1. Partnerships Introduction to Forms of Business and Formation of Partnerships Operation of Partnerships Dissolution & Winding Up Limited Liability Companies & Limited Partnerships 9 McGraw-Hill/Irwin Business Law, 13/e 2007 The McGraw-Hill Companies, Inc. All rights reserved.

2. INTRODUCTION TO FORMS OF BUSINESS AND FORMATION OF PARTNERSHIPS P A E T R H C 37 It sounds boring, but anything is easy to start starting a novel, starting a businessits keeping the thing going that is difficult. Prue Leith, author and executive, quoted inThe Adventure Capitalists(Grout and Curry, 1998) 3. Learning Objectives

Choosing a form of business

Creation of partnership

Purported partners

Partnership capital and property

Partnership interests

37 - 4.

Choosing a form of business is important because the business owners liability and control of the business vary greatly among the many forms of business

Overview 37 -What you choose depends on where you want to go 5.

Sole proprietorship

Partnership

• General, limited, limited liability, or limited liability limited partnership

Corporation

• Regular C, Subchapter S, nonprofit, professional

Limited liability company

• Including professional form

Basic Forms 37 - 6.

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 37 - 7.

A partnership has two or more owners or partners and includes several forms: general, limited (LP), limited liability (LLP), limited liability limited (LLLP), or professional

Though a legal entity, a partnership is not a federal tax-paying entity, thus all income or loss must be reported on the individual partners federal income tax return whether or not distributed or allocated to partners

Partnership 37 - 8.

Advantages :relatively easy to create, has a legal entity but individual taxation, partners control the business, partners take all gain, flexible structure

Disadvantages :partners bear all risk of loss jointly and severally, different levels of liability to partners depending on sub-form

Partnership37 - 9.

A corporation is owned by shareholders who elect a board of directors to manage thebusiness, thus ownership and management of a corporation may be separate

Shareholders have limited liability for the obligations of the corporation

The corporation is a legal and tax-paying entity for federal income tax purposes

• Exception:Subchapter S corporations

Corporation 37 - 10.

Advantages :shareholders enjoy limited liability for corporate obligations, perpetual existence, ability to raise large amounts of capital

Disadvantages :greater formality required for formation and operation, double-taxation, complexity of structure

Corporation 37 - 11.

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 37 - 12.

Many nations share similar forms of business, including partnership and corporation, though details vary widely

Business Forms Worldwide 37 - 13.

Every state has enacted partnership laws

The Revised Uniform Partnership Act (RUPA) of 1994, with the 1997 amendments, is a model partnership statute

The General Partnership 37 - 14.

RUPA defines partnership as an association of two or more persons to carry on as co-owners a business for profit.

• Partners share profit and loss

A partnership is a voluntary and consensual relationship and may exist by law even if the parties entered it inadvertently, without considering whether they had created a partnership

Partnership Creation 37 - 15.

Several musicians agree to form a band and share profits

Two students stand in line for hours to buy 10 concert tickets.They sell 8 tickets for a $5 fee per ticket and splitting the profits.

Partnership Creation -- Examples 37 - 16.

Unlike an ordinary partnership, creating a limited liability partnership (LLP) must comply with a states limited liability partnership statute

Formation of an LLP requires filing a form with the secretary of state, paying an annual fee, and using proper terminology

• Registered Limited Liability Partnership, RLLP, Limited Liability Partnership, LLP

Partnership Creation The LLP 37 - 17.

If a third person deals with two or more people who seem to be partners and is harmed, the third person may sue to recover damages from both of the apparent partners

RUPA Section 308(e): persons who are not partners as to each other are not liable as partners to other persons.

Non-Partners Not Liableto Third Parties 37 - 18.

However, under thedoctrine of purported partners , if the third party proves that one apparent partner misled him to believe that the two (or more) people were partners, the third party may sue the partner that caused the deception for damages suffered when the apparent partnership failed to perform as agreed

Purported Partners 37 - 19.

When a partnership or limited liability partnership is formed, partners contribute cash or other property partnership capital to the partnership

• Belongs to partnership as an entity

Tangible and intangible property acquired by a partnership presumptively belongs to the partnership as an entity rather than individual partners

Partners and Ownership 37 - 20.

As owner of a partnership or LLP, a partner has an ownership interest in the partnership

The partnership interest includes partners:

• Transferable interest

• • Partners share of profits and losses and right to receive partnership distributions

• Management and other rights

A Partners Partnership Interest 37 - 21.

Generally, partnership law applies to joint ventures, but a court may distinguish the two if the business purpose is limited to a single project rather than series of related transactions

• Reason:joint venturers usually held to have less implied and apparent authority than partners due to limited scope of the enterprise

Partnership or Joint Venture? 37 - 22. Learning Objectives

Limited Liability Companies

Limited Partnerships and Limited Liability Limited Partnerships

Creation of Limited Partnerships

Right and liabilities of members and partners

Dissociation and dissolution

40 - 23.

The limited liability company (LLC) combines advantages of the corporation with regard to protection from personal liability and favorable tax status of the partnership

The Uniform Limited Liability Company Act of 1996 (ULLCA) offers default rules similar to RUPA that govern an LLC in the absence of a contrary agreement of its owners

• http:// www.nccusl.org /Update/

Overview 40 - 24.

An LLC may elect to be taxed like a partnership or a corporation for federal income tax purposes

• Election as partnership more common

Therefore, the LLC pays no federal income tax and all income and losses of the LLC are reported by the LLCs owner-members on their individual income tax returns

Taxation of the LLC 40 - 25.

At least one person (organizers) must file articles of organization with a secretary of state

• Articles must include LLC name, its duration, and the name and address of its registered agent

Owners of an LLC are members

• An individual, partnership, corporation, or another LLC may be a member of an LLC

• An LLC is an entity separate from its members

Creation of the LLC 40 - 26.

Articles of organization must state whether the LLC is member-managed or manager-managed

• If manager-managed, initial managers must be named

An LLC probably will have an operating agreement covering how members will share profits, manage the LLC, and withdraw from the LLC

Management of the LLC 40 - 27.

An LLC member has no individual liability on LLC contracts, unless LLC contracts signed in a personal capacity (e.g., as a surety)

A members liability is usually limited to the members capital contributions

A member is liable for torts s/he committed while acting for the LLC

Liability of Members 40 - 28.

Under the ULLCA, an LLC must choose to be member-managed or manager-managed

Each member in amember-managedLLC shares equal rights in the management of the business and each member is an agent of the LLC with implied authority to carry on its ordinary business

A Member-Managed LLC40 - 29.

The LLC operating agreement may modify ULLCA default rules by granting more power to some members

• Creating a class of members whose approval is required for certain contracts

• Members share power based on capital contributions

A Member-Managed LLC40 - 30.

Managers in a manager-managed LLC are elected and removed by a vote of a majority of LLC members

A managers powers to act for the LLC are similar to a members power in a member- managed LLC

A Member-Managed LLC40 -A team effort. 31.

An LLC is liable for the contractual obligations incurred by its members or managers acting within their express, implied, or apparent authority

An LLC is also liable for the torts and other wrongful acts of managing members and other managers acting within their authority

Tort and Contract Liability40 - 32.

Each member in a member-managed LLC and each manager in a manager-managed LLC is a fiduciary of the LLC and its members with duties similar to the duties of partners, including the duty of care

Nonmanaging members of a manager-managed LLC owe no fiduciary duties

• But owe a duty of good faith and fair dealing when exercising rights as members

Duties of Members40 - 33.

A members ownership interest in an LLC is the members personal property

• Limited ability to sell or transfer LLC rights

A member may transfer the distributional interest in the LLC to another person

• Transferee not a member, but receives right to partnership distributions

• Limited right of transfer may be altered in the operating agreement

Ownership Interest of Members40 - 34.

A member in an LLC has the right is to receive distributions (usually profits)

ULLCA states that members share profits and other distributions equally, regardless of differences intheir capital contributions

• This may be altered by the operating agreement

Distributions to Members40 - 35.

Under the ULLCA, members dissociate from an LLC in ways similar to those by which a partner dissociates from a partnership or LLP under RUPA

• Under the ULLCA, a partner has the power to dissociate by withdrawing from the LLC at any time

Dissociation 40 - 36.

As in partnership, a members dissociation may be wrongful or nonwrongful

Dissociation terminates a members status as a member, and a dissociated member is treated as a transferee of a members distributional interest

In Re Garrison-Ashburn, LCconcerns dissociation

Dissociation 40 - 37.

Dissolution of an LLC is similar to that of an LLP or partnership

When an LLC dissolves, any member who has not wrongly dissociated may wind up the business

• LLC bound by reasonable acts of members during winding up

Dissolution40 - 38.

After all the LLC assets sold, proceeds distributed first to LLC creditors, then members contributions are returned

Any remaining proceeds are distributed in equal shares to the members

Dissolution40 - 39.

Substantially similar to RUPA, the ULPA of 2001 is the first comprehensive statement of American limited partnership law

• Only ULPA applies to limited partnerships

The limited partnership (or LLLP) form is perpetual and used primarily in tax shelter ventures, real estate ventures, oil and gas drilling, and professional sports

Uniform Limited Partnership Act 40 - 40.

Limited partnerships has two owner classes:

• General partnerscontribute capital, manage the business, share in profits, and possess unlimited liability for its obligations

• Limited partnerscontribute capital and share profits, but possess no management powers

• • Liability limited up to the amount of their investments in the business

Limited partnership agreements common

The Limited Partnership40 - 41.

A variant of a limited partnership is the limited liability limited partnership (LLLP) which offers limited liability status for all its partners, including general partners

Except for liability of general partners, limited partnerships and LLLPs are identical

Limited Liability Limited Partnership40 - 42.

A limited partnership (or LLLP) may be created only by complying with the applicable state statute, but requirements are minimal

Acertificate of limited partnership must be executed (signed by all general partners) and submitted to the secretary of state

Creating the LP or LLLP40 - 43.

A partner may contribute any property or other benefit to the limited partnership

Under ULPA, profits and losses are shared on the basis of the value of each partners capital contribution unless there is a written agreement to the contrary

ULPA of 2001 requires few actions to be approved by all the partners

Rights of LP and LLLP Partners40 - 44.

ULPA is clear that limited partners have no inherent right to vote on any matter

Default rule is that no new partner may be admitted unless each partner has consented to the admission

• Limited partnership agreement may provide for other admission procedures

Rights of LP and LLLP Partners40 - 45.

Each partner in a limited partnership owns a transferable interest in the limited partnership as personal property

A partners transfer of his transferable interest has no effect on his status as a partner, absent a contrary agreement

Transferable Interest40 - 46.

A general partner of a limited partnership or LLLP has same right to manage and same agency powers as a partner in an ordinary partnership, including the duty of care

A general partner of a limited partnership or LLLP is in a position of trust and therefore owes fiduciary duties to the limited partnership and the other partners

Management & Duties 40 - 47.

Through aderivative actionorderivative suit , a partner may sue to enforce a limited partnership right of action against a person who has harmed the limited partnership

Derivative Actions40 - 48.

Partners have the power to withdraw from the limited partnership at any time, but ULPA gives the partners no right to withdraw, absent a contrary provision in the limited partnership agreement

Under ULPA, a withdrawing partner has no right to receive the value of the partnership interest

Withdrawing40 - 49.

ULPA of 2001 adopts terminology and the framework of partnership law, thus ULPA establishes dissociation and dissolution rules

A limited partner dissociates upon limited partners death, withdrawal, or expulsion from the partnership

Dissociation of the LP and LLLP40 - 50.

A dissociated limited partner is not a limited partner, has no rights as a limited partner, and is treated as a mere transferee of the dissociated limited partners transferable interest

ULPA treats dissociation of general partners as RUPA treats partner dissociations in a partnership

Dissociation of the LP and LLLP 40 - 51.

A general partners express and implied authority to act for the limited partnership terminates upon dissociation, the partner may retain apparent authority

A dissociated general partner will remain liable on a limited partnership obligation incurred while a partner unless creditor agrees to a release of liability

• No liability for post-dissociation obligations

Dissociation of the LP and LLLP 40 - 52.

ULPA provides that a limited partnership (or LLLP) is not dissolved, wound up, or terminated merely because a partner dissociated from the limited partnership

When a limited partnership dissolves, winding up follows automatically by the general partners

Dissolution of the LP and LLLP 40 - 53.

After general partners have liquidated the assets, proceeds are distributed first to creditors and if proceeds exceed creditors claims, the remainder is paid to the partners in the same proportions that they shareddistributions

Dissolution of the LP and LLLP 40 -