Lecture Dynamic business law, the essentials (2/e) - Chapter 21: Partnerships

Lecture Dynamic business law, the essentials (2/e) - Chapter 21: Partnerships. After studying this chapter you will be able to understand: What are the steps in the termination of a partnership? How is a limited partnership formed? What are the rights and privileges of a limited partner and a general partner?

Chapter 21 Partnerships McGraw­Hill/Irwin         Copyright © 2013 by The McGraw­Hill Companies, Inc. All rights reserved Partnership Uniform Partnership Act Definition: “Association of two or more persons to carry on as co-owners a business for profit” 21­2 Characteristics of Partnership • Voluntary and consensual relationship • Between two or more individuals, partnerships, corporations, or other forms of business organization • Engaged in numerous business transactions over period of time • Partners share profits and management of business 21­3 Situations Where No Partnership: • Employer shares profits with employee as payment for work • Landlord accepts share of profits for payment of rent • Party receives share of profits for payment of debt • Party receives share of profits for payment of annuity to widow/representative of deceased partner • Party receives share of profits for payment from sale of goodwill of business/other property • Party receives share of profits for payment of interest on a loan 21­4 Formation of Partnership Partnership 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 partner 21­5 Partnership Duties • Duty of Loyalty • Duty of Obedience • Duty of Care 21­6 Partnership Rights • Right to Share in Management • Right to Share in Profits • Right to Compensation • Rights to Partnership Property • Right to Inspect Books • Right to an Accounting 21­7 Circumstances “Triggering” Partner’s Right to an Accounting • Whenever partnership agreement provides for an accounting • Whenever co-partners wrongfully exclude partner from partnership/from access to partnership books • Whenever partner fails to disclose profit/benefit from partnership (breach of “fiduciary duty”) • Whenever circumstances render accounting “just and reasonable” 21­8 Interactions Between Partners and Third Parties • If 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 debts • All partners jointly and severally liable for commission of tort by any partner • Implied liability of partners when purchases made to perpetuate partnership’s business 21­9 The Revised Uniform Partnership Act (RUPA) Revised version of Uniform Partnership Act (UPA); use of RUPA varies from state to state 21­10 Partnership Termination • Begins when partnership dissolves • Once partnership dissolved and assets liquidated and distributed (“winding up”), partnership terminated 21­11 Partnership Dissolution • Definition: Partnership cessation • Partnership dissolution can result from: -Partner actions -Operation of law -Court action 21­12 Events Resulting in Partnership Dissolution • Expiration of term (time period) stated in partnership agreement • Fulfillment of established (agreed-upon) partnership objective • Partner withdraws from “partnership at will” (partnership that does not specify objective/duration of partnership) • Partner withdraws in accordance with partnership agreement • Partner expelled from partnership in accordance with partnership agreement 21­13 Examples of Partnership Dissolution By “Operation of Law” • Partner dies • Partner adjudicated bankrupt • Partnership engages in illegal activity 21­14 Examples of Partnership Dissolution By “Court Action” • Partner adjudicated insane • Impractical to continue partnership business • Partner incapable of fulfilling his/her duties established by partnership agreement • Partner disagreement as to how to conduct partnership business 21­15 “Winding Up” of Partnership Definition: Activity of completing unfinished partnership business, collecting and paying debts, collecting partnership assets, and taking inventory 21­16 Order of Distribution of Partnership Assets (Upon “Winding Up”) • Payment to partnership creditors • Payment of refunds/loans to partners for loans made to partnership • Payment of partners for invested capital • Payment of profits distributed to partners per terms of partnership agreement 21­17 Limited Partnership • Definition: Agreement between at least one general partner and at least one limited partner • Allows investor (limited partner) to share in profits of partnership • Limited partner’s liability limited to amount he/she invests in business 21­18 Requirements for Limited Liability (of Limited Partner) • Limited partner has complied in good faith with certificate of limited partnership filing requirement • Limited partner does not participate in control of business • Limited partner’s surname is not part of partnership name 21­19 Comparison of General Partners and Limited Partners General Partner Limited Partner – Has all rights associated with controlling business – Has no right to participate in management and control of business – Has unlimited personal liability for all partnership debts – Acts as agent of partnership – Liability limited to amount of capital partner has contributed to business – Is not an agent of the partnership 21­20 Reasons For Dissolution of Limited Partnership • Expiration of term established in certificate of limited partnership • Completion of objective established in certificate of limited partnership • Unanimous 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 21­21 ... co-owners a business for profit” 21­2 Characteristics of Partnership • Voluntary and consensual relationship • Between two or more individuals, partnerships, corporations, or other forms of business. .. • Definition: Partnership cessation • Partnership dissolution can result from: -Partner actions -Operation of law -Court action 21­12 Events Resulting in Partnership Dissolution • Expiration of... of deceased partner • Party receives share of profits for payment from sale of goodwill of business/ other property • Party receives share of profits for payment of interest on a loan 21­4 Formation