what are the three essential elements of a partnership? what are the three essential elements of a...
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• What are the three essential elements of What are the three essential elements of a partnership?a partnership?• What are the rights and duties of What are the rights and duties of
partners in an ordinary partnership?partners in an ordinary partnership?• What is meant by joint and several What is meant by joint and several
liability? Why is this often considered to liability? Why is this often considered to be a disadvantage of the partnership be a disadvantage of the partnership form of business? form of business?
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• What advantages do limited liability What advantages do limited liability partnerships offer to businesspersons partnerships offer to businesspersons that are not offered by general that are not offered by general partnerships?partnerships?• What are the key differences between What are the key differences between
the rights and liabilities of general the rights and liabilities of general partners and those of limited partners?partners and those of limited partners?
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• Agency Concepts and Partnership Agency Concepts and Partnership Law:Law:–Partnerships are governed both by
common law and by statutory laws.–Each partner is deemed to be an agent
and fiduciary of the other.–There may be imputation of liability.
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• Uniform Partnership Act. Uniform Partnership Act. –In the absence of a partnership
agreement, the Uniform Partnership Act, as adopted by most states, governs the partnership.
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• Definition Definition of a Partnership: created of a Partnership: created when two or more persons when two or more persons (including corporations) agree to (including corporations) agree to carry on business for profit as co-carry on business for profit as co-owners with equal right to manage owners with equal right to manage and share profits (UPA).and share profits (UPA).
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• When Does a Partnership Exist? When Does a Partnership Exist? Under the UPA there is a Under the UPA there is a presumption presumption of of a partnership if:a partnership if:–1. A sharing of profits or losses. –2. A joint ownership of the business.–3. An equal right to be involved in the
management of the business.
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• Entity versus Aggregate Entity versus Aggregate Theory.Theory.–At common law, a partnership was not a
separate legal entity distinct from its owners. –Today, a majority of 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). © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8
• Entity versus Aggregate Entity versus Aggregate (cont’d).(cont’d).–A partnership is considered a separate
legal entity (cont’d):• To have judgments collected against its assets,
and individual partners’ assets.• To own and convey partnership property.
–Tax Treatment:–Under federal tax law it is a “pass
through” entity.© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9
• The Partnership Agreement The Partnership Agreement can be can be written or oral, unless the Statute of written or oral, unless the Statute of Frauds requires a written agreement. Frauds requires a written agreement. • Duration Duration of Partnership.of Partnership.–Partnership for a Term. –Partnership at Will.
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• Partnership by EstoppelPartnership by Estoppel. . Occurs when Occurs when a person who is not a partner holds a person who is not a partner holds himself out to third parties and the third himself out to third parties and the third party relies to her detriment. In this case party relies to her detriment. In this case the “nonpartner” is considered an agent the “nonpartner” is considered an agent whose acts are binding on the whose acts are binding on the partnership.partnership.
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• Rights of PartnersRights of Partners: : In the absence of a In the absence of a partnership agreement (oral or written) state partnership agreement (oral or written) state statutes govern the partner rights. statutes govern the partner rights. –Management: equal, each one vote,
majority wins; need unanimous consent for some actions.–Interest in the Partnership: equal profits,
losses shared as profits shared.
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• Rights of Partners Rights of Partners ((cont’dcont’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.
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• Rights of Partners Rights of Partners ((cont’dcont’d): ): –Property Rights. Property acquired by
the partnership remains partnership property. An individual partner has no right to sell, mortgage, or transfer partnership property. • However, creditor of individual partner can petition a
court for a charging order to attach to individual partner’s property interest.
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• Rights of Partners Rights of Partners ((cont’dcont’d): ): –Property Rights (cont’d). Each partner
can:• Use or possess property on behalf of the
partnership.• Assign her right to her share of the profits
to another to satisfy individual debt.
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• Duties and Liabilities of Partners. Duties and Liabilities of Partners. –Fiduciary Duties. Partners are
fiduciaries and general agents of one another and the partnership. –CASE 32.1 Meinhard v. Salmon Meinhard v. Salmon (1928).
How did Salmon violate his duty of loyalty to Meinhard?
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• Duties and LiabilitiesDuties and Liabilities (cont’d). (cont’d). –Authority of Partners.• UPA affirms general principles of agency
law.• Partner may be able to subject
partnership to tort liability.• Partner has apparent authority when
carrying out partnership business.
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• Duties and LiabilitiesDuties and Liabilities (cont’d). (cont’d). –Authority of Partners (cont’d).• Scope of Implied Powers.• Authorized versus Unauthorized
Actions. If partner acts within scope of authority, partnership is bound. Partners generally do not have authority to make charitable contributions.
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• Duties and LiabilitiesDuties and Liabilities (cont’d). (cont’d). –Liability of Partners. If Partner is sued for
Partnership debt, Partner has right to insist that other partners be sued with her.• Joint Liability: third party must sue ALL
partners as a group, but each partner can be held liable for the full amount.
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• Duties and LiabilitiesDuties and Liabilities (cont’d). (cont’d). –Liability of Partners (cont’d). • Joint and Several Liability: third party can sue
either one or all partners. 3rd party may collect against personal assets of all partners.• Liability of Incoming Partner: new admitted
partner has no personal liability for existing partnership debts and obligations.
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• Partner’s Dissociation.Partner’s 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.
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• Partner’s DissociationPartner’s Dissociation (cont’d). (cont’d).–Events Causing Dissociation:• Notice.• Triggering Event.• Unanimous Vote.• Court or Arbitrator Order.• Partner’s bankruptcy, assignment of
interest, incapacity, or death.
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• Partner’s DissociationPartner’s Dissociation (cont’d). (cont’d).–Wrongful Dissociation.• Dissociating partner breaches partnership
agreement.• Dissociating partner files bankruptcy.•May be liable for costs.
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• Partner’s DissociationPartner’s Dissociation (cont’d). (cont’d).–Effects of Dissociation: rights and duties.–Liability to Third Parties. Partnership
bound for two years by acts of outgoing partner, unless proper notice given.
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• The termination of a partnership The termination of a partnership occurs in two stages:occurs in two stages:–Dissolution (is the legal “death” of the
partnership), and–Winding up and Distribution of Assets
(collecting and distributing partnership assets).
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• DissolutionDissolution: : by operation of law or by operation of law or judicial decree. judicial decree. –Partners can Agree to Dissolve.–By Operation of Law:• Death of a partner. • Bankruptcy of a partner. • Bankruptcy of partnership.• Illegality.
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• DissolutionDissolution: (cont’d).: (cont’d).–By Judicial Decree:• Insanity.• Incapacity.• Business Impracticality.• Improper Conduct.• Other Circumstances (personal
dissension).
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• Winding UpWinding Up: after dissolution, : after dissolution, partnership continues to wind up the partnership continues to wind up the partnership affairs. Partners have no partnership affairs. Partners have no authority except to:authority except to:–Complete transactions already begun.–Collect and preserve partnership assets,
discharge liabilities, and provide an accounting.
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• Winding UpWinding Up (cont’d). (cont’d).–Partnership obligations are paid in the
following order: •1. Payment of debts, including those
owed to partner and nonpartner creditors.•2. Return of capital contributions and
distribution of profits to partners.•
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• Winding UpWinding Up (cont’d). (cont’d).–If liabilities are greater than assets
partners bear losses in proportion in which they shared profits, unless agreed otherwise.
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• Designed for professionals service Designed for professionals service firms, it allows limits on personal firms, it allows limits on personal liability of the partners but allows liability of the partners but allows “pass through” tax advantages. “pass through” tax advantages. • Formation of an LLPFormation of an LLP. . Relatively easy to Relatively easy to
convert a partnership to an LLP. convert a partnership to an LLP.
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• Liability in an LLPLiability in an LLP. Partnership law . Partnership law makes all partners jointly and makes all partners jointly and severally liable for another partner’s severally liable for another partner’s tort, including personal assets.tort, including personal assets.–LLP allows professionals to avoid
personal liability for the malpractice of other partners.
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• Liability in an LLPLiability in an LLP (cont’d). (cont’d). –Liability Outside the State of
Formation? –Sharing Liability Among Partners.
• Family Limited Liability PartnershipsFamily Limited Liability Partnerships..–FLLP is a limited liability partnership in
which the majority of the partners are related to each other (agriculture).
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• Entity that limits the liability of some Entity that limits the liability of some of its owners (the limited partners).of its owners (the limited partners).–Consists of at least one general partner
and one limited partner to carry on a business for profit.
• FormationFormation: : creature of state statute. creature of state statute. Certificate of limited partnership. Certificate of limited partnership.
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• Liabilities of PartnersLiabilities of Partners. . –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.
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• Liabilities of PartnersLiabilities of Partners (cont’d). (cont’d).–General partner assumes all
management and personal liability.–Limited Partner has no management
rights, and liability is limited to the amount of investment; however limited partner can be liable if he participates in management.
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• Rights and Duties.Rights and Duties. –Except for right to participate in
management, limited and general partners have essentially the same rights. –Limited partners have the right to
inspect the LP’s books and be informed of the LP’s business.
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• Rights and Duties Rights and Duties (cont’d). (cont’d). –Both general and limited partners owe
each other a fiduciary duty.–CASE 32.2 1515 North Wells, LP v. 1515 North Wells, LP v.
1513 North Wells, LLC 1513 North Wells, LLC (2009). Did any of the parties commit an ethical violation?
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• Dissociation and DissolutionDissociation and Dissolution..–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.
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• Dissociation and DissolutionDissociation and Dissolution(cont’d).(cont’d).–Limited partners’ liability is limited to the
capital investment.–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
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• Dissociation and DissolutionDissociation and Dissolution(cont’d).(cont’d).–Creditors are paid first then partners.–CASE 32.3 In re Dissolution of In re Dissolution of
Midnight Star Enterprises, LPMidnight Star Enterprises, LP (2006). According to the court, why was a forced sale not appropriate in this case?
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• Limited Liability Limited Partnerships.Limited Liability Limited Partnerships.–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.
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