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Partnerships

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

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Partnerships

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

  2. Operation of Partnership and Related Forms 38 C H E A P T R “It is not the individual but the team that is the instrument of sustained and enduring success in management.” Anthony Jay, quoted in Management Teams – Why They Succeed (R. Meredith Belbin, 1984)

  3. Learning Objectives • Duties of partners to the partnership and each other • Compensation of partners • Management powers of partners • Liability for torts and crimes • Lawsuits by and against partnerships and partners 38 - 4

  4. Duties of Partners • Under RUPA, partners owe partnership and each other the highest degree of loyalty and the obligation of good faith and fair dealing • A fiduciary relationship • General duties: to serve, account for use or disposal of partnership funds, act within actual authority, avoid interests adverse to partnership, disclose material information, maintain confidentiality 38 - 5

  5. Duty of Care • Each partner owes a duty of care in doing partnership business • Partner isn’t liable to partnership for honest errors in judgment (negligence) • Partner liable for losses resulting from gross negligence, reckless conduct, intentional misconduct, or a knowing violation of law • Partnership agreement may alter duty of care, but may not eliminate the duty 38 - 6

  6. Compensation & Management • Partner not entitled to salary or wages, but compensation is share of business profits offset by shared losses • Shared equally unless otherwise agreed • Generally, management decisions in the ordinary course of partnership business are by majority rule, one vote per partner • Unless otherwise expressed by agreement 38 - 7

  7. Management Powers • Every partner in a partnership or LLP is a general manager of the business • Thus, by implied authority, a partner binds partnership and partners for acts within ordinary course of business • By unanimous agreement, partners may modify management rules to expand or limit authority, delegate powers, or alter voting rights 38 - 8

  8. Partner Authority • Individual partner may transfer real property owned by partnership and bind the firm if expressly, impliedly, apparently authorized, or ratified by partnership • Partner may not borrow money in name of partnership without express, implied, or apparent authority • Partner with authority to borrow has authority to issue negotiable instruments (e.g., promissory notes) for that purpose 38 - 9

  9. Liability for Torts & Crimes • Under RUPA, a general partnership may sue or be sued in its own name and partners also may be sued (jointly and severally) for contract or tort partnership obligations • Partnership, partners liable jointly, severally • LLP only is liable for contract obligations • LLP and tortfeasor partner liable for torts • Innocent LLP partner bears no tort liability 38 - 10

  10. Liability for Legal Claims • If general partnership and individual partners sued, any judgment must first be satisfied from partnership assets, then from personal assets of the partners sued • LLP partners have no personal liability for debts of the business, such as an invoice, leases, or loans 38 - 11

  11. Test Your Knowledge • True=A, False = B • Partners owe to the partnership and each other an ordinary degree of loyalty • Partners may compete with the partnership as long as it does not harm the partnership. • A partner is liable to the partnership for losses resulting from gross negligence or reckless conduct. • A partnership may sue in its own name. 38 - 12

  12. Test Your Knowledge • True=A, False = B • In general, management decisions in a partnership are decided by majority rule. • A general partnership is liable for a partner’s negligence. • For contract obligations of an LLP, only the partners are liable. • A partner with authority to borrow money has authority to issue negotiable instruments. 38 - 13

  13. Test Your Knowledge • Multiple Choice • Two accountants formed Caine & Able, LLP. The partnership and each partner were sued for Able’s alleged negligence. Who might be liable? • (a) Only Able due to his negligence • (b) Only the partnership, Caine & Able • (c) The partnership and Able • (d) The partnership and either partner, jointly or severally 38 - 14

  14. Test Your Knowledge • Multiple Choice • A partner in a trading partnership (one with inventory) has what type(s) of authority for borrowing money? • (a) Express authority • (b) Implied and apparent authority • (c) Actual authority • (d) Implied authority • (e) All of the above 38 - 15

  15. Thought Questions • Do you think the result in the Moren v. JAX Restaurant case was correct? Would you have handled things differently? 38 - 16

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