Transcript Business Law and the Regulation of Business Chapter 31

Business Law and the
Regulation of Business
Chapter 31: Formation and Dissolution
of General Partnerships
By
Richard A. Mann
&
Barry S. Roberts
Topics Covered in this Chapter
I. Choosing a Business Association
A. Factors Affecting the Choice
B. Forms of Business Associations
II. Formation of General Partnerships
A. Nature of Partnership
B. Formation of a Partnership
III. Dissolution of General Partnerships
A. Dissolution
B. Winding Up
C. Continuation After Dissolution
Definition of Partnership

An association of two or more persons
to carry on as co-owners a business
for profit.
Entity Theory

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Partnership as Legal Entity – an
organization having a legal existence
separate from that of its members; the RUPA
considers a partnership a legal entity for
nearly all purposes.
Partnership as Legal Aggregate – a group
of individuals not having a legal existence
separate from that of its members; the RUPA
considers a partnership a legal aggregate for
few purposes.
Types of Partnerships
Term Partnership – partnership for a
specific term or particular undertaking.
 Partnership At Will – partnership in
which the partners have not agreed to
remain partners until the expiration of a
definite term or the completion of a
particular undertaking.

Formation


Partnership Agreement – it is preferable,
although not usually required, that the
partners enter into a written partnership
agreement.
Tests of Partnership Existence – the
formation of a partnership requires all of the
following:
– Association two or more persons with legal
capacity who agree to become partners
– Business for Profit
– Co-ownership includes sharing of profits and
control of the business
Sample Partnership Agreement
THIS 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 be
deemed to have become partners in business. The purposes, terms and conditions of this partnership
are 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 LOSSES
Name of Partner
Capital Contribution
Agreed Upon
Cash Valuation
Specific
of Contribution
Contribution
Percentage
Distribution
of Profit
and Loss
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 by
a numerical majority of the partners. Any act beyond the scope of this partnership agreement or any
contract 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.
Formation
Partnership Capital – total money and
property contributed by the partners for
use by the partnership.
 Partnership Property – sum of all of
the partnership's assets, including all
property acquired by the partnership.
 Partner’s Interest in Partnership –
includes the partner’s transferable
interest and all management and other
rights.

Tests for Existence of a Partnership
Two or more
persons
with capacity?
No
Yes
Business
for profit?
No
No Partnership
Yes
Co-ownership:
profit sharing, loss
sharing, control?
No
Yes
Partnership
Partnership Property Compared with
Partner’s Interest
Partnership Property
Partner’s Interest
Definition
Tenant in partnership
Share of profits and surplus
Possession
For partnership purposes, not
individual purposes
Intangible, personal property
right
Assignability
NO: unless all other partners
assign their rights in the
property
YES: but the assignee does not
become a partner
Attachment
YES: but only for a claim
against the partnership
YES: by a charging order
Inheritance
NO: goes to surviving
partner(s)
YES: passes to the personal
representative
Dissociation and Dissolution of General
Partnerships Under RUPA
Definition of Dissociation – change in
the relation of partners caused by any
partner's ceasing to be associated in
carrying on of the business; may be
wrongful or rightful (see next 2 slides).
 Effect of Dissociation – terminates
dissociating partner’s right to participate
in the management of the partnership
business and duties to partnership.

Dissociation & Dissolution under RUPA
Partnership at Will
Term Partnership
Dissociation Dissolution Dissociation Dissolution
ACTS OF THE PARTNERS
Assignment of partner’s interest
Accounting
Withdrawal
Bankruptcy
Incapacity
Death
Expulsion of partner
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Expiration of term
Event specified in agreement
Unanimous agreement to dissolve
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*Dissolution will occur, if within 90 days of dissociation, at least
half the remaining partners desire to wind up business.
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Dissociation & Dissolution under RUPA
Partnership at Will
Term Partnership
Dissociation Dissolution Dissociation Dissolution
OPERATION OF LAW
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Illegality
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COURT ORDER
Judicial expulsion of partner
Judicial determination of partner’s
incapacity to perform duties
Judicial determination of
economic frustration or
impracticability
Application by transferee of
partner’s interest if equitable
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*Dissolution will occur, if within 90 days of dissociation, at least
half the remaining partners desire to wind up business.
Wrongful Dissociation

Wrongful Dissociation – a dissociation that
breaches an express provision of the
partnership agreement or in a term
partnership if before the expiration of the
term or the completion of the undertaking (1)
the partner voluntarily withdraws by express
will, (2) the partner is judicially expelled for
misconduct, (3) the partner becomes a
debtor in bankruptcy, or (4) the partner is an
entity (other than a trust or estate) and is
expelled or otherwise dissociated because
its dissolution or termination was willful.
Rightful Dissociation

Rightful Dissociation – all other
dissociations are rightful including the
death of a partner in any partnership
and the withdrawal of a partner in a
partnership at will.
Causes of Dissolution

Dissolution by Act of the Partners –
– Partnership at will: withdrawal of a partner;
– Term partnership: (1) the term ends, (2) all
partners expressly agree to dissolve, or (3) a
partner’s dissociation is caused by a partner’s
death or incapacity, bankruptcy or similar
financial impairment, or wrongful dissociation if
within 90 days after dissociation at least half of
the remaining partners express their will to wind
up the partnership business;
– Any partnership: an event occurs that was
specified in the partnership agreement as
resulting in dissolution.
Causes of Dissolution
Dissolution by Operation of Law – a
partnership is dissolved by operation of
law upon the subsequent illegality of
the partnership business.
 Dissolution by Court Order – a court
will order dissolution of a partnership
under certain conditions.

Effects of Dissolution

Upon dissolution a partnership is not
terminated but continues until the winding up
is completed.
– Authority – a partner's actual authority to act for
the partnership terminates, except so far as may
be appropriate to wind up partnership affairs;
apparent authority continues unless notice of the
dissolution is given to a third party.
– Existing Liability – dissolution does not in itself
discharge the existing liability of any partner;
partners are liable for their share of partnership
liabilities incurred after dissolution.
Causes and Effects of Dissolution
Partnership Dissolution
Act of Partners
Operation of Law
Court Order
Winding Up
Limited Power
Distribution of Assets
Termination
Continuation
Wrongful Dissolution
Expulsion
Agreement of Parties
Liability of Incoming and
Retiring Partners
Partnership Debts
Arising:
Limited
Liability
Admission of
New Partner
Unlimited
Liability
No
Liability
Notice of
Retirement
Winding Up

Completing unfinished business, collecting
debts, and distributing assets to creditors and
partners; also called liquidation.
– Winding Up Required – unless all of the
partners, including any rightfully dissociating
partner, waive the right to have the partnership’s
business wound up and the partnership
terminated.
– Participation in Winding Up – any partner who
has not wrongfully dissociated may participate in
winding up the partnership’s business.
Distribution of Assets

The assets of the partnership include all
required contributions of partners; the
liabilities of a partnership are to be paid
out of partnership assets in the following
order: (1) amounts owing to nonpartner
and partner creditors and (2) amounts
owing to partners on their partners’
accounts.
Non-dissolving Dissociations

Partnership at Will – a partner’s
death, bankruptcy, or incapacity, the
expulsion of a partner, or the
termination of an entity-partner results
in a dissociation of that partner but
does not result in a dissolution.
Non-dissolving Dissociations

Term Partnership – if within 90 days after
any of following causes of dissolution occurs,
fewer than half of the remaining partners
express their will to wind up the partnership
business, then the partnership will not
dissolve: a partner’s dissociation by death,
bankruptcy or incapacity, the distribution by a
trust-partner of its entire partnership interest,
the termination of an entity-partner, or a
partner’s wrongful dissociation.
Continuation After Dissociation

The remaining partners have the right
to continue the partnership with a
mandatory buyout of the dissociating
partner; the creditors of the partnership
have claims against the continued
partnership.
Power to Bind the Partnership


A dissociated partner's actual authority to act
for the partnership terminates; apparent
authority continues for two years unless
notice is given to a third party.
Dissociated Partner’s Liability to Third
Persons – a partner’s dissociation does not
of itself discharge the partner’s liability for a
partnership obligation incurred before
dissociation; a dissociated partner is liable
for a partnership obligation incurred within
two years after a partner dissociates unless
notice of the dissolution is given to a third
party.
Liability of Incoming and
Retiring Partners
Partnership Debts
Arising:
Limited
Liability
Admission of
New Partner
Unlimited
Liability
No
Liability
Notice of
Retirement