PART

PART

Partnerships

Introduction to Forms of Business and Formation of Partnerships

Operation of PartnershipsDissolution & Winding Up

Limited Liability Companies & Limited Partnerships

9

McGraw-Hill/Irwin Business Law, 13/e

© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

INTRODUCTION TO FORMS OF BUSINESS AND FORMATION OF

PARTNERSHIPS

PA ET RHC 37“It sounds boring, but anything is easy to start – starting a novel, starting a business – it’s keeping the thing going that is difficult.”

Prue Leith, author and executive, quoted in The Adventure Capitalists (Grout and Curry, 1998)

Learning Objectives

Choosing a form of businessCreation of partnershipPurported partnersPartnership capital and propertyPartnership interests

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Choosing a form of business is important since business owner’s liability and control vary among the many forms of business

Overview

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Sole proprietorship Partnership Corporation Limited Liability

Company

A sole proprietorship has only one owner and is an extension of its owner

It is not a legal entity and cannot sue or be sued, so creditors/claimants sue the owner

Advantages: no formalities, taxes flow to owner, owner takes all profit and control

Disadvantage: owner bears all risk of loss

Sole Proprietorship

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A corporation is owned by shareholders who do not necessarily manage the business

Corporation is a legal and tax-paying entity Advantages: limited liability for

shareholders for corporate obligations, perpetual existence

Disadvantages: more formality and more complex structure, double-taxation

Corporation

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A limited liability company (LLC) combines the nontax advantages of corporations with favorable tax treatment of partnerships

An LLC is owned by members, who may manage themselves or retain a manager to run the business

Members have limited liability for the obligations of the LLC

Limited Liability Company

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A partnership has two or more owners or partners in several forms General, limited, limited liability, professional

A legal entity, but not a federal tax-paying entity; all income or loss reported on each partner’s federal income tax return

Advantages: easy to create, flexible Disadvantages: partners bear all risk of loss

Partnership

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Revised Uniform Partnership Act (RUPA) guides partnership creation and operation Most state laws follow RUPA

Formation of a limited liability partnership requires filing form with secretary of state, paying annual fee, using proper designation Registered Limited Liability Partnership (RLLP) Limited Liability Partnership (LLP)

Partnership Creation

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Partnership may exist by law even if parties entered it inadvertently, without considering whether they had created a partnership If third person deals with two or more

people who seem to be partners and is harmed, third person may sue both apparent partners for damages or, under doctrine of purported partners, sue only apparent partner that caused the deception

Unintended Partnership

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When general or limited liability partnership formed, partners contribute cash or property – partnership capital – to partnership entity

Tangible and intangible property acquired by partnership belongs to partnership entity, not individual partners

Partner-owner has ownership interest in partnership: (a) interest in share of profit, loss, distributions; (b) management interest

Partners and Ownership

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Generally, partnership law applies to joint ventures, but a court may distinguish the two if business purpose limited to single project instead of transaction series See Southex Exhibitions v. Rhode Island Builders

Assoc.

Partnership or Joint Venture?

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Test Your Knowledge

True=A, False = B The Revised Uniform Partnership Act

(RUPA) is a model partnership statute. Partnership is an “association of two or

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

Partnership capital belongs to the individual partners allocated in equal shares.

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Test Your Knowledge Multiple Choice

The partnership interest includes a partner’s: (a) Management and other rights participation (b) Share of profits and losses and right to

receive partnership distributions (c) Ownership interest in partnership capital (d) both A and B (e) none of the above

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Thought Questions

Do you want to start a business? If you wanted to start a business (snowboards, for example), would you choose partnership as the form of business?

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