39-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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9• Introduction to Forms of Business and

Formation of Partnerships• Operation of Partnerships and

Related Forms• Partners’ Dissociation and Partnerships’

Dissolution and Winding Up• Limited Liability Companies,

Limited Partnerships, and Limited Liability Limited Partnerships

Partnerships

PART

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Partners’ Dissociation and Partnerships’ Dissolution

and Winding Up

PA ET RHC 39

Change is inevitable, but it is in us to control its content and directions.

Indira Ghandhi , Indian Prime Minister, speech (Jan. 8, 1967)

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Learning Objectives

• Define dissociation and identify actions that cause wrongful and nonwrongful dissociations

• Understand the causes of dissolution and the process of winding up

• Identify issues involved in adding new partners to existing partnerships

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• Sometimes even the best-laid plans go awry and a business fails

• Sometimes, it is simply time to make a change by modifying a partnership business to re-emerge as another partnership form, such as a Limited Liability Company, or a corporation

• Whether an ending or new beginning, this chapter is about controlling a change

Overview

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• The Revised Uniform Partnership Act (RUPA) defines dissociation as a change in the relation of partners caused by any partner ceasing to be associated in the carrying on of the business:– A partner’s retirement, death, or

expulsion– A bankruptcy filing

Dissociation

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• Dissociation starts the process of dissolution, winding up (liquidation), and termination of a partnership

• A partner has the power – but not necessarily the right – to dissociate from the partnership at any time, such as by withdrawing from the partnership– A partnership agreement may provide for a

right of dissociation

Dissociation

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• Nonwrongful dissociation does not violate a partnership agreement and includes events such as death or retirement of a partner, or partner’s withdrawal in accordance with partnership agreement

• Wrongful dissociation includes withdrawal that violate the partnership agreement or occurs before end of partnership’s term, filing bankruptcy, or judicial expulsion

Nonwrongful and Wrongful Dissociation

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• When a partner dissociates, dissolution may be the next step, but RUPA allows the partnership business to continue after a partner’s dissociation• Thus dissolution is not automatic

• RUPA provides a list of events that force a partnership to be dissolved and wound up

After Dissociation

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• Dissolution begins the winding up process:– Orderly liquidation of partnership assets

and the distribution of proceeds to those having claims against the partnership

• Winding up partner has implied authority to do those acts appropriate for winding up the partnership business and apparent authority to conduct business as s/he did before dissolution

Dissolution

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• After partnership assets have been sold during winding up, proceeds are distributed to those who have claims against the partnership, including partners; creditor claims satisfied first

• Remaining proceeds from sale of assets will be distributed to the partners according to the net amounts in their capital accounts

Winding Up and Distribution of Assets

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• Asset distribution rules modified for limited liability partnership since in an LLP most partners have no liability for partnership obligations

• If a partner committed malpractice or another wrong for which LLP statutes do not provide liability protection, the partner must contribute funds to the partnership

Distribution of Assets For an LLP

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• After partnership assets have been distributed, termination of the partnership occurs automatically

Termination

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• Partners may choose not to seek dissolution and winding up after dissociation

• When the business of a partnership is continued, creditors of the partnership continue as creditors of the person or partnership continuing the business.

• Original partners remain liable for obligations incurred prior to dissociation– Including dissociated partners

If Business Continued

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• A partnership agreement generally states terms under which a new partner is admitted to a partnership

• In absence of a partnership agreement, RUPA sets rules for partner’s admission and rights and duties upon admission:– New partner fully liable for all partnership

obligations incurred after admission as partner, but no liability for obligations incurred before admission as partner

Partners Joining Partnership

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• RUPA states that a new partner in an LLP incurs no liability for any LLP obligations, whether incurred before or after admission, beyond new partner’s capital contribution unless new partner committed malpractice or other wrong (and incurs personal liability)

Partners Joining LLP

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Thought Questions

• How would you deal with a partner who was mismanaging the firm or committed malpractice? How would you deal with a partner who had a substance abuse problem?