Partnership Flashcards
Partnership (or General Partnership)- Definition
RUPA
§ 101. Definitions . …
(6) “Partnership” means an association of two or more persons to carry on as co-owners a business for profit formed under Section 202, predecessor law, or comparable law of another jurisdiction.
§ 202. Formation of Partnership.
(a) Except as otherwise provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.
Partnership Parts- ‘An association of…’
“An association of” is not expressly defined in the Uniform Partnership Act, but it generally refers to the voluntary nature of the relationship. Partnerships are a consensual relationship.
The parties must agree – either expressly or by conduct – to associate.
When a partnership is formed by conduct, the parties may not have contemplated forming a PARTNERSHIP and the resulting LEGAL CONSEQUENCES. We will refer to this as an INADVERTENT PARTNERSHIP. However, even parties that expressly form a partnership may not contemplate all the resulting LEGAL CONSEQUENCES.
Partnership Parts- ‘…two or more persons…’
There must be more than one person.
RUPA (1997) § 101. Definitions. (10) “Person” means an individual, corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision, agency, or instrumentality, or any other legal or commercial entity.
UPA (1914) § 2. Definition of Terms. “Person” includes individuals, partnerships, corporations, and other associations.
Partnership Parts- ‘…to carry on as co-owners a business for profit.’
“Business” is defined previously.
“Co-ownership” is a key characteristic of partnership, but it can be a confusing one, because the term is used both as:
(1) a factor in determining whether a partnership exists, and
(2) to describe the rights of partners in a partnership with respect to partnership property (a legal consequence of partnership).
Partnership Liability
UPA § 15. Nature of Partner’s Liability.
All partners are liable
(a) Jointly and severally for everything chargeable to the partnership under sections 13 and 14.
(b) Jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract.
Rights and Duties of Partners
UPA § 18. Rules Determining Rights and Duties of Partners.
The rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules:
(a) Each partner shall be repaid his contributions, whether by way of capital or advances to the partnership property and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied; and must contribute towards the losses, whether of capital or otherwise, sustained by the partnership according to his share in the profits.
(b) 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.
(c) A partner, who in aid of the partnership makes any payment or advance beyond the amount of capital which he agreed to contribute, shall be paid interest from the date of the payment or advance.
(d) A partner shall receive interest on the capital contributed by him only from the date when repayment should be made.
(e) All partners have equal rights in the management and conduct of the partnership business.
(f) No partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs.
(g) No person can become a member of a partnership without the consent of all the partners.
(h) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act in contravention of any agreement between the partners may be done rightfully without the consent of all the partners.
Court Examination to Determine Partnership
Courts look at the following elements:
Sharing of Profits (Reward)
Sharing of Losses (Risk)
Right to Manage (Control) the business
Intent of the Parties (express and implied)
Contribution of Capital (cash or other property) to the business
Sole Proprietorship
What is a Sole Proprietorship?
- A business which is carried on by an individual (sole owner).
- It is the oldest and simplest form of business organization.
- No formalities are required to create a Sole Proprietorship. There is no required internal structure.
- That individual – the Sole Proprietor –
- has total control
- is entitled to all the profits.
- has personal liability for the debts of the business.
- can sell the business at will.
For tax purposes – profits are included in the Sole Proprietor’s income and losses are deductible.
If the Sole Proprietor needs:
- help – the Sole Proprietor may hire others (creating an agency relationship of employer - employee).
- money – the Sole Proprietor may borrow it (creating the relationship of debtor - creditor).
- property (real or personal) – the Sole Proprietor may buy it or rent it (creating the relationship of leaser - lessee).
Possible Business Relationships
Some possible business relationships include:
- Employment Relationship – Employer - Employee (Principal - Agent)
- Lending Relationship – Debtor - Creditor
- Franchise Relationship – Franchisor - Franchisee
- Landlord-Tenant Relationship – Leasor - Leasee
Sharing of Profits Factor
Sharing of Profits is a pivotal factor. If the parties do not share profits there can be no PARTNERSHIP.
The UPA and RUPA state that if the parties share profits it is presumptive evidence of PARTNERSHIP. However, sharing of profits may be recharacterized as something else (an exception under UPA § 7 or RUPA § 202). If the sharing of profits is recharacterized as something else, the recharacterization will overcome the presumption and the Court will look more closely at the other factors.
Partnership Authority- Actual Authority
Section 301 sets forth a partner’s power, as an agent of the firm, to bind the partnership entity to third parties. § 301(1) declares that “each partner is an agent of the partnership for the purpose of its business.” That language over the years has been interpreted to mean that a partner is a “general managerial agent” having actual authority co-extensive in scope with the firm’s ordinary business. That authority exists unless it has been taken away from a particular partner by a contrary partnership agreement.
So, without more, every partner is automatically given actual authority to bind the partnership in transactions which are part of the partnership’s “business” unless that authority is otherwise removed.
Partnership Authority- Removing Partnershp Auth.
The partnership can take away a partner’s actual authority by acting pursuant to UPA Section 401, which allows partners to decide issues of partnership business by majority vote. It states as follows: “401. (f) Each partner has equal rights in the management and conduct of the partnership business.”
To understand the significance of this provision, you must appreciate that it it is a “default” provision (as opposed to a “mandatory” provision) – i.e., it is a provision that may be changed by agreement of the parties, but if it is not changed it governs the relationship as written. Partners might spell out in their partnership agreement which partners have what authority to do which specific acts.
Partnership Authority- Apparent Auth.
Section 301(1) of the UPA declares that each partner is an agent of the partnership and that, by virtue of partnership status, each partner has apparent authority to bind the partnership in ordinary course transactions. The effect of Section 301(1) is to characterize a partner as a general managerial agent having both actual and apparent authority co-extensive in scope with the firm’s ordinary business, at least in the absence of a contrary partnership agreement.
Over the years, the question of what is in the “ordinary course” of a partnership’s business has plagued the courts. Section 301(1) made a change from UPA Section 9(1) in thinking about what kinds of acts bind the partnership by apparent authority. It clarified that a partner’s apparent authority includes acts for carrying on in the ordinary course “business of the kind carried on by the partnership,” not just the business of the particular partnership in question.
Partnership Authority- Apparent Auth. 3rd Person Knowledge
It is not enough for a person to appear to be authorized. The third person must also be in a situation where he did not know that the person lacked authority. In order for the partnership to be bound by a partner’s apparent authority, therefore, the third party asserting the apparent authority theory must not have known or received a notification that the partner lacked actual authority.
Obviously, it is more difficult to prove actual knowledge of a thing than it is to prove that notice was given, so the new UPA makes the legal standard much clearer. [Notice is in 102(c)]
Partnership Authority- Inherent Agency Power
As it turns out, even though it is less obvious than the actual and apparent authority scenarios contemplated by Section 301, partners may possess inherent authority to bind the partnership even though there is no tort, contract, or restitutional theory upon which the liability can otherwise be rested. The principle explaining such cases is based on the idea that a special power of the partner/agent to affect the legal rights of the partnership/principal exists purely as a product of the agency relationship that exists between the partner and the partnership. Because such a power is derived solely from the agency relation and is not based upon principles of contracts or torts, the term inherent agency power is used to distinguish it from other powers of an agent which are sustained upon contract or tort theories. Most lawyers refer to this idea as “inherent authority.”
