Partnerships and Limited Liability Partnerships

Chapter 30

Agency Concepts and Partnership Law

– Partnerships are governed by common law and statutory laws.

– Partners are agents and fiduciaries of each other.

Basic Partnership Concepts

• Uniform Partnership Act. – In the absence of a partnership agreement the

UPA, as adopted by most states, governs the partnership.

Basic Partnership Concepts

• Definition of a Partnership. – UPA defines as “association of two or more

persons to carry on a business for profit.”– Partnership presumed under UPA if:

• 1. Sharing of profits or losses. • 2. Joint ownership of the business.• 3. Equal right to be involved in the

management of the business.

Basic Partnership Concepts• Entity versus Aggregate.

– Today, a majority of states recognize the partnership as a separate legal entity for the following purposes: • (1) To sue and be sued

• (2) To have judgments collected against it’s assets, and individual partners’ assets.

• (3) To own and convey partnership property.

Basic Partnership Concepts• Tax Treatment.

– Under federal (and most state) tax laws, a partnership is treated as a “pass through” entity, with profits, losses, and taxes attributed on a pro-rata basis to the partners.

Basic Partnership Concepts• Tax Treatment.

– Under federal (and most state) tax laws, a partnership is treated as a “pass through” entity, with profits, losses, and taxes attributed on a pro-rata basis to the partners.

Partnership Formationand Operation

• The Partnership Agreement.–Can be written or oral, unless the

Statute of Frauds requires a written agreement.

• Duration of the Partnership.–Partnership for a Term. –Partnership at Will.

Partnership Formationand Operation

• Rights of Partners.– In the absence of a partnership agreement

(oral or written) state 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.

Partnership Formationand Operation

• Rights of Partners.–Compensation: none.–Inspection of the Books: always and also

by rep. of deceased partner.–Accounting: when fraud, embezzlement,

wrongful exclusion, etc, it is just and reasonable.

Partnership Formationand Operation

• Rights of Partners.–Property Rights.

•Property acquired by the partnership remains partnership property.

•An individual partner has no right to sell, mortgage, or transfer partnership property.

Partnership Formationand Operation

• Rights of Partners.–Property Rights. 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.

Partnership Formationand Operation

• Duties and Liabilities of Partners. –Liability of Partners.

• If Partner is sued for Partnership debt, Partner has right to insist that other partners be sued with him or her.

• Joint Liability: third party must sue ALL partners as a group, but each partner can be held liable for the full amount.

Dissociation of a Partner

• 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.

Dissociation of a Partner

• Events That Cause Dissociation:–Notice.–Triggering Event.–Unanimous Vote.–Court or Arbitrator Order.–Partner’s bankruptcy, assignment of interest,

incapacity, or death.

Dissociation of a Partner

• Effects of Dissociation.–Rights and Duties.–Liability to Third Parties. Partnership

bound for two years by acts of outgoing partner, unless proper notice given.

Partnership Termination

• The termination of a partnership occurs in two stages:–Dissolution (is the legal “death” of

the partnership), and–Winding up and Distribution of

Assets (collecting and distributing partnership assets).

Partnership Termination• Dissolution: by operation of law or judicial

decree.– Partners can Agree to Dissolve.– By Operation of Law:

• Death of a partner. • Bankruptcy of a partner. • Bankruptcy of partnership.• Illegality.

Partnership Termination• Dissolution.

– By Judicial Decree:

• Insanity.• Incapacity.• Business Impracticality. • Improper Conduct.• Other Circumstances (personal dissension).

Partnership Termination• Winding Up and Distribution of Assets.

–After dissolution, partnership continues to wind up the partnership affairs.

–Creditors’ Claims:• 1. Payment of debts, including those

owed to partner and nonpartner creditors.

• 2. Return of capital contributions and distribution of profits to partners.

Partnership Termination• Winding Up and Distribution of Assets.

–Creditors’ Claims:• 1. Payment of debts, including those owed

to partner and nonpartner creditors.• 2. Return of capital contributions and

distribution of profits to partners. • If liabilities are greater than assets partners

bear losses in proportion in which they shared profits, unless agreed otherwise.

Limited Liability Partnerships

• Designed for professionals service firms, it allows limits on personal liability of the partners but allows “pass through” tax advantages.

Limited Liability Partnerships • Liability in an LLP.

–LLP allows professionals to avoid personal liability for the malpractice of other partners.

Limited Liability Partnerships • Liability in an LLP.

–LLP allows professionals to avoid personal liability for the malpractice of other partners.

24

Limited Partnerships

• Entity that limits the liability of some of its owners (the limited partners).–Consists of at least one general

partner and one limited partner to carry on a business for profit.

Limited Partnerships

• Formation: –Creature of state statute.

• Liabilities of Partners. –Only General Partners can manage,

but they have a fiduciary obligation to LP’s.

Limited Partnerships

• Liabilities of Partners. –LP’s enjoy limited liability as long

as they do not engage in management functions.

–General partner assumes all management and personal liability.

Limited Partnerships

• Liabilities of Partners. –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.

–On dissolution, the limited partner is entitled to return of capital contributions.

Partnerships and Limited Liability Partnerships

Chapter 30