38-1 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

38-2

9• Introduction to Forms of Business and

Formation of Partnerships• Operation of Partnerships and

Related Forms• Partners’ Dissociation and Partnerships’

Dissolution and Winding Up• Limited Liability Companies,

Limited Partnerships, and Limited Liability Limited Partnerships

Partnerships

PART

38-3

Operation of Partnerships and Related Forms

PA ET RHC 38

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)

38-4

Learning Objectives

• List and explain duties partners owe to the partnership and each other

• Explain why partnership agreements can resolve issues about partners’ management and compensation rights

• Describe the liability of partners for torts and contracts

38-5

• Revised Uniform Partnership Act (RUPA) states that partners owe to the partnership and each other the highest degree of loyalty and must act consistently with the obligation of good faith and fair dealing (a fiduciary relationship)

• Same duty applies to all forms of partnership

Duties of Partners to Partnership and Each Other

38-6

• Partners have duties to serve, account for use or disposal of partnership funds, act within actual authority, avoid interests adverse to the partnership, disclose material information, and maintain the confidentiality of partnership information– Exception: “silent” partners do not serve– Partners may compete with the partnership

only upon the consent of other partners

General Duties

38-7

• Each partner owes a duty of care in doing partnership business

• A partner isn’t liable to the partnership for honest errors in judgment (negligence), but is liable for losses resulting from gross negligence, reckless conduct, intentional misconduct, or a knowing violation of law

Duty of Care

38-8

• RUPA states that a partner is not entitled to salary or wages, even if disproportionate time spent conducting partnership business – A monthly draw is allowable

• Instead, partner compensation is a share of business profits, offset by shared losses– Shared equally unless agreement to

the contrary

Compensation of Partners

38-9

• Every partner in a partnership or LLP is a general manager of the business

• Thus, by implied authority, a partner binds the partnership and partners for acts within the ordinary course of business

• Agreement among partners may expand, restrict, or eliminate a partner’s implied authority

Management Powers

38-10

• A partner’s implied authority may not contradict a partner’s express authority created by agreement of the partners

• A partner’s express and implied authority together constitute actual authority

Management Powers

38-11

• In general, management decisions in the ordinary course of partnership business are by majority rule, one vote per partner – Unless otherwise expressed by agreement

• Some decisions not in the ordinary course of business require unanimous consent– Example: a decision to expand or bring

in another partner

Management Decisions

38-12

• Under RUPA, a partnership may sue or be sued in its own name

• Partners also may be sued since they are jointly and severally liable for partnership obligations (contract or tort)

• If partnership and individual partners sued, any judgment must first be satisfied from partnership assets, then from personal assets of the partners sued

General Partnership as Entity

38-13

• Partners and the partnership are liable:– When a partner commits a breach of trust– For a partner’s negligence (generally)

• Generally not for a partner’s intentional torts

• When a partnership and partners are held liable for a partner’s tort, they may recover the amount of their vicarious liability from the wrongdoing partner.

General Partnership Liability for Torts & Crimes

38-14

• The limited liability partnership (LLP) was created to reduce personal liability of professional partners– An innocent partner of an LLP has no

liability for malpractice of partners

• LLP partners also have no personal liability for debts of the business, such as an invoice, leases, or loans

The LLP & Tort Liability

38-15

• For contract obligations, only LLP is liable• For tort obligations, LLP is liable as well

as the partner who committed the tort– Innocent LLP partners bear no liability

• Ederer v. Gursky: New York’s LLP law, while mostly shielding LLP partners from liability to LLP creditors, did not shield LLP partners from liability to each other for breaches of contract or partner duties

LLP as Entity

38-16

Thought Questions

• When drafting the partnership agreement, should duties and compensation be allocated evenly or according to each partner’s contribution and skill? Should partners be shielded from personal liability?