Partnerships
Chapters 31 and 32
Partnerships - Defined
• A partnership is an association of two or
more persons carrying on a business as coowners for a profit
– Any person with capacity can be a partner;
minors have right to disaffirm and return of
capital and unpaid share of profits, except to
extent necessary 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/transactions
– Must be for a LEGAL purpose
Partnership by Estoppel
• When, through words or conduct, a person
who is NOT a partner is represented 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
partnership
•
Treatment
of
a
Partnership
As a distinct entity
– The assets are treated
as belonging to the
business, not as
individual assets of the
members
– Title to real property
may acquired in the
Partnership name
– Each partner is a
fiduciary of the
partnership
– Each partner is
considered an agent of
the partnership
• May sue and be sued
• As an aggregate of the
individual partners
– A partnership lacks
continuity of existence
– No person can become
a partner without
consent of all partners
– A partnership is not
subject to federal
income tax
– Partnership debts are
debts of the individuals
Formation of Partnership
• No formalities required; may be implied by
conduct (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
firm’s name; nature of the business; capital
contributions; share profits & losses equally
(unless Articles state otherwise); managerial
duties, withdrawal rights; provisions in case of
death of a partner.
Partnership Profits
• The sharing of profits is prima facie
evidence of a partnership, BUT the sharing
of gross returns does not, in itself, establish
a partnership.
• Sharing 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
decedent’s beneficiary (5) sale of goodwill
of the business.
Evidence of a Partnership
• Sharing of Profits
• Intent to form a partnership
• Title to property held as Joint Tenants or
Tenants-in-Common
• Partners designate their relationship as a
partnership
• Extensive, continuous activity between the
two.
Partnership Capital
• A partnership may begin with no capital
(services partner)
• The total assets contributed for permanent
use is partnership capital
• A fixed amount, may be listed in the
Articles of Partnership
• May be money, property, or services
• Capital is returned upon dissolution
Partnership Property
• All property, including contributed capital,
brought into, acquired, purchased,
manufactured by partnership funds. May
consist of:
– Real and personal property purchased by
partnership funds. If title is in the partnership’s
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 partnership
– Profits earned by the partnership
Property as a Partnership Asset
• Legal 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 as partnership funds?
Conveyance of Partnership
Property
• Title 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
partnership
• If partner improperly transfers, the
partnership can recover it UNLESS sold to
a subsequent good faith purchaser
No partner owns specific
partnership property directly
• Property owned by the partnership belongs
to the partnership.
• No right to personally use, control or sell
partnership property
• Creditors have no right to specific
partnership property
• Assignability - Partner may sell/assign his
interest (right to receive profits), but not
partnership status.
Creditors
• Must get a “charging order
• A “receiver” collects and turns over
partnership profits
• Creditor may “foreclose”, causing debtor’s
interest to be sold at judicial sale
Dissociation, Dissolution, &
Winding Up
• Dissociation- A change in the partnership
relationship (Buyout, Creditor’s 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 continues through winding up.
• Winding up - Liquidation, complete
unfinished business, take inventory, etc.
Partnership Authority After
Dissolution
• Actual 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.
• 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 past
– Constructive Notice - to those who knew of partnership
but didn’t extend credit
– No notice - to those who had no knowledge of
partnership
Liability of Incoming/Outgoing
Partners
• Incoming - Complete
liability after joining
• Outgoing Partner the partnership
Remains fully liable
• However, liability for
for debts and liabilities
pre-existing debts
incurred when a
before becoming a
partner UNLESS a
partner are limited to
novation is signed
his capital contribution
with the continuing
Liability may only be
partners AND the
satisfied out of
creditors
partnership property;
no personal liability
Rights Among Partners
•
•
•
•
•
•
•
Right in specific partnership property
Right to share distributions
Right to share profits
Right to return of capital
Right to return of advances
Right to compensation
Right to participate in management (equal unless
agree otherwise)
• Right to choose associates (consent required)
• Right to information & inspection of books
• Right to a Formal Accounting
Consent for Action
• Majority consent is needed for ordinary
matters that are connected with the
partnership business.
• Extraordinary matters require unanimous
consent:
– Consent to the entry of a court judgment
– Submitting a partnership claim to arbitration
– Assigning partnership property for the benefit
of creditors
– Disposing of partnership goodwill
– Acting in any way that makes ordinary
partnership business impossible
Fiduciary Duties
• A 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. Innocent partner may seek
indemnification from wrongful partner.
• Duty of Good Faith and Loyalty
– Must not profit except agreed upon compensation
– Shouldn’t compete with the partnership.
• Duty of Due Care - Partners are only liable for
culpable negligence, not ordinary, business
mistakes.
• Duty of Obedience• Duty of Accounting
Order of Distribution of Assets
•
•
•
•
Creditors
Loans/Advances made by Partners
Amounts owed to Partners for Capital
Amounts owed to Partners for Profits
Solvent Partnership -Book p. 629
•
•
•
•
•
•
A contributes $6000 capital & $3000 loan
B contributes $4000 capital
C contributes services only
No agreement on sharing profits/losses
Assets: $54,000; Liabilities to C’s: $26,000
Total Assets ($ 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. 629
• Same contributions by A, B and C
• Assets $12,000; Owe Creditors $26,000
• Total Liabilities ($39,000) minus Total
Assets($12,000)= Aggregate Loss ($27,000)
• Share losses equally ($9000 each)
• After pay the Creditors the $26,000
– A 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 losses)
– C must contribute $9000 for his share of losses
Insolvency of Partnership and of
a Partner - p. 629
• If A were insolvent, results are the same
• If A and B solvent, & C insolvent, then A
and B must contribute equally, an additional
$4500 (C’s share)(contribution would be
the relative portion in which they share
profits) Acontributes $4500; B $9500
• If A and C individually insolvent, B would
pay entire $14,000 (B’s unpaid share plus
contribution of full amount of C’s unpaid
share of the loss.
Problem # 11
• No one is correct. The total contributions
are $15,000. After paying debts, the
remaining assets are $6000 (Loss, $9000, to
be 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 the
amounts stated.
Problem #13
• Ben 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 Dan’s share. Ben & Lilli share
profits in the proportion of 3 to 5 (1/4
divided 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 # 15
• Total capital contributions =100,000 & interest of
$39,000 is due to S and J each on their respective
capital contributions. Liabilities to creditors =
$420,000, 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 = $479,200. Cr’s claims of $420,000 are
paid 1st; leaving $59,200. S & J are then paid
$29,600. Answer assumes W & B are solvent.
Tort Liability
• A 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 any torts committed within the
ordinary course of partnership business.
• Each partner has unlimited personal
liability for the partnership obligation
• Wrongful partner must indemnify other
• Joint & Several liability
• Partnership liability is like vicarious
liability
Criminal Liability
• Partners not usually criminally 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 Liability
• Contractual liability is limited to their partnership
obligation; can’t be sued personally.
• Because a 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 (doesn’t exist if
third person knows partner has no authority)