section 27.2

The Partnership The Partnership Section 27.2Section 27.2

Understanding Business and Personal Law


Sole Proprietorship and Partnership

What You’ll Learn

How to define general partnership (p. 588)How to define general partnership (p. 588)

How to identify the ways that a partnership How to identify the ways that a partnership can be created (p. 588)can be created (p. 588)




What You’ll Learn

How to identify partnership rights in How to identify partnership rights in relation to property (p. 593)relation to property (p. 593)

How to explain the effects of the How to explain the effects of the dissolution of a partnership (p. 597)dissolution of a partnership (p. 597)




Why It’s Important

Understanding the nature of a partnership Understanding the nature of a partnership will help you decide when to form that type of will help you decide when to form that type of business association.business association.




Legal Terms

general partnership (p. 588)general partnership (p. 588)articles of partnership (p. 588)articles of partnership (p. 588)partnership by proof of existence (p. 590)partnership by proof of existence (p. 590)partnership by estoppel (p. 591)partnership by estoppel (p. 591)tenancy in partnership (p. 593)tenancy in partnership (p. 593)




Legal Terms

joint liability (p. 596)joint liability (p. 596)dissolution (p. 597)dissolution (p. 597)registered limited liability partnership registered limited liability partnership (RLLP)(RLLP) (p. 598)(p. 598)limited partnership (p. 599)limited partnership (p. 599)




The Nature of Partnership Forming a General PartnershipTypes of PartnersPartnership Property Property Rights of PartnersDuties of the PartnersLiability of the Partners

Section OutlineSection Outline




Dissolving a Partnership Effects of DissolutionDistribution of Assets





The Revised Uniform Partnership Act Registered Limited Liability Partnerships Limited Partnerships





Pre-Learning Question Pre-Learning Question

What is a partnership?




Partnership law is largely found in the Partnership law is largely found in the Uniform Partnership Act (UPA).Uniform Partnership Act (UPA).

The UPA defines partnership as “an The UPA defines partnership as “an association of two or more persons to association of two or more persons to carry on a business for profit.”carry on a business for profit.”

The Nature of Partnership The Nature of Partnership




more capital and credit availablemore capital and credit availableburden of work is sharedburden of work is sharedresponsibility for losses shared responsibility for losses shared

Advantages of Partnerships Advantages of Partnerships




partners share in the liabilitiespartners share in the liabilitieseach partner is responsible for the each partner is responsible for the others’ actionsothers’ actionsmust share profitsmust share profitsdisagreements among partnersdisagreements among partnersdeath of a partner dissolves the death of a partner dissolves the partnership partnership

Disadvantages of Partnerships Disadvantages of Partnerships




When two or more competent parties When two or more competent parties combine their money, labor, and skills combine their money, labor, and skills for the purpose of carrying on a lawful for the purpose of carrying on a lawful business, they create a business, they create a general general partnershippartnership. .

Forming a General Partnership Forming a General Partnership




General partnerships can be formed in General partnerships can be formed in one of three ways: one of three ways:

Forming a General Partnership Forming a General Partnership

1.1. by agreementby agreement2.2. by proof of existenceby proof of existence3.3. by estoppelby estoppel




27.227.2

Partnership FormationPartnership Formation

Partnership by

contract

Partnership by

proof of

existence Partnership by

estoppel

Express agreement drawn up by partners

Articles of partnership

Individuals form partnership because of their

method of doing business

Sharing of profits is prima facie evidence

Third party led to believe a partnership exists

No true partnership created




Forming a general partnership by Forming a general partnership by agreement requires the valid assent of agreement requires the valid assent of all parties. Such an agreement is all parties. Such an agreement is usually express and may be written or usually express and may be written or oral.oral.

By Agreement By Agreement




Under the Statue of Frauds, if a Under the Statue of Frauds, if a partnership is to last more than a year partnership is to last more than a year or if the partnership is formed to sell, or if the partnership is formed to sell, buy, or lease real property, it must be buy, or lease real property, it must be evidenced in writing.evidenced in writing.





The partnership agreement is known The partnership agreement is known as the as the articles of partnershiparticles of partnership, or as , or as the articles of copartnership.the articles of copartnership.





parties to the agreementparties to the agreementspecific nature, scope, and limits of specific nature, scope, and limits of the businessthe businessplanned duration of the businessplanned duration of the business

Important Points Covered Important Points Covered in an Agreement in an Agreement




amount of each partner’s original amount of each partner’s original investment and procedure for future investment and procedure for future investmentsinvestmentsprovisions regarding salaries, provisions regarding salaries, withdrawal of funds, and the division withdrawal of funds, and the division of profitsof profits





terms under which a partner may terms under which a partner may withdraw from the partnershipwithdraw from the partnership





Sometimes a partnership can be Sometimes a partnership can be formed because of the way that two or formed because of the way that two or more people conduct their business more people conduct their business together.together.

By Proof of Existence By Proof of Existence




Such a partnership, which forms Such a partnership, which forms regardless of the label given to the regardless of the label given to the enterprise or the intent of the parties enterprise or the intent of the parties involved, is termed a involved, is termed a partnership by partnership by proof of existence.proof of existence.

By Proof of Existence By Proof of Existence




If someone does or says something If someone does or says something that leads a third party to believe that that leads a third party to believe that a partnership exists, then a court may a partnership exists, then a court may treat the arrangement as a treat the arrangement as a partnership by estoppelpartnership by estoppel..

By Estoppel By Estoppel




This type of partnership is not a real This type of partnership is not a real partnership. It is a way for the court to partnership. It is a way for the court to prevent injustice because someone prevent injustice because someone has relied on the words or actions of has relied on the words or actions of another party and has acted another party and has acted accordingly.accordingly.

By Estoppel By Estoppel




There are five types of partners: There are five types of partners:

Types of Partners Types of Partners

1.1. generalgeneral2.2. secretsecret3.3. silentsilent4.4. dormantdormant5.5. limitedlimited




Each of these partners is a co-owner Each of these partners is a co-owner of the business and has some liability of the business and has some liability for the debts of the firm.for the debts of the firm.





27.227.2


Type of Partner Participation in the Business

Relationship to the Public

Degree of Liability

General Active Known Unlimited

Secret Active Unknown Unlimited

Silent Not active Known Unlimited

Dormant Not active Unknown Unlimited

Limited Not active Known Limited




It is important to distinguish between It is important to distinguish between property that belongs to the property that belongs to the partnership and property that belongs partnership and property that belongs to individual partners.to individual partners.

Partnership PropertyPartnership Property




is property contributed directly to is property contributed directly to the partnership when the the partnership when the partnership is createdpartnership is createdis property that is bought with is property that is bought with partnership fundspartnership funds





In addition, the court may ask certain In addition, the court may ask certain questions to determine whether or not questions to determine whether or not certain property belongs to the certain property belongs to the partnership.partnership.





Certain rights arise regarding property Certain rights arise regarding property that belongs to the partnership. These that belongs to the partnership. These include include

Property Rights of the Partners Property Rights of the Partners

the right to use the propertythe right to use the propertythe right to manage the firmthe right to manage the firmthe right to share in the profits the right to share in the profits




Partners are co-owners of all the real Partners are co-owners of all the real and personal property included in the and personal property included in the partnership. partnership.

This co-ownership is called This co-ownership is called tenancy tenancy in partnershipin partnership by the UPA. by the UPA.

Right to Use Property Right to Use Property




As a result, the partners can use the As a result, the partners can use the property for partnership business; property for partnership business; however, there are limitations. however, there are limitations.

For example, a partner cannot, on his For example, a partner cannot, on his or her own, transfer ownership of the or her own, transfer ownership of the property.property.

Right to Use Property Right to Use Property




Unless a partner’s rights are limited in Unless a partner’s rights are limited in the partnership agreement, each the partnership agreement, each partner has an equal voice in partner has an equal voice in managing the partnership’s business.managing the partnership’s business.

Right to Manage the Firm Right to Manage the Firm




Unless there is an agreement to the Unless there is an agreement to the contrary, partners share equally in the contrary, partners share equally in the profits, regardless of their initial capital profits, regardless of their initial capital contribution or the time devoted by contribution or the time devoted by each partner to the business.each partner to the business.

Right to Share in the Profits Right to Share in the Profits




Partners must trust one another. Partners must trust one another.

Each partner is an agent of the other Each partner is an agent of the other partner and has duties comparable to partner and has duties comparable to those of an agent.those of an agent.

Duties to the Partners Duties to the Partners




1.1. To always act in good faith and in To always act in good faith and in the best interests of the firm.the best interests of the firm.





2.2. To always use their best skill and To always use their best skill and judgment in looking after the firm’s judgment in looking after the firm’s affairs.affairs.





3.3. To be loyal to the firm and put the To be loyal to the firm and put the firm’s interests first.firm’s interests first.





Partners have unlimited liability for all Partners have unlimited liability for all of the debts of the partnership of the debts of the partnership incurred while they are partners, even incurred while they are partners, even to the extent of their personal assets.to the extent of their personal assets.

Liability of the Partners Liability of the Partners




Partners are liable to other Partners are liable to other members of the firm for their share members of the firm for their share of the firm’s debts.of the firm’s debts.Partners share losses in the same Partners share losses in the same proportion that they share profits.proportion that they share profits.





Partners are jointly liable with their Partners are jointly liable with their partners on contracts entered into by partners on contracts entered into by any member of the firm acting within any member of the firm acting within the actual or apparent scope of the the actual or apparent scope of the firm’s business.firm’s business.





Joint liabilityJoint liability means that in the event means that in the event of a lawsuit, all the partners must be of a lawsuit, all the partners must be sued together. Partners are jointly and sued together. Partners are jointly and severally (separately) liable for torts severally (separately) liable for torts committed within the scope of the committed within the scope of the firm’s business.firm’s business.






How do partnerships come to an end?




A A dissolutiondissolution is a legal detachment. is a legal detachment. The dissolution of a partnership is a The dissolution of a partnership is a change in the relationship of the change in the relationship of the partners that occurs when any partner partners that occurs when any partner stops being associated with the stops being associated with the business.business.

Dissolving a Partnership Dissolving a Partnership




Dissolution does not necessarily bring Dissolution does not necessarily bring the business to an end. the business to an end.

Other partners may want to continue Other partners may want to continue in business together.in business together.

Effects of Dissolution Effects of Dissolution




If so, If so,


new financial arrangements need to new financial arrangements need to be made.be made.a new agreement must be drawn a new agreement must be drawn up.up.




public notice is usually given to public notice is usually given to relieve retiring partners from liability relieve retiring partners from liability for any new debts.for any new debts.





Upon dissolution, an accounting of the Upon dissolution, an accounting of the firm’s financial affairs is necessary to firm’s financial affairs is necessary to determine how the firm’s assets will determine how the firm’s assets will be distributed or divided. be distributed or divided.

Distribution of Assets Distribution of Assets




Liabilities are paid in this order.Liabilities are paid in this order.


1.1. Money owed to creditors other than Money owed to creditors other than partnerspartners

2.2. Money lent by partners to the firmMoney lent by partners to the firm




3.3. The original money paid into the The original money paid into the partnership by each partnerpartnership by each partner

4.4. The surplus, if any, owed to the The surplus, if any, owed to the partnerspartners





If the business is insolvent:If the business is insolvent:


Assets are sold to pay the creditors.Assets are sold to pay the creditors.Partners are individually liable for Partners are individually liable for any unpaid balance that the sale of any unpaid balance that the sale of the assets will not cover.the assets will not cover.




When Jess and Joe’s Café closed, they had $38,000 and owed $25,000 to creditors. Neither Jess nor Joe had any outstanding loans to the business, but each had paid $5,000 into the business to start it.




Will Jess and Joe get their money back? Will there be any additional money leftover?




ANSWERANSWER

Yes, Jess and Joe will get their money back. There will $3,000 leftover. $38,000 – 25,000 = 13,000 –10,000 = $3,000.





What is the Revised Uniform Partnership Act?




Since the UPA was written in 1914, it Since the UPA was written in 1914, it has undergone extensive revision. has undergone extensive revision. This new variation of the act is This new variation of the act is referred to as the Revised Uniform referred to as the Revised Uniform Partnership Act (RUPA).Partnership Act (RUPA).

The Revised The Revised Uniform Partnership Act Uniform Partnership Act





What is a registered limited liability partnership?




A A registered limited liability registered limited liability partnership (RLLP) partnership (RLLP) is a new type of is a new type of partnership designed to eliminate a partnership designed to eliminate a major disadvantage of the general major disadvantage of the general partnership—joint and several liability.partnership—joint and several liability.

Registered Limited Registered Limited Liability Partnerships Liability Partnerships




Partners of an RLLP can escape joint Partners of an RLLP can escape joint and several liability for the torts, and several liability for the torts, wrongful acts, negligence, or wrongful acts, negligence, or misconduct of other partners by misconduct of other partners by registering with the appropriate state registering with the appropriate state office.office.

Registered Limited Registered Limited Liability Partnerships Liability Partnerships





What is a limited partnership?




According to RUPA, a According to RUPA, a limited limited partnershippartnership is “a partnership formed is “a partnership formed by two or more persons. . . having one by two or more persons. . . having one or more general partners and one or or more general partners and one or more limited partners.”more limited partners.”

Limited Partnership Limited Partnership




Limited partnerships are often used in Limited partnerships are often used in real estate ventures and tax shelter real estate ventures and tax shelter investments.investments.

Limited Partnership Limited Partnership




Reviewing What You Learned

1. What is a general partnership?

Section 27.2 Assessment





When two or more competent parties combine their money, labor, and skills for the purpose of carrying on a lawful business.


Answer





2. How can a partnership be created?






By agreement, by proof of existence, and by estoppel.


Answer





3. What are the partner’s rights in relation to property?






Include the right to use partnership property, the right to manage the firm, and the right to share profits.


Answer





4. What are the effects of the dissolution of a partnership?






Dissolution need not end a partnership. Other partners may wish to continue the business.


Answer





New financial arrangements must be made in regard to the new firm. A new agreement must be drawn up regarding the conduct of the new firm.


Answer





Public notice must usually be given in order to relieve the retiring partners from liability for any new debts created by the new firm.


Answer





Critical Thinking ActivityLimited Liability Partnership Why did some state legislatures decide to create registered limited liability partnerships?





Critical Thinking Activity AnswerLimited Liability Partnership To eliminate the problems associated with joint and several liability.





Legal Skills in ActionPartnership Liability Clay, who is a general partner in Harrington Enterprises, believes he will not be liable for a tort committed by Ian, another partner in the firm.





Legal Skills in ActionPartnership Liability Write a letter to Clay explaining whether he will be liable for Ian’s tort.





Legal Skills in Action AnswerPartnership Liability Letters will vary but should include, that Clay needs to be told that because he and Ian are partners, they are jointly and severally (separately) liable for torts committed by each other within the scope of the firm’s business.

The Partnership The Partnership End of Section 27.2End of Section 27.2

section 27.2

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