Business Law Chapter 24

Front 1

Agency Concepts and Partnership Law

Back 1

Partnership arises from agreement, express or implied, between two or more persons to carry on a business together for profit.
Partners are agents and fiduciaries of one another, but differ from agents in that they are also co-owners and have equal rights to manage and share in the profits and losses.
If a commercial enterprise shares profits and losses, a partnership will be inferred.
Law: Uniform Partnership Act.

Front 2

Sole Proprietorships

Back 2

The owner is the business; anyone who does business without creating a separate business organization has a sole proprietorship

Front 3

Sole Proprietorships: Advantages

Back 3

Owner is in complete control & receives all profits

Flexibility

Ease of creation; maintenance

Front 4

Sole Proprietorships: Disadvantages

Back 4

Owner is personally liable for all torts/contracts

Lacks continuity after death

Difficult to raise financing

Front 5

Agency Concepts and Partnership Law
Partnership Agreements

Back 5

In the absence of a partnership agreement (oral or written) state statutes govern the rights among partners:
Management: equal, each one vote, majority wins; need unanimous consent for some actions.
Partnership Interest: equal profits, losses shared as profits shared.

Front 6

When Does a Partnership Exist?

Back 6

Intent to associate is a key element of a partnership, and all “partners” must consent.
Key elements:
A sharing of profits and losses, AND
A joint ownership of the business, AND
An equal right to be involved in the management of the business.

Sharing profits or losses.
Joint ownership of the business.
Equal right in the management of the business.
No inference if:
Debt.
Wages.
Rent.
Annuity.
Sale of goodwill.

Front 7

Entity versus Aggregate Theory of Partnerships

Back 7

At common law, partnerships were treated as aggregate, not legal entities.
A suit at common law could never be brought by or against the firm in its own name; each individual partner had to sue or be sued.

Today, many states recognize the partnership as a separate legal entity for the following purposes:
To sue and be sued (for federal questions, yes; for state questions, differs).
To have judgments collected against it’s assets, and individual partners’ assets.

Partnerships are recognized as separate legal entities (cont’d):
To own partnership property.
To convey partnership property.
At common law -- property owned in tenancy in partnership, all partners had to be named and sign the conveyance.
Under UPA partnership property can be held and sold in firm name.

Front 8

Partnership Formation

Back 8

Generally, agreements to form a partnership can be:
Oral.
Written, or
Implied by Conduct.

Partnership agreements (Articles of Partnership) should be written.
Partners must have legal capacity. UPA permits corporations to be a partner.
Partnership for a Term.

Front 9

Partnership By Estoppel

Back 9

Legally binding partnership that may arise where, in fact, no formal partnership agreement is in effect. A person who by conduct or words represents, or allows him/herself to be represented, as a partner in a firm is liable for the credit or loans obtained by firm on the basis of such representation. Also called presumption of partnership.

parties who are not partners hold themselves out to 3rd Parties and 3rd Party relies to her detriment.

Front 10

Rights of Partners

Back 10

Management: equal, each one vote, majority wins; need unanimous consent for some actions.
Partnership Interest: equal profits, losses shared as profits shared.
Compensation: generally, none.

Inspection of the Books: always and also by rep. of deceased partner.
Accounting: when other partner(s) committing fraud, embezzlement, wrongful exclusion, or anytime it is just and reasonable.
Property Rights ->

Each partner has a property right, which includes:
An interest in the partnership.
A right in specific partnership property.
A right to participate in the management of the partnership, as mentioned above.

Front 11

Duties and Liabilities of Partners

Back 11

Fiduciary Duties: Partners are fiduciaries and general agents of one another and the partnership.
Authority of Partners: Partners have implied authority to conduct ordinary partnership business but need unanimous consent to sell assets or donate to charity.

Front 12

Joint Liability for Contracts.

Back 12

If Partner is sued for Partnership debt, Partner has right to insist that other partners be sued with her.

Front 13

Joint and Several Liability for Torts

Back 13

3rd party can sue either one or all partners. 3rd party may collect against personal assets of all partners.

Front 14

Liability of Incoming Partner & Outgoing Partner.

Back 14

Newly admitted partner has no personal liability for existing partnership debts and obligations.

Front 15

Partner’s Dissociation

Back 15

Occurs when a partner ceases to be associated with the carrying on of partnership business.
Events causing dissociation:
Giving notice of withdrawal.
Contractual event.
Expelled.
Bankruptcy, assignment to creditors, incapacity or death.
Wrongful Dissociation.
Effects of Dissociation.

Front 16

Partnership Termination

Back 16

Dissolution (termination) can occur for a variety of reasons:
Partners agree to terminate.
Partner’s withdrawal can terminate.
Termination has two stages:
Dissolution and “Winding Up” (actual process of collecting and distributing the partnership assets).

Front 17

Dissolution: By Acts of the Partners:

Back 17

Partners can agree to Agreement.
Partner’s Withdrawal.
Partnership for term – breach.
No term -- no breach.
Admission of a new partner.
Not a transfer of a partner’s interest.
By assignment or attachment by creditor.

Front 18

Dissolution: By Acts of the Partners:

Back 18

Partners can agree to Agreement.
Partner’s Withdrawal.
Partnership for term – breach.
No term -- no breach.
Admission of a new partner.
Not a transfer of a partner’s interest.
By assignment or attachment by creditor.

Front 19

Dissolution: By Operation of Law:

Back 19

Death of a partner.
Bankruptcy of a partner.
Bankruptcy of partnership.
Illegality.

Front 20

Winding Up: Partners have no authority after dissolution occurs except to:

Back 20

Complete transactions already begun.
Wind up by collecting and preserving partnership assets, discharging liabilities, and accounting to each partner for the value of his share.

Front 21

Winding Up: If partner has violated the partnership agreement, he:

Back 21

Must pay damages.
May not participate in winding up.
But other partners may choose to continue.

Front 22

Winding Up: If partner dies:

Back 22

Other partners act as fiduciaries.
Accounting to deceased partner’s estate.
Survivors get paid for their services.

Front 23

Winding Up: Partnership obligations are paid in the following order:

Back 23

First, 3rd party creditors.
Second, partner loans to partnership.
Third, return of capital contributions.
Fourth, distribution of the balance, if any to partners.

Front 24

Limited Liability Partnerships

Back 24

Creature of state statute, similar to an LLC, except that an LLP is designed for professionals who normally do business as a partnership (lawyers and accountants).
LLP allows partnership to limit personal liability of the partners but allows “pass through” tax advantages.

Front 25

Liability in an LLP

Back 25

Recall that partnership law makes all partners jointly and severally for another partner’s tort, including personal assets.
The LLP allows professionals to avoid personal liability for the malpractice of other partners.
Supervising Partner is also liable for acts of subordinate.

Front 26

Family Limited Liability Partnerships

Back 26

FLLP is a limited liability partnership in which the majority of the partners are related to each other.
Used frequently for agriculture.

Front 27

Limited Partnerships

Back 27

Agreement of two or more persons to carry on a business for profit with at least one general partner and one limited partner.
Limits the liability of some of its owners (the limited partners) to their investment.
A LP is a creature of state statute. Filing a certificate with the Secretary of State is required.

Front 28

LP -- Rights and Liabilities

Back 28

The General partner assumes all management and personal liability.
General partners are personally liable to 3rd parties for breach of contract and tort liability.
However, a corporation (or an LLC) can be a general partner and have limited liability.

Limited Partner contributes cash but has no management rights. Liability is limited to the amount of investment.
A limited partner can forfeit this “veil” of immunity by taking part in the management of the LP.
Limited partners have the right to inspect the LP’s books.

Front 29

LP – Dissociation and Dissolution

Back 29

General partner has right to withdraw, but can lead to dissolution.
On dissolution, the limited partner is entitled to return of capital contributions.
LP interests are considered securities and regulated by both federal and state securities laws.
Limited partners’ liability is limited to the capital investment.

Front 30

LP – Dissolution

Back 30

Dissolved in much the same way as a general partnership (Chapter 33).
Retirement, withdrawal, death bankruptcy or mental incompetence of a general partner will trigger dissolution unless the remaining GP’s consent to continue.
Creditors are paid first then partners.
CASE 24.2 In re Dissolution of Midnight Star Enterprises, LP (South Dakota, 2006).

Front 31

Limited Liability Limited Partnerships

Back 31

Limited Liability Limited Partnership is a type of limited partnership.
Difference between LP and LLLP is that the general partner has limited liability, like a limited partner, up to the amount of investment.
Most states do not allow for LLLP’s.

Front 32

Limited Liability Companies

Back 32

Like corporations, LLC’s are creatures of state law.
The owners are called “members” (not shareholders) and their ownership is called an “interest” (not shares).
Members of an LLC enjoy limited liability.
Can a third party pierce the LLC “veil” and hold managing member liable?

Front 33

LLC Formation

Back 33

Articles of Organization require:
Name of Business.
Principal Address.
Name and Address of Registered Agent.
Names of the Owners; and
How the LLC will be managed.
Business name must include LLC or Limited Liability Company.
CASE 24.3 02 Development, LLC v. 607 South Park, LLC (California, 2008).

Front 34

Jurisdictional Requirements

Back 34

An LLC is a legal entity separate from its owners.
For federal jurisdiction based on diversity, an LLC may be treated differently than a corporation.
For diversity purposes the citizenship of an LLC is the citizenship of its members, which may live in multiple jurisdictions.

Front 35

Advantages LCC

Back 35

Member liability is limited to amount of investment.

Can be treated as a “pass through” entity for tax purposes.

Profits can be distributed to members without the double taxation of a corporation. Members pay personal income tax on received dividends.

Front 36

Disadvantages LCC

Back 36

State statutes are not uniform.

Not all states recognize LLC’s.

Front 37

The LLC Operating Agreement

Back 37

Operating agreement is analogous to corporation’s bylaws.
Operating agreements may be oral and contain provisions relating to management, dividends, meetings, transfer of membership interests, and other significant issues.
Generally, if the operating agreement is silent, courts will apply partnership principles.

Front 38

Management of an LLC

Back 38

There are two options for management, generally set forth in the articles of organization:
Member-Managed: all of the members participate in management, like a partnership.
Manager-Managed: members are elected to manage the LLC.
If the articles are silent, statutes provide either that each member has one vote or votes are made based on percentage of ownership.

Front 39

Dissociation and Dissolution of an LLC

Back 39

Dissociation: same partnership principle applies. Member of LLC has power to dissociate but she may not have the right to do so.
External events may trigger dissociation: bankruptcy, court order, incompetence, death.
Effect of Dissociation: member loses right to participate or act as agent for LLC, have his interest bought out.

Disassociated member has no right to force LLC to dissolve.
LLC operating agreement can stipulate what events cause dissolution.
Winding up: Members must collect, liquidate, and distribute LLC assets.
After assets sold, proceeds used to pay off creditors (including members who are creditors).
Then members’ capital contributions are returned, and anything remaining is shared as “profits” among the members according to the operating agreement.

Front 40

Special Business Forms: Joint Venture:

Back 40

Joint Venture: two or more entities combine efforts or property for a single transaction or project.
Unless agreed otherwise, JV’s share profits and losses equally.
Common in international transactions when U.S. companies wish to expand overseas.

Front 41

JV Characteristics

Back 41

Resembles a partnership and is taxed like a partnership. However, a JV is limited in time and scope, whereas a partnership is an ongoing business. Other differences:
JV members has less implied and apparent authority than partners.
Death of JV member does not terminate JV.
JV members can specify duration. If not, then JV terminates when purpose is accomplished.

Front 42

Franchises

Back 42

Franchise is an arrangement between a Franchisor (owner of a trademark or trade name) and a Franchisee can sell goods or services.
25% of all retail sales based on franchise merchandising.

Front 43

Sole Proprietorships

Back 43

The simplest form of business organization; used by anyone who does business without creating
a separate organization. The owner is the business. The owner pays personal income taxes on all
profits and is personally liable for all business debts.

Front 44

Partnerships

Back 44

1 . A partnership is created by agreement of the parties.
2. A partnership is treated as an entity except for limited purposes.
3. Each partner pays a proportionate share of income taxes on the net profits of the partnership,
whether or not they are distributed; the partnership files only an information return with the
Internal Revenue Service.
4. Each partner has an equal voice in management unless the partnership agreement provides
otherwise.
5. In the absence of an agreement, partners share profits equally and share losses in the same
ratio as they share profits.
6. The capital contribution of each partner is determined by agreement.
7. Partners have unlimited liability for partnership debts.
8. A partnership can be terminated by agreement or can be dissolved by action of the partners,
operation of law (subsequent illegality), or court decree.

Front 45

Limited Liability
Partnerships (LLPs)

Back 45

1 . Formation—LLPs must be formed in compliance with state statutes. Typically, an LLP is
formed by professionals who normally work together as partners in a partnership.
Under most state LLP statutes, it is relatively easy to convert a traditional partnership
into an LLP.
2. Liability of partners—LLP statutes vary, but under the UPA, professionals generally can avoid
personal liability for acts committed by other partners. The extent to which partners’ limited
liability will be recognized when the partnership does business in another state depends on the other state’s laws. Partners in an LLP continue to be liable for their own wrongful acts and
for the wrongful acts of those whom they supervise.
3. Family limited liability partnership (FLLP)—A form of LLP in which all of the partners are family
members or fiduciaries of family members; the most significant use of the FLLP is by families
engaged in agricultural enterprises.

Front 46

Limited Partnerships: Formation

Back 46

Formation—A certificate of limited partnership must be filed with the secretary of state’s office
or other designated state official. The certificate must include information about the business,
similar to the information included in a corporate charter. The partnership consists of one or
more general partners and one or more limited partners.

Front 47

Limited Partnerships: Rights and liabilities of partners

Back 47

Rights and liabilities of partners—With some exceptions, the rights of partners are the same as
the rights of partners in a general partnership. General partners have unlimited liability for
partnership obligations; limited partners are liable only to the extent of their contributions.

Front 48

Limited Partnerships: Limited partners and management

Back 48

Limited partners and management—Only general partners can participate in management.
Limited partners have no voice in management; if they do participate in management
activities, they risk having general-partner liability.

Front 49

Limited Partnerships: Dissociation and dissolution

Back 49

Dissociation and dissolution—Generally, a limited partnership can be dissolved in much
the same way as an ordinary partnership. A general partner has the power to voluntarily
dissociate unless the parties’ agreement specifies otherwise. Some states limit the
power of limited partners to voluntarily withdraw from the firm. The death or assignment of
interest of a limited partner does not dissolve the partnership; bankruptcy of a
limited partner also will not dissolve the partnership unless it causes the bankruptcy
of the firm.

Front 50

Limited Partnerships: Limited liability limited partnerships (LLLPs)

Back 50

Limited liability limited partnerships (LLLPs)—A special type of limited partnership in which the
liability of all partners, including general partners, is limited to the amount of their investments.

Front 51

Limited Liability
Companies (LLCs): Formation

Back 51

Formation—Articles of organization must be filed with the appropriate state office—usually the
office of the secretary of state—setting forth the name of the business, its principal address, the
names of the owners (called members), and other relevant information.

Front 52

Limited Liability
Companies (LLCs): Advantages and disadvantages of the LLC

Back 52

Advantages and disadvantages of the LLC—Advantages of the LLC include limited liability, the
option to be taxed as a partnership or as a corporation, and flexibility in deciding how the
business will be managed and operated. Disadvantages relate mainly to the absence of
uniformity in state LLC statutes and the lack of case law dealing with LLCs.

Front 53

Limited Liability
Companies (LLCs): Operating agreement

Back 53

Operating agreement—When an LLC is formed, the members decide, in an operating
agreement, how the business will be managed and what rules will apply to the organization.

Front 54

Limited Liability
Companies (LLCs): Management

Back 54

Management—An LLC may be managed by members only, by some members and some
nonmembers, or by nonmembers only.

Front 55

Limited Liability
Companies (LLCs): Dissociation and dissolution

Back 55

Dissociation and dissolution—Members of an LLC have the power to dissociate from the LLC at
any time, but they may not have the right to dissociate. Dissociation does not always result in
the dissolution of an LLC; the remaining members can choose to continue the business.
Dissociated members have a right to have their interest purchased by the other members. If
the LLC is dissolved, the business must be wound up and the assets sold. Creditors are paid
first; then members’ capital investments are returned. Any remaining proceeds are distributed
to members.

Front 56

Special
Business Forms

Back 56

A number of special business forms exist. Typically, they are hybrid organizations having
characteristics similar to partnerships or corporations, or combining features of both. Special
business forms include joint ventures, syndicates or investment groups, joint stock companies,
business trusts, and cooperatives. A widely used way of conducting business is the franchise.