Transcript Chapter 23

P A R T
9
Partnerships
Introduction to Forms of Business
and Formation of Partnerships
Operation of Partnerships
Dissolution & Winding Up
Limited Liability Companies &
Limited Partnerships
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
C H A P T E R
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INTRODUCTION TO FORMS OF BUSINESS
AND FORMATION OF PARTNERSHIPS
“It sounds boring, but
anything is easy to start
– starting a novel,
starting a business…it’s
keeping the thing going
that is difficult.”
Prue Leith, author and
executive, quoted in The Adventure
Capitalists (Grout and Curry, 1998)
Learning Objectives
 Choosing
a form of business
 Creation of partnership
 Purported partners
 Partnership capital and property
 Partnership interests
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Overview

Choosing a form of business is important
because the business owner’s liability and
control of the business vary greatly among
the many forms of business
What you
choose depends
on where you
want to go
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Basic Forms
Sole proprietorship
 Partnership



Corporation


General, limited, limited liability, or limited
liability limited partnership
Regular “C”, Subchapter “S”, nonprofit,
professional
Limited liability company

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Including professional form
Sole Proprietorship
A sole proprietorship has only one owner
and is an extension of its owner
 It is not a legal entity and cannot sue or be
sued, so creditors/claimants sue the owner
 Advantages: no formalities, taxes flow to
owner, owner takes all profit and control
 Disadvantage: owner bears all risk of loss

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Partnership
A partnership has two or more owners or
partners and includes several forms: general,
limited (LP), limited liability (LLP), limited
liability limited (LLLP), or professional
 Though a legal entity, a partnership is not a
federal tax-paying entity, thus all income or
loss must be reported on the individual
partner’s federal income tax return whether
or not distributed or allocated to partners

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Partnership
Advantages: relatively easy to create, has a
legal entity but individual taxation, partners
control the business, partners take all gain,
flexible structure
 Disadvantages: partners bear all risk of loss
jointly and severally, different levels of
liability to partners depending on sub-form

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Corporation
A corporation is owned by shareholders who
elect a board of directors to manage the
business, thus ownership and management
of a corporation may be separate
 Shareholders have limited liability for the
obligations of the corporation
 The corporation is a legal and tax-paying
entity for federal income tax purposes


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Exception: Subchapter S corporations
Corporation
Advantages: shareholders enjoy limited
liability for corporate obligations, perpetual
existence, ability to raise large amounts of
capital
 Disadvantages: greater formality required for
formation and operation, double-taxation,
complexity of structure

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Limited Liability Company
A limited liability company (LLC) combines
the nontax advantages of corporations with
favorable tax treatment of partnerships
 An LLC is owned by members, who may
manage themselves or retain a manager to
run the business
 Members have limited liability for the
obligations of the LLC

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Business Forms Worldwide

Many nations share
similar forms of business,
including partnership
and corporation, though
details vary widely
Venice, Italy, where the
limited partnership
probably originated.
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The General Partnership
Every state has enacted partnership laws
 The Revised Uniform Partnership Act
(RUPA) of 1994, with the 1997 amendments,
is a model partnership statute

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Partnership Creation
RUPA defines partnership as an “association
of two or more persons to carry on as coowners a business for profit.”
 Partners share profit and loss
 A partnership is a voluntary and consensual
relationship and may exist by law even if the
parties entered it inadvertently, without
considering whether they had created a
partnership

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Partnership Creation -- Examples
Several musicians agree to
form a band and share
profits
 Two students stand in line
for hours to buy 10
concert tickets. They sell 8
tickets for a $5 fee per
ticket and splitting the
profits.

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Partnership Creation – The LLP
Unlike an ordinary partnership, creating a
limited liability partnership (LLP) must
comply with a state’s limited liability
partnership statute
 Formation of an LLP requires filing a form
with the secretary of state, paying an annual
fee, and using proper terminology


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Registered Limited Liability Partnership, RLLP,
Limited Liability Partnership, LLP
Non-Partners Not Liable
to Third Parties
If a third person deals with two or more
people who seem to be partners and is
harmed, the third person may sue to recover
damages from both of the apparent partners
 RUPA Section 308(e): “persons who are not
partners as to each other are not liable as
partners to other persons.”

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Purported Partners

However, under the doctrine of purported
partners, if the third party proves that one
apparent partner misled him to believe that
the two (or more) people were partners, the
third party may sue the partner that caused
the deception for damages suffered when
the apparent partnership failed to perform
as agreed
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Palmer v. Claydon

Facts:

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Palmer sued attorney
Claydon for malpractice
for legal services
Palmer also sued Lawler
alleging Lawler was a
purported partner of
Claydon
Palmer v. Claydon

Legal Reasoning and Holding:


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The court reviewed evidence indicating Lawler
and Claydon might be partners, a matter for a
jury to decide precluding summary judgment
 Evidence: expense and office sharing, both
names on office sign and stationery,
Claydon’s comments…
But Palmer released her claims against Claydon
before Lawler’s appeal, so her claims against
Lawler were also released
Partners and Ownership
When a partnership or limited liability
partnership is formed, partners contribute
cash or other property – partnership capital
– to the partnership
 Belongs to partnership as an entity
 Tangible and intangible property acquired
by a partnership presumptively belongs to
the partnership as an entity rather than
individual partners

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A Partner’s Partnership Interest
As owner of a partnership or LLP, a partner
has an ownership interest in the partnership
 The partnership interest includes partner’s:
1. Transferable interest


2.
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Partner’s share of profits and losses and right
to receive partnership distributions
Management and other rights
Partnership or Joint Venture?

Generally, partnership law applies to joint
ventures, but a court may distinguish the
two if the business purpose is limited to a
single project rather than series of related
transactions
 Reason: joint venturers usually held to
have less implied and apparent authority
than partners due to limited scope of the
enterprise
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Southex Exhibitions v. Rhode
Island Builders Assoc.

Facts:


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1974: RIBA and show producer SEM entered a 5year contract; RIBA agreed to sponsor and
endorse only SEM shows with net show profits
shared 55% to SEM and 45% to RIBA
During negotiations, SEM and RIBA discussed
agreement’s use of the term “partners” and
SEM’s president claimed “no ownership”
1994: Southex acquired SEM’s interest in the
agreement and RIBA contracted with another
show producer
Southex Exhibitions v. Rhode
Island Builders Assoc.

Procedural History and Legal Reasoning:


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Southex sued RIBA to enjoin the 2000 home show
claiming the 1974 agreement established a
partnership and RIBA breached fiduciary duties
by wrongful dissolution
Trial court found for RIBA and Southex appealed
Appellate court reviewed partnership law basics
and noted first that the 1974 agreement simply
titled “Agreement” rather than “Partnership
Agreement”
Southex Exhibitions v. Rhode
Island Builders Assoc.

Legal Reasoning and Holding:
Court noted that the agreement was for a limited
term and, more interesting, plaintiff Southex
entered contracts with third parties “in its own
name, rather than in the name of the putative
partnership.”
 Court concluded partnership did not exist and
affirmed the judgment for RIBA

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Test Your Knowledge

True=A, False = B
 The Revised Uniform Partnership Act
(RUPA) is a model partnership statute.
 Partnership is an “association of two or
more persons to carry on as co-owners a
business for profit.”
 Partnership capital belongs to the
individual partners in equal shares.
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Test Your Knowledge

Multiple Choice

The partnership interest includes a
partner’s:
(a) Management and other rights participation
 (b) Share of profits and losses and right to
receive partnership distributions
 (c) Ownership interest in partnership capital
 (d) both A and B
 (e) none of the above

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Thought Questions

Do you want to start a
business? If you wanted to
start a business (snowboards,
for example), would you
choose partnership as the
form of business?
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