CHAPTER 48

PARTNERSHIPS

I. Nature

II. Formation

III. Relations Among Partners

IV. Relations With Third Persons

V. Dissociation

VI. Limited Partnerships

VII. Limited Liability Companies

I. Nature

A. Revised Uniform Partnership Act (RUPA) RUPA defines a partnership as an association of two or more persons to carry on a business for profit as co-owners.

1. Business  "To carry on a business" includes almost any type of profitable, legal activity. 2. Co-Ownership  The persons engaged in a partnership must be co-owners. This

requirement distinguishes a partnership from an agency. An agent may at times receive a share of the profits of a business. However, an agent does not have a partner's proprietary interest in the business. There is a fiduciary relationship among the partners, and between them and the partnership. Thus, each partner is an agent for the partnership and for all other partners.

3. For Profit  Nonprofit, unincorporated associations such as religious or charitable groups, labor unions, or clubs, are not partnerships.

4. Capacity  Generally, any person (entity) who is competent to contract may be a partner.

a. An infant may be a partner, but only to the extent of the infant's power to contract. Therefore, an infant may at any time withdraw her/his investment unless, and to the extent that, the partnership is subject to creditors' claims. Furthermore, if liable for debts, an infant is liable only up to the amount of her/his contribution.

b. A corporation may become a partner only where permitted by state corporation laws.

c. A partnership may become a partner in another partnership provided all the partners agree to the arrangement.

d. A trustee may become a partner if to do so would be prudent and in the best interest of the trust.

e. RUPA allows general partnerships to convert to limited partnerships and vice versa. RUPA also allows general partnerships to merge with other general partnerships and with limited partnerships.

B. Partnership Theories

1. Entity  RUPA embraces the entity theory of the partnership for some purposes, but it does away with the marshalling of assets. The entity theory is used for such matters as title to partnership property, legal actions by and against the partnership, and continuity of existence.

All property acquired by a partnership, by transfer or otherwise, becomes partnership property and belongs to the partnership as an entity, rather than to the individual partners. RUPA abolishes the Uniform Partnership Act (UPA) concept of tenants in partnership. Generally, under RUPA, partners and third parties dealing with partnerships will be able to rely on the record to determine whether property is owned by the partnership. A partner's interest is the partner's share of the profits and losses of the partnership and the partner's right to receive distributions. This interest is personal property and can be transferred (RUPA uses the word transfer instead of assign) by the partner. The partners, by unanimous vote, may expel a partner who has transferred all of the partner's interest in the partnership.

2. Aggregate  For some purposes, a partnership still is treated as a collection of individuals; the partnership itself is not taxed; rather, each partner pays income tax on her/his share of the profits or losses, regardless of whether cash or other property is received.

C. Distinguished From Other Entities

1. Corporations a. Advantages of a corporation as compared to a general partnership are:

1. The liability of stockholders is limited to the amount of their investment, whereas partners have unlimited liability.

2. A corporation allows continuity of business operations despite changes in ownership or management; a partnership is of limited duration (for example, the death of a partner results in a dissociation of the partnership).

3. A corporation may utilize a centralized management of professional managers, whereas a partnership is run equally by all the partners.

4. The ownership rights in a corporation are readily transferable; however, a partner may not transfer interest and rights in the partnership without the approval of all other partners.

b. Advantages of a partnership as compared to a corporation are:

1. A partnership may be organized easily and cheaply, whereas a corporation must be organized in accordance with specific statutory procedures and must have sufficient capitalization.

2. A partnership generally is burdened less than a corporation by government supervision and reporting requirements.

2. Joint Ventures  A joint venture is a special form of partnership that is formed for only one transaction or series of transactions, rather than for a general purpose.

3. Sole Proprietorship  A sole proprietorship is one individual engaged in business. A sole proprietorship is not a separate legal entity, distinct from its owner. A transfer of the interest of the proprietor causes a dissolution of the proprietorship. A partial transfer of a proprietor's interest requires another form of entity. A transfer of the whole interest of the proprietor in a proprietorship typically has an attendant non-competition agreement. Due to the disadvantages of the sole proprietorship form of entity, sole proprietorships tend to be small.

a. Advantages of a sole proprietorship as compared to other forms of business are:

1. A sole proprietorship generally may be formed more easily and cheaply than any other entity, at the will of the proprietor. Generally, there are no requirements relating to a sole proprietorship, per se, although a sole proprietorship must abide by laws that relate to all businesses, such as employment, zoning, licensing, and fictitious name laws. Ordinarily, a sole proprietorship with a nationwide business need not register to do business in each state, in the manner of a corporation or limited liability company.

2. A sole proprietor receives all profits.

3. Control and accountability are centralized. A sole proprietor makes all decisions without answering to other owners. Control can change only with the proprietor's consent.

4. The duration of a sole proprietorship is at the owner's will. The ownership rights in the entity's assets are transferable, although not always readily.

b. Disadvantages of a sole proprietorship as compared to other forms of business are:

1. A sole proprietor has unlimited liability, placing the proprietor's personal assets at risk.

2. By definition, a sole proprietorship's equity financing is limited to the proprietor's personal resources. Typical debt financing sources are banks and the Small Business Administration. Because a sole proprietorship is not a separate legal entity, lenders for either business or personal credit typically consider both business and personal assets and debts, which may complicate or, at least, lengthen application processes. Creditors effectively may place significant restrictions on the proprietor's financial decisions, both personal and business.

3. A sole proprietor may lack the expertise to make sound decisions in all areas of the business. The checks and balances in more complex entities might remedy this lack or, at least, bring it to light.

4. A sole proprietorship has no continuity of existence; it automatically terminates upon the proprietor's death.

D. Classifications

1. General Partnership  An ordinary partnership formed under RUPA or common law and consists only of general partners. A general partner has the right to share in the management and profits of the partnership and has unlimited liability to partnership creditors.

2. Limited Partnership  An arrangement specially created under the Revised Uniform Limited Partnership Act (RULPA) which consists of one or more general partners and one or more limited partners. A limited partner is one who contributes capital to the partnership but does not have any authority or voice in the management of the business. The limited partner's liability to partnership creditors is limited to the amount of her/his capital contributed.

3. Silent Partner  One who has unlimited liability but does not share in the management of the partnership.

4. Ostensible or Nominal Partner  One who is not actually a partner, but who may become a partner by estoppel insofar as s/he is held out to appear to be a partner.

5. Dormant Partner  One who is a partner with the right to management participation, but who is undisclosed and generally inactive. Once disclosed, the dormant partner has the same liability as any other general partner.

6. Secret Partner  One who actually participates in the management of the partnership but is undisclosed. If the secret partner's connection with the business is disclosed, s/he has unlimited liability.

7. Limited Liability Partnership (LLP)  Limited liability partnerships afford liability protection to general partners. This is vastly different from traditional general partnerships. In essence, an LLP is merely a general partnership which has made an election to invoke the limited liability protection of the enabling state statute. Some states allow most professional partnerships to use LLPs; others allow most operating businesses to use LLP.

E. Federal Income Tax Ramifications The individual partners are taxed on their distributive shares of partnership gain and income regardless of whether the distributive share actually is distributed. The partnership's return is made on Form 1065 and is for information purposes only.

1. Conduit  General and limited partnerships, as well as LLCs, are not tax-paying entities. Rather, they are reporting entities which pass through distributive shares of gain and loss as well as partnership ordinary income or loss to the individual partners.

2. Entity Status  The general rule is that if an entity with two or more persons is formed under state law that is not a state law corporation, the entity is taxed as a partnership. A one-person LLC is disregarded for federal tax purposes and no separate return is required, yet it does not lose its liability shield.

F. Property All property originally brought into the partnership, or subsequently acquired by purchase or otherwise on account of the partnership, is partnership property. Included within this description is the partnership's capital, name, and goodwill. The direct property rights of a partner are the partner's interest in the partnership and the partner's right to participate in the management of the partnership.

1. Intent of Parties  In construing the phrase "acquired…on account of the partnership," the courts look to the intent of the parties as evidenced by the facts and circumstances surrounding each acquisition. The following are of particular importance.

a. Title  The fact that an asset is acquired or held in the partnership name may be considered by the court, but is not usually a major indication.

b. Partnership Improvement  The fact that partnership funds were used to improve an asset may be considered, but it is not a major indication.

c. Property Use  The fact that an asset is used in the partnership business is indicative of partnership ownership if that fact, combined with others, tends to establish the asset as partnership property.

d. Partnership Purpose  The fact that an asset is connected closely with the operation of a partnership is of particular importance when there is a dispute between one of the partners and the firm. In recognition of the fiduciary responsibilities inherent in a partnership, courts often view assets acquired by a partner which are necessary for or related to partnership operations as actually held in trust for the firm.

2. Acquisition & Conveyance  Under RUPA, any estate in real property may be acquired in the partnership name, and title so acquired may be conveyed in the partnership name. A partner may convey title to the property by a conveyance executed in the partnership name. If the partner in fact has no authority to so convey and the person with whom the partner is dealing has knowledge of the fact that s/he has no authority, the partnership may recover the property conveyed. However, when the purchaser or the purchaser's assignee is a holder for value who is without knowledge that the partner has exceeded her/his authority, then the partnership may not recover the property.

3. Interest in Partnership  A partner's interest in the partnership is her/his share of the profits and surplus. This interest is classified as personal property.

a. Profits & Losses  Profits and losses are shared equally unless the agreement specifies otherwise, even if the amount of contributed capital is not equal. If the partners agree on unequal profit sharing percentages, but are silent as to loss sharing percentages, losses are to be shared using the profit sharing proportions.

b. Inheritance  On her/his death, a partner's interest descends as personal property regardless of the form in which the firm's assets exist.

c. Assignment  Unless otherwise agreed, a partner's interest is freely assignable. The assignee is entitled only to receive the profits and capital to which the partner would have been entitled. s/he does not become a partner and is not entitled to exercise control over the partnership or use partnership property. The assignor remains liable on all partnership debts. An assignment does not cause a dissociation.

d. Rights of Individual Partner's Creditor to Partnership Assets  The creditor of an individual partner may not execute on or attach partnership assets. The creditor's only remedy, once her/his claim has been reduced to a judgment, is to obtain a charging order against the debtor-partner's interest. The creditor then is entitled to all future distributions of assets or surplus due the partner until the judgment is satisfied.

e. Family Rights  Generally, the partner's interest is treated as community property and is subject to a family allowance (statutory right of a widow to certain portions of the deceased husband's property).

4. Right to Participate in Management  Unless there is a specific agreement to the contrary, all partners have equal rights in the management and control of the partnership business.

5. Rights to Partnership Property  Each partner in a partnership has the right to possess and use the partnership property for partnership purposes.

a. This right is not assignable except in connection with the assignment of rights of all the partners in the same property.

b. This right is not subject to execution or attachment on a claim arising against the individual partner.

c. This right is not community property, nor is it subject to family allowance or dower rights.

d. On the death of the partner, the surviving partners are then under a duty to account to the estate of the deceased for the value of the deceased partner's rights in the property.

II. Formation

A. Overview A partnership may be formed by either an express or implied agreement.

1. Writing  Except in specific instances, there is no need for a partnership agreement to be in writing, and the acts of the parties alone may establish a partnership. A writing is needed in the formation of a partnership only when the partnership would otherwise be in violation of the Statute of Frauds. For example, any partnership agreement which necessitates the transfer of real property or to carry on a business for a term in excess of one year must be in writing.

2. Articles of Partnership  Important provisions contained in the Articles of Partnership are the following.

a. Firm name

b. Names and addresses of all the partners

c. Date the partnership becomes effective, as well as the intended duration of the partnership

d. Nature, purpose, and scope of partnership activity

e. Procedure for admission of new partners

f. Computation of interest on partnership capital

g. Computation of profits and the proportionate share of profits and losses attributable to each partner

h. Powers and duties of the partners

i. Dissolution procedures and rights

j. Procedure for distribution of surplus, including the disposition of the firm name and goodwill

3. Certificate  In most states, when a partnership is doing business under a fictitious name, it must file a certificate with the Secretary of State. This certificate must list the names and addresses of the partners and the fictitious name of the business. Failure to comply with the statutes does not invalidate the partnership, but may result in fines. The purpose of requiring registration is to allow third parties to know who is in the partnership.

4. Filing  A statement may be filed in the state-specified office. A certified copy of a statement that is filed in the specified office of another state may be filed in the state-specified office. Either filing has the effect provided in RUPA with respect to partnership property located in or transactions that occur in that state. RUPA provides for a single,

central filing of all statements (as is the case with corporations, limited partnerships, and limited liability companies). No filings are mandatory under RUPA; in all cases, the filing of such statements is optional and voluntary. Only statements that are executed, filed, and, if appropriate (such as the authority to transfer real property), recorded in conformity with RUPA have the legal consequences accorded to such statements by RUPA.

B. Determining Partnership Existence The determining test is whether or not the parties intended to carry on together, as partners, a business for profit. It must appear that the parties intended joint responsibility in the management and operation of the business and intended to share in its profits and losses.

1. Share  The sharing of gross revenues, by itself, does not establish a partnership. The receipt by a person of a share of the profits of a business is prima facie evidence that the person is a partner in the business, but no such inference shall be drawn if the profits were received in payment of any one of several items.

a. Of a debt by installments or otherwise.

b. As wages of an employee or rent to a landlord.

c. As an annuity to a widow or representative of a deceased partner.

d. As interest on a loan, though the amount of payment varies with the profits of the business.

e. As the consideration for the sale of goodwill of a business or other property by installments or otherwise.

2. Ownership  Joint tenancy, tenancy in common, tenancy by the entireties, or any other type of joint ownership of property does not in itself establish a partnership. This is true regardless of whether the co-owners share any profits made through use of the property.

3. Capital  The contribution of capital to a business endeavor does not establish a partnership, and it is not essential to the existence of a partnership that all the partners contribute capital.

4. Designation  The designation of a business relationship as a "partnership" does not conclusively establish a partnership, nor can the parties avoid partnership liability merely by denouncing the existence of a partnership.

C. Estoppel The relationship among the partners is governed by the express or implied partnership agreement. In dealings with third parties, however, the conduct of parties may bind them as partners.

1. Appearance  One who holds her/himself out as a partner in an actual or apparent partnership is liable to another who in good faith, and in reliance on the

misrepresentation, extends credit to the apparent partner. An actual partner who either expressly or impliedly consents to a misrepresentation is likewise liable to third parties.

2. Agent  When an actual partner represents that another is a member of the partnership, when in fact s/he is not, the partner makes the other person her/his agent. The "agent" then has the power to bind the partner to third parties as though the "agent" were actually a partner. Any liability resulting from such a misrepresentation extends only to the partners who consented to the misrepresentation.

III. Relations Among Partners

A. Fiduciary The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care. Those duties may not be waived or eliminated in the partnership agreement, but the agreement may identify activities and determine standards for measuring performance of the duties, if not manifestly unreasonable. RUPA establishes the duty of care that partners owe to the partnership and to the other partners. The standard of care imposed by RUPA is that of gross negligence. RUPA requires a partner to refrain from competing with the partnership in the conduct of its business, but that duty is not violated merely because the partner's conduct furthers her/his own interest if certain requirements are met. RUPA also provides that partners have an obligation of good faith and fair dealing in the discharge of all their duties.

B. Mandatory Rule Agreement cannot change certain requirements under RUPA. Some rights and duties, and implicitly the corresponding liabilities and remedies, are mandatory and cannot be waived or varied by agreement beyond what is authorized. The partnership agreement may not do any of the following.

1. Vary the requirements for executing, filing, and recording partnership statements, except the duty to provide copies to all the partners.

2. Unreasonably restrict partners' or former partners' access rights to books and records.

3. Entirely eliminate the fiduciary duties of loyalty or care, or the obligation of good faith and fair dealing. However, the statutory requirements of each can be modified by agreement, subject to limitations. Exculpatory agreements drafted by partners may be drafted in terms of types or categories of activities or transactions, but should be reasonably specific. The partners may determine the standards by which the performance of the obligation of good faith and fair dealing is to be measured. RUPA permits the partnership agreement to identify specific types or categories of partnership activities that do not violate the duty of loyalty.

4. Unreasonably reduce the partners' duty of care below the statutory standard, that is, to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. The standard may be increased by agreement to a higher standard of care.

5. Eliminate the obligation of good faith and fair dealing under RUPA, except the partnership agreement may prescribe the standards by which the performance of obligations is to be measured.

6. Bargain away the traditional rule that every partner has the power to withdraw from the partnership at any time. The partnership may require that the notice of withdrawal be in writing. (UPA was silent with respect to requiring a written notice of withdrawal.)

7. Vary the right of partners to have the partnership dissolved and its business wound up.

8. Vary the right of a court to expel a partner.

9. Vary the requirement to wind up the partnership business in certain cases.

10. Vary the law applicable to a limited liability partnership (LLP).

11. Restrict the rights of third parties under RUPA.

C. Default Agreement The rights and duties of each partner in relation to the partnership are governed by any agreement among them. If there is no agreement, RUPA imposes the following rules.

1. Equal Rights  All partners have equal rights in the management and conduct of the partnership business. Any differences concerning ordinary matters connected with the partnership business may be decided by a majority of the partners, but no act in contravention of any agreement among the partners may be done rightfully without the consent of all the partners.

2. Share in Profits, Losses & Assets  A partner has a share in profits and losses and rights to assets upon dissolution of the partnership as follows.

a. Each partner is entitled to repayment of her/his capital contributions or advances made to the partnership. All partners are entitled to an equal share in profits and any surplus remaining after all liabilities (including those to the partners) are satisfied. A partner must contribute to the losses sustained by the partnership proportionately according to the partner's share in the profits.

b. The partnership must indemnify every partner for payments made or liabilities incurred by her/him in the ordinary conduct of the partnership business or in the preservation of its business or property.

c. A partner is entitled to interest on any sums advanced by her/him in furtherance of partnership business beyond the amount of capital the partner agreed to contribute.

d. A partner is not entitled to compensation for acting in the partnership business other than sharing in its profits, unless otherwise agreed. However, a surviving partner is entitled to reasonable compensation for her/his services in winding up the partnership affairs.

3. Books & Information  The partnership must keep its books at a central, agreed-to location. Each partner is entitled to have access to them at all times. A partner has the right to demand from the other partners full and true information of all things affecting the partnership. A partner's legal representative has the same right to such information.

4. Formal Accounting  Any partner has the right to a formal accounting of partnership affairs:

a. When the partner is wrongfully excluded from the partnership or possession of its property,

b. If the right is provided for under the agreement,

c. When another partner breaches her/his fiduciary duty, or

d. At any other reasonable time.

D. Actions Between Partner & Partnership

1. Suit in Equity  The principal remedy available to a partner against her/his co-partners is a suit in equity for a dissolution and an accounting.

2. Action at Law  Disputes between partners almost invariably involve a conflict as to partnership assets, which necessitates an accounting of assets. Additionally, any suit by a partner against the partnership creates a conflict of interest for the plaintiff partner between her/his individual interest as plaintiff and her/his interest as a defendant member of the partnership. For these reasons, actions at law are seldom permitted except in a few situations. Typically, these situations involve controversies in which no complex accounting is necessary or in which the partner's activity is outside the scope of the partnership business. Thus, the courts will allow an action at law involving a dispute which arose at the outset of the partnership, a suit between partners not related to partnership business, or a suit for fraud or conversion of partnership assets.

IV. Relations With Third Persons

A. Authority to Bind Partnership Generally, the rules of agency apply in determining whether or not the partnership is bound by the dealings of one of its members with a third party. Thus, for the purpose of conducting partnership business, every partner is an agent for the partnership and for every other partner. The act of a partner committed within the scope of the partner's actual or apparent authority, therefore, will bind the partnership.

1. Actual a. Express  A partner's express authority includes that authority specifically set forth

in an agreement among the partners. It also may arise from decisions made by a majority of the partners regarding the conduct of the partnership business. The partnership may file a statement of authority outlining the authority that particular partner or partners may have.

b. Implied  This type of authority has not been granted expressly to a partner, but instead arises from the nature and business of the partnership. It is essentially that type of authority which is reasonably necessary for a partner to perform her/his duties. For example, if a partner is in charge of the partnership's personnel, it would be reasonable and necessary to imply that s/he has the power to hire and fire employees even though this authority is not granted expressly.

2. Apparent  The actions of a partner which are apparently for the carrying on of the partnership's business in the usual way, but which are not actually authorized, still will bind the partnership if the third party does not know of the partner's lack of actual authority. However, if the third party knows that a partner's dealings exceed the partner's authority or is outside of the scope of the partner's apparent authority, the other partners are not liable.

3. Limitations  Without authorization to the contrary, no partner may do any of the following. Additional limitations may be imposed by the partnership agreement.

a. Assign the partnership property in trust for the benefit of creditors or on the assignee's promise to pay the debts of the partnership.

b. Dispose of the goodwill of the business or do any other act that would make it impossible to carry on the ordinary business of a partnership.

c. Confess a judgment.

d. Submit a partnership claim or liability to arbitration.

4. Termination  The majority of partners may terminate the authority of a partner, or minority of partners, unless this action would be contrary to a previous agreement. Some cases have allowed one partner to terminate the authority of a co-partner when the partnership is limited to two persons.

5. Notice  In regard to any matter affecting partnership affairs, notice to any individual partner is imputed to all other partners.

6. Knowledge  The knowledge of any partner gained while working on partnership matters is imputed to all other members of the partnership. However, any knowledge gained by a partner who is engaged in a fraud as to the partnership is not imputed to the partnership. Normally, knowledge acquired by one before s/he becomes a partner is not imputed to the partnership.

7. Admissions  An admission or representation made by any partner while the partner is acting within the scope of her/his authority is admissible as evidence against the partnership.

B. Partnership Liability Partners are jointly and severally liable for contracts and all actions in tort or fraud against any partnership member where the partnership is not a limited liability partnership. The other partners are liable only when the cause of action arises out of partnership business. A person with a cause of action against a partnership may sue any number of partners s/he wishes, collectively or separately. Each partner is liable for the entire amount of damages arising out of such a cause of action. However, a partner may have either a right to contribution from the other partners or a right to indemnification from a wrongdoing partner.

1. Contract Liability  Partners are jointly and severally liable for all debts and contract obligations of the partnership.

a. This liability extends to all "in fact" partners (for example, dormant partners) whether or not the creditor relied upon the fact that such a person was a partner.

b. An incoming partner is not personally liable for debts of the partnership incurred before the partner's admission. The partner's liability as to pre-existing claims may be satisfied only out of partnership property. Thus, an incoming partner's liability for pre-existing claims is limited to that partner's capital contribution.

2. Tort Liability  All partners are liable jointly and severally for actions in tort.

a. Tort liability may arise from the wrongful act or omission of a partner arising out of activity which was authorized by the other partners or within

the partner's normal course of business. The partnership is also liable for funds misapplied by one of the partners.

b. Since the partners are severally liable, an action may be brought against any one of the partners.

c. Any partner adjudicated guilty of tortious conduct towards an outsider is liable to her/his co-partner(s). Generally, a partnership has no right to recover from third persons who inflict injuries on an individual partner.

V. Dissociation

A. Causes Dissociation is the result of the change in the relation of the partners when a partner ceases to be associated with the carrying on of the business. A partner's dissociation always will result in either a buyout of the dissociated partner's interest or a dissolution and winding up of the business. The partnership does not terminate on dissolution, but continues until the winding up of the partnership is complete. Dissociation may be accomplished either without violating the partnership agreement or in violation of the partnership agreement. The entity theory of partnership provides a conceptual basis for continuing the firm itself despite a partner's dissociation from the firm, if there is a buyout of that partner's interest. A dissociated partner remains a partner for some purposes and still has some residual rights, duties, powers, and liabilities.

1. Accordance With Partnership Agreement a. Completion of Term or Particular Project  When the partnership agreement

specifies that the partnership will terminate on a certain date or when a particular project is completed, the expiration of the term or completion of the undertaking dissolves the partnership. The partners, if they choose, may continue beyond the term as partners at will.

b. Partner's Express Decision (at Will)  When the partnership is at will, a partner may dissociate from the partnership at anytime without liability to the other partners even if the dissociation causes a loss to the firm. However, pursuant to the partner's fiduciary duty, a partner must act in good faith. Thus, if a partner chooses to exercise her/his right to dissociate from the partnership in order to exclude the partner's co-partners from a lucrative business opportunity, the act of dissociation would be wrongful, and her/his rights on dissociation would change accordingly.

c. All Partners' Express Will  When all the partners who have not assigned their interests or had them claimed in satisfaction of a personal debt agree to dissolve, it is immaterial that the partnership is for a term and not at will.

d. Expulsion  The expulsion of a partner from the firm must be both authorized by the agreement and bona fide. Under these circumstances, the expelling partners are not liable for any resulting damages.

2. Violating Partnership Agreement

a. Partner's Express Decision (not at Will)  Every partner has the power to dissociate from the partnership whether or not the partner has that right under the partnership agreement. When the dissociating partner acts in violation of the agreement, the partner may be held liable for any losses caused by the

dissociation. The following acts by a partner have been construed by the courts as evidencing the partner's intent to discontinue.

1. Assignment of Partnership Interests  A partner's transfer of her/his partnership property to a third party may be indicative, but is not conclusive, of an intent to dissociate.

2. Levy of Charging Order  The levy of a charging order on the partnership interest of a debtor/partner does not by itself produce a dissociation. However, the assignee or holder of a charging order can obtain a judicial dissociation of a partner from the partnership after expiration of the term or, if it is a partnership at will, whenever the interest is acquired.

b. Illegality  Dissolution of a partnership results automatically upon the occurrence of any event that makes it unlawful for the partnership business to be conducted. The partners may change their business to avoid the illegality and thus continue the partnership relationship.

c. Partner Death, Withdrawal, Bankruptcy, or Incompetency  Unless the partnership agreement provides otherwise, a partner's death, withdrawal, bankruptcy, or incompetency will result in the partner's dissociation from the partnership. The other partners may agree to continue or terminate the partnership.

d. Judgment  The court has the power to adjudicate dissolution on application by or for a partner when any of the following circumstances exist.

1. A partner has been declared insane in a judicial proceeding or is otherwise shown to be of unsound mind.

2. A partner otherwise becomes incapable of performing her/his part of the partnership contract (generally, the incapacity must be of such a nature as to materially affect the partner's ability to discharge her/his duties).

3. A partner has been guilty of conduct that tends to prejudicially affect the conduct of the business.

4. A partner willfully or persistently commits a breach of the partnership agreement.

5. The business of the partnership can be conducted only at a loss.

6. Whenever the dissolution would be equitable.

e. Charging Order  Upon the application of a partner's assignee or creditor with a charging order, the court may adjudge dissolution. Normally, the following procedures are followed when a court decrees dissolution.

1. Accounting  A suit for dissolution generally is a suit in equity for dissolution and accounting. An accounting is necessary so that the court can determine the credits or debits of each partner and supervise the distribution of partnership assets.

2. Distribution Method  Usually, the court orders a sale of all partnership assets and applies the proceeds first to satisfy debts, and then to repay each partner's capital account. Any proceeds still remaining are paid to the partners as current earnings in proportion to each partner's share of the profits.

a. If there are no debts, the court may distribute the partnership assets in kind.

b. If there are losses, each partner must contribute in proportion to her/his share of the profits. If one partner is insolvent or refuses to contribute, the remaining partners are liable for her/his share. They then have a cause of action against the noncontributing partner.

B. Continuing Business If a partner is dissociated from a partnership without resulting in a dissolution and winding up of the partnership business, the partnership shall cause the dissociated partner's interest in the partnership to be purchased for a buyout price. RUPA provides for a statement of dissociation.

1. Authority  Every partner has apparent authority to bind the partnership by any act for carrying on the partnership business in the ordinary course, unless the other party knows that the partner has no actual authority to act for the partnership or has received a notification of the partner's lack of authority. RUPA continues that the general rule is for two years after a partner's dissociation, subject to limitations.

2. Liability  A partner's dissociation does not, of itself, discharge the partner's liability for a partnership obligation incurred before dissociation. A dissociated partner is not liable for a partnership obligation incurred after dissociation, except as otherwise provided. In general, under RUPA, as a result of the adoption of the entity theory, relationships between a partnership and its creditors are not affected by the dissociation of a partner or by the addition of a new partner, unless otherwise agreed. RUPA provides that a dissociated partner is not liable for the debts of the continuing business simply because of continued use of the partnership name or the dissociated partner's name as a part of the partnership name.

3. Continuing Liability  Generally, anytime a partner dissociates from a partnership and the same business is conducted by a newly formed partnership, creditors of the dissolved partnership are also creditors of the partnership continuing the business. The liability of a third person who becomes a partner in the new partnership for debts owed to creditors of the dissolved partnership may be satisfied only out of partnership property.

4. Retiring or Deceased Partner  When a partner retires or dies and the business is continued without any settlement of accounts, the partner, her/his estate, or her/his legal representative has the option of taking the value of the partner's partnership interest as of the date of dissolution of either of the following.

a. Interest  Any interest accruing until the date of discharge.

b. Profits  Instead of interest, the profits attributable to the use of that partner's interest in continuing the business.

5. Conversion & Mergers  RUPA Article 9 rules regarding conversions and mergers are not mandatory. Partnerships may be converted and merged in any other manner provided by law. The effect of compliance with Article 9 is to provide a "safe harbor" assuring the legal validity of such conversions and mergers. Under UPA, unanimous consent was required for conversion or merger; in certain circumstances, RUPA requires less than unanimous consent.

a. Conversion  RUPA authorizes the conversion of a partnership to a limited partnership and a limited partnership to a partnership. (RUPA limits the usual RUPA definition of "partnership" to general partnerships.) RUPA sets forth the effect of a conversion; the converted partnership is for most purposes the same entity as before the conversion.

b. Merger  RUPA provides for the merger of a general partnership and one or more general or limited partnerships and states the effect of a merger on the partnerships that are parties to the merger and on the individual partners. The surviving entity may be either a general or a limited partnership. RUPA provides that the surviving entity may file a statement of merger.

C. Winding Up Business RUPA provides that a partnership continues after dissolution only for the purpose of winding up its business, after which it is terminated. The partners who have not dissociated wrongfully may participate in winding up the partnership business. Even after termination, if a previously unknown liability is asserted, all of the partners are still liable.

1. Continuation  RUPA makes explicit the right of the remaining partners to continue the business after an event of dissolution, if all of the partners [including the dissociating partner(s)] waive the right to have the business wound up and the partnership terminated.

2. Asset Distribution  RUPA changes the distribution of assets to provide that partnership assets must be applied to discharge the obligations of partners who are creditors on parity with other creditors. Also, RUPA's distribution does not distinguish between amounts owed to partners for capital and for profit.

3. Filing  RUPA provides that, after dissolution, any partner who has not dissociated wrongfully may file a statement of dissolution on behalf of the partnership. After 90 days,

this notice gives constructive notice to creditors that the apparent authority of the partnership is ended for all purposes except winding up.

D. Partners' Rights & Authority Unless otherwise agreed, any nonbankrupt partner who has not dissociated from the partnership wrongfully, or the legal representative of the last surviving partner, has the right to wind up the partnership affairs. Any partner, the partner's legal representative, or the partner's assignee may petition for a winding up by the court.

1. Accordance With Partnership Agreement  As against the partner's co-partners and persons claiming through them, each partner has the right (unless otherwise agreed) to have the partnership property applied to discharge its liabilities and the surplus applied to pay in cash the amount owing to the partner. An expelled partner who is discharged from all partnership liabilities receives only the net amount due the partner from the partnership.

2. Contravention of Partnership Agreement  Partners who have not dissociated wrongfully from the partnership have all their ordinary rights, and the right to damages from the breaching partner or partners. If all nonbreaching partners desire to continue the business in the same name, they may do so. They are entitled to possess the partnership property, but must pay the value of that partner's interest to any partner who dissociated from the partnership wrongfully.

a. When the business is not continued, a partner who dissociated from the partnership wrongfully has the previously discussed rights and liabilities.

b. When the business is continued by the nonbreaching partners, a partner who dissociates from the partnership wrongfully is liable for all damages to the partnership caused by the partner's action.

3. Fraud  When a partnership contract is rescinded on the grounds of fraud or misrepresentation, the partner(s) entitled to rescission has(have) the following rights.

a. The right to a lien on, or a right to retention of, the surplus of the partnership to secure her/his capital investment and any advances.

b. After all liabilities to third persons have been satisfied, the right to stand in the place of creditors for her/his payments made on partnership liabilities.

c. The right to be indemnified by the person who is guilty of the fraud or the misrepresentation. This indemnity is good against all the debts and liabilities of the partnership.

4. Contribution From Co-Partners After Dissociation  When a partner's dissociation is caused by the act, death, or bankruptcy of a partner, each partner is liable to her/his co-partners as though the partnership had not been dissociated. However, the nondealing partners are not liable to any partner who has actual knowledge of the dissociation from the partnership before the partner acts on "behalf of the partnership."

5. Third Persons  A partner has the power to bind the partnership as to third persons by either an act appropriate for winding up partnership affairs or completing unfinished transactions or a transaction that would bind the partnership if dissociation had not taken place, provided the third party has no knowledge of the dissociation.

6. Acts of Partners  The partnership is not bound by any partner's acts after dissociation when either of the following apply.

a. The partnership is dissolved because it is unlawful to carry on the business, except when the act is appropriate to wind up partnership affairs.

b. The partner is bankrupt or has no authority to wind up partnership affairs.

E. Partner's Liability Generally, a dissociation from a partnership does not discharge the existing liability of any partner.

1. Agreement  A partner may be discharged from any existing liability upon dissociation from the partnership by an agreement to that effect. The agreement must include as parties the partner her/himself, the partnership creditor, and the person or partnership continuing the business. The agreement may be inferred from the course of dealing between the creditor having knowledge of the dissociation and the person or partnership continuing the business.

2. Assumption Discharges Partner's Liability  When a person agrees to assume the existing obligations of a partnership from which a former partner has dissociated her/himself, the withdrawing partner thereby is discharged from any liability to creditors who agree to the substitution.

3. Deceased Partner's Nonpartnership Property  A deceased partner's nonpartnership property is subject to all the partnership's obligations which were incurred while s/he was a partner. However, the claims of a decedent's individual creditors have priority over those of any partnership creditors as against the nonpartnership property.

F. Asset Distribution Subject to any agreement among the partners, the following rules apply.

1. Priority  The partnership's assets (which are the partnership property and the contributions of the partners necessary for the payment of all liabilities) are applied in the order of partnership liabilities. The liabilities of the partnership rank in order of payment as follows.

a. Those owing to creditors including partners.

b. Those owing to partners other than for capital and profits.

c. Those owing to the partners for capital and profits.

2. Contribution  The partners are liable for the amount necessary to satisfy all the claims. If a partner is insolvent or beyond the reach of judicial process, the other partners are responsible for her/his liabilities. Such contributing partners are liable in the proportion in which they share in the profits.

a. An assignee for the benefit of creditors or any person appointed by the court may enforce the contributions.

b. Any partner or the partner's legal representative may enforce the contributions, to the extent of the amount the partner has paid in excess of her/his share.

c. The individual property of a deceased partner is liable for contributions.

3. Sources  Once the partnership property and the property of the individual partners are in the hands of the court for distribution, the priorities are as follows.

a. Partnership creditors have priority as to partnership property.

b. Individual creditors generally have priority as to individual property, except for a partnership bankruptcy, wherein the partnership creditors share pro rata with partners' personal creditors.

c. The rights of secured or lien creditors are provided for as previously discussed.

4. Partner Insolvency  If a partner becomes bankrupt or if the partner's estate is insolvent, the claims against her/his separate property rank as follows.

a. Those owing to personal creditors.

b. Those owing to partnership creditors.

c. Those owing to partners who have made advances for the benefit of the partnership.

VI. Limited Partnerships

A. Nature A limited partnership is a partnership formed by two or more persons having as members one or more general partners and one or more limited partners. The purpose of a limited partnership is to allow persons, who do not have the desire or ability to assume the responsibilities of a general partner, to invest in a partnership business. A limited partnership can be created only by complying with the appropriate local statute.

1. General  A general partner is analogous to a partner in a general partnership. The partner is responsible for the management and control of the partnership and is personally liable for its debts. There must be at least one general partner in any limited partnership.

2. Limited  A limited partner is one who makes a capital contribution to the partnership and thereby obtains an interest in that partnership.

a. Services  Under the ULPA, limited partners may contribute cash or property, but not services. However, under the RULPA, limited partners are allowed to contribute services, including future services.

b. Rights  A limited partner has all the rights of a general partner except that the partner has no right to manage or control the partnership. Nevertheless, the partner has the right to inspect the books, demand an accounting, and have a dissolution and winding-up decree by the court.

c. Name  A limited partner's surname may not appear in the partnership name unless there is sufficient designation attached to the partner's name to indicate that s/he is a limited partner.

d. Liability  A limited partner's liability ordinarily is limited to the amount of the partner's contribution in the partnership unless s/he takes part in the management of the business or violates name restrictions.

e. Under Capitalization  A limited partner is liable to the partnership for any difference between her/his contribution as actually made and that which the partner agreed to make in the certificate. A limited partner holds, as trustee for the partnership, property stated in the certificate as contributed by the partner, but which in fact s/he possesses, and any money or property wrongfully paid or conveyed to the partner on account of her/his contribution.

f. Withdrawals  A limited partner may receive a share of the profits or other compensation as stipulated in the certificate, provided, however, that after such payment, the partnership assets are in excess of all liabilities to creditors.

g. Separate Entity  A limited partner may loan money to and transact other business with the partnership. The partner also receives payment on any resulting claims on an equal, pro rata basis with third party creditors.

h. Liquidation  Generally, a limited partner may demand or receive cash in repayment of her/his contribution. However, the partner may not do so until all partnership liabilities to creditors have been paid or the partnership has sufficient assets to pay them.

i. Interest  A limited partner's interest is considered personal property and it is freely assignable. A limited partner's rights are not assignable unless they are assigned to a substituted limited partner. For a person to become a substituted limited partner, all partners must be in agreement, and the certificate must be amended to reflect the substitution of limited partners.

j. Death  The death of a limited partner does not dissolve the partnership.

k. Creditor  Any creditor of a limited partner may obtain, through the court, a charge against the debtor's interest in the partnership.

B. Formation & Dissolution In contrast to the formation of a general partnership, the formation of a limited partnership must be in accordance with strict statutory requirements. Additionally, limited partnerships may be formed only in those jurisdictions which have enacted enabling statutes. Some states have adopted the Uniform Limited Partnership Act (ULPA). Others have adopted the Revised Uniform Limited Partnership Act (RULPA) as amended in 1985. A limited partnership may be dissolved in any of the ways discussed for general partnerships, except the death or assignment of interest of a limited partner does not dissolve the partnership.

1. Elements  The partners must execute a certificate which states the following: the name of the partnership, the character of the business, the location of the business, the term for which the partnership is to exist, a description of the capital, and the name and residence of each partner or limited partner together with a list of each member's status and rights.

2. Filing  The certificate must be filed with the Secretary of State, and a copy must be filed with the clerk of the court in the county of the principal place of business. The certificate may be amended or canceled only if the above formalities are observed. The purpose of the certificate is to put creditors on notice of the limited liability of the limited partners.

3. Loss  The certificate must comply substantially with the requirements. If a certificate contains a false statement, anyone who suffers a loss through reliance thereon may hold all the partners liable.

C. Revised Uniform Limited Partnership Act (RULPA) A limited partnership is not a RUPA general partnership, but RUPA governs limited partnerships to the extent RULPA fails to provide for a circumstance. RULPA requires a limited partnership to name an office and agent for service of process. If not designated in the agreement, RULPA

allocates profits and losses according to capital contributions. RULPA requires foreign partnerships to register.

1. Distribution  RULPA provides for the following distribution of partnership assets. a. First, to partnership creditors including partners (general and limited) who

are creditors, except for "unpaid distributions" to partners.

b. Second, to partners who previously have withdrawn from the partnership, payments to these partners for "unpaid distributions" plus the return of capital. Unpaid distributions are any distributions a partner is entitled to upon withdrawal from the firm.

c. Third, to partners (general and limited) to the extent of their capital contribution and profits.

2. Services  RULPA allows limited partners to contribute services, including future services. Section 303 of RULPA provides "safe harbors" for limited partners to participate in management, including the following.

a. Being a contractor for, or an agent or employee of, the limited partnership or of a general partner.

b. Consulting with and advising a general partner regarding the partnership business.

c. Acting as a surety for the limited partnership.

d. Voting on partnership matters such as dissolution and winding up the limited partnership or the removal of a general partner.

3. Certificate  RULPA requires less information in the certificate than ULPA. The names of the limited partners are not required. New investors may be admitted as limited partners without amending the certificate as is required under the ULPA. The certificate need only include (a) the limited partnership's name, (b) the address of the partnership's registered office and the name and business address of its agent for service of process, (c) the name and business address of each general partner, (d) its mailing address, and (e) the latest date on which the limited partnership is to dissolve.

VII. Limited Liability Companies

A. Nature A limited liability company (LLC) is a hybrid of corporate and partnership law.

1. Members  An LLC is a company formed by one or more members. Owners in LLCs usually are referred to as members. Members are equivalent to partners in a general partnership. That is, they manage the company unless expressly agreed otherwise.

2. Individual Owners  A single individual may form an LLC.

3. Manager  The members may elect what commonly is referred to as a manager to operate the business. The manager is the equivalent of the president of a corporation. A manager does not have to be a member in the LLC.

4. Liability Shield  There are no restrictions on members of LLCs like restrictions on limited partners. Members may be involved fully in the business and not lose the liability shield.

B. Formation & Termination LLCs must be created in accordance with the applicable state statute.

1. Articles of Organization  The members or organizers of the LLC must file what commonly is referred to as articles of organization. These are similar to articles of incorporation and require the name of the company, the character of the business, the location of the business, the term for which the company is to exist, and the name and address of each member. The articles or certificate normally is filed with the Secretary of State and clerk of the court in the county of the principal place of business. The articles or certificate may be amended or canceled. The purpose of the filings is to put creditors on notice.

2. Operating Agreement  Members commonly enter into what is also known as an operating agreement, company agreement, or regulations. This is a private contract between the members which generally outlines how they will conduct the business and what rights each member in the company may have in the event a member leaves the company.

3. Dissolution  Formerly, LLCs were dissolved upon the events that would traditionally dissolve general partnerships. Now, however, the trend is to state that such events will not dissolve the LLC. Even if there are no members, statutes provide that holders of financial rights may elect members and continue the business of the LLC.

4. Distribution  In settling accounts after dissolution, liabilities of the LLC are paid in the following order.

a. Creditors  To creditors, except claims by members on account of capital contributions.

b. Capital  To members in respect to their capital contributions.

c. Profits  To members with respect to their share of undistributed profits.