnershipCompletion of objective established in certificate of limited partnershipUnanimous written consent of all partners (limited and general)Withdrawal of general partner (unless certificate establishes that other general partners will continue operation of business)Court action