Partnership Dissolution Flashcards
Two Possible Results from a Partner’s Dissociation
Section 603(a) indicates that one of two things can happen when a partner dissociates.
(1) It can result in a dissolution and winding up of the partnership business, in which case Article 8 applies.
(2) If it does not result in a dissolution of the partnership, Article 7 applies. (Buyout)
RUPA 801 (Reasons for a Dissolution)
RUPA § 801. Events Causing Dissolution and Winding Up of Partnership Business
A partnership is dissolved, and its business must be wound up, only upon the occurrence of any of the following events:
(1) in a partnership at will, the partnership’s having notice from a partner…of that partner’s express will to withdraw as a partner…
(2) in a partnership for a definite term or particular undertaking:
(i) within 90 days after a partner’s dissociation by death or otherwise…or wrongful dissociation…, the express will of at least half of the remaining partners to wind up the partnership business, for which purpose a partner’s rightful dissociation…constitutes the expression of that partner’s will to wind up the partnership business;
(ii) the express will of all of the partners to wind up the partnership business; or
(iii) the expiration of the term or the completion of the undertaking;
(3) an event agreed to in the partnership agreement resulting in the winding up of the partnership business;
(4) an event that makes it unlawful for all or substantially all of the business of the partnership to be continued…
(5) on application by a partner, a judicial determination that:
(i) the economic purpose of the partnership is likely to be unreasonably frustrated;
(ii) another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; or
(iii) it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement;
or
(6) on application by a transferee of a partner’s transferable interest, a judicial determination that it is equitable to wind up the partnership business…
Dissociation- 603(a)
Section 603(a) says that one of two things occurs when a partner dissociates from a partnership: (1) the partnership is dissolved as specified in section 801; or (2) the dissociated partner is entitled to a buyout pursuant to section 701.
When a partner dissociates from a partnership, you first look to section 801 to determine if the dissociation also results in a dissolution. If it does, then the partnership is dissolved and the partnership business is wound up. \
If the partner’s dissociation does not result in a dissolution, then Article 7 applies. We’ll look at Article 7 in the next section of the lesson. Remember that you go to Article 7 only when an event of dissolution specified in section 801 has not occurred.
Partner Buyout Under 701
Section 701(a) establishes that, if a partner dissociates from a partnership without that partnership being dissolved, he is entitled to be bought out by the partnership. The purchase price is set by section 701(b):
“(b) The buyout price of a dissociated partner’s interest is the amount that would have been distributable to the dissociating partner under Section 807(b) if, on the date of dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern without the dissociated partner and the partnership were wound up as of that date. Interest must be paid from the date of dissociation to the date of payment.”
In other words, the price to buy out a partner is essentially the same as what the partner would get if the partnership were dissolved–the amount specified in Section 807(b).
Partnership- Profits & Losses
If the partnership agreement specifies how to share profits and/or losses, that governs. RUPA § 103(a).
If the partnership agreement doesn’t specify how to share profits and/or losses, RUPA § 401(b) says to use the following default rules:
Profits: Equal
Losses : Same as Profits
Partnership- Losses
Absent an agreement, losses are shared exactly as profits are shared.
Winding Up
When a partnership is dissolved and its business wound up, its assets must first be applied to pay its creditors, including partners who are also creditors. If the partnership has insufficient assets to pay its obligations, the partners must contribute additional amounts to make up the loss. RUPA § 807(a).
After creditors are paid, the partnership accounts must be settled. Each partner with a negative balance in his or her account must pay that amount to the partnership. Each partner with a positive balance in his or her account will receive that amount from the partnership. RUPA § 807(b).
If one or more partners don’t make the required payments, the other partners must make the required payment, in proportion to their share of the partnership losses. Partners who have to make these extra payments can recover from the partner or partners who didn’t pay the proper amount.
Winding Up- Creditors
During the winding up phase of a partnership, creditors must be paid first. This includes crediitors of the partership which are parters. This occurs before a distribution of any profits.
Partners’ Accounts
Add [RUPA § 401(a)(1)]:
(1) The amount of any money the partner contributes to the partnership
(2) The value of any property, net of the amount of any liabilities, the partner contributes to the partnership
(3) The partner’s share of partnership profits.
Subtract [RUPA § 401(a)(2)]:
(1) The amount of any money the partnership distributes to the partner.
(2) The value of any property, net of the amount of any liabilities, the partnership distributes to the partner.
(3) The partner’s share of partnership losses.
