Chapter 36
Partnerships and
Special Business Forms
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Introduction
Partnerships are governed both by common law
and by statutory laws.
Agency Concepts and Partnership Law:
 Each partner is deemed to be an agent of the other.
 There may be imputation of liability.
 Each partner is a fiduciary of the other.
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§1: Law Governing Partnerships
Partners are agents and fiduciaries of one
another, but differ from agents in that they
are also co-owners and share in profits and
losses.
Sources of Law:
 State common law.
 Uniform Partnership Act (UPA), adopted by all
states in some form.
 Revised Uniform Partnership Act (RUPA):
adopted by some states.
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§ 2: Definition of Partnership
Partnership is created when two or more
persons agree to carry on business for
profit as co-owners with equal right to
manage and share profits (UPA).
Case 36.1: Cap Care Group Inc. v.
McDonald (2002).
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Definition of Partnership
Advantages
Disadvantages
Easy to create and
maintain
Partners are personally
liable for all
torts/contracts
Flexible, informal
Dissolved upon death
Partners share profits
and losses equally
Difficult to raise
financing
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Definition of Partnership
If a commercial enterprise shares profits and
losses a partnership will be inferred.
Exceptions: Partnership not inferred if profits
received as payment in the following situations:




Debt by installments of interest on a loan.
Wages of an employee.
Rent to a landlord.
Annuity to a widow or representative of a deceased
partner.
 Sale of good will.
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§ 3: The Nature of Partnerships
At common law, the partnership was not a
separate legal entity from its owners.
Today, partnership law in many states recognizes
a partnership as an independent entity for some
purposes.
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Partnership as an Entity [1]
Today, many states recognize the partnership as a
separate legal entity for the following purposes:
 To sue and be sued (for federal questions, yes; for
state questions, differs).
 To have judgments collected against it’s assets, and
individual partners’ assets.
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Partnership as an Entity [2]
Partnerships are recognized as separate legal
entities (cont’d):
 To own partnership property.
 To convey partnership property.
• At common law -- property owned in tenancy in
partnership, all partners had to be named and sign the
conveyance.
• Under UPA partnership property can be held and sold in
firm name.
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Partnership as an Entity [3]
Partnerships are recognized as separate legal
entities (cont’d):
 For “marshaling of assets.”
• Federal Bankruptcy changes marshaling of assets.
 To keep its own books.
 File its own federal/state tax returns.
Aggregate Theory of Partnership.
 Partnership pays no federal income tax.
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§ 4: Partnership Formation
Duration of Partnership.
 Partnership for a term.
 Partnership at will. Partnership agreements can
be oral unless Statute of Frauds requires a
written agreement. Practically, agreements
should be in writing.
Capacity. Partners must have legal capacity.
Corporations. UPA permits corporations to
be a partner.
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Partnership by Estoppel
Occurs when a person who is not a partner
holds himself out to 3rd Parties and the 3rd
Party relies to her detriment.
Two Aspects of Liability:
 Person who misrepresents he is a partner is liable.
 Any person consenting to the misrepresentation is
also liable.
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Partnership by Estoppel
When real partnership exists:
 A partner represents a non-partner is in fact a partner,
 The non-partner is an agent whose acts are binding on
the partner only, not the partnership.
Remember: Partnership by estoppel requires
third party reasonably rely on the representation
to her detriment.
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§ 5: Partnership Operations
Rights of Partners: In the absence of a
partnership agreement (oral or written) state
statutes govern the partner rights:
 Management: equal, each one vote, majority wins;
need unanimous consent for some actions.
 Partnership Interest: equal profits, losses shared as
profits shared.
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Rights of Partners [1]
Rights among partners (cont’d):
 Compensation: none.
 Inspection of the Books: always and also by rep. of
deceased partner.
 Accounting: when other partner(s) committing fraud,
embezzlement, wrongful exclusion, or anytime it is
just and reasonable.
 Property Rights 
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Rights of Partners [2]
Each partner has a property right, which
includes:
 An interest in the partnership.
 A right in specific partnership property.
 A right to participate in the management of the
partnership, as mentioned above.
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Rights of Partners [3]
Each Partner has right to equally share
partnership interest:
 A proportionate share of the profits earned and a
return of capital on the partnership's termination.
 A partner may assign his interest.
 A partner’s interest is susceptible to a creditor’s
lien. Creditors may attach and get a “charging
order.”
 Assignment or charging order does not dissolve
the firm.
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Rights of Partners [4]
Partner Has a Right to Partnership Property:
(cont’d)
 What she originally brought into the partnership, or
 Acquired on account of the partnership, or
 Purchased with partnership funds.
 Partners are tenants in partnership of all firm property =
other partners have rights of survival if one dies and then
they account to the deceased partner’s estate for the
value of his interest. (*but see RUPA)
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Rights of Partners [5]
Partner cannot sell, assign or take a particular
item of partnership property, nor can individual
partner’s creditors seize the property.
Creditors can get a charging order against the
partnership for the partner’s interest in the
partnership.
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Duties, Powers and
Liabilities of Partners [1]
Fiduciary Duties. Partners are fiduciaries
and general agents of one another and the
partnership.
General Agency Powers. Partners have
implied authority to conduct ordinary
partnership business but need unanimous
consent to sell assets or donate to charity.
 Case 36.2: Helpinstill v. Regions Bank (2000).
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Duties, Powers and
Liabilities of Partners [2]
Authorized vs. Unauthorized Actions.
 Liability depends on the scope of authority.
Joint Liability for Contracts. If Partner is sued
for Partnership debt, Partner has right to insist
that other partners be sued with her.
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Duties, Powers and
Liabilities of Partners [3]
Joint and Several Liability for Torts.
 JSL means 3rd party can sue either one or all
partners. 3rd party may collect against personal
assets of all partners.
Liability of Incoming Partner & Outgoing
Partner. New admitted partner has no
personal liability for existing partnership
debts and obligations.
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§ 6: Partnership Termination
The termination of a partnership occurs in two
stages:
 Dissolution (is the legal “death” of the partnership),
and
 Winding up. (collecting and distributing partnership
assets).
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Dissolution [1]
By Acts of the Partners:
 Partners can agree to Agreement.
 Partner’s Withdrawal.
• Partnership for term – breach.
• No term -- no breach.
 Admission of a new partner.
 A transfer of a partner’s interest.
• Although the transferee does not become a partner.
• By assignment or attachment by creditor.
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Dissolution [2]
By Operation of Law:




Death of a partner.
Bankruptcy of a partner.
Bankruptcy of partnership.
Illegality.
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Dissolution [3]
By Judicial Decree:





Insanity.
Incapacity.
Business Impracticality.
Improper Conduct.
Other Circumstances (personal dissension).
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Notice of Dissolution
To avoid liability for apparent authority, apply
the agency rules by giving:
 Actual notice.
 Constructive notice.
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Winding Up
Partners have no authority after dissolution
occurs except to:
 Complete transactions already begun.
 Wind up by collecting and preserving partnership
assets, discharging liabilities, and accounting to each
partner for the value of his share.
Case 36.3: Creel v. Lilly (1999).
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Winding Up [2]
If partner has violated the partnership
agreement, he:
 Must pay damages.
 May not participate in winding up.
 But other partners may choose to continue.
If partner dies:
 Other partners act as fiduciaries.
 Accounting to deceased partner’s estate.
 Survivors get paid for their services.
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Distribution of Assets
Partnership obligations are paid in the following
order:




First, 3rd party creditors.
Second, partner loans to partnership.
Third, return of capital contributions.
Fourth, distribution of the balance, if any to partners.
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Distribution of Assets
[2]
If liabilities are greater than assets partners bear
losses in proportion in which they shared profits,
unless agreed otherwise.
If one partner does not contribute, other partners
are liable for his share and they have the right of
contribution against the partner who didn’t pay.
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Partnership Buy-Sell Agreements
Partners can agree in advance that, in the event of
the death of one of the partners or some other
event, what occurs: e.g., how much the deceased
partner or her estate will get for interest, or
whether the other partners can acquire the
partnership interest. Partnership can buy life
insurance to cover this accounting on partner’s
death.
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§ 7: Special Business Forms
Joint Venture: two or more entities combine
efforts or property for a single transaction or
project.
Unless agreed otherwise, JV’s share profits and
losses equally.
Common in international transactions when U.S.
companies wish to expand overseas.
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JV Characteristics
 Resembles a partnership and is taxed like a
partnership. However, a JV is limited in time and
scope, whereas a partnership is an ongoing
business. Other differences:
 JV members have less implied and apparent authority
than partners.
 Death of JV member does not terminate JV.
 JV members can specify duration. If not, then JV
terminates when purpose is accomplished.
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JV Rights and Liabilities
JV members owe a fiduciary duty to each
other (loyalty, no conflicts of interest).
JV members have equal right to manage the
business.
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Other Entities
Syndicate (Investment Group): group of
individuals getting together to finance a
particular project.
Joint Stock Company is a hybrid of partnership
and corporation: (1) ownership represented by
shares of stock; (2)managed by directors and
officers of the company; and (3) can have a
perpetual existence.
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Other Entities [2]
Business Trust is created by a written agreement
setting forth the interests of the beneficiaries and
obligations and powers of trustees. Legal
ownership and management of property remains
with trustees and profits distributed to the
beneficiaries.
Cooperative is an association organized to
provide a not-for-profit service to members.
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Law on the Web
Small Business Administration’s Web Site.
Law Firm of Reinhart et al. for information on
business organizations.
Legal Research Exercises on the Web.
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