Transcript www.bobfarley.org

Slide Set Five:
Introduction to Business Organizations
Sole Proprietorships and Partnerships
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Last Time We Spoke About:
• The History and Development of Business Law
- It All Started With Trade and Markets
Business like Law developed to address human needs
- The Rise of the Corporation
Roman Law
English Law
Colonial America
Early New York State
Delegation / General Incorporation Statutes
Federal Regulation
• Vehicles of Business Organization
- Individual (Sole) Proprietorships
- Partnerships
- Corporations
Business Corps, Professional Corps, Public Benefit Corps,
- Limited Liability Companies
- Organizations
Joint Ventures, Unincorporated Associations, Co-operatives, Franchises
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Tonight We Will Speak About:
• Sole Proprietorships
• DBA’s – “Doing Business As”
• Partnerships
- 1. Nature of Partnerships
- 2. Formation of Partnerships
- 3. Property of a Partnership
- 4. Relations Between Partners
- 5. Relations Between Partners and Third Parties
- 6. Limited Partnerships
- 7. Dissolution or Termination of Partnerships
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TYPES OF BUSINESS ORGANIZATIONS
So You Want to Start a Business
What type of Business
Organization do you
choose?
Tonight we will discuss
two possibilities:
Sole Proprietorships
and
Partnerships
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TYPES OF BUSINESS ORGANIZATIONS
Sole Proprietorships
A. What is a Sole Proprietorship?
• A sole proprietorship is a business established, owned, and
controlled by a single person.
• Sole proprietorships come in all shapes and sizes.
• The owner realizes all the profits and assumes responsibility for all
losses.
• The sole proprietorship is the most prominent of the four forms of
ownership.
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TYPES OF BUSINESS ORGANIZATIONS
Sole Proprietorships
B. Formation of a Sole Proprietorship
•
Of the four forms of ownership, the sole proprietorship is by far the easiest
to form.
•
The government exercises very little control over the establishment of new
sole proprietorships.
•
Start-up can be immediate and simple.
•
You may need to obtain licenses or permits for your particular type of
business. (DBA’s)
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TYPES OF BUSINESS ORGANIZATIONS
Sole Proprietorships
C. A DBA Certificate
• A “Doing Business As” (DBA) is a
certificate filed with a local government
(the office of the County Clerk in New
York State) that designates that a sole
proprietorship is being operated within
that community under a specific name.
• The local government will require the
business owner file a form to provide
their name, type of business operated,
and address on the DBA application.
• A DBA certificate is filed in every county
where the business operates
• There is often a small filing fee for a
DBA (in Saratoga County for instance
it is $25 with a $5 certified copy fee).
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TYPES OF BUSINESS ORGANIZATIONS
Sole Proprietorships
D. Operation of a Sole Proprietorship
•
Sole proprietors make all the decisions regarding the operation of the
business.
•
The assets of sole proprietors are not considered legally separate from the
assets of the business.
•
Owners of sole proprietorships report business income and expenses on
their personal income tax returns.
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TYPES OF BUSINESS ORGANIZATIONS
Sole Proprietorships
E. Advantages of a Sole Proprietorship
•
•
•
•
•
•
•
Sole proprietorships are simple to start.
No formal action is required.
A sole proprietorship may be started immediately.
The owner has total control of all aspects of the business.
The business is nimble and easily adaptable to changes
The owner receives all the profits.
The business itself pays no income tax; the owner pays income tax as an
individual on his or her individual return.
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TYPES OF BUSINESS ORGANIZATIONS
Sole Proprietorships
F. Disadvantages of a Sole Proprietorship
•
•
•
•
•
No Liability Protection.
The owner is solely liable for all financial losses (and damages).
The owner has total control of all aspects of the business (including
management).
The owner is solely responsible for all capital expenses.
The business itself pays no income tax; the owner pays income tax as an
individual on his or her individual return.
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
A. What is the Nature of a Partnership?
1. Partnership Defined:
• The New York State Partnership Law (New York’s version of the Uniform
Partnership Act) defines a partnership as:
“An association of two or more persons to carry on as
co-owners of a business for profit, and includes a
registered limited liability partnership.” [See §10 (1)]
• The law of partnership is based on the law of contracts and agency.
2. Elements of a Partnership:
• A partnership is thereby:
 a relationship;
 created by the voluntary association of two or more persons;
 to carry on as co-owners a business for profit.
• A Partnership consists of:
 Voluntary Relationships and Capital or in-kind contributions.
• If no profit intended, then an unincorporated association is formed.
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
A. What is the Nature of a Partnership?
3. Characteristics of A Partnership:
• The existence of a partnership may be found from the existence of:
 Shared control in the running of the business and
 The fact that the parties share profits and losses.
• The sharing of gross returns, as opposed to profits, is very slight
evidence of a partnership.
4. Joint Venture Distinguished:
• Courts can distinguish a joint venture (i.e. a single or limited enterprise or
venture) from a partnership.
• When the joint venture involves two or more persons to carry on as
co-owners of a business for profit, however, regardless of however
briefly, the the legal consequences of the joint venture are identical to
those of a partnership. [See Pedersen v. Manitowoc Co., 25 N.Y.2d 412
(1969)].
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
A. What is the Nature of a Partnership Continued?
5. A Partnership is Not a Legal Entity:
• A partnership, unlike a corporation, is not deemed to be a separate legal
person under the law, in that it lacks the entity characteristics of a
corporation.
Liability and Debts: The liability and debts of the partnership are the
liability and debts of the individual partners, and any one partner may be
held liable for the partnership's entire indebtedness.
Exceptions:
• In some distinct cases, the partnership. at least in form, is treated as a
legal entity for the following purposes. These include:
 Title to Land
Title to land may be taken in the partnership name. [NYSPL §12 (3)]
 Lawsuits
● A partnership may sue or be sued in the partnership name. [CPLR § 1025].
● Service an any one partner is service on the partnership. [CPLR 310(a)]13
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
B. Formations of Partnerships:
1. Applicability of Contract Rules:
• Because a partnership is the result of an agreement, it is necessarily
governed by the general rules applicable to contracts.
 Capacity:
● Who May Be A Partner?
The basic rule is the same as that governing a principal in an agency
relationship. Anyone may be a partner who is capable (i.e. has capacity) of
entering into a binding contract.
● Liability Where No Capacity
The basic rule is the same as that governing a principal in an agency
- Extent of Liability:
The general rule is where a would be partner lacks capacity, they are not
personally liable for the obligations of the partnership or for breaches of the
partnership agreement. They would be bound, despite their lack of capacity, to
the extent they made capital contributions to the partnership.
- Example:
Arnold is 17 and Bertha is age 21 and they agree to form a partnership to sell and deliver
pies. Each contributes $1000 to the partnership from their piggy bank. The partnership
incurs debts of $2000 for baking materials. The $1000 contributed by Arnold is subject to a
claim from partnership creditors.
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
B. Formations of Partnerships:
1. Applicability of Contract Rules Continued:
 Formalities
● The Partnership Agreement:
A partnership is born of contract and thus requires an agreement. The
partnership agreement governs the terms of the partnership during its
existence (and may include terms of profit and loss distribution and capital
contributions as well as provisions relating to dissolution).
● General Rule – No Formalities:
Although a partnership is based upon a contract, the law does not require any
particular, essential formalities to constitute a valid contract of partnership.
As a result, in the absence of statute, the partnership agreement may be
either express or implied (i.e. established solely from the conduct of the
parties).
Additionally, although it often is in written format, it is not normally required
for the partnership agreement to be in writing.
● When Writing is Necessary:
- Statute of Frauds: Partnership agreements that cannot be performed within
one year must be in writing in order to comply with the statute of frauds
[NYUCC § 2-201]. If the parties act upon an oral agreement, that must be
in
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writing to satisfy the statute of frauds they will be treated as “partners at will”
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
B. Formations of Partnerships:
1. Applicability of Contract Rules Continued:
 Legality of Purpose
● The Purpose of the Partnership Must be Lawful:
The purpose for which the partnership is formed or is to be formed must be legal.
The illegality of the enterprise will make the partnership null and void.
When a partnership has been formed for an illegal purpose, the court will not
compel an accounting or a settlement of the partnership affairs.
- Example:
Aaron and Brent formed a partnership for the purpose of making and selling fake
Identifications. This is obviously an illegal enterprise, contrary to law. The money
secured by the operation of the partnership was deposited in Aaron's name. In an action
by Brent to secure an accounting of the partnership funds held by Aaron, the court
refused to grant the accounting on the ground of illegality of the partnership.
 Consent
● Consent of the Parties
Unless the agreement provides otherwise, no one can become a partner in a
partnership without the express or implied consent of all the partners. [NYSPL.
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§40 (7); see also People v. Herbert, 162 Misc. 817 (1937)].
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
B. Formations of Partnerships:
2. Proof of Partnership Existence:
1.
 Rules for Determining Existence:
● Intent of the Parties:
Generally, the courts look to the intent of the parties to determine the existence of a
partnership. There is, of course, no difficulty where the parties have an express
contract. But where the intention is unexpressed, a problem may arise.
● Tests for Determining Intent:
The courts and the Uniform Partnership Act [NYSPL §11] have provided certain
tests to be applied to the acts of the parties in making a determination whether a
partnership exists. Pursuant to these test, the following should be considered:
 Title to Property
 Designation of Entity by Parties
 Amount of Activity Involved
 Sharing of Gross Returns
 Sharing of Profits
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
B. Formations of Partnerships:
2. Proof of Partnership Existence:
1.
 Rules for Determining Existence Continued:
● Tests for Determining Intent Continued:
- Title to Property
Joint or common tenancies of any type do not establish, by themselves, the existence of a
partnership even if such co-owners share profits from the use of the property. [NYSPL § 11(2)]
- Designation of Entity by Parties
The designation by the parties of their entity as a "partnership" or some other business entity
form is important as indicative of intent, but is not conclusive.
- Amount of Activity Involved
The amount of activity involved in the enterprise undertaken by the parties will be considered a
relevant factor in determining whether a partnership exists.
Examples:
1) Anne and Bill each contribute $5,000 and purchase Blackacre. Thereafter, they hold the property for
investment, hoping it will appreciate. Anne lives on the farm and pays more of the mortgage than Bill.
2) Anne and Bill each contribute $5,000 and purchase Blackacre. Thereafter, they develop the land by
building apartments and proceed to manage the development, sharing equally in the rents and expenses.
In the second example, due to the degree of activity, the court is much more likely to find a partnership than
the first example.
- Sharing of Gross Returns
The sharing of gross returns does not by itself establish a partnership, regardless of whether the
persons sharing them have a joint or common interest in any property from which the returns
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are derived.
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
B. Formations of Partnerships:
2. Proof of Partnership Existence:
1.
 Rules for Determining Existence Continued:
● Tests for Determining Intent Continued:
- Sharing of Profits
✭ General Rule-Prima Facie Evidence of Partnership
The receipt by a person of a share of the profits of a business is prima facie evidence that
they are a partner in the business. [NYSPL §11(4)]
✭ Exceptions to Inference of Partnership
Pursuant to section 11(4) of the New York State Partnership Law, no such inference of
partnership will be drawn if such profits were received in payment as:
➔ A debt, by installment or otherwise;
➔ Wages of an employee;
➔ Rent to a landlord;
➔ Annuities to a surviving spouse or representative of a deceased partner;
➔ Interest on a loan even if the amount varies with the profits of the business; or
➔ Consideration for the sale of goodwill of a business, by installment or otherwise.
Example:
Andrew owns a piece of land. Brandon desires to rent it and to build and operate a hotel thereon. Andrew leases the land
to Brandon, who agrees to pay Andrew 10% of the net profits earned from the operation of the hotel. Carrie, who delivers
goods to Brandon for the hotel, seeks to hold Andrew liable for the goods as Brandon's partner when Brandon fails to pay
for the goods. Carrie cannot recover from Andrew. Absent a partnership agreement, the 10% payments are deemed
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rent pursuant to NYSPL. §11(4)(b).
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
B. Formations of Partnerships:
2. Proof of Partnership Existence:
1.
 Rules for Determining Existence Continued:
● Tests for Determining Intent Continued:
- Sub-partnership
A sub-partner who shares with a partner of a principal partnership profits derived from that
partnership is not thereby deemed a partner of the principal partnership.
Example:
Amy and Bertha enter into a written partnership agreement that provides that they will share profits of the business
equally. Bertha then enters into an agreement with Christopher that provides that Bertha and Christopher will share
the profits received by Bertha from the Amy/Bertha partnership. In this example, Christopher is not a partner in the
Amy/Bertha partnership even though he will, in effect, be receiving a share of the Amy/Bertha profits. At most, he
is a member of the Bertha/Christopher partnership.
- Sharing of Losses
While there is no statutory requirement that sharing losses is necessary to create a partnership,
the absence of an agreement to share losses is strong evidence that the parties did not intend to
form a partnership. [See Mill Factors' Corp. v. Margolies, 210 A.D. 739 (1924)].
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
B. Formations of Partnerships:
3. Partnership by Estoppel:
1.
In certain situations, even where there is no agreement, and the parties
between themselves are not partners, the law may nevertheless hold such
parties liable to third parties as if they were partners. There are two basic
partnership by estoppel situations, as follows:
 Liability of Person Held Our as Partner:
When a person, by words or conduct, represents themself or permits another to
represent them as a partner, they will be liable to third parties who extend credit to
the actual or apparent partnership on the faith (i.e. upon the reliance of) the
representation. [NYSPL §27 (1)]
Example:
Alan, Bart, and Caroline are partners. They agree to terminate their partnership, but
continue to share office space, telephone numbers, secretarial staff, stationery, etc.,
and give no public indication of the partnership's termination. Alan holds Bart and
Caroline out as partners, despite their agreement to the contrary. Bart and Caroline
may be held liable as partners by estoppel. [Royal Bank & Trust Co. v. Weinuaub,
Gold, & Alper, 68 N.Y.2d 124 (1986)]
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
B. Formations of Partnerships:
3. Partnership by Estoppel:
 Liability of Person Who Holds Another Out as Partner:
When a person, by words or conduct, holds another person out to be their partner,
they thereby make such alleged partner their agent with the power to bind them to
third parties as if the other were, in fact, a partner. [NYSPL.§27(2)]
It should be noted, however, that if the person making such representation is in fact
a member of an already existing partnership, and the representation is to the effect
that the would-be partner is a member of this partnership, only those partners who
made or consented to the representation will be bound.
Example:
Amanda, Barry, and Carrie are partners in a textile manufacturing concern. To obtain
financing for herself, Darla, with the knowledge of Barry and Carrie, represents herself to
be a member of the ABC partnership. In fact, Darla is not a partner. On the strength of this
representation, Sally lends money to Darla, believing it to be for the ABC partnership.
Upon a later default, Sally may hold Barry, Carrie, and Darla liable. Neither Amanda nor
the ABC partnership is liable.
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
C. Property of a Partnership:
1. In General:
 The Nature of Partnership Property:
In addition to testing whether a partnership exists, partnership questions often focus
on the rights and liabilities as between partners and third parties - both in the
ongoing conduct of the partnership and in any eventual dissolution.
In analyzing such issues, it is important to distinguish which property belongs to the
partnership and which belongs to the individual partners. Partnership property is a
seriously major issue.
 General Issues of Partnership Property:
● Partners hold title to firm property by tenancy in partnership.
● Surviving partners receive property.
● A creditor of a partner cannot proceed against any specific item of partnership
property but must obtain a charging order to seize the debtor-partner’s share of
the profits.
● An assignee of a partner’s interest does not become a partner without the consent
of the other partners and is entitled only to a share of the profits and the
assignor’s interest upon dissolution.
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
C. Property of a Partnership:
2. Classifications of Property:
 Partnership Capital:
Partnership capital consists of the property or money contributed by each of the
partners for the purpose of carrying on the partnership's business.
 Partnership Property:
Partnership property, in its broadest sense, embraces everything that the
partnership owns, consisting of both the capital contributed by its members
and the properties subsequently acquired in partnership transactions.
Example:
Adam and Bernie form a partnership, each contributing $500. During the first year of
operation, the partnership earns a profit of $20,000. Adam and Bernie each take a $7,500
draw. Partnership capital is still $1,000. Partnership property is now $6,000.
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
C. Property of a Partnership:
3. What is Includable in Partnership Property:
 Generally:
Absent an agreement, there is no restriction as to what may be included in partnership
property. The controlling factor in determining what comprises partnership property is the
partner's intent to devote the property to partnership purposes. The following criteria are
usually applied in making this determination, but no single criterion is determinative:
● Acquisition with Partnership Funds: Unless a contrary intention appears, property acquired
with partnership funds is partnership property.
● Use of Property: The use of the property by the partnership in conducting its business is
evidence that the partnership intended it to be partnership property.
● Improvement of Property by Partnership: If the property that was acquired has been
improved by the partnership, it is more likely than not to be partnership property.
● Relation of Property to Business: If the acquired property is closely related in character to
the business operations of the partnership, it is likely the property was meant to be partnership
property.
● Title to Property: If the property has been acquired in the partnership name, it is partnership
property.
● Entry in Partnership Books: If the property has been listed as an asset on the partnership
books, particularly where all the partners are aware of this fact, it is likely the property will be
considered partnership property.
● Maintenance and Expenses: If the partnership has paid the taxes, insurance, maintenance
costs, and other expenses associated with the property, this is evidence that the property is 25
partnership property.
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
C. Property of a Partnership:
4. Partner’s Rights in Partnership Property:
 Tenancy in Partnership:
A partner's ownership interest in any specific item of partnership property is not that
of an outright owner, joint tenant, or tenant in common, but rather is that of a tenant
in partnership. The incidents of this tenancy are:
● Possession: Each partner has an equal right with copartners to possess partnership property for
partnership purposes, but has no right to possess it for any other purpose without the consent of his
copartners [NYSPL §51 (2)(a)].
● Assignability: A partner's right in specific partnership property is not assignable to nonpartners
except in connection with the assignment of the rights of all the partners in the property. If, therefore, a
partner attempts to assign his interest in' specific partnership property to someone who is not already a
partner, the attempted assignment will convey no right, title, or interest in the specific property [NYSPL
§51 (2)(b)].
● Mortgage: An attempted mortgage of a partner's interest in specific partnership property has no
effect upon the passing of title to the property., and as such, the mortgagee will have no rights
against the property.
● Death: Upon the death of a partner, his right in specific partnership property vests in the surviving
partner(s). Upon the death of the last surviving partner, the rights in such property vests in their legal
representative [NYSPL §51 (2)(d)].
● Attachment of Specific Property: A partner's interest in specific partnership property is not
subject to attachment or execution at the insistence of her individual creditors, and is subject to
attachment or execution only on a claim against the partnership [NYSPL §51 (2)(c)].
● Homestead: None of the partners may assert any claim to specific partnership property under the
homestead or exemption laws [NYSPL §51 (2)(c)].
● Allowance to Heirs or Next of Kin: Surviving spouses, heirs, and next of kin are not entitled to26
share in specific partnership property absent an agreement to the contrary [NYSPL §51 (2)(e)].
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
C. Property of a Partnership:
5. Partner’s Interest in the Partnership:
● Interest In Personal Property: Each partner has an interest in the partnership itself, which
consists of a share of the profits and surplus and is treated as personal property. [NYSPL §52]
✭ Presumption of Equal Profits and Losses: A legal presumption exists that interests of partners
in profits and surplus are equal, in the absence of evidence of an agreement to the contrary.
● Assignment of Interest: A partner's interest in the partnership is personalty and consists
only of their share of the profits and surplus, it may thus be assigned by a partner at any time.
✭ Assignment of Profits is not an Assignment of Interest: The right to assign profits and surplus
should not be confused with the limitation on the right to assign an interest in partnership property.
✭ Method of Assignment: The usual transfer rules for personal property are applicable, including
the requirements of delivery and acceptance. [See Adamson v. Adamson, 249 A.D. 418 (1937)].
✭ Assignee's Rights:
- In Partnership:
As against the other partners, in the absence of an agreement, an assignment of a partner's
partnership interest does not entitle the assignee to interfere in the management or administration
of the partnership business, to require any information or account of the partnership transactions
or to inspect the partnership books. Rather, an assignment merely entitles the assignee to receive,
in accordance with his assignment contract, profits to which the assigning partner would otherwise
be entitled [NYSPL §53(1)].
- At Dissolution
In the case of dissolution, the assignee is entitled to receive the assignor's interest and may require
an accounting from the date of the last accounting agreed by all the partners [NYSPL §53(2)]
● Charge of Interest (Attachment): A judgment creditor of a partner, on application to the
court that entered the judgment or other competent court, may charge the interest of the
debtor partner with payment of the unsatisfied amount of such judgment debt with interest
thereon. In addition, the court may then or later appoint a receiver of the debtor partner's
share of the profits, and of any other money due or to become due to him in respect of the27
partnership [NYSPL §54(1)].
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
D. Relations Between Partners:
1. Generally:
 Fiduciary duty:
Each partner owes a fiduciary duty to the partnership. As such, each partner is bound to
use the partnership property and exercise their partnership powers for the benefit of the
partnership and not for themself alone. Profits made in the course of the partnership
belong to the partnership, and one partner will not be permitted to gain for themself at the
expense of the partnership [NYSPL §43(1)].
 Right to Participate in Management:
Absent an agreement to the contrary, all partners have equal rights in the management of
the partnership business [NYSPL §40(5)].
 Right to Distributions:
Absent an agreement to the contrary, each partner shares equally in the profits and
surplus remaining after all liabilities, including those to partners, are satisfied. Each
partner must contribute to the losses, whether capital or otherwise, sustained by the
partnership according to her share in the profits. Furthermore, unless the partners agree
otherwise, each partner is to be repaid their contribution, whether by way of capital or
advances to the partnership property. Any payment or advance made by a partner to or
on behalf of the partnership beyond her agreed-upon contribution constitutes a loan to the
partnership which must be repaid with interest [NYSPL §40(1)and (3)].
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
D. Relations Between Partners:
1. Generally Continued:
 Remuneration:
● General Rule - No Remuneration Except for Extraordinary Services: A partner is
not entitled to any remuneration for services rendered to the partnership unless the
partnership agreement provides to the contrary [NYSPL §40(6), and see also Levy v.
Leavitt, 257 N.Y. 461 (1931)].
✭ Work Ethic: This is true even in cases where one partner is forced to assume more work than
they had anticipated and the other partner does nothing to further the affairs of the partnership.
✭ Unequal Interest: However, where partners do not have an equal interest, are not equally liable,
and are not equally responsible for the conduct of the partnership business, it is possible to infer
an agreement to compensate a partner for extraordinary services. [See Steinberg v. Goodman, 27
N.Y.2d 304 (1970)].
● Exception - Winding Up by Surviving Partner: A surviving partner is entitled to
reasonable compensation for his services in winding up the partnership affairs [NYSPL
§40(6)].
● Breach of Agreement to Work for Partnership: Unless the circumstances indicate
otherwise, it is implied that each partner will devote their entire time and energies to the
business of the partnership.
✭ Promise to Devote Time: Where a partner has impliedly or expressly promised to devote time
to the partnership business and fails to do so, they may be charged in an accounting for damages
caused to the partnership.
✭ Replacement Services Time: The amount expended by the partnership to replace the services
that a partner should have performed as well as any other loss caused by his breach of contract
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is compensable under such an action. .
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
D. Relations Between Partners:
1. Generally Continued:
 Indemnification:
The partnership must indemnify every partner in respect of payments made and
personal liabilities reasonably incurred by him in the ordinary and proper conduct of
its business, or for the preservation of its business or property [NYSPL §40(2)].
 Contribution:
Where one partner is compelled to pay or satisfy the whole or more than their share
of a partnership debt, they may require (usually in an action in equity) the other
partners to contribute their pro rata shares [NYSPL §40(1)].
 Books and Information:
The partnership books must be kept, subject to an agreement to the contrary, at the
partnership's principal place of business and every partner has the right to inspect
and copy them [NYSPL §41]. Moreover, each partner, upon demand of another
partner (or their legal representative) must "render true and full information of all
things affecting the partnership" [NYSPL §42].
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
D. Relations Between Partners:
2. Legal Actions Between Partners:
 General Rule – No Action at Law:
As a general rule, a partner cannot sue or be sued by the partnership (in an action at
law), nor may one partner sue another partner on matters related to the partnership
business.
- Example:
Abby is a member of the partnership of A, B, and C. Abby maintains a separate business of her
own. Abby sells certain goods to the partnership. Abby cannot maintain an action to recover for
the goods sold and delivered because, in effect, she would be suing herself as a party defendant.
● Rationale:
✭ Plaintiff on Both Sides of Suit:
Because a partner is personally liable for all debts and obligations of the partnership, they will in
effect be partially suing themself if they sue the partnership.
✭ Accounting Is Necessary:
There is a general policy against having piecemeal litigation. Yet this will usually be the result
unless a complete accounting and settlement of partnership affairs is had. Accordingly, an
accounting is necessary because:
◆ Partnership Assets Applied:
Claims by one partner arising out of partnership business must first be satisfied out of partnership
assets. Thus, it is possible that even though the plaintiff partner's claim is valid, that they will
(because of other transactions) actually owe money to the partnership.
◆ Creditors' Priority:
The result of litigation between partners is not binding on third-party creditors. Hence, without an
accounting, the losing partner might have double liability (i.e., liability to the prevailing partner and
then liability to an unpaid outside creditor who decides to seek relief against the losing partner).
● Exception:
One partner may sue the other at law when no complex accounting is required or when a single,31
fully
closed but unadjusted transaction is involved. [See Schuler v. Birnbaum, 62 A.D.2d 461 (1978)].
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
D. Relations Between Partners:
2. Legal Actions Between Partners Continued:
 Actions for an Accounting:
● What is An Accounting?
An accounting is an equitable proceeding that considers all transactions between partners
in connection with the partnership. It is usually held in connection with a final settlement of
the partnership affairs. The liabilities between each partner and the partnership are
thereby converted into liabilities between the partners individually, and an action lies to
recover the balance due any partner.
Example:
Amanda and Becky were partners. A final accounting was held upon partnership dissolution in
which it was found that Amanda owed Becky the sum of $500. Amanda is liable to Becky $500.
● When Can an Accounting Be Held Outside of Dissolution?
There are a few situations in which an accounting may be had other than in connection
with a final settlement and dissolution.
✭ Wrongful
Exclusion: A partner is entitled to an accounting if he has been wrongfully
excluded from participation in the partnership business or from joint possession of the
partnership property [NYSPL §44(1)].
✭ Agreement: An accounting can always be obtained in accordance with the partnership
agreement [NYSPL §44(2)].
✭ Secret Profits: Where one partner has improperly obtained secret profits in violation of
their fiduciary duty to the partnership, an action for an accounting may be maintained
against them [NYSPL §44(3) and §43(1)].
✭ Other Circumstances: An accounting may be had whenever the court feels it is "just and
32
reasonable”. [NYSPL §44(4)].
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
D. Relations Between Partners:
2. Legal Actions Between Partners Continued:
 Separate Actions at Law:
● Specific Separate Actions at Law:
There are a few situations in which an action at law may be maintained separate
and apart from an accounting.
✭ Segregated
Transactions:
Where the partnership has dealt with one partner as if he were a third person and it is
clear that the transaction is not to be reflected in the general partnership account, an
action may be maintained.
Example:
Abraham, Bertha, and Carl form a partnership, ABC Bank. Abraham opens a savings account at
ABC Bank and deposits money therein. Abraham is entitled to all of the rights of an ordinary
depositor.
✭ Tort
Claims:
◆ Negligent
Partner: Where one partner negligently injures the person or property of
another, the injured partner may maintain an action against the tortfeasor partner.
◆ Negligent Employee: Where injury to a partner is caused by the negligence of an
employee of the partnership, the traditional rule has been that the negligence of the
employee would be imputed to the partnership and partners, thus barring suit. The
modern trend however is to permit the partner to sue. [See, Smith v. Hensley, 354
S.W.2d 744 (Ky. 1961)]
✭ Workers
Compensation:
A partner is an employer - not an employee. Accordingly, they are not permitted to
recover under workers' compensation acts.
33
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
1. Generally:
 Application of the Law of Agency:
● The Law of Agency:
✭ Governing
Law: The authority of a partner to bind the partnership when dealing with third
parties is governed by the law of agency.
✭ Agency Principles: Under agency principles, every partner is an agent of the partnership
for the purpose of its business, and thus the act of every partner "for apparently carrying on
in the usual way the business of the partnership" (within the scope of the partnership
business) will bind the partnership and thereby bind the other partners.
✭ Liability for Act of a Partner: The partnership's liability for the act of a partner may be in
contract, in tort, or for breach of trust.
● Elements of the Law of Agency Relating to Partnerships:
➔ Actual Authority
➔ Apparent Authority
➔ Notice and Knowledge
➔ Fraud
➔ Breach of Trust
➔ Liability of Partners
34
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
2. Actual Authority:
 Conveyance of Actual Authority:
A partner has whatever authority the partner reasonably believes he has based on
the communications between the partnership and the partner. Actual authority can
be granted either in the partnership agreement or by the consent of the partners.
● Means to Grant Actual Authority:
➔ Partnership Agreement
➔ Majority Vote
➔ Unanimous Vote
 Actual Authority by Means of Partnership Agreement or Majority Vote:
● Authorized in a Partnership Agreement:
The partnership agreement may authorize a partner to act, in which case no further partnership
action is required for the partner to take the authorized action.
Example: The partnership agreement of ABC investment partnership states that Bart shall have
exclusive authority to make all decisions regarding the purchase and sale of commodity futures. A
purchase by Bart of commodity futures will be binding on the partnership.
● Authorized by a Majority Vote of the Partners:
The partnership may also authorize a partner to act by means of a majority vote of the partners.
As a result if the partnership agreement is silent as to whether the partner may do the particular
action sought to be taken, then a majority vote of the partners is what is usually required. The
majority vote thereby will authorize the partner to act in certain classes of transactions without
further consultations with the other partners.
35
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
2. Actual Authority Continued:
 Actual Authority by Means of Unanimous Vote:
● Authorized by a Unanimous Vote of the Partners:
In certain situations, a unanimous, not a majority vote, of the partners is required. They include:
✭ Statutory Provisions:
Certain statutory provisions require a partnership to act upon a unanimous grant of authority:
◆ Arbitration
A partner may not bind the partnership, nor her copartners individually, to a submission to
arbitration [NYSPL §20(3)(e)].
◆ Assignment for Benefit of Creditors
A partner cannot bind her copartners by an assignment of partnership property for the
benefit of creditors [NYSPL §20(3)(a)].
◆ Confession of Judgment
A partner has no implied power to confess a judgment or give a warrant of attorney to
confess a judgment against the partnership, although she has the power to compromise a
debt in good faith and without fraud or collusion [NYSPL §20(3)(d)].
◆ Goodwill
A partner has no implied power to dispose of goodwill of the business [NYSPL §20(3)(b)].
◆ Interference with Ordinary Partnership Business
No partner may do any act that would make it impossible to carry on the ordinary business
of the partnership [NYSPL §20(3)(c)].
✭ Partnership Agreement:
If the partnership agreement specifically provides for other than a majority vote, then it, of course,
governs. Additionally, it is generally held that unanimous consent is needed to engage in business
36
other than business that contemplated by the agreement.
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
3. Apparent Authority:
 Conveyance of Apparent Authority:
Even where a partner lacks actual authority, he can-under general agency
principles-bind the partnership because of his apparent authority (i.e., authority that
a third party reasonably believes the agent has because of the principal's actions).
There are specific rules in the following areas regarding the disposition of property
that are helpful in analyzing this issue. They are as follows:
➔ Real Property
✭ Title in Partnership Name
◆ Conveyance
◆ Conveyance
in Partnership Name
in Individual Partner's Name
✭ Title in Name of Fewer than All Partners
◆ Conveyance in Name of Titleholders
◆ Conveyance in Name of Partnership or Fewer than All Titleholders
✭ Title in Name of All Partners
➔ Other Transfers of Interest in Real Property
✭ Mortgages
✭ Leases
➔ Personal Property
37
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
3. Apparent Authority Continued:
 Conveyance of Apparent Authority Continued:
The rules regarding the disposition of property are as follows:
➔ Real Property
The Uniform Partnership Act (NYSPL) sets out the following rules regarding the apparent
authority of a partner to convey real property of the partnership.
✭ Title in Partnership Name:
◆ Conveyance in Partnership Name:
If title is held in the partnership name, title may be conveyed in the partnership name
by any one partner.
However, if the partner lacked actual or apparent authority to convey title, the
partnership may recover the property from the transferee unless the property has
subsequently been acquired by a bona fide purchaser [NYSPL §21(1)].
A bona fide purchaser is one who takes for value and without knowledge that the
partner exceeded his authority.
◆ Conveyance in Individual Partner's Name:
If title is held in the name of the partnership but a conveyance is made in an individual
partner's name, the conveyance will pass the equitable interest of the partnership in
the property only if the conveyance was authorized.
If the conveyance was not authorized by the partnership, no interest passes [NYSPL
§21(2)].
38
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
3. Apparent Authority Continued:
 Conveyance of Apparent Authority Continued:
The rules regarding the disposition of property are as follows:
➔ Real Property
The Uniform Partnership Act (NYSPL) sets out the following rules regarding the apparent
authority of a partner to convey real property of the partnership.
✭ Title in Name of Fewer than All Partners:
◆ Conveyance in Name of Titleholders:
If title is held in the name of fewer than all of the partners and the record does not
show the right of the partnership, conveyance by the titleholders in their own names is
effective.
However, if they lacked actual or apparent authority to convey title, the partnership
may recover the property from the transferee unless the transferee, or his assignee, is
a bona fide purchaser [NYSPL §21(3)].
◆ Conveyance in Name of Partnership or Fewer than All Titleholders:
Where title is held in the name of one or more partners, conveyance in the name of
the partnership or fewer than all titleholders passes the equitable interest of the
partnership if the conveyance was authorized.
Otherwise, no interest will pass [NYSPL §21(4)].
✭ Title
in Name of All Partners:
If title is in the name of all of the partners, only a conveyance by all the partners 39
passes the equitable interest in the property as well as legal title [NYSPL §21(5)].
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
3. Apparent Authority Continued:
 Conveyance of Apparent Authority Continued:
The rules regarding the disposition of property are as follows:
➔ Other Transfers of Interest in Real Property
✭ Mortgages:
Although there are no cases directly on point, it would appear that the same rules
regarding transfers of title would generally be applicable.
✭ Leases:
Ordinary contract rules govern.
To the extent that the lease is within the scope of partnership business, one partner
has the apparent authority to execute the lease on behalf of the partnership.
➔ Personal Property
Ordinary contract rules govern both the sale and pledge of personal property.
40
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
4. Notice and Knowledge:
 The Doctrine of Imputed Knowledge:
To determine when a participating partner's knowledge will be imputed to the
partnership, it is necessary to determine when the partner acquired the knowledge.
● When is Notice Effective:
✭
“Notice" Defined:
"Notice" is a communication by a third person about a matter relating to partnership
business that is transmitted to one or more partners with the intent that the partnership be
informed of the message communicated.
Example:
Tom notifies Alan, who is a partner of ABC partnership, that he, Tom, is exercising his right to
renew his lease of space from the partnership for an additional two years. ABC has effective notice
of the renewal.
✭ How
Notice is Delivered:
◆ Oral-Direct:
Unless otherwise required to be in writing, notice may be delivered orally by third
person to a partner [NYSPL. §3(2)(a)].
◆ Written: Notice may be given by delivering a written statement to a partner or to a proper
person at the partner's office or residence [NYSPL. §3(2)(b)].
41
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
4. Notice and Knowledge Continued:
 The Doctrine of Imputed Knowledge Continued:
● When Knowledge Imputed:
✭ “Knowledge”
Defined:
◆ Information
Known: "Knowledge" refers to information that is or reasonably should be known
by an individual partner.
◆ Partner’s Mind: When asking whether a partner "knows" something, you are concerned with
what was actually in the partner's mind, although it will be necessary to resort to external
objective criteria to make the determination.
◆ Deemed to Know: Furthermore, a person is deemed to how something when “they have
knowledge of such other facts as in the circumstances shows bad faith" [NYSPL.§3(2)(b)].
✭
Whose Knowledge:
In determining whether the partnership is to be charged with the knowledge of a partner
regarding a particular transaction, it is necessary to distinguish between knowledge of a
partner who is participating in the transaction and a partner who is not so participating.
◆ Participant:
To determine when a participating partner's knowledge will be imputed to the
partnership, it is necessary to determine when the partner acquired the knowledge.
- Acquired When Partner: If the knowledge was acquired by the partner while he was a member
of the partnership, his knowledge will be imputed to the partnership.
- Acquired When Not a Partner: If the knowledge was acquired when the partner was not a
member of the partnership, then his knowledge will be imputed to the partnership only if the
information is "present to his mind" at the time he is acting for the partnership [NYSPL. §23].
◆ Non-Participant:
Information possessed by a partner who is not participating in a transaction
will be imputed to the partnership if under the circumstances, the partner "reasonably could and
should have communicated it" to the participating partner (but it should be noted that fraud is42
an
exception to this rule) [NYSPL. §23].
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
4. Notice and Knowledge Continued:
 The Doctrine of Imputed Knowledge Continued:
● Notice of Dissolution:
✭ When A
Partner Continues to Bind the Partnership:
Section 65 of the Uniform Partnership Act [NYSPL] provides that where dissolution is
caused by the act, death, or bankruptcy of a partner, another partner may bind the
partnership to a liability as if the partnership had not been dissolved, until the binding
partner has notice or knowledge of the act, death, or bankruptcy.
✭ Statutory
Exception:
This is a statutory exemption to the agency rule that provides that an agent's authority
ceases upon the death of the principal.
43
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
5. Fraud:
 The Doctrine of Fraud:
The partnership is liable for any wrongful act or omission by a partner "acting in the ordinary
course of the business of the partnership or with authority of his copartners." [NYSPL § 24]
● “Fraud” Defined:
“Blacks Law Dictionary (Fifth Edition Page 594) defines “fraud” as:
“Any intentional perversion of truth tor the purpose of inducing another in reliance upon
it to part with some valuable thing belonging to him or to surrender a legal right;
A false representation of a matter of fact, whether by words or by conduct, by false or
misleading allegations, or by concealment of that which should have been disclosed,
which deceives and is intended to deceive another so that he shall act upon it to his legal
injury; or
Any kind of artifice employed by one person to deceive another.”
“An intentional misrepresentation of a material fact
for the purpose of deceitfully inducing another.”
44
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
5. Fraud Continued:
 The Doctrine of Fraud Continued:
● Fraud On A Third Party:
✭ Within the Scope of Partnership Business:
Where one partner, acting within the scope of partnership business, defrauds a third party, the
partnership will be held liable.
Example:
Peter, a partner in a brokerage firm, accepts securities from a customer of the firm and, without
knowledge of the other partners, endorses the securities, converts them to cash, and deposits the
cash in his own bank account. The partnership is liable.
✭ Outside
the Scope of Partnership Business:
In this category, it is often difficult to determine whether the partner is defrauding a third party, the
partnership, or both. Generally, if the fraudulent act involves a transaction outside the scope of
partnership business, the partnership will not be held liable.
Example:
Paula, a partner in a law firm, tells Tom, a client of the firm, that the firm is making investments for
clients. Tom gives Paula a check for $3,000 made out to the firm. Paula has the check deposited
in the firm account. She then draws a firm check payable to and signed by herself, and deposits it
in her own account. Is the firm liable to Tom? No, because Paula had no authority to accept the
check. As a law firm, the making of investments for clients is outside the scope of partnership.
Paula was acting for her own benefit. Paula's knowledge will thus not be imputed to the law firm.
● Fraud On Partnership:
If a partner seeks to defraud the partnership as part of a transaction with a third party and that
party is aware of the fraud, the partnership is not liable to the third party.
Example:
Patrick is a partner in a manufacturing business. He contracts to sell $5 million worth of widgets to
45
Teddy for $3 million, with the understanding that Teddy will pay him a kickback of $1 million. Teddy
cannot enforce the contract against the partnership.
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
6. Breach of Trust:
 The Doctrine of Breach of Trust:
● Within the Scope of A Partner’s Apparent Authority:
The partnership is liable if one partner misapplies money or property of a third
person received by him within the scope of his apparent authority
[NYSPL §25(1)]
● Within the Scope of Partnership Business:
The partnership is also liable if money or property received in the ordinary course
of business is misapplied by a partner while in the custody of the partnership
[NYSPL §25(2)].
46
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
7. Liability of Partners:
 Civil Liability:
● Types of Civil Liability:
✭ Contract
Liability:
◆ Contracts
Made By A Partner: Partners will be liable on contracts made by a partner in the
scope of the partnership business and on any other contracts expressly authorized by the
partners [NYSPL §26(a)(2)]
✭ Tort
Liability:
◆ Torts
Made By A Partner: Partners will be liable for any torts committed by a partner or by an
employee of the partnership in the ordinary course of partnership business [NYSPL §24]
Note:
This liability will be extended to cover frauds committed by a copartner in course of partnership
business, even though the other partners have no connection with, knowledge of, or participation in
the fraud.
Example:
Abby, Bob, and Carol are partners and members of a stock brokerage firm. The firm has received
certain securities belonging to Diane. Abby, one of the partners, fraudulently converts the securities
to her own use. In an action by Diane against the partnership, Carol defends on the ground that
she did not participate in or have knowledge of the conversion. Carol is nonetheless liable
because the conversion took place while she was a partner.
Compare:
Carol would not be liable if the partnership business was totally unrelated to securities. In that47
case,
Abby would not have had authority to receive securities.
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
7. Liability of Partners Continued:
 Civil Liability Continued:
● Nature of A Partner’s Liability:
✭ In
General:
◆ Joint
Liability: Partners are jointly liable for all contract liabilities, and jointly and severally
liable for all torts or breaches of trust (e.g., misapplication of money or property received from
third persons) [NYSPL §26]
✭ Parties:
◆ Joint
and Several: Where there is joint and several liability, an action may be brought against
any one or more of the partners or the partnership, but a judgment is not personally binding on
a partner unless they have been served. [CPLR §5201(b)].
◆ Joint: Where there is simply joint liability, all partners should be joined as defendants.
- This may be done by naming all the partners as defendants or by naming the partnership
as a defendant [CPLR §1025].
- Where fewer than all of the partners are served, a judgment can be enforced
against partnership property owned by named defendants, whether served or nonserved.
[CPLR §1510]
- The judgment , however, cannot be enforced against the individual assets of a
48
named defendant who was not served.
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
7. Liability of Partners Continued:
 Civil Liability Continued:
● Nature of A Partner’s Liability:
✭ Extent of a Partner’s Liability:
Each partner is personally and individually liable for the entire amount of all partnership
obligations, whether arising in contract or tort. [Midwood Development Corp. v. K 12th
Associates, 146 A.D.2d 754 (1989)
Where one partner is thus compelled to pay or satisfy the whole of a partnership obligation, he is
entitled to indemnification from the partnership. He also may require the other partners to
contribute their pro rata shares of the payment if the partnership is unable to indemnify.
✭ Change of Partnership Membership as Affects Partners' Liability
◆ Liability of Incoming Partner: A person admitted as a partner into an existing partnership is
liable for all the obligations of the partnership arising before her admission as though she had
been a partner when such obligations were incurred. However, her liability shall be satisfied
only out of partnership property. [NYSPL §28]
Note:
A partner may make himself personally liable for the existing obligations (beyond her interest in the
partnership property) by novation or by promising to pay existing obligations. [Wisnouse v. Telsey,
367 F. Supp. 855 (S.D.N.Y1.9 73)J
◆ Liability
of Incoming Partner: A retiring partner remains liable on all obligations incurred by
the partnership while a member of the partnership, unless there has been payment, release, or
novation., and as a result, they are liable for acts done until they have not only withdrawn from
the partnership, but has also given notice of their withdrawal.
49
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
7. Liability of Partners Continued:
 Criminal Liability:
● Nature of A Partner’s Criminal Liability:
✭ Extent of a Partner’s Criminal Liability:
The mutual agency of partners is not sufficient to make other partners
criminally responsible for the crime of a partner committed within the scope of
the partnership business, unless the other partners participated in the
commission of the crime either as principals or accessories.
50
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
7. Liability of Partners Continued:
 Authority of Partners:
• Scope of authority is determined by partnership agreement.
• Majority of partners prevails.
• Individual partners may have express authority under agency rules.
– Implied powers as co-owner of business.
– Partnership may be bound by act of partner with third party if
third party did not know of limitations.
51
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
7. Liability of Partners Continued:
52
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
7. Liability of Partners Continued:
53
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
7. Liability of Partners Continued:
DUTIES
RIGHTS
LIABILITIES
Loyalty and Good Faith Management
Firm Contracts
Obedience
Share of Profits
Torts of Employees
Partners Within
Scope of Business
Reasonable Care
Repayment of Loans
Breach of Duties
Information
Payment of Interest
Partners Remain Liable
After Dissolution
Accounting
Contribution and Indemnity New Partner Not
Personally Liable for
Participation in Distribution Existing Debts
of Capital
Inspection of Books
54
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
8. Review:
 Prohibited Transactions:
•
Certain transactions a partner cannot undertake without express approval:
 Cessation of business
 Suretyship
 Arbitration
 Confession of judgment (admission)
 Assignment of partnership property
 Personal obligations.
55
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
E. Relations Between Partners and Third Parties:
8. Review Continued:
 Duties, Rights and Liabilities of Partners:
• Duties (general agency law):
- Loyalty and good faith.
- Obedience.
• Rights:
- Management.
- Inspection of Books.
- Share of Profits.
- Contribution and Indemnity.
56
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
F. Limited Partnerships:
1. Generally:
 Limited Partnerships:
● Introduction
✭
Definition: A limited partnership is a partnership formed by two or more persons under the
laws of New York and having one or more general partners and one or more limited
partners. It differs from a general partnership in two basic ways:
◆
◆
Statutory Creation: A limited partnership is unknown at common law and is created under
specific statutory authority; and
Limited to the Capital Contribution: The liability of a limited partner for partnership debts is
generally limited to the capital that she contributes to the partnership.
● Formation
✭
Certificate: To form a limited partnership, a certificate of limited partnership must be
executed and filed with the department of state. Such a certificate must set forth:
Name: The name of the limited partnership;
County: The county in which the office of the limited partnership is to be located;
Service of Process: For Service of Process:
- A designation of the department of state as agent for service of process;
- The name and address of a partnership agent for service of process; and
- The partnership office address where any process can be mailed;
◆ Partner Names: The name and business address of each general partner;
◆ Date of Dissolution: The latest date upon which the limited partnership is to dissolve; and
◆ Partner Names: Any other matters the general partners determine to include therein
57
[See NYSPL §121-201]
◆
◆
◆
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
F. Limited Partnerships:
1. Generally:
 Limited Partnerships Continued:
● Name of Partnership
✭ Name
Requirements: The partnership name must contain the words "limited partnership"
or the abbreviation "L.P.," and may not contain the name of a limited partner unless it is also:
-
The name of a general partner,
The corporate name of a corporate general partner, or
The business was conducted under the name before the admission of the limited partner.
[See NYSPL §121-102]
● Nature of the Partner’s Contribution:
✭ Cash,
Property or Services Rendered: The contribution of a partner may be in cash,
property, or services rendered, or a promissory note or other obligation to contribute cash or
property or to perform services [NYSPL §121-501].
✭ Liability for Contribution: Unless the partnership agreement provides otherwise, a partner
is obligated to make a promised contribution, even if they are unable to perform because of
death, disability, or any other reason.
◆
Cash Substitute: If a partner does not make a required contribution of property or services, they
are obligated, at the option of the limited partnership, to contribute cash equal to that portion of
the value, as stated in the partnership records, of the stated contribution that has not been made
[See NYSPL §121-502]
✭ Compromise
of Liability: Subject to the provisions in the partnership agreement, a
partner's obligation to make a contribution may be compromised only by the consent of all of
the partners. However, a partnership creditor who extended credit in reliance on the
obligation may enforce the original obligation [NYSPL §121-502 (b)]
58
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
F. Limited Partnerships:
1. Generally:
 Limited Partnerships Continued:
● Liability of Partners:
✭
Liability of General Partner: Except as otherwise provided in statute or in the partnership
agreement, a general partner of a limited partnership is subject to all of the liabilities of a
partner in a partnership without limited partners [NYSPL § 121-403(a)]. Thus, a general
partner is personally liable for the limited partnership's obligations.
✭
Liability of Limited Partner:
◆
General Rule-Not Liable for Partnership Obligations Beyond Contribution: As a general
rule, a limited partner is not liable for the obligations of a limited partnership for any amount
beyond her contribution [NYSPL § 121-303].
◆
Exceptions to the General Rule Where the Limited Partner:
- Is also a General Partner;
- Participates in Control of Business; or
- Has their Name Used in the Partnership Name.
59
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
F. Limited Partnerships:
1. Generally:
 Limited Partnerships Continued:
● Rights of Partners:
✭
Rights of Both General and Limited Partners:
◆
Right to Share Profits and Losses: The profits and losses of a limited partnership are
allocated among the partners, and among classes of partners, in the manner provided in the
partnership agreement. If the partnership agreement does not so provide in writing, profits
and losses are allocated on the basis of the value, as stated in the partnership records, of the
contributions made by each partner to the extent they have been received by the partnership
and have not been returned [NYSPL §121-503].
◆
Right to Assign Partnership Interest: Unless the partnership agreement provides
otherwise, a partnership interest is assignable in whole or in part. An assignment of a
partnership interest:
- Does not dissolve a limited partnership;
- Does not entitle the assignee to become or to exercise any rights of a partner;
- Entitles the assignee to receive the distribution to which the assignor would be entitled;
- Causes, unless the agreement provides otherwise, the partner to cease to be a partner.
[See NYSL. §121-702(a)].
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
F. Limited Partnerships:
1. Generally:
 Limited Partnerships Continued:
● Rights of Partners Continued:
✭ Rights of Both General and Limited Partners:
◆
◆
Right to Assign Transact Business with the Partnership: Except as provided in the
partnership agreement, a partner may lend money to and transact other business with the
limited partnership and, subject to other applicable law, has the same rights and obligations
with respect thereto as a person who is not a partner [NYSPL §121-108].
Right to Withdraw:
- General Partner: A general partner may withdraw from the partnership at any time by providing
written notice to the other partners, but if the withdrawal is in violation of the partnership
agreement, the partner will be liable to the partnership for damages caused by his breach of the
agreement [NYSPL §121-602].
- Limited Partner: A limited partner may withdraw from the partnership at the time or upon the
happening of events specified in the partnership agreement. if the agreement does not specify in
writing the time or the events upon the happening of which a limited partner may withdraw or a
definite time for the dissolution or winding up of the limited partnership, a limited partner may
withdraw upon not less than six months' prior written notice to each general partner at the address
on the books of the limited partnership at its office in New York [NYSPL §121-603].
◆
Right to Dissolve: On application by or for a partner, a supreme court in the judicial district in
which the office of the limited partnership is located may decree dissolution of a limited
partnership whenever it is not reasonably practicable to carry on the business in conformity with
the partnership agreement [NYSPL §121-802].
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
F. Limited Partnerships:
1. Generally:
 Limited Partnerships Continued:
● Rights of Partners Continued:
✭ Rights Specific to General Partners: Except as otherwise provided in statute or in the
partnership agreement, a general partner of a limited partnership also has all of the rights
of a partner in a partnership without limited partners, including the right to manage the
limited partnership.
✭ Rights Specific to Limited Partners:
◆
Right to Vote: The partnership agreement may grant to all or a specified group of limited
partners the right to vote (on a per capita or other basis) upon any matter, as long as the vote
does not constitute taking control of the business.
◆
Right to Information: Each limited partner the right to:
- Inspect and copy any of the partnership books required to be maintained; and
- Obtain from the general partners from time to time, upon reasonable demand, true and
full information regarding the state of the business and financial condition of the limited
partnership, the limited partnership's federal, state, and local income tax returns, and any
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other information as is just and reasonable.
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
F. Limited Partnerships:
1. Generally:
 Limited Partnerships Continued:
● Dissolution and Distribution:
✭
Dissolution: A limited partnership is dissolved and its affairs must be wound up upon the
happening of the first to occur of the following:
At the time specified in the certificate of limited partnership;
◆ Upon the happening of events specified in writing in the partnership agreement;
◆ Upon written consent of all general partners and two-thirds of each class of limited partners;
◆ Upon withdrawal of a general partner unless:
- the partnership agreement permits the continuation of the business by the remaining general
partner(s), or
- if within 90 days after withdrawal, all partners agree in writing to continue the business and to
the appointment, effective as of the date of withdrawal, of one or more additional general
partners if necessary or desired; or
◆ Upon entry of a decree of judicial dissolution.
[See NYSPL §121-801].
◆
✭
Distribution of Assets: Upon the winding up of a limited partnership, the assets are
distributed as follows:
◆
◆
◆
To creditors, including partners who are creditors, in satisfaction of liabilities of the limited
partnership, other than liabilities for distributions to partners upon withdrawal;
Except as provided in the partnership agreement, to partners and former partners in
satisfaction of liabilities for distributions to partners upon withdrawal; and
Except as provided in the partnership agreement, to partners first for the return of their
contributions, and second, respecting their partnership interests, in the proportions in which
the partners share in distributions.
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[See NYSPL §121-804].
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
G. Dissolution and Termination of Partnerships:
1. Generally:
 The Process of Dissolution:
● Methods of Dissolution:
✭
Dissolution Defined: Dissolution is the "change in the relationship of the partners caused
by any partner ceasing to be associated in the carrying on as distinguished from the
winding up of the business" [NYSPL §121-108].
✭
What Dissolution Means: It is important to note that a dissolution is simply a change in
legal relationship. It does not mean that the business has been ended or any assets have
been distributed to partners.
✭ What Causes Dissolution: Dissolution may be caused in three ways:
◆
By act of the partners;
◆
By operation of law; or
◆
By court decree.
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
G. Dissolution and Termination of Partnerships:
1. Generally:
 The Process of Dissolution:
● Causes of Dissolution:
✭
Act of the Partners:
◆
Per Agreement: A partnership contract may set a definite term to the partnership relationship
or it may set achievement of a particular undertaking as a purpose of the partnership. When
that term has elapsed or the undertaking is accomplished, the partnership automatically
terminates or dissolves [NYSPL §62(1)(a)].
Note:
Even where partners covenant with each other that the partnership shall continue for a fixed period, any
partner may dissolve it by express will at any time although they may subject themself to an action for
damages for the breach of the partnership agreement [NYSPL §62(2)].
◆
◆
◆
Mutual Assent: A partnership may be brought to an end at any time by the mutual assent of
all partners [NYSPL §62(1)(c)].
Expulsion of Partner: There is no common law right to expel a partner. The partnership
agreement, however, may provide for involuntary dismissal, with or without cause (subject to
the implied term of good faith), of a partner. [See Gelder Medical Group v. Webber, 41 N.Y.2d
680 (1977)]. If any partner is expelled from the business in accordance with a power to do so
conferred by the agreement between the partners, this will result in dissolution [NYSPL
§62(1)(d)].
Partnership at Will: Dissolution may be caused without liability by the express will of
any partner when no definite term or particular undertaking is specified [NYSPL
§62(1)(b)].
Example:
Annie and Barry enter into an oral partnership agreement to continue for five years. Annie notifies Barry of
her intention to dissolve the partnership before the expiration of the five years. Because the oral agreement
is unenforceable under the Statute of Frauds, the partnership is treated as a partnership at will, and
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therefore may be dissolved by either partner without liability at any time.
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
G. Dissolution and Termination of Partnerships:
1. Generally:
 The Process of Dissolution:
● Causes of Dissolution:
✭
Operation of Law:
◆ Partnership
Activity Unlawful: Any event that makes it unlawful for the business to be
carried on will dissolve the partnership [NYSPL §62(3)].
Example:
Arnie and Beth are copartners in the business of selling liquor when the state of New York passes
a prohibition law making such business illegal. Accordingly, the partnership is thereby dissolved.
◆
◆
Death of a Partner: The death of a partner will dissolve the partnership [NYSPL. §62(4)].
Bankruptcy: The bankruptcy of any partner or the partnership will dissolve the partnership
[NYSPL. §62(5)].
✭ Decree of a Court of Equity: Upon the application of one or more of the partners, a court
of equity may, for sufficient reason, decree the dissolution of a partnership. The following
are sufficient reasons for a decree of dissolution:
◆
◆
◆
◆
◆
◆
Breach of Agreement: A partner commits willful or persistent breaches of the partnership
agreement or otherwise conducts herself so that it is not reasonably practicable to carry on
the business in partnership with her [NYSPL §63(l)(d)];
Unprofitablity: The business can only be carried on at a loss [NYSPL §63(1)(e)];
Misconduct: A partner is guilty of such conduct as tends to "affect prejudicially the carrying
on of the business" [NYSPL §63(1)(c)];
Incompetence: A partner has been declared incompetent in a judicial proceeding or is shown
to be of unsound mind [NYSPL §63(1)(a)];
Incapability: A partner is shown to be incapable of performing her part of the partnership
contract [NYSPL §63(l)(b)]; and
Other Circumstances: The court determines that other circumstances would render a 66
dissolution equitable [NYSPL §63(1)(f)].
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
G. Dissolution and Termination of Partnerships:
1. Generally:
 Notice of Dissolution:
● Generally:
✭ Proper
◆
◆
Notice:
Publication: Third parties who have had "dealings" with the partnership (except those who
have extended credit and those who have simply known of the partnership prior to dissolution
are entitled to proper notice published in newspapers of general circulation in the area in
which the partnership carries on its business.
Failure to Publish: Failure to furnish this information to such third parties will bind members
of the former partnership to such third parties who, while unaware of the dissolution, extend
credit to the partnership [NYSPL §66(1)(b)].
✭ Personal
Notice:
◆ Creditors:
Those who were creditors at the time of dissolution or who had extended credit to
the partnership prior to dissolution are entitled to personal notice.
◆ Size and Number of Transaction Doesn’t Matter: It does not matter whether a creditor has
advanced a large or small amount or if there were only one or two transactions between the
partnership and the creditor.
Note:
A third party who has dealt with the partnership only on a cash basis and has never been a
partnership creditor is only entitled to the notice that is given the general public.
✭ Liability
of Invisible Partners:
◆ Liability
Limited to Partnership Assets: The liability of a partner for post dissolution
transactions when notice was not given is limited to partnership assets if the partner was so
inactive in partnership affairs that credit to the partnership was not based on her personal
credit and the creditor in fact did not know she was a partner [NYSPL §66].
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
G. Dissolution and Termination of Partnerships:
1. Generally:
 Authority of Partners to Transact Business after Dissolution:
● Generally:
✭ General
Rule:
◆ Dissolution
Generally Terminates Authority: As a general rule, the dissolution of a
partnership terminates the authority of any partner to act as an agent for either the partnership
or the other partners, except for the purpose of winding up the partnership affairs [NYSPL
§66(1)(a)].
◆ An Exception in the Agreement: If the partnership agreement provides that the business is
to be continued by one or more of the partners, the agreement controls and the business will
be continued by the new partners without any winding up.
✭ Winding
Up:
◆ Actions
to Conclude Partnership Operations: After dissolution, absent an agreement to the
contrary, the partnership must be wound up.
◆ Authority to Wind Up: A partner has authority to carry out the necessary acts to wind up the
partnership business.
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TYPES OF BUSINESS ORGANIZATIONS
Partnerships
G. Dissolution and Termination of Partnerships:
1. Generally:
 Authority of Partners to Transact Business after Dissolution:
● Acting to Wind Up the Partnership:
✭ Winding
Up Continued:
◆ Actions
That Terminate Wind Up: Generally only transactions designed to terminate rather than
to carry on the business are within the scope of the partner's actual authority.
◆ Authority is Limited to Old Business: In short, "old business" can be wrapped up and if "new
business" is entered into, the partner who continues to carry on the new business on behalf of
the partnership with knowledge of the dissolution assumes sole liability, and as a result, if such
losses result, such partner alone will bear them.
◆ Old
Business vs. New Business: After dissolution but before termination, the liquidating
partners can bind the partnership in transactions winding up old business, but not in transactions
constituting new business.
➢ Old Business: The following constitutes Old Business:
✪ Assigning claims;
✪ Selling partnership assets;
✪ Compromising claims; ✪ Distributing assets of the business;
✪ Performing contracts made prior to dissolution.
✪ Collecting debts due;
✪ Paying off creditors; and
➢ New Business: The following constitutes New Business:
✪ Extending time on a debt; ✪ Entering into new contracts; and
✪ Increasing obligations,
69
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
G. Dissolution and Termination of Partnerships:
1. Generally:
 Authority of Partners to Transact Business after Dissolution:
● Acting to Wind Up the Partnership:
✭ Who
May Wind Up:
◆ All
Partners: If all partners agree to a dissolution of the partnership or the partnership term
expires, then all the partners have the right to wind up the affairs of the partnership.
◆ Remaining
Partners: If a partner dissolves the partnership by bankruptcy, then the remaining
partner(s) have the right to wind up the partnership's affairs.
◆ Surviving
Partners: If a partnership is dissolved by the death of a partner, then the surviving
partner(s) have the right to wind up partnership affairs.
◆ Executor:
If the partnership affairs have not been wound up when the last surviving partner
dies, then the executor or administrator of such last survivor's estate has the right to wind up
the partnership's affairs [NYSPL §68].
✭ Who
May Not Wind Up:
◆ Partner
Wrongfully Dissolving Partnership: A partner who wrongfully dissolves a
partnership is not entitled to wind up the affairs of the partnership [NYSPL §68].
70
TYPES OF BUSINESS ORGANIZATIONS
Partnerships
G. Dissolution and Termination of Partnerships:
1. Generally:
 Final Distribution after Dissolution:
● Distribution of Assets in a Final Accounting:
✭
Order of Distribution: Where a solvent partnership is dissolved and its assets are
reduced to cash, such cash shall be used to pay the partnership's liabilities in the following
order:
◆ Outside
Creditors: Creditors who are not partners must be paid before the partners
themselves receive any payments.
◆ Partners:
➢ Advances: Where a partner advances more than the capital provided for in the
agreement, such advances (and any interest due) must be returned to him before the
surplus can be divided among the partners.
➢ Contributions to Capital: After payments of advances or loans, payments are to be made
to partners on account of agreed contributions to capital.
➢ Surplus or Profits: Whatever cash remains after the above payments are made is
distributed among the partners.
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• Bonus Questions of the Day
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