Chapter 42Chapter 42PARTNERSHIPSPARTNERSHIPS

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Nature of a PartnershipNature of a Partnership

A A partnershippartnership is a relationship: is a relationship: created by the voluntary association of two or more created by the voluntary association of two or more

persons, persons, to carry on as co-owners a business for profit. to carry on as co-owners a business for profit.

Partnership consists of:Partnership consists of: Voluntary relationships.Voluntary relationships. Capital or in-kind contributions.Capital or in-kind contributions.

If no profit intended, then an unincorporated If no profit intended, then an unincorporated association.association.

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Existence of a PartnershipExistence of a Partnership

The existence of a partnership may be found The existence of a partnership may be found from the existence of:from the existence of: shared controlshared control in the running of the business and in the running of the business and the fact that the parties the fact that the parties share profitsshare profits and losses. and losses. The sharing of gross returns, as opposed to profits, The sharing of gross returns, as opposed to profits,

is very slight evidence of a partnership. is very slight evidence of a partnership.

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Partnership AgreementPartnership Agreement

The The partnership agreementpartnership agreement governs the governs the partnership during its existence and may also partnership during its existence and may also contain provisions relating to dissolution. contain provisions relating to dissolution.

The partnership agreement will generally be in The partnership agreement will generally be in writing; this may be required by the statute of writing; this may be required by the statute of frauds. frauds.

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Partners hold title to firm property by Partners hold title to firm property by tenancy in tenancy in partnership. partnership. Surviving partners receive property.Surviving partners receive property.

A creditor of a partner cannot proceed against any A creditor of a partner cannot proceed against any specific item of partnership property but must specific item of partnership property but must obtain a obtain a charging ordercharging order to seize the debtor- to seize the debtor-partner’s share of the profits. partner’s share of the profits.

An An assignee assignee of a partner’s interest does not of a partner’s interest does not become a partner without the consent of the other become a partner without the consent of the other partners and is entitled only to a share of the partners and is entitled only to a share of the profits and the assignor’s interest upon dissolution. profits and the assignor’s interest upon dissolution.

Partnership PropertyPartnership Property

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Authority of PartnersAuthority of Partners

Scope of authority is determined by Scope of authority is determined by partnership agreement.partnership agreement.

Majority of partners prevails.Majority of partners prevails.Individual partners may have express Individual partners may have express

authority under agency theory.authority under agency theory. Implied powers as co-owner of business.Implied powers as co-owner of business. Partnership may be bound by act of partner Partnership may be bound by act of partner

with third party if third party did not know of with third party if third party did not know of limitations.limitations.

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Make contracts.

Sell goods in the regular course of business.

Purchase items needed by the business.

Borrow money for the firm’s purposes.

Buy insurance. Hire

employees.

Adjust claims for or against the partnership.

Execute commercial paper in the name of the firm.

An individual

partner can:

Authority of PartnersAuthority of Partners

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Prohibited TransactionsCessation of business, suretyship,

agreement to arbitrate, confession ofjudgement, assignment for creditors.

Law of AgencyIndividual partners, acting in an

apparently proper way,have authority to bind the firm.

Business TransactionsIndividualPartner

ThirdPerson

Limitations on Authority of Limitations on Authority of Partner to Bind PartnershipPartner to Bind Partnership

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Prohibited TransactionsProhibited Transactions

Certain transactions a partner cannot undertake Certain transactions a partner cannot undertake without express approval:without express approval: Cessation of business.Cessation of business. Suretyship.Suretyship. Arbitration.Arbitration. Confession of judgment (admission).Confession of judgment (admission). Assignment of partnership property.Assignment of partnership property. Personal obligations.Personal obligations.

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Duties, Rights and Duties, Rights and Liabilities of PartnersLiabilities of Partners

Duties (general agency law):Duties (general agency law): Loyalty and good faith.Loyalty and good faith. Obedience.Obedience.

Rights:Rights: Management.Management. Inspection of Books.Inspection of Books. Share of Profits.Share of Profits. Contribution and Indemnity. Contribution and Indemnity.

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Liability of PartnersLiability of Partners

Partnership Contracts: Partners are jointly Partnership Contracts: Partners are jointly liable.liable.

Partnership Torts: Partners are jointly and Partnership Torts: Partners are jointly and severally liable for torts within scope of severally liable for torts within scope of business.business. Partner who has paid has right to contribution.Partner who has paid has right to contribution.

Liability of New Partners.Liability of New Partners.

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Dissolution and TerminationDissolution and Termination

A partnership may be dissolved by the parties A partnership may be dissolved by the parties themselves in accordance with the terms of the themselves in accordance with the terms of the partnership agreement, by the expulsion of a partnership agreement, by the expulsion of a partner, by the withdrawal of a partner, or by partner, by the withdrawal of a partner, or by the bankruptcy of the firm or one of the the bankruptcy of the firm or one of the partners. partners.

A court may order dissolution of a partnership A court may order dissolution of a partnership upon the petition of a partner because of the upon the petition of a partner because of the insanity, incapacity, or major misconduct of a insanity, incapacity, or major misconduct of a partner.partner.

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Dissolution Dissolution (cont’d)(cont’d)

Dissolution may be decreed because of lack of Dissolution may be decreed because of lack of success, impracticability, or other success, impracticability, or other circumstances that equitably call for circumstances that equitably call for dissolution.dissolution.

Dissolution ends the right of the partnership to Dissolution ends the right of the partnership to exist as a going concern. exist as a going concern.

Notice of dissolution, except dissolution by Notice of dissolution, except dissolution by operation of law, must be given. operation of law, must be given.

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Winding UpWinding Up

Dissolution is followed by a winding-up period Dissolution is followed by a winding-up period and the distribution of assets. and the distribution of assets.

Distribution of Assets.Distribution of Assets. After the firm’s liabilities After the firm’s liabilities to non-partners have been paid, the assets are to non-partners have been paid, the assets are distributed among the partners as follows: distributed among the partners as follows: (1) refund of advances, (1) refund of advances, (2) return of contributions to capital, and (2) return of contributions to capital, and (3) division of remaining assets in accordance with the (3) division of remaining assets in accordance with the

partnership agreement or, if no agreement is stated, partnership agreement or, if no agreement is stated, division of net assets equally among the partners.division of net assets equally among the partners.

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DUTIES RIGHTS LIABILITIES

Loyalty and Good Faith Management Firm Contracts

Obedience Inspection of Books Torts of EmployeesPartners WithinScope of BusinessShare of Profits

Reasonable Care Repayment of Loans Breach of Duties

Information Payment of Interest Partners Remain LiableAfter Dissolution

Accounting Contribution and Indemnity New Partner NotPersonally Liable forExisting DebtsParticipation in Distribution

of Capital

Rights and Liabilities of PartnersRights and Liabilities of Partners