978-1133019145 Chapter 3 Solution Manual

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CHAPTER 3

General Partnerships

THEME

Chapter 3 is an introduction to partnerships, fo-

cusing on the nature of the partnership, the rela-

tionship between partners, the advantages and

disadvantages of doing business as a general

partnership, and the partnership agreement.

CHAPTER GOAL

The goal of this chapter is for students to be-

come familiar with the following terms and

topics concerning general partnerships:

• Partner and partnership

• Elements of a partnership

• Rights and responsibilities of partners

• Advantages and disadvantages of doing

business as a partnership compared to other

forms of business organization

• Partnership organization and management

and the importance of the partnership

agreement

• Formalities for forming, operating, and dis-

solving a partnership

• The role of the paralegal who works with

partnerships

• Resources to assist paralegals working with

partnerships

SUGGESTED APPROACH

As of late 2011, most states have adopted the

Uniform Partnership Act (1997), but several still

follow the Uniform Partnership Act (1914). This

chapter focuses on the Uniform Partnership Act

of 1997 (UPA 1997), with references and com-

parisons to its predecessor, the Uniform Partner-

ship Act of 1914 (UPA 1914). The UPA 1997

can be found on the website of the National

Conference of Commissioners on Uniform State

Laws at http://www.nccusl.org.

Partnership law and interpretation of that

law vary from state to state. For that reason, it is

important to bring the law of your state into your

discussions on partnership law. Students may be

encouraged to research the positions of their

home state on some of the pertinent topics dis-

cussed throughout the chapter. Links to the part-

nership acts for most states can be found on the

CourseMate website that accompanies this text

at http://cengagebrain.com.

The importance of the partnership

agreement may be stressed by discussing its ap-

plication to the various topics included in this

chapter, as they are discussed.

LECTURE NOTES

An Introduction to General Partnerships

1. A partnership is an “association of two or

more persons to carry on as co-owners of a

business for profit.”

2. All partners of a general partnership are

considered general partners. Limited part-

nerships consist of general partners and

limited partners.

3. General partners have personal liability for

the debts and obligations of the partnership.

4. The partnership may be viewed as both a

separate entity and as an aggregate of its

partners. States that have adopted the UPA

1997 treat the partnership as a separate en-

tity for most purposes.

5. Statutes of most states provide that partner-

ships may file a special election to be treat-

ed as a limited liability partnership (LLP).

Limited liability partnerships are discussed

in Chapter 5.

6. There are fewer partnerships in the United

States than either sole proprietorships or

corporations, and their income per year is

less than that of either sole proprietorships

or corporations.

CHAPTER 3 General Partnerships 13

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7. The UPA 1914 was originally approved

in nearly every state in the country. Most

states have now adopted the UPA 1997

with limited liability partnership

provisions.

8. Partnerships are also governed by common

law and the partnership agreement. As long

as the provisions of the partnership agree-

ment do not conflict with the law, the part-

nership agreement governs the partnership.

The Relationship between Partners and

Others

9. Partners are considered agents of the part-

nership and other partners.

10. With few exceptions, each partner may act

on behalf of the partnership and has actual

authority to bind the partnership to contrac-

tual relationships with third parties.

11. An act of any one partner is binding on the

partnership as long as the partner’s act is

apparently undertaken for the purpose of

carrying on the ordinary course of the part-

nership business.

12. A partner’s act may bind the partnership

even if the partner is not acting in good

faith.

13. Certain acts require unanimous consent of

the partners. These acts may be specified

by state statute or the partnership

agreement.

14. Under the UPA 1914, the following acts

require unanimous consent of the partners:

• Acts undertaken with a third party who

has knowledge that the act is not au-

thorized

• Acts not apparently undertaken for car-

rying on the business of the partnership

• The assignment of partnership property

in trust for creditors

• Acts to dispose of the goodwill of the

business

• Acts that make it impossible to carry on

the business of the partnership

• The confession of a judgment on behalf

of the partnership

• The submission of a partnership claim

or liability to arbitration or reference

• The admission of new partners to the

partnership

15. The UPA 1997, which relies more on pro-

visions in the partnership agreement than

the UPA 1914, provides that the following

actions must have the unanimous consent

of partners:

• Acts undertaken with a third party who

has knowledge or has received notifica-

tion that the act is not authorized

• Acts not apparently undertaken for the

purpose of carrying on the ordinary

course of the partnership business

• Amending the partnership agreement

(unless otherwise specified in the part-

nership agreement)

• Adopting limited liability partnership

status (unless otherwise specified in the

partnership agreement)

16. In states that follow the UPA 1997 in this

regard, the partnership may file a statement

of authority with the secretary of state or

other appropriate state official to give pub-

lic notice of the authority granted or denied

certain partners. Persons transacting busi-

ness with the partnership are not necessari-

ly deemed to know of a limitation of au-

thority because the limitation is contained

in the filed statement.

17. A statement of denial may be filed to re-

voke authority granted in a previously filed

statement of authority.

18. The full extent of the personal liability of

partners may vary depending on state stat-

ute and the partnership agreement. Gener-

ally, partners have joint and several liability

for all debts and obligations of the partner-

ship, and creditors may look to the personal

property of the individual partners to satis-

fy the partnership’s obligations.

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The Relationship among Partners and be-

tween Partners and the Partnership

19. When a partnership enters into an agree-

ment with a third party, the agreement of-

ten includes provisions specifying the

limitations of each partner to act on be-

half of the partnership. Actions taken out-

side of that authority will not be binding

on the partnership.

20. Under the UPA 1914, partnership property

is held in a tenancy in partnership. When

property is held in a tenancy in partnership,

each partner has an equal right to possess

specific partnership property for partner-

ship purposes, but has no right to possess

such property for any other purpose with-

out consent of the other partners.

21. With regard to partnership property, the

UPA 1997 treats the partnership as a sepa-

rate entity. Partnership property is owned

by the partnership. The individual partners

own the right to receive income or profits

from the partnership property. A partner’s

right to receive income or profits from the

partnership property can be transferred. A

partner’s right in specific partnership prop-

erty is generally not assignable.

22. State statutes and partnership agreements

generally grant each partner the right to

have a separate account that reflects their

contributions, share of the gains, and share

of the losses in the partnership assets.

23. Partners are granted by statute the right to

an equal share of the partnership profits un-

less that right is amended by the partnership

agreement. Partners are also responsible for

a proportionate share of the partnership’s

losses.

24. Unless otherwise specified in the partner-

ship agreement, partners have the right to

be repaid contributions and to share equally

in the surplus remaining after partnership

liabilities are satisfied.

25. Partners have the right to reimbursement

for certain money they spend on behalf of

the partnership.

26. Unless otherwise specified in the partner-

ship agreement, each partner has the right

to share equally in the management and

conduct of the partnership business. The

partnership agreement may provide for a

managing partner or committee to oversee

the management of the partnership.

27. Partners are granted, by statute, access to

the books and records of the partnership.

28. Partners are entitled to reasonable compen-

sation for their services in winding up the

affairs of the partnership.

29. State statutes and the partnership agree-

ment may provide that each partner has a

right to have his or her partnership interest

purchased by the remaining partners after a

permissible dissociation from the partner-

ship.

30. State statutes and most partnership agree-

ments generally provide that partners owe

each other and the partnership the follow-

ing duties:

• The duty to contribute toward losses

sustained by the partnership according

to each partner’s share in the profits,

unless the partnership agreement pro-

vides otherwise

• The duty to work for the partnership

without pay, unless such remuneration

is provided for in the partnership

agreement

• The duty to submit to a vote of the ma-

jority of the partners when differences

arise among the partners

• The duty to provide information to the

other partners concerning the partner-

ship

31. Partners owe a fiduciary duty to each other.

The UPA 1997 specifically states that the

fiduciary duty partners owe each other in-

cludes the duty of loyalty and the duty of

care (as defined in the UPA 1997).

CHAPTER 3 General Partnerships 15

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Advantages of Doing Business as a Partner-

ship

32. Some of the possible advantages of doing

business as a partnership compared to other

types of business organization include the

following:

• Partners have flexibility in managing

the partnership, including the ability of

all partners to participate in the man-

agement.

• Partnerships are subject to fewer for-

malities and regulatory and reporting

requirements than corporations, espe-

cially publicly held corporations.

• The cost of organization of the partner-

ship is relatively low compared to other

types of business organizations. Gener-

ally, partnership documents are not re-

quired to be filed at the state level, so

no filing fees are assessed.

• The flow-through income taxation of

the partnership is probably the biggest

advantage the partnership offers over

most other types of business organiza-

tions.

• Compared with sole proprietorships,

partnerships generally have diversified

capital resources because more than

one owner is involved.

Disadvantages of Doing Business as a

Partnership

33. Some of the possible disadvantages of do-

ing business as a partnership, rather than as

another type of business organization, in-

clude the following:

• Partners are generally personally liable

for the debts and obligations of the

partnership.

• Compared to corporations, partnerships

have a very loosely structured man-

agement under state statutes. Unless the

partnership agreement is worded very

carefully, it can be difficult for the

partnership to take action in the event

of disputes among the partners.

• Compared to corporations, which have

stock that may be freely transferred,

partnerships present a lack of business

continuity and difficulty in transferring

partnership interests.

• Compared to corporations that may

raise capital by selling stock on the

open market, partnerships have a lim-

ited ability to raise capital to run the

partnership business.

• Compared to sole proprietors, partners

may incur significant expenses in or-

ganizing their businesses due mainly to

legal fees to draft partnership agree-

ments.

Management and Control of a General Part-

nership

34. Unless otherwise specified in the partner-

ship agreement, all partners have an equal

right to manage the partnership business.

35. The partnership may be managed by a des-

ignated managing partner or by a manage-

ment committee.

36. In the event of a dispute, decisions are

made by a majority of the partners, unless

some other method of resolving the dispute

is agreed on.

The General Partnership Agreement

37. A partnership may be formed by an oral

agreement as long as all the elements of a

partnership are present. A written partner-

ship agreement is generally recommended

for all partnerships.

38. The partnership agreement is entered into

by all partners.

Financial Structure of a General Partnership

39. The partnership capital consists of all assets

of the partnership, including the contribu-

tions of the partners and the undistributed

income earned by the partnership.

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40. Unless otherwise provided for in the part-

nership agreement, partners share equally

the profits and losses of the partnership.

The partnership agreement may provide a

different formula for sharing the profits and

losses based on (1) the amount of the initial

capital contributions, (2) additional capital

contributions, or (3) services rendered on

behalf of the partnership by the individual

partners.

Dissociation, Dissolution, Winding Up, and

Termination of the General Partnership

41. Under the UPA 1914, whenever one part-

ner quits the partnership for any reason, the

partnership is dissolved. Under the UPA

1997, one or more partners may be dissoci-

ated from a partnership without causing its

dissolution.

42. A partner’s dissociation can be caused by

agreement, by statute, or wrongfully.

43. Partners who dissociate from the partner-

ship contrary to provisions of the partner-

ship agreement and/or state statute cause a

wrongful dissociation and may be liable to

the partnership and other partners for dam-

ages caused by the wrongful dissociation.

44. In most instances, when the dissociation is

not wrongful, the dissociating partner has

the right to have his or her interest in the

partnership purchased for a buyout price set

forth in the partnership agreement or by

statute.

45. Under the UPA 1914, the following acts

cause a partnership dissolution:

• Expiration of the term or completion of

a particular undertaking specified in the

partnership agreement

• The express will of any partner when

no definite term or particular undertak-

ing is specified

• The express will of all the partners who

have not assigned their interests in the

partnership

• The expulsion of any partner from the

business pursuant to the partnership

agreement

• The express will of any partner at any

time, if contrary to the agreement, but

circumstances do not permit a dissolu-

tion under any other statutory provision

• Any event that makes it unlawful for

the business of the partnership to be

carried on

• The death of a partner

• The bankruptcy of any partner or the

partnership

• The order of a court

46. Only the following events cause a partner-

ship to dissolve under the UPA 1997:

• Notice given by a partner to the part-

nership of that partner’s express will to

withdraw (in a partnership at will)

• In a partnership for a definite term or

particular undertaking, when (1) a 90-

day period expires after a partner’s dis-

sociation by death or otherwise or

through wrongful dissociation, unless a

majority of the remaining partners

agree to continue the partnership; (2)

the express will of all of the partners to

wind up the partnership business; (3)

the expiration of the term or the com-

pletion of the undertaking

• An event set forth in the partnership

agreement resulting in the winding up

of the partnership business

• An event that makes it unlawful for the

partnership business to be continued

• A judicial determination to dissolve the

partnership

47. Upon dissolution of the partnership, the

partnership relation terminates and the

winding-up process begins.

48. Guidelines for distributing the assets of the

partnership on dissolution are usually set

forth in the partnership agreement. These

guidelines must not violate the statutes of

the partnership’s state of domicile with re-

gard to partnership distributions.

CHAPTER 3 General Partnerships 17

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49. The debts and obligations of the partner-

ship owing to third parties must be paid in

full before distributions may be made to the

partners in respect of profits.

50. The partners must contribute to the assets

of a dissolving partnership to the extent

necessary to meet the financial obligations

of the partnership.

51. In states that follow the UPA 1914, all

nonpartner creditors must be paid before

partner-creditors may be paid.

52. In states that follow the UPA 1997, the as-

sets of the partnership must first be applied

to discharge the partnership obligations to

creditors, including partners who are credi-

tors.

53. If any, but not all, of the partners are insol-

vent or unable to pay their share of the

partnership’s liabilities, that partner’s share

must be paid by the remaining partners.

54. Any partner who is required to pay in ex-

cess of his or her fair share to settle the af-

fairs of the partnership has the right to en-

force contribution of other partners pursu-

ant to statute and the partnership agree-

ment.

Other Types of Partnerships

55. Joint ventures are very similar, but not

identical, to partnerships. Joint ventures are

usually formed for a single transaction or

an isolated enterprise, rather than for an

ongoing concern.

The Paralegal’s Role

56. Paralegals who assist attorneys represent-

ing partnerships often assist by researching

state partnership law and drafting the part-

nership agreement. They may also assist

with filing documents such as a statement

of authority and with adopting an assumed

name on behalf of the partnership.

57. The resources most often used by parale-

gals when assisting with partnership mat-

ters include state statutes, legal form books,

and information available from the secre-

tary of state’s office and the offices of other

appropriate state agencies.

CASE BRIEFS

Cleland v. Thirion, 268 A.D. 842 (704 N.Y.S.

2d 316)

Purpose: This case is an example of how a court

may view the elements of a partnership dis-

cussed in the text when determining whether a

partnership does, in fact, exist.

Cause of Action: Breach of agreement

Facts: In this case, heard in 2000, the plaintiff

Jennifer Cleland (“Cleland”) brought suit against

her former lover, Christian Thirion (“Thirion”).

Cleland and Thirion lived together at Cleland’s

residence for approximately three years. When

they moved in together, Thirion was already es-

tablished as an artisan glassblower, doing busi-

ness under the trade name of “Glassart,” and he

had recently purchased a building that he intend-

ed to convert into a studio and personal living

quarters. Cleland assisted Thirion with his busi-

ness in various ways when they lived together.

In 1994, after the parties had been to-

gether for about a year, they executed a one-

page document intended to establish the parties’

financial and personal relationship. Cleland ini-

tially brought this suit in 1997, seeking a decla-

ration that the agreement constituted a partner-

ship agreement for “ownership and operation”

of the Glassart business; seeking damages for

breach of the agreement and an accounting of

the profits, losses, and assets of Glassart; and

imposing a constructive trust upon the assets of

Glassart. The New York Supreme Court found

that the parties never entered into a partnership

and that it was unenforceable due to the absence

of any material terms. Cleland appealed.

Issue: Did the agreement between the parties

form a partnership to own and operate the

Glassart business?

Holding: The Court of Appeals upheld the low-

er court’s decision in favor of the defendant, in-

dicating that there was no partnership agreement

between the parties.

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Reasoning: In determining whether a partner-

ship existed, the court considered the following

elements of a partnership:

1. The intent of the parties (express or implied)

2. Joint control and management of the

business

3. Sharing of the profits and losses

4. A combination of property, skill, or

knowledge

The court found that there was no evi-

certificate of doing business as partners in-

dicating joint control and management of

the business. This would indicate that a

partnership was not the intent of the parties.

• No partnership tax returns were ever filed

was characterized by both parties as a loan,

further indicating there was no sharing of

the profits and losses.

• Plaintiff contributed some services to the

business, but then sought compensation in

the form of wages, portraying herself as an

employee rather than a partner.

REVIEW QUESTIONS

1. What five elements are necessary to form a

partnership?

1. The partnership must have two or

more partners.

2. The partners must actively carry on

the partnership business together.

. . . every trade, occupation, or pro-

fession”).

5. The partnership must be formed

with the intent of making a profit.

2. In what ways are partnerships similar to

sole proprietorships?

Some of the ways in which partnerships

are similar to sole proprietorships in-

clude the fact that both partners and sole

proprietors have unlimited personal lia-

bility, partnerships are taxed in much

the same manner as sole proprietor-

In what ways do they differ from sole pro–

prietorships?

Unlike a sole proprietorship, it takes at

least two individuals or entities to form a

3. Suppose that John, Megan, and Alex form

a partnership to operate a restaurant in a

state that follows the UPA 1997. John de-

cides to buy hamburger buns from the

Fresh Bread Bakery. He enters into a con-

tract with the owner of the Fresh Bread

Bakery, on behalf of the partnership, for

the delivery of 500 hamburger buns each

week, for the price of $70 per week. If Me-

gan and Alex disagree with this decision

because they prefer another baker, is the

partnership still liable for this contract?

Yes, John has apparent authority to

bind the other partners in a relationship

with a third party. The representatives

Must the Fresh Bread Bakery be paid out

of the partnership funds?

Yes

CHAPTER 3 General Partnerships 19

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4. Suppose again that John, Megan, and Alex

form a partnership, and John has contribut-

ed 50 percent of the capital, Megan has

contributed 30 percent of the capital, and

Alex has contributed 20 percent of the cap-

ital. Who has the right to manage the part-

nership under the UPA 1997, assuming the

partnership agreement has no contrary pro-

visions?

a disagreement?

Assuming that there are not partnership

5. In a state that follows the UPA 1914, how

is partnership property owned? How is that

different from property owned by a partner-

ship in a state that follows the UPA 1997?

In states that follow the provisions of the

UPA 1914 regarding property owner-

ship, the partnership property is held in

a tenancy in partnership, with each

partner considered a co-owner of specif-

ic partnership property. Each partner

bulk of the capital for the partnership, and

Anna’s main contribution has been her ser-

vices. All partners agree that either Kara or

Tim should have the authority to sign doc-

uments transferring real estate on behalf of

the partnership and that Anna should not

have that authority. If the partnership is

formed in a state that follows the UPA

1997, what steps must they take to give no-

tice to those dealing with their partnership

of their agreement with regard to the au-

thority to transfer real estate?

In addition to entering into a partner-

ship agreement stating their intentions,

Kara, Tim, and Anna should file a

statement of authority with the secretary

7. Janet is a partner in a 10-partner partner-

ship located in a state that follows the UPA

partnership before its duration lapses, what

are the possible outcomes to the partner-

ship and the remaining partners?

If Janet withdraws from an active part-

nership formed under the UPA 1997,

Janet will become dissociated from the

partnership. The partnership will not

necessarily be dissolved, but Janet will

lose her right to participate in the man-

agement and conduct of the partnership

business. She will no longer be able to

What if the partnership is located in a state

that follows the UPA 1914?

In states that follow the UPA 1914 in this

regard, the partnership is dissolved

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8. Suppose that three retirees form a partner-

ship to own and operate a horse ranch.

They all plan to work at the ranch and

board horses to supplement their retirement

income. If the business does not go as

planned, and the retirees earn no income

from the ranch, do they still have a valid

partnership?

Yes

Why or why not?

The partnership was formed with the in-

partnership to build and lease a strip mall.

The partners agree that Ken will be respon-

sible for securing the location on which to

build the mall. Ken selects a site that turns

out to have poor soil quality, and the pro-

ject suffers several setbacks before they fi-

nally decide it is not feasible, and the part-

ners decide to go their separate ways. If the

partnership funds have all been exhausted,

and the partnership still owes $20,000 to an

environmental engineering firm that Ken

hired, who must pay?

Unless the partnership agreement indi-

What if Ken and Mary have no substantial

personal assets, but Bill has $30,000 in the

bank?

All three partners are still responsible

for the debt, but as a practical matter,

the creditors may choose to go after Bill

10. Suppose that the three partners of a partner-

ship have a falling out, and two of them stop

third partner claims she is entitled to com-

pensation for her time spent winding up the

partnership, but the other partners claim that,

unless agreed to in a partnership agreement,

partners are not entitled to compensation for

their time spent on partnership business. As-

suming that their partnership agreement is

silent on the matter, who is right? Why?

Although partners typically have no

right to compensation for their services

rendered on behalf of the partnership,