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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. INTRODUCTION TO FORMS OF BUSINESS AND FORMATION OF PARTNERSHIPS 37 C H E A P T R “It sounds boring, but anything is easy to start – starting a novel, starting a business – it’s keeping the thing going that is difficult.” Prue Leith, author and executive, quoted in The Adventure Capitalists (Grout and Curry, 1998)

  3. Learning Objectives • Choosing a form of business • Creation of partnership • Purported partners • Partnership capital and property • Partnership interests 37 - 4

  4. Overview • Choosing a form of business is important since business owner’s liability and control vary among the many forms of business • Sole proprietorship • Partnership • Corporation • Limited Liability Company 37 - 5

  5. Sole Proprietorship • A sole proprietorship has only one owner and is an extension of its owner • It is not a legal entity and cannot sue or be sued, so creditors/claimants sue the owner • Advantages: no formalities, taxes flow to owner, owner takes all profit and control • Disadvantage: owner bears all risk of loss 37 - 6

  6. Corporation • A corporation is owned by shareholders who do not necessarily manage the business • Corporation is a legal and tax-paying entity • Advantages: limited liability for shareholders for corporate obligations, perpetual existence • Disadvantages: more formality and more complex structure, double-taxation 37 - 7

  7. Limited Liability Company • A limited liability company (LLC) combines the nontax advantages of corporations with favorable tax treatment of partnerships • An LLC is owned by members, who may manage themselves or retain a manager to run the business • Members have limited liability for the obligations of the LLC 37 - 8

  8. Partnership • A partnership has two or more owners or partners in several forms • General, limited, limited liability, professional • A legal entity, but not a federal tax-paying entity; all income or loss reported on each partner’s federal income tax return • Advantages: easy to create, flexible • Disadvantages: partners bear all risk of loss 37 - 9

  9. Partnership Creation • Revised Uniform Partnership Act (RUPA) guides partnership creation and operation • Most state laws follow RUPA • Formation of a limited liability partnership requires filing form with secretary of state, paying annual fee, using proper designation • Registered Limited Liability Partnership (RLLP) • Limited Liability Partnership (LLP) 37 - 10

  10. Unintended Partnership • Partnership may exist by law even if parties entered it inadvertently, without considering whether they had created a partnership • If third person deals with two or more people who seem to be partners and is harmed, third person may sue both apparent partners for damages or, under doctrine of purported partners, sue only apparent partner that caused the deception 37 - 11

  11. Partners and Ownership • When general or limited liability partnership formed, partners contribute cash or property – partnership capital – to partnership entity • Tangible and intangible property acquired by partnership belongs to partnership entity, not individual partners • Partner-owner has ownership interest in partnership: (a) interest in share of profit, loss, distributions; (b) management interest 37 - 12

  12. Partnership or Joint Venture? • Generally, partnership law applies to joint ventures, but a court may distinguish the two if business purpose limited to single project instead of transaction series • See Southex Exhibitions v. Rhode Island Builders Assoc. 37 - 13

  13. Test Your Knowledge • True=A, False = B • The Revised Uniform Partnership Act (RUPA) is a model partnership statute. • Partnership is an “association of two or more persons to carry on as co-owners a business for profit.” • Partnership capital belongs to the individual partners allocated in equal shares. 37 - 14

  14. Test Your Knowledge • Multiple Choice • The partnership interest includes a partner’s: • (a) Management and other rights participation • (b) Share of profits and losses and right to receive partnership distributions • (c) Ownership interest in partnership capital • (d) both A and B • (e) none of the above 37 - 15

  15. Thought Questions • Do you want to start a business? If you wanted to start a business (snowboards, for example), would you choose partnership as the form of business? 37 - 16

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