Introduction to Forms of Business and Formation of Partnerships

Operation of Partnerships and Related FormsPartners’ Dissociation & Partnerships’ Dissolution and

Winding UpLimited Liability Companies, Limited Partnerships, and

Limited Liability Limited Partnerships

© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Operation of Partnerships

and Related FormsIt is not the individual but the team that is the instrument of sustained and enduring success in management.

Anthony Jay, quoted in Management Teams – Why

They Succeed (R. Meredith Belbin,

1984)© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Duties of partners to the partnership and each other

Compensation of partnersManagement powers of partnersLiability for torts and crimesLawsuits by and against

partnerships and partners

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Revised Uniform Partnership Act (RUPA) states that partners owe to the partnership and each other the highest degree of loyalty and must act consistently with the obligation of good faith and fair dealing (a fiduciary relationship)

Same duty for all partnership forms

Duties of Partners to Partnership and Each Other

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General duties include duties to serve, account for use or disposal of partnership funds, act within actual authority, avoid interests adverse to the partnership, disclose material information, and maintain the confidentiality of partnership information “Silent” partners do not serve Partners may compete with the partnership

only upon the consent of partners

General Duties

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Ann and Elkie own the Ann Elk Tavern as general partners. Ann wants to invest in her boyfriend Brock’s auto shop and neighbor Carol’s Bar N’ Grill. Ann could invest in Brock’s shop without competing with the Ann Elk Tavern partnership, but should not invest in Carol’s Bar N’ Grill without first getting Elkie’s consent A tavern and a bar are too similar and

may give rise to a breach of duty claim

Example

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Ann is general manager of Ann Elk Tavern and Elkie handles the company’s finances and accounting. Ann wants to help Brock run his auto shop instead of working for Ann Elk Tavern. While reviewing the books, Ann discovered Elkie used company funds for a down payment on her car. Ann also found out that Elkie hired two waiters yesterday. What issues are raised by this scenario?

Example

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Each partner owes a duty of care in doing partnership business

A partner isn’t liable to the partnership for honest errors in judgment (negligence), but is liable for losses resulting from gross negligence, reckless conduct, intentional misconduct, or a knowing violation of law

Duty of Care

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A partner must make business decisions that s/he has a reasonable belief are in the best interests of the partnership

A partnership agreement may alter the duty of care, but may not eliminate the duty

Duty of Care

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Partners agreed to build shopping plazas under a particular entity No written agreement Managing partner Konover diverted

partnership funds to other entities and commingled funds

Appellate court found Konover liable for breach of fiduciary duty by misusing partnership funds, self-dealing, and failing to disclose material information

Spector v. Konover

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RUPA states that a partner is not entitled to salary or wages, even if disproportionate time spent conducting partnership business A monthly draw is allowable

Instead, partner compensation is a share of business profits, offset by shared losses Shared equally unless agreement to the

contrary

Compensation of Partners

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Every partner in a partnership or LLP is a general manager of the business

Thus, by implied authority, a partner binds the partnership and partners for acts within the ordinary course of business

Agreement among partners may expand, restrict, or eliminate a partner’s implied authority

Management Powers

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A partner’s implied authority may not contradict a partner’s express authority created by agreement of the partners

A partner’s express and implied authority together constitute actual authority

Management Powers

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When a partner’s implied authority is restricted or eliminated, the partnership risks the possibility that apparent authority to do a denied act will remain

Partners may give notice of a partner’s authority or limitation of authority by filing a Statement of Partnership Authority or Statement of Denial with the secretary of state or the real estate recording office

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Restricting Implied Authority

An individual partner’s transfer of real property owned by a partnership will bind the partnership if expressly, impliedly, or apparently authorized, or ratified by the partnership

A partner has implied and apparent authority to sell real property if the partnership sells real property in the usual course of the partnership business

Power to Convey Real Property

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A partner may not borrow money in the partnership’s name without express, implied, or apparent authority

A partner in a trading partnership (with inventory) has implied and apparent authority to borrow money for partnership

A partner of a nontrading partnership (services) has no implied or apparent authority to borrow money

Borrowing Money

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A partner with authority to borrow money has authority to issue negotiable instruments (e.g., promissory notes) for that purpose

If a partner’s name is on a checking account signature card filed with a bank, the partner has express authority to draw checks

Partners have authority to negotiate or transfer instruments (e.g., checks) for the partnership

Negotiable Instruments

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In general, management decisions in the ordinary course of partnership business are by majority rule, one vote per partner Unless otherwise expressed by agreement

Some decisions not in the ordinary course of business require unanimous consent Example: a decision to expand or bring

in another partner

Management Decisions

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Partners may modify management rules by their unanimous agreement: limiting or expanding authority, delegating powers, or creating classes of partners with special or weighted voting rights

The Partnership Agreement

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NBN Broadcasting, Inc. v. Sheridan Broadcasting Networks, Inc.: a lesson in the necessity of careful drafting of an agreement

Agency law respondeat superior doctrine is applied to determine the liability of the partnership and other partners for torts of a partner and partnership employees Partnership and partners are liable

jointly and severally for torts of a partner committed within ordinary course of partnership business

Liability for Torts & Crimes

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Under RUPA, a partnership may sue or be sued in its own name

Partners also may be sued since they are jointly and severally liable for partnership obligations (contract or tort)

If partnership and individual partners sued, any judgment must first be satisfied from partnership assets, then from personal assets of the partners sued

General Partnership as Entity

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A partnership and partners are liable: When a partner commits a breach of trust For a partner’s negligence (generally)

Generally not for a partner’s intentional torts When a partnership and partners are held

liable for a partner’s tort, they may recover the amount of their vicarious liability from the wrongdoing partner.

General Partnership Liability for Torts & Crimes

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The limited liability partnership (LLP) was created to reduce personal liability of professional partners An innocent partner of an LLP has no

liability for malpractice of partners LLP partners also have no personal

liability for debts of the business, such as an invoice, leases, or loans

The LLP & Tort Liability

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For contract obligations, only LLP is liable For tort obligations, LLP is liable as well as

the partner who committed the tort Innocent LLP partners bear no liability

However, in Moren v. JAX Restaurant, the court found a partnership liable to a partner’s child who was injured as a result of the parent-partner’s negligence

LLP as Entity

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Test Your Knowledge

True=A, False = B Partners owe to the partnership and

each other an ordinary degree of loyalty Partners may compete with the

partnership as long as it does not harm the partnership.

A partner is liable to the partnership for losses resulting from gross negligence or reckless conduct.

A partnership may sue in its own name.38 - 25

Test Your Knowledge

True=A, False = B In general, management decisions in a

partnership are decided by majority rule.

A general partnership is liable for a partner’s negligence.

For contract obligations of an LLP, only the partners are liable.

A partner with authority to borrow money has authority to issue negotiable instruments.38 - 26

Test Your Knowledge

Multiple Choice Two accountants formed Caine & Able,

LLP. The partnership and each partner was sued for Able’s alleged negligence. Who might be liable?(a) Only Able due to his negligence(b) Only the partnership, Caine & Able (c) The partnership and Able (d) The partnership and either partner,

jointly or severally38 - 27

Test Your Knowledge

Multiple Choice A partner in a trading partnership has

what type(s) of authority for borrowing money? (a) Express authority(b) Implied and apparent authority(c) Actual authority(d) Implied authority(e) All of the above

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Thought Questions

Do you think the result in the Moren v. JAX Restaurant case was correct? Would you have handled things differently?

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