Business Law and the Business Law and the Regulation of BusinessRegulation of Business

Chapter 31: Formation and Dissolution Chapter 31: Formation and Dissolution

of General Partnershipsof General Partnerships

Business Law and the Business Law and the Regulation of BusinessRegulation of Business

Chapter 31: Formation and Dissolution Chapter 31: Formation and Dissolution

of General Partnershipsof General Partnerships

ByBy

Richard A. MannRichard A. Mann

&&

Barry S. RobertsBarry S. Roberts

Topics Covered in this ChapterTopics Covered in this Chapter

I. Choosing a Business AssociationI. Choosing a Business AssociationA. Factors Affecting the ChoiceA. Factors Affecting the Choice

B. Forms of Business AssociationsB. Forms of Business Associations

II. Formation of General PartnershipsII. Formation of General PartnershipsA. Nature of PartnershipA. Nature of Partnership

B. Formation of a PartnershipB. Formation of a Partnership

III. Dissolution of General PartnershipsIII. Dissolution of General PartnershipsA. Dissolution A. Dissolution

B. Winding UpB. Winding Up

C. Continuation After DissolutionC. Continuation After Dissolution

Definition of PartnershipDefinition of Partnership

An association of two or more persons An association of two or more persons to carry on as co-owners a business to carry on as co-owners a business for profit.for profit.

Entity TheoryEntity Theory

Partnership asPartnership as Legal EntityLegal Entity – – an an organization having a legal existence organization having a legal existence separate from that of its members; the RUPA separate from that of its members; the RUPA considers a partnership a legal entity for considers a partnership a legal entity for nearly all purposes.nearly all purposes.

Partnership asPartnership as Legal AggregateLegal Aggregate – – a group a group of individuals not having a legal existence of individuals not having a legal existence separate from that of its members; the RUPA separate from that of its members; the RUPA considers a partnership a legal aggregate for considers a partnership a legal aggregate for few purposes.few purposes.

Types of PartnershipsTypes of Partnerships

Term PartnershipTerm Partnership – – partnership for a partnership for a specific term or particular undertaking.specific term or particular undertaking.

Partnership At WillPartnership At Will – – partnership in partnership in which the partners have not agreed to which the partners have not agreed to remain partners until the expiration of a remain partners until the expiration of a definite term or the completion of a definite term or the completion of a particular undertaking.particular undertaking.

Formation Formation

Partnership AgreementPartnership Agreement – – it is preferable, it is preferable, although not usually required, that the although not usually required, that the partners enter into a written partnership partners enter into a written partnership agreement. agreement.

Tests of Partnership ExistenceTests of Partnership Existence – – the the formation of a partnership requires all of the formation of a partnership requires all of the following:following:– Association two or more persons with legal Association two or more persons with legal

capacity who agree to become partnerscapacity who agree to become partners– Business for ProfitBusiness for Profit– Co-ownership includes sharing of profits and Co-ownership includes sharing of profits and

control of the business control of the business

Sample Partnership AgreementSample Partnership AgreementTHIS PARTNERSHIP AGREEMENT is entered into this _______ day of ________________ 19_____, between the following persons whose names and addresses are set forth below:

The above partners hereby agree that upon the commencement date of this partnership they shall bedeemed to have become partners in business. The purposes, terms and conditions of this partnershipare as follows:

1. NAME-The firm name of the partnership shall be

2. PRINCIPAL PLACE OF BUSINESS - The principal place of the partnership shall be

3. PURPOSE-The business of the partnership is set forth below and includes any other business related thereto.

4. TERM-The partnership shall commence on ____________, 19______, and shall continue for an indefinite time.

5. CAPITAL CONTRIBUTION: DISTRIBUTION OF PROFITS AND LOSSESCapital Contribution

Name of PartnerSpecific Contribution

Agreed UponCash Valuationof Contribution

PercentageDistributionof Profitand Loss

Sample Partnership Agreement (cont.)Sample Partnership Agreement (cont.)

A division of profits and losses shall be made at such time as may be agreed upon by the partners and at the close of each fiscal year. The profits and losses of the partnership shall be divided between the partners according to the above schedule of “Distribution of Profits and Losses.”

6. CONTROL-The partners shall have the exclusive control over the business of the partnership and each partner shall have equal rights in the management and conduct of the partnership business. Any differences arising as to the ordinary matters connected with the partnership business shall be decided bya numerical majority of the partners. Any act beyond the scope of this partnership agreement or anycontract which may subject this partnership to liability in excess of ___________________ DOLLARS shall be subject to the prior written consent of all the partners.

7. DISSOLUTION-In the event of retirement, expulsion, bankruptcy, death, or insanity of a general partner, the remaining partners have the right to continue the business of the partnership under the same name by themselves, or in conjunction with any other persons they select.

IN WITNESS WHEREOF, the parties hereto have signed this partnership agreement on the day and year first written above.

________________________________PARTNER

________________________________PARTNER

________________________________PARTNER

Source: “West’s Book of Legal Forms,” by Robert D. McNutt, Copyright 1981 by West Publishing Co. Reprinted with permission.

FormationFormation

Partnership CapitalPartnership Capital – – total money and total money and property contributed by the partners for property contributed by the partners for use by the partnership.use by the partnership.

Partnership PropertyPartnership Property – – sum of all of sum of all of the partnership's assets, including all the partnership's assets, including all property acquired by the partnership. property acquired by the partnership.

Partner’s Interest in PartnershipPartner’s Interest in Partnership – – includes the partner’s transferable includes the partner’s transferable interest and all management and other interest and all management and other rights.rights.

Tests for Existence of a PartnershipTests for Existence of a Partnership

Two or morepersons

with capacity?

Businessfor profit?

Co-ownership:profit sharing, losssharing, control?

No Partnership

Partnership

No

Yes

Yes

No

No

Yes

Partnership Property Compared with Partnership Property Compared with Partner’s InterestPartner’s Interest

Partnership Property Partner’s Interest

Definition Tenant in partnership Share of profits and surplus

Possession For partnership purposes, notindividual purposes

Intangible, personal propertyright

Assignability NO: unless all other partnersassign their rights in theproperty

YES: but the assignee does notbecome a partner

Attachment YES: but only for a claimagainst the partnership

YES: by a charging order

Inheritance NO: goes to survivingpartner(s)

YES: passes to the personalrepresentative

Dissociation and Dissolution of General Dissociation and Dissolution of General Partnerships Under RUPAPartnerships Under RUPA

Definition of DissociationDefinition of Dissociation – – change in change in the relation of partners caused by any the relation of partners caused by any partner's ceasing to be associated in partner's ceasing to be associated in carrying on of the business; may be carrying on of the business; may be wrongful or rightful (see next 2 slides).wrongful or rightful (see next 2 slides).

Effect of DissociationEffect of Dissociation – – terminates terminates dissociatingdissociating partner’s right to participate partner’s right to participate in the management of the partnership in the management of the partnership business and duties to partnership.business and duties to partnership.

Dissociation & Dissolution under RUPADissociation & Dissolution under RUPA

ACTS OF THE PARTNERSACTS OF THE PARTNERS

Assignment of partner’s interestAssignment of partner’s interest

AccountingAccounting

WithdrawalWithdrawal •• •• ••**

BankruptcyBankruptcy •• ••**

IncapacityIncapacity •• ••**

DeathDeath •• ••

Expulsion of partnerExpulsion of partner •• ••

Expiration of termExpiration of term ••

Event specified in agreementEvent specified in agreement •• •• •• ••Unanimous agreement to dissolveUnanimous agreement to dissolve •• •• •• ••

DissociationDissociation DissociationDissociationDissolutionDissolution DissolutionDissolution

Partnership at WillPartnership at Will Term PartnershipTerm Partnership

*Dissolution will occur, if within 90 days of dissociation, at least *Dissolution will occur, if within 90 days of dissociation, at least half the remaining partners desire to wind up business.half the remaining partners desire to wind up business.

Dissociation & Dissolution under RUPADissociation & Dissolution under RUPA

OPERATION OF LAWOPERATION OF LAW

IllegalityIllegality •• ••

COURT ORDERCOURT ORDER

Judicial expulsion of partnerJudicial expulsion of partner •• ••**

Judicial determination of partner’s Judicial determination of partner’s incapacity to perform dutiesincapacity to perform duties

•• ••**

Judicial determination of Judicial determination of economic frustration or economic frustration or impracticabilityimpracticability

•• ••

Application by transferee of Application by transferee of partner’s interest if equitablepartner’s interest if equitable

•• ••

DissociationDissociation DissociationDissociationDissolutionDissolution DissolutionDissolution

Partnership at WillPartnership at Will Term PartnershipTerm Partnership

*Dissolution will occur, if within 90 days of dissociation, at least *Dissolution will occur, if within 90 days of dissociation, at least half the remaining partners desire to wind up business.half the remaining partners desire to wind up business.

Wrongful DissociationWrongful Dissociation

Wrongful DissociationWrongful Dissociation – – a dissociation that a dissociation that breaches an express provision of the breaches an express provision of the partnership agreement or in a term partnership agreement or in a term partnership if before the expiration of the partnership if before the expiration of the term or the completion of the undertaking (1) term or the completion of the undertaking (1) the partner voluntarily withdraws by express the partner voluntarily withdraws by express will, (2) the partner is judicially expelled for will, (2) the partner is judicially expelled for misconduct, (3) the partner becomes a misconduct, (3) the partner becomes a debtor in bankruptcy, or (4) the partner is an debtor in bankruptcy, or (4) the partner is an entity (other than a trust or estate) and is entity (other than a trust or estate) and is expelled or otherwise dissociated because expelled or otherwise dissociated because its dissolution or termination was willful.its dissolution or termination was willful.

Rightful Dissociation Rightful Dissociation

Rightful DissociationRightful Dissociation – – all other all other dissociations are rightful including the dissociations are rightful including the death of a partner in death of a partner in anyany partnership partnership and the withdrawal of a partner in a and the withdrawal of a partner in a partnership at will.partnership at will.

Causes of DissolutionCauses of Dissolution

Dissolution by Act of the PartnersDissolution by Act of the Partners – – – Partnership at willPartnership at will: withdrawal of a partner; : withdrawal of a partner; – Term partnershipTerm partnership: (1) the term ends, (2) all : (1) the term ends, (2) all

partners expressly agree to dissolve, or (3) a partners expressly agree to dissolve, or (3) a partner’s dissociation is caused by a partner’s partner’s dissociation is caused by a partner’s death or incapacity, bankruptcy or similar death or incapacity, bankruptcy or similar financial impairment, or wrongful dissociation if financial impairment, or wrongful dissociation if within 90 days after dissociation at least half of within 90 days after dissociation at least half of the remaining partners express their will to wind the remaining partners express their will to wind up the partnership business; up the partnership business;

– Any partnershipAny partnership: an event occurs that was : an event occurs that was specified in the partnership agreement as specified in the partnership agreement as resulting in dissolution.resulting in dissolution.

Causes of Dissolution Causes of Dissolution

Dissolution by Operation of LawDissolution by Operation of Law – a – a partnership is dissolved by operation of partnership is dissolved by operation of law upon the subsequent illegality of law upon the subsequent illegality of the partnership business.the partnership business.

Dissolution by Court OrderDissolution by Court Order – a court – a court will order dissolution of a partnership will order dissolution of a partnership under certain conditions. under certain conditions.

Effects of Dissolution Effects of Dissolution

Upon dissolution a partnership is not Upon dissolution a partnership is not terminated but continues until the winding up terminated but continues until the winding up is completed.is completed.– AuthorityAuthority – a partner's actual authority to act for – a partner's actual authority to act for

the partnership terminates, except so far as may the partnership terminates, except so far as may be appropriate to wind up partnership affairs; be appropriate to wind up partnership affairs; apparent authority continues unless notice of the apparent authority continues unless notice of the dissolution is given to a third party.dissolution is given to a third party.

– Existing LiabilityExisting Liability – dissolution does not in itself – dissolution does not in itself discharge the existing liability of any partner; discharge the existing liability of any partner; partners are liable for their share of partnership partners are liable for their share of partnership liabilities incurred after dissolution. liabilities incurred after dissolution.

Causes and Effects of DissolutionCauses and Effects of Dissolution

Partnership DissolutionAct of PartnersOperation of LawCourt Order

Winding UpLimited PowerDistribution of Assets

ContinuationWrongful DissolutionExpulsionAgreement of Parties

Termination

Liability of Incoming and Liability of Incoming and Retiring PartnersRetiring Partners

Partnership Debts Arising:

LimitedLiability

UnlimitedLiability

NoLiability

Admission of New Partner

Notice of Retirement

Winding UpWinding Up

Completing unfinished business, collecting Completing unfinished business, collecting debts, and distributing assets to creditors and debts, and distributing assets to creditors and partners; also called liquidation.partners; also called liquidation.– Winding Up RequiredWinding Up Required – – unless unless allall of the of the

partners, including any rightfully dissociating partners, including any rightfully dissociating partner, waive the right to have the partnership’s partner, waive the right to have the partnership’s business wound up and the partnership business wound up and the partnership terminated. terminated.

– Participation in Winding UpParticipation in Winding Up – – any partner who any partner who has not wrongfully dissociated may participate in has not wrongfully dissociated may participate in winding up the partnership’s business.winding up the partnership’s business.

Distribution of AssetsDistribution of Assets

The assets of the partnership include all The assets of the partnership include all required contributions of partners; the required contributions of partners; the liabilities of a partnership are to be paid liabilities of a partnership are to be paid out of partnership assets in the following out of partnership assets in the following order: (1) amounts owing to nonpartner order: (1) amounts owing to nonpartner and partner creditors and (2) amounts and partner creditors and (2) amounts owing to partners on their partners’ owing to partners on their partners’ accounts. accounts.

Non-dissolving DissociationsNon-dissolving Dissociations

PartnershipPartnership at Willat Will – – a partner’s a partner’s death, bankruptcy, or incapacity, the death, bankruptcy, or incapacity, the expulsion of a partner, or the expulsion of a partner, or the termination of an entity-partner results termination of an entity-partner results in a dissociation of that partner but in a dissociation of that partner but does does notnot result in a dissolution. result in a dissolution.

Non-dissolving DissociationsNon-dissolving Dissociations

TermTerm PartnershipPartnership – – if within 90 days after if within 90 days after any of following causes of dissolution occurs, any of following causes of dissolution occurs, fewer than half of the remaining partners fewer than half of the remaining partners express their will to wind up the partnership express their will to wind up the partnership business, then the partnership will business, then the partnership will notnot dissolve: a partner’s dissociation by death, dissolve: a partner’s dissociation by death, bankruptcy or incapacity, the distribution by a bankruptcy or incapacity, the distribution by a trust-partner of its entire partnership interest, trust-partner of its entire partnership interest, the termination of an entity-partner, or a the termination of an entity-partner, or a partner’s wrongful dissociation.partner’s wrongful dissociation.

Continuation After DissociationContinuation After Dissociation

The remaining partners have the right The remaining partners have the right to continue the partnership with a to continue the partnership with a mandatory buyout of the dissociating mandatory buyout of the dissociating partner; the creditors of the partnership partner; the creditors of the partnership have claims against the continued have claims against the continued partnershippartnership..

Power to Bind the Partnership Power to Bind the Partnership

A dissociated partner's actual authority to act A dissociated partner's actual authority to act for the partnership terminates; apparent for the partnership terminates; apparent authority continues for two years unless authority continues for two years unless notice is given to a third party. notice is given to a third party.

Dissociated Partner’s Liability to Third Dissociated Partner’s Liability to Third PersonsPersons – – a partner’s dissociation does not a partner’s dissociation does not of itself discharge the partner’s liability for a of itself discharge the partner’s liability for a partnership obligation incurred before partnership obligation incurred before dissociation; a dissociated partner is liable dissociation; a dissociated partner is liable for a partnership obligation incurred within for a partnership obligation incurred within two years after a partner dissociates unless two years after a partner dissociates unless notice of the dissolution is given to a third notice of the dissolution is given to a third party.party.

Liability of Incoming and Liability of Incoming and Retiring PartnersRetiring Partners

Partnership Debts Arising:

LimitedLiability

UnlimitedLiability

NoLiability

Admission of New Partner

Notice of Retirement