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1、Partnerships Chapters 31 and 32Partnerships-Defined A partnership is an association of two or more persons carrying on a business as co-owners for a profitAny person with capacity can be a partner;minors have right to disaffirm and return of capital and unpaid share of profits,except to extent neces
2、sary to pay creditors.Must be a business,trade,or profession Must have an intent to make a profit(no charitable organizations,social clubs)Must be continuous in activities/transactionsMust be for a LEGAL purposePartnership by EstoppelWhen,through words or conduct,a person who is NOT a partner is rep
3、resented to a third party as BEING a partner,with the approval,knowledge and consent of the partners,a Partnership by Estoppel is created.The person who is NOT truly a partner will nonetheless be liable to a third party who extended credit on reliance of the partnershipTreatment of a Partnership As
4、a distinct entityThe assets are treated as belonging to the business,not as individual assets of the membersTitle to real property may acquired in the Partnership nameEach partner is a fiduciary of the partnershipEach partner is considered an agent of the partnershipMay sue and be suedAs an aggregat
5、e of the individual partnersA partnership lacks continuity of existenceNo person can become a partner without consent of all partnersA partnership is not subject to federal income taxPartnership debts are debts of the individuals Formation of PartnershipNo formalities required;may be implied by cond
6、uct(however,Articles are suggested)No writing required,except for partnerships that must comply with the Statute of Frauds(partnerships to last longer than a year;real estate partnerships)Written partnership agreements should contain the firms name;nature of the business;capital contributions;share
7、profits&losses equally(unless Articles state otherwise);managerial duties,withdrawal rights;provisions in case of death of a partner.Partnership ProfitsThe sharing of profits is prima facie evidence of a partnership,BUT the sharing of gross returns does not,in itself,establish a partnership.Sharing
8、of profits does not infer a partnership when the profits are received in payment of:(1)a debt(2)wages(3)rent;(4)annuity,retirement or health benefit to decedents beneficiary(5)sale of goodwill of the business.Evidence of a PartnershipSharing of ProfitsIntent to form a partnershipTitle to property he
9、ld as Joint Tenants or Tenants-in-CommonPartners designate their relationship as a partnershipExtensive,continuous activity between the two.Partnership CapitalA partnership may begin with no capital(services partner)The total assets contributed for permanent use is partnership capitalA fixed amount,
10、may be listed in the Articles of PartnershipMay be money,property,or services Capital is returned upon dissolutionPartnership PropertyAll property,including contributed capital,brought into,acquired,purchased,manufactured by partnership funds.May consist of:Real and personal property purchased by pa
11、rtnership funds.If title is in the partnerships name it belongs to partnership;BUT property in the name of an individual partner,or a third party,may ALSO belong to the partnership.Real and personal property contributed by the partners.Property manufactured by the partnershipProfits earned by the pa
12、rtnershipProperty as a Partnership AssetLegal title is only one element.Look at the intent of the parties.Was property improved with partnership funds?How was property used?How was property treated on the books?Who paid taxes,liens,insurance,repairs?Was income or the proceeds of the property treated
13、 as partnership funds?Conveyance of Partnership PropertyTitle to real property acquired in the partnership name can be conveyed only in the partnership name.Any partner can convey title to real property by a conveyance signed on behalf of a partnership if title is in the name of the partnershipIf pa
14、rtner improperly transfers,the partnership can recover it UNLESS sold to a subsequent good faith purchaserNo partner owns specific partnership property directlyProperty owned by the partnership belongs to the partnership.No right to personally use,control or sell partnership propertyCreditors have n
15、o right to specific partnership propertyAssignability-Partner may sell/assign his interest(right to receive profits),but not partnership status.CreditorsMust get a“charging orderA“receiver collects and turns over partnership profitsCreditor may“foreclose,causing debtors interest to be sold at judici
16、al saleDissociation,Dissolution,&Winding Up Dissociation-A change in the partnership relationship(Buyout,Creditors Charging Order,Death)Dissolution-Results in Winding up of Partnership-Rightful(time up);Wrongful,(Breach of Fiduciary Duty);Operation of Law(Death,Bankruptcy);Court Order.Partnership co
17、ntinues through winding up.Winding up-Liquidation,complete unfinished business,take inventory,etc.Partnership Authority After DissolutionActual authority ends,except to wind up affairs.Person who causes a wrongful dissolution has no right to participate in winding up or to take“goodwill into account
18、.Apparent authority may continue to bind partnership for acts w/n scope of partnership business unless NOTICE of the dissolution is given to the third party:Actual Notice-verbal/writing to those who extended credit in the pastConstructive Notice-to those who knew of partnership but didnt extend cred
19、itNo notice-to those who had no knowledge of partnershipLiability of Incoming/Outgoing Partners Incoming-Complete liability after joining the partnershipHowever,liability for pre-existing debts before becoming a partner are limited to his capital contribution Liability may only be satisfied out of p
20、artnership property;no personal liability Outgoing Partner-Remains fully liable for debts and liabilities incurred when a partner UNLESS a novation is signed with the continuing partners AND the creditorsRights Among PartnersRight in specific partnership propertyRight to share distributionsRight to
21、share profitsRight to return of capitalRight to return of advancesRight to compensationRight to participate in management(equal unless agree otherwise)Right to choose associates(consent required)Right to information&inspection of booksRight to a Formal Accounting Consent for ActionMajority consent i
22、s needed for ordinary matters that are connected with the partnership business.Extraordinary matters require unanimous consent:Consent to the entry of a court judgmentSubmitting a partnership claim to arbitrationAssigning partnership property for the benefit of creditorsDisposing of partnership good
23、willActing in any way that makes ordinary partnership business impossibleFiduciary DutiesA partnership is a fiduciary relationship.It is breached if a partner tries to secure an advantage by internal/external dealings.If one partner breaches his duty,can be required to surrender illicit profits.Inno
24、cent partner may seek indemnification from wrongful partner.Duty of Good Faith and LoyaltyMust not profit except agreed upon compensationShouldnt compete with the partnership.Duty of Due Care-Partners are only liable for culpable negligence,not ordinary,business mistakes.Duty of Obedience-Duty of Ac
25、counting Order of Distribution of AssetsCreditorsLoans/Advances made by PartnersAmounts owed to Partners for CapitalAmounts owed to Partners for Profits Solvent Partnership-Book p.629A contributes$6000 capital&$3000 loanB contributes$4000 capitalC contributes services onlyNo agreement on sharing pro
26、fits/lossesAssets:$54,000;Liabilities to Cs:$26,000Total Assets($54,000)minus Total Liabilities($39,000)=Profits($15,000)A gets$14,000($3000+$6000+$5000)B gets$9000($4000+$5000)C gets$5000(his share of profits)Insolvent Partnership-p.629Same contributions by A,B and CAssets$12,000;Owe Creditors$26,0
27、00Total Liabilities($39,000)minus Total Assets($12,000)=Aggregate Loss($27,000)Share losses equally($9000 each)After pay the Creditors the$26,000A receives 0($3000 for loan+6000 for capital minus$9000 for his share of losses)B must contribute$5000($4000 owed for capital minus$9000 for his share of l
28、osses)C must contribute$9000 for his share of lossesInsolvency of Partnership and of a Partner-p.629If A were insolvent,results are the sameIf A and B solvent,&C insolvent,then A and B must contribute equally,an additional$4500(Cs share)(contribution would be the relative portion in which they share
29、 profits)Acontributes$4500;B$9500If A and C individually insolvent,B would pay entire$14,000(Bs unpaid share plus contribution of full amount of Cs unpaid share of the loss.Problem#11No one is correct.The total contributions are$15,000.After paying debts,the remaining assets are$6000(Loss,$9000,to b
30、e shared equally-$3000 each)Lauren is entitled to return of her$10,000 capital contribution,less loss,or$7000.Matthew is entitled to the return of his$5000 contribution,less loss,or$2000.Susan must pay her share of the loss,$3000,which sum added to the$6000 on hand would be paid to Lauren&Matthew in
31、 the amounts stated.Problem#13Ben must contribute$9000;Lilli$15,000.IF Dan were subject to process,the partners would be liable:Ben,$6000;Dan,$8000;and Lilli,$10,000.Since Dan is NOT subject to process,Ben&Lilli must contribute Dans share.Ben&Lilli share profits in the proportion of 3 to 5(1/4 divid
32、ed by 5/12=3/5).Ben must contribute 3/8ths of the$24,000($9000)required to pay creditors&Lilli must contribute 5/8ths of the$24,000,or$15,000.Problem#15Total capital contributions=100,000&interest of$39,000 is due to S and J each on their respective capital contributions.Liabilities to creditors=$42
33、0,000,assets are$400,000.Total losses are$198,000($4000-($420,000+$100,000+$78,000).Losses same ration as profits.S&J get$29,600($50,000 in capital+$39,000 minus his share of loss,30%or$59,400)J gets$29,600.W&B should each pay$39,600 for their share of loss,total$79,200 This sum added to the$400,000
34、=$479,200.Crs claims of$420,000 are paid 1st;leaving$59,200.S&J are then paid$29,600.Answer assumes W&B are solvent.Tort LiabilityA partnership is liable for loss or injury caused by wrongdoing(trespass,fraud,negligence)of any partner while acting within the scope of partnership business;liable for
35、any torts committed within the ordinary course of partnership business.Each partner has unlimited personal liability for the partnership obligationWrongful partner must indemnify otherJoint&Several liabilityPartnership liability is like vicarious liabilityCriminal LiabilityPartners not usually crimi
36、nally liable for the crimes of other partners committed within the scope of partnership business(i.e.,embezzlement)unless the other partner authorized or participated in the crimes Contractual LiabilityContractual liability is limited to their partnership obligation;cant be sued personally.Because a
37、 partner acts concurrently as a principal and an agent,a partner may contractually bind the partnership and each co-partner by contract if partner had(1)Actual Express Authority to act as per the partnership agreement;(2)Actual Implied Authority(hire/fire,ordering,doing things for customers,ordinary daily transactions);(3)Apparent Authority,authority that a third person may reasonably believe exists(doesnt exist if third person knows partner has no authority)