Partnerships

1
Partnerships

• Chapters 31 and 32

2
Partnerships - Defined

• A partnership is an association of two or more
  persons carrying on a business as co-owners for a
  profit
• Any person with capacity can be a partner minors
  have right to disaffirm and return of capital and
  unpaid share of profits, except to extent
  necessary to pay creditors.
• Must be a business, trade, or profession
• Must have an intent to make a profit (no
  charitable organizations, social clubs)
• Must be continuous in activities/transactions
• Must be for a LEGAL purpose

3
Partnership by Estoppel

• When, through words or conduct, a person who is
  NOT a partner is represented to a third party as
  BEING a partner, with the approval, knowledge and
  consent of the partners, a Partnership by
  Estoppel is created.
• The person who is NOT truly a partner will
  nonetheless be liable to a third party who
  extended credit on reliance of the partnership

4
Treatment of a Partnership

• As a distinct entity
• The assets are treated as belonging to the
  business, not as individual assets of the members
• Title to real property may acquired in the
  Partnership name
• Each partner is a fiduciary of the partnership
• Each partner is considered an agent of the
  partnership
• May sue and be sued

• As an aggregate of the individual partners
• A partnership lacks continuity of existence
• No person can become a partner without consent of
  all partners
• A partnership is not subject to federal income
  tax
• Partnership debts are debts of the individuals

5
Formation of Partnership

• No formalities required may be implied by
  conduct (however, Articles are suggested)
• No writing required, except for partnerships that
  must comply with the Statute of Frauds
  (partnerships to last longer than a year real
  estate partnerships)
• Written partnership agreements should contain the
  firms name nature of the business capital
  contributions share profits losses equally
  (unless Articles state otherwise) managerial
  duties, withdrawal rights provisions in case of
  death of a partner.

6
Partnership Profits

• The sharing of profits is prima facie evidence of
  a partnership, BUT the sharing of gross returns
  does not, in itself, establish a partnership.
• Sharing of profits does not infer a partnership
  when the profits are received in payment of (1)
  a debt (2) wages (3) rent (4) annuity,
  retirement or health benefit to decedents
  beneficiary (5) sale of goodwill of the business.

7
Evidence of a Partnership

• Sharing of Profits
• Intent to form a partnership
• Title to property held as Joint Tenants or
  Tenants-in-Common
• Partners designate their relationship as a
  partnership
• Extensive, continuous activity between the two.

8
Partnership Capital

• A partnership may begin with no capital (services
  partner)
• The total assets contributed for permanent use is
  partnership capital
• A fixed amount, may be listed in the Articles of
  Partnership
• May be money, property, or services
• Capital is returned upon dissolution

9
Partnership Property

• All property, including contributed capital,
  brought into, acquired, purchased, manufactured
  by partnership funds. May consist of
• Real and personal property purchased by
  partnership funds. If title is in the
  partnerships name it belongs to partnership BUT
  property in the name of an individual partner, or
  a third party, may ALSO belong to the
  partnership.
• Real and personal property contributed by the
  partners.
• Property manufactured by the partnership
• Profits earned by the partnership

10
Property as a Partnership Asset

• Legal title is only one element.
• Look at the intent of the parties.
• Was property improved with partnership funds?
  How was property used?
• How was property treated on the books?
• Who paid taxes, liens, insurance, repairs?
• Was income or the proceeds of the property
  treated as partnership funds?

11
Conveyance of Partnership Property

• Title to real property acquired in the
  partnership name can be conveyed only in the
  partnership name.
• Any partner can convey title to real property by
  a conveyance signed on behalf of a partnership if
  title is in the name of the partnership
• If partner improperly transfers, the partnership
  can recover it UNLESS sold to a subsequent good
  faith purchaser

12
No partner owns specific partnership property
directly

• Property owned by the partnership belongs to the
  partnership.
• No right to personally use, control or sell
  partnership property
• Creditors have no right to specific partnership
  property
• Assignability - Partner may sell/assign his
  interest (right to receive profits), but not
  partnership status.

13
Creditors

• Must get a charging order
• A receiver collects and turns over partnership
  profits
• Creditor may foreclose, causing debtors
  interest to be sold at judicial sale

14
Dissociation, Dissolution, Winding Up

• Dissociation- A change in the partnership
  relationship (Buyout, Creditors Charging Order,
  Death)
• Dissolution - Results in Winding up of
  Partnership - Rightful (time up) Wrongful,
  (Breach of Fiduciary Duty) Operation of Law
  (Death, Bankruptcy) Court Order. Partnership
  continues through winding up.
• Winding up - Liquidation, complete unfinished
  business, take inventory, etc.

15
Partnership Authority After Dissolution

• Actual authority ends, except to wind up affairs.
• Person who causes a wrongful dissolution has no
  right to participate in winding up or to take
  goodwill into account.
• Apparent authority may continue to bind
  partnership for acts w/n scope of partnership
  business unless NOTICE of the dissolution is
  given to the third party
• Actual Notice - verbal/writing to those who
  extended credit in the past
• Constructive Notice - to those who knew of
  partnership but didnt extend credit
• No notice - to those who had no knowledge of
  partnership

16
Liability of Incoming/Outgoing Partners

• Incoming - Complete liability after joining the
  partnership
• However, liability for pre-existing debts before
  becoming a partner are limited to his capital
  contribution Liability may only be satisfied out
  of partnership property no personal liability
  

• Outgoing Partner - Remains fully liable for debts
  and liabilities incurred when a partner UNLESS a
  novation is signed with the continuing partners
  AND the creditors

17
Rights Among Partners

• Right in specific partnership property
• Right to share distributions
• Right to share profits
• Right to return of capital
• Right to return of advances
• Right to compensation
• Right to participate in management (equal unless
  agree otherwise)
• Right to choose associates (consent required)
• Right to information inspection of books
• Right to a Formal Accounting

18
Consent for Action

• Majority consent is needed for ordinary matters
  that are connected with the partnership business.
  
• Extraordinary matters require unanimous consent
• Consent to the entry of a court judgment
• Submitting a partnership claim to arbitration
• Assigning partnership property for the benefit of
  creditors
• Disposing of partnership goodwill
• Acting in any way that makes ordinary
  partnership business impossible

19
Fiduciary Duties

• A partnership is a fiduciary relationship. It is
  breached if a partner tries to secure an
  advantage by internal/external dealings. If one
  partner breaches his duty, can be required to
  surrender illicit profits. Innocent partner may
  seek indemnification from wrongful partner.
• Duty of Good Faith and Loyalty
• Must not profit except agreed upon compensation
• Shouldnt compete with the partnership.
• Duty of Due Care - Partners are only liable for
  culpable negligence, not ordinary, business
  mistakes.
• Duty of Obedience-
• Duty of Accounting

20
Order of Distribution of Assets

• Creditors
• Loans/Advances made by Partners
• Amounts owed to Partners for Capital
• Amounts owed to Partners for Profits

21
Solvent Partnership -Book p. 629

• A contributes 6000 capital 3000 loan
• B contributes 4000 capital
• C contributes services only
• No agreement on sharing profits/losses
• Assets 54,000 Liabilities to Cs 26,000
• Total Assets ( 54,000) minus Total Liabilities
  (39,000)Profits (15,000)
• A gets 14,000 (300060005000)
• B gets 9000 (4000 5000)
• C gets 5000 (his share of profits)

22
Insolvent Partnership - p. 629

• Same contributions by A, B and C
• Assets 12,000 Owe Creditors 26,000
• Total Liabilities (39,000) minus Total
  Assets(12,000) Aggregate Loss (27,000)
• Share losses equally (9000 each)
• After pay the Creditors the 26,000
• A receives 0 (3000 for loan 6000 for capital
  minus 9000 for his share of losses)
• B must contribute 5000 (4000 owed for capital
  minus 9000 for his share of losses)
• C must contribute 9000 for his share of losses

23
Insolvency of Partnership and of a Partner - p.
629

• If A were insolvent, results are the same
• If A and B solvent, C insolvent, then A and B
  must contribute equally, an additional 4500 (Cs
  share)(contribution would be the relative
  portion in which they share profits)
  Acontributes 4500 B 9500
• If A and C individually insolvent, B would pay
  entire 14,000 (Bs unpaid share plus
  contribution of full amount of Cs unpaid share
  of the loss.

24
Problem 11

• No one is correct. The total contributions are
  15,000. After paying debts, the remaining
  assets are 6000 (Loss, 9000, to be shared
  equally- 3000 each) Lauren is entitled to
  return of her 10,000 capital contribution, less
  loss, or 7000. Matthew is entitled to the
  return of his 5000 contribution, less loss, or
  2000. Susan must pay her share of the loss,
  3000, which sum added to the 6000 on hand would
  be paid to Lauren Matthew in the amounts
  stated.

25
Problem 13

• Ben must contribute 9000 Lilli 15,000.
• IF Dan were subject to process, the partners
  would be liable Ben, 6000 Dan, 8000 and
  Lilli, 10,000. Since Dan is NOT subject to
  process, Ben Lilli must contribute Dans share.
  Ben Lilli share profits in the proportion of 3
  to 5 (1/4 divided by 5/12 3/5). Ben must
  contribute 3/8ths of the 24,000 (9000) required
  to pay creditors Lilli must contribute 5/8ths
  of the 24,000, or 15,000.

26
Problem 15

• Total capital contributions 100,000 interest
  of 39,000 is due to S and J each on their
  respective capital contributions. Liabilities to
  creditors 420,000, assets are 400,000. Total
  losses are 198,000 (4000-(420,000 100,000
  78,000). Losses same ration as profits. S J
  get 29,600 (50,000 in capital 39,000 minus
  his share of loss, 30 or 59,400) J gets
  29,600. W B should each pay 39,600 for their
  share of loss, total 79,200 This sum added to
  the 400,000 479,200. Crs claims of 420,000
  are paid 1st leaving 59,200. S J are then
  paid 29,600. Answer assumes W B are solvent.
  

27
Tort Liability

• A partnership is liable for loss or injury caused
  by wrongdoing (trespass, fraud, negligence) of
  any partner while acting within the scope of
  partnership business liable for any torts
  committed within the ordinary course of
  partnership business.
• Each partner has unlimited personal liability
  for the partnership obligation
• Wrongful partner must indemnify other
• Joint Several liability
• Partnership liability is like vicarious liability

28
Criminal Liability

• Partners not usually criminally liable for the
  crimes of other partners committed within the
  scope of partnership business (i.e.,
  embezzlement) unless the other partner authorized
  or participated in the crimes

29
Contractual Liability

• Contractual liability is limited to their
  partnership obligation cant be sued personally.
  
• Because a partner acts concurrently as a
  principal and an agent, a partner may
  contractually bind the partnership and each
  co-partner by contract if partner had (1) Actual
  Express Authority to act as per the partnership
  agreement (2) Actual Implied Authority
  (hire/fire, ordering, doing things for customers,
  ordinary daily transactions) (3) Apparent
  Authority, authority that a third person may
  reasonably believe exists (doesnt exist if third
  person knows partner has no authority)