Partnerships



Partnerships

Association of two or more persons or entities who operate a business for profit

Governed by partnership agreement

or

Uniform Partnership Act (1914)

Revised Uniform Partnership Act (1997)

Traditional Characteristics

1. voluntary agreement

2. agency

3. equal management rights

4. personal liability

5. equal rights to profit

6. personal taxation of business profits and losses

7. automatic dissolution upon the death, expulsion, or withdrawal of one or more of the partners

Partnership Forms

General Partnerships

Limited Partnerships

Limited Partnerships

Limited Liability Partnerships

Limited Liability Limited Partnerships

Limited Partnership Associations

General Partnerships

The Traditional Partnership

Requires no formalities

□ Formation

✓ Voluntary Agreement

(e.g., co-owning a business for profit)

✓ Registration of Partnership/Assumed Business Name

✓ Foreign Registration

(state in which the partnership is not registered)

Regulates partnership and creates revenue

✓ Licenses

Business licenses

Sales tax license

✓ Partnership Agreement

The cornerstone of partnership relationships

□ Agency

Each partner has the authority to bind the partnership to obligations within the scope of partnership business.

= Apparent Authority

Purpose: to provide protection to third parties who assume partners can participate in the operation of the partnership business

(versus partner clearly not acting within scope of partnership authority)

Limiting apparent authority by

1. partnership agreement

2. statement of partnership authority

Actual Authority (Express Authority)

= authority granted by one of the following:

1. partnership agreement

2. majority vote

Exceeding actual authority can lead to expulsion or suit for damages caused by using excess authority.

□ Management

➢ All general partners have both

1. Equal management rights (although management is often delegated to small group)

2. Equal participation rights (voting rights)

Exception: unless the partnership agreement specifies otherwise

➢ Voting

Decisions by majority vote, except

1. votes affecting continuation of business

(e.g., selling business)

2. partnership activities beyond partnership agreement

voting violations = void transactions

□ Fiduciary Duties

Partners are fiduciaries of one another.

(Fiduciary holds a position of trust and confidence.)

Duties: duty of loyalty

duty of care

duty of good faith and fair dealing

➢ Duty of Loyalty

Partners must act solely for benefit of partnership.

Partners must not accept benefits from partnership, use partnership property, compete with the partnership . . . without the consent of the partnership.

Key: Disclose all interests adverse to partnership.

Drafting Note: cannot eliminate duty in partnership agreement

➢ Duty of Care

Partners must use ordinary and reasonable care in partnership business.

Partners are liable for reckless or intentional misconduct.

➢ Duty of Good Faith and Fair Dealing

Don’t take unfair advantage of the partnership—

be honest.

□ Liability

Business liability: use of business assets to pay partnership debts

Personal liability: use of personal assets to pay partnership debts

Each partner is personally liable for all

1. contract obligations of partnership

2. tort obligations of partnership

Liability (responsibility) is equal unless

partnership agreement specifies otherwise.

➢ Exhaustion Rule (RUPA)

Business assets must be used to pay business obligations

before personal assets can be taken.

➢

➢ Contract Liability Versus Tort Liability

Contract liability: breach of partnership’s written agreements

= joint liability (sue all partners together)

Tort liability: personal injuries, fraud, and so on caused by one or more partners

= joint and several liability (can sue all or just one partner)

□ Limiting Personal Liability for

Partnership Obligations

➢ Contract Liability

How can you limit personal liability for partnership

contract obligations?

“All obligations due on or liabilities created by the contract or a breach thereof will be limited to and payable solely from the partnership’s assets.”

➢ Tort Liability

How can you limit personal liability for partnership tort obligations?

In the partnership agreement, insert indemnification (reimbursement) provision.

Innocent partner can sue wrongful partner for

reimbursement of money paid for tort such as fraud.

□ Partnership Property

1. contributions (gifts) by partners

2. property purchased with partnership profits

3. other property (partnership loans, etc.)

➢ Contributions = Partnership Capital

(investments by individual partners)

Contributions are owned by partnership.

Therefore, partners cannot withdraw their contributions until partnership is dissolved.

➢ Partner’s Interest in Partnership

Based on capital contribution (investment)

Example: Partner A giving 40 percent of all money invested in partnership is a 40 percent partner (gets 40 percent profits and losses).

partnership interest =

contributions + % profits – liabilities

Drafting Note: State dollar value of all contributions of partners in partnership agreement.

In the absence of an agreement, all profits or losses are divided equally.

➢ Rights to Partnership Property

Partnership owns property

not individual partners

• Assignment of partnership interest

(giving third party, such as a creditor, partnership interest)

Gives only right to receive profits

(can’t participate or manage otherwise = involuntary partnership)

• Attachment of partnership interest

(creditors trying to get partnership interest to satisfy personal debts of partners)

Can’t get partnership property, only individual partner’s interest (profits)

□ Taxation Considerations

partnership profits - losses = personal income

➢ Advantages

1. profits taxed once

2. profits taxed at lower individual rates rather than business rates

3. partnership losses offset other personal income

Remember: Partnerships must file an informational tax return.

□ Termination of a Partnership

To terminate, partnerships have to both

1. dissolve (someone leaves or joins partnership)

2. wind up (end business)

➢ Options for Termination

1. RUPA termination = partnership reorganization

Remaining partners buy out leaving partner’s interest.

buyout price = partner’s interest

(i.e., contribution + profits – liabilities)

or price set in partnership agreement

2. Partnership agreement provision allowing continuation of partnership after dissolution

➢ Winding Up

= concluding partnership business

Includes completing existing partnership contracts, collecting obligations due partnership, liquidating partnership assets, and so on

plus paying out money left in partnership

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