PowerPoint Slides to accompany
The Legal Environment of Business
and Online Commerce 4E,
by Henry R. Cheeseman
Chapter 15
Partnerships and
Limited Liability Companies
Prentice Hall © 2005
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Forms of Conducting Domestic Business
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Sole proprietorship
General partnership
Limited partnership
Limited liability
partnership (LLP)
Limited liability
company (LLC)
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Definition of a General Partnership
A voluntary
association of two
or more persons
created for
carrying on a
business as coowners for profit
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Formation of General Partnerships
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Express partnership
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Implied partnership
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General partnership created by words, either
verbal or written
General partnership implied from the conduct of
the parties
Certificate of partnership
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A document that a partnership must file with the
appropriate state government agency in some
states to acknowledge that the partnership exists
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Duration of Partnership
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Partnership for a
term
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Partnership at will
A partnership with a
fixed duration
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A partnership with
no fixed duration
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Property Rights of the Partnership and the Partners
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Partnership property
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Right of survivorship
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A deceased partner’s right in specific partnership property
vests with the remaining partners upon his or her death
Partner’s interest
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Property that is originally brought into the partnership on
account of the partnership and property that is subsequently
acquired by purchase or otherwise on account of the
partnership or with partnership funds
A partner’s share of profits and surplus of the partnership
Charging order
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A document that the court issues against the debtorpartner’s partnership interest in order to satisfy a debt
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Partnership Agreements
A written partnership agreement should
contain:
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The
The
The
The
The
The
The
The
firm name
names and addresses of the partners
principal office of the partnership
nature and scope of the partnership business
duration of the partnership
capital contributions of each partner
division of profits and losses among the partners
salaries, if any, to be paid to the partners
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Partnership Agreements
A written partnership agreement should
contain:
 The duties of the partners regarding management
of the partnership
 Limitations, if any, on the authority of partners to
bind the partnership
 Provision for admission and withdrawal of partners
from the firm
 Provisions for continuing partnership upon
withdrawal of a partner, death of a partner, or
other dissolution of the partnership
 Any other provisions deemed relevant by the
partners
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Rights of Partners
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Right
Right
Right
Right
Right
Right
Right
Right
to
to
to
to
to
to
to
to
participate in management
share in profits
an accounting
compensation
indemnification
return of advance
return of capital
information
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Duties of Partners
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Duty
Duty
Duty
Duty
of loyalty
of obedience
of care
to inform
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Tort Liability to Third Parties
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The partnership is liable if the
tortious act of a partner, or
employee, or agent of the
partnership is committed while
the person is acting within the
ordinary course of partnership
business or with the authority of
his or her copartners
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Contract Liability to Third Parties
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A partnership acts through its agents,
i.e., partners
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If partners have express, implied, or
apparent authority, contracts are binding
Partners are jointly liable for contracts
and debts of the partnership
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Liability of Incoming Partners
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A new partner who is admitted to the
partnership is liable for the existing debts and
obligations of the partnership only to the
extent of his or her capital contribution
The new partner is personally liable for debts
and obligations incurred by the partnership
after becoming a partner
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Termination of the Partnership by Acts of the Partners
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Termination of a stated time or purpose
Withdrawal of a partner
Expulsion of a partner
Admission of a partner
Mutual agreement of the partners
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Termination of a Partnership by Operation of Law
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Death of any partner
Bankruptcy of any partner or the partnership
Illegality
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Termination of a Partnership by Judicial Decree
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Partner is adjudicated insane
Partner is incapable of performing duties
Partner is guilty of improper conduct
Partnership can only be carried on at a loss
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Winding-Up
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The process of liquidating the
partnership’s assets and distributing
the proceeds to satisfy claims
against the partnership
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Distribution of Assets
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After the winding-up of a dissolved
partnership, the assets of the
partnership are distributed in the
following order
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Creditors (except partners who are
creditors)
Creditor-partners
Capital contributions
Profits
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Limited Partnership
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A type of partnership that has two types
of partners
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General partners
Limited partners
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Limited Partnership
Limited
partnership
Debt or
obligation owed
Third
party
Capital
investment
Limited
partner
Liability limited
to capital
contribution
General
partner
Personal
liability for
partnership’s
debts and
obligations
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Liability of Limited Partners
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General rule
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Limited partners are not individually liable for the
obligations or conduct of the partnership beyond
the amount of their capital contributions
Exceptions
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Defective formation
Participation in management
Personal guarantee
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Dissolution of a Limited Partnership
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End of the life of the partnership as specified
in the certificate of limited partnership
Written consent of all general and
limited partners
Withdrawal of a general partner
Entry of a decree of judicial dissolution
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Permissible Activities of Limited Partners
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Being an agent, employee, or contractor of
the limited partnership or a general partner
Being a consultant or advisor to a general
partner regarding the limited partnership
Acting as a surety for the limited partnership
Approving or disapproving an amendment to
the limited partnership agreement
Voting on certain partnership matters
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Rights of Limited Partners
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Share of profits and losses
Right to information
Voting rights
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Limited Liability Partnership (LLP)
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A limited liability partnership is a special
form of partnership where all partners
are limited partners and there are no
general partners
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Limited Liability Partnership (LLP)
Debt or
obligation owed
Limited liability
partnership
(LLP)
Third
party
Capital
Investment
Limited
partner
Limited
partner
Limited
partner
Liability limited to capital contribution
No personal liability for
partnership’s debts and obligations
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Limited Liability Company (LLC)
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An unincorporated business that combines
the most favorable attributes of general
partnerships, limited partnerships,
and corporations
An LLC is a separate legal entity—an artificial
person—that can own property, sue and be
sued, enter into and enforce contracts, etc.
Members are liable for the LLC’s debts,
obligations, and liabilities only to the extent
of their capital contributions
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Limited Liability Company (LLC)
Limited liability
company
(LLC)
Debt or
obligation owed
Third
party
Capital
investment
Member
Member
Member
Liability limited to capital contribution
No personal liability for
Company’s debts and obligations
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Articles of Organization of an LLC
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Articles of organization must set forth:
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The name of the LLC
The address of the LLC’s initial office
The name and address of the initial agent for service
of process
The name of each organizer
Whether the LLC is a term LLC, and if so, the term specified
Whether the LLC is to be manager-managed
Whether one or more of the members of the LLC are to be
personally liable for the LLC’s debts and obligations
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Three Kinds of LLCs
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Domestic
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Foreign
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An LLC in the state in which it is organized
An LLC in any other state other than the
one in which it is organized
Alien
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An LLC that is organized in another country
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Liability of an LLC
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An LLC is liable for any loss or injury
caused to anyone as a result of a
wrongful act or omission by a member,
manager, agent, or employee of the LLC
who commits the wrongful act while
acting within the ordinary course of
business of the LLC or with authority of
the LLC
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Member Lawsuits
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Direct lawsuit
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A lawsuit that a
member can bring
against an LLC to
enforce his or her
personal rights as
a member
Derivative action
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A lawsuit that a
member may bring
against an offending
third party on behalf
of his or her LLC
when the LLC fails to
bring the lawsuit or
when a request of
the LLC to do so is
excused
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Fiduciary Duties Owed to an LLC
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Duty of loyalty
Limited duty of care
Duty of good faith and fair dealing
No fiduciary duty owed by a
nonmanager-member
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Dissolution of an LLC
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An LLC is dissolved upon the occurrence of
any of the following
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An event specified in the operating agreement
The occurrence of an event that makes it unlawful
for all or substantially all of the business of the
LLC to be continued
A member applies to a court to have the LLC
dissolved by judicial decree
The secretary of state commences a proceeding to
dissolve an LLC administratively
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