Chapter 37 – Introduction to Forms of Business and Formation of Partnerships
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CHAPTER 37
INTRODUCTION TO FORMS OF BUSINESS AND FORMATION
OF PARTNERSHIPS
I. OBJECTIVES
This chapter serves the function of introducing a student to the forms of business organization
and the creation of partnerships and limited liability partnerships (LLPs). Students should master
at least the following subjects covered by this chapter:
A. The differences between the various forms of business.
B. The advantages and disadvantages of the various forms of business.
C. When a partnership is created.
D. When a person becomes a purported partner of another person.
E. The distinction between partnership property and partner’s property.
F. The effects created by a transfer of a partner’s transferable interest and an issuance of a
charging order against a partner’s transferable interest.
II. ANSWER TO INTRODUCTORY PROBLEM
management of the business.
B. If an LLC is chosen, you will want to designate that the LLC is member-managed with you as
the manager. It is important that the operating agreement state that you may not be removed
except with your consent. While the limited partnership will also work, the LLLP is better,
because it grants limited liability to the general partner (you), if that form is chosen. As the
Chapters 43 and 44 regarding how to adapt the corporation to your needs. While the Internal
Revenue Code requires an S Corporation to have only one class of shares, IRS regulations
indicate that a difference in voting rights by itself does not create two classes of shares for
Subchapter S purposes.
III. SUGGESTIONS FOR LECTURE PREPARATION:
A. Choosing a Form of Business
1. Begin your lecture by listing the eight business forms summarized in Figure 1 (page 995)
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Revised Uniform Partnership Acts gives limited liability for all obligations to a partner of
an LLP, except for wrongful acts committed by the partner.
2. It may be instructive to reproduce Figure 1 on the chalkboard or overhead screen. Start
up any ambiguities.
3. Students may struggle with the confusingly similar names and acronyms for the various
business forms. You can eliminate this confusion by organizing the forms by type and by
liability.
The limited partnership and the LLLP are essentially the same form. The LLLP is a
limited liability [pause] limited partnership, that is, a limited partnership whose partners
of partners. If partners in a partnership or LLP do create more than one class of partners,
they will not use the terms limited partners and general partner. Partners who manage the
partners.
getting the necessary tax forms.
5. Example: Problem Cases ## 1, 2, and 3.
6. Additional Example: Chapter Introductory Problem (p. 990)
7. The Global Business Environment (p. 994): Note that while the names may be different,
8. Ethics in Action (p. 996):
a. You can examine the first question from each of the ethical perspectives presented in
Chapter 4. Here are some suggestions. A profit maximizer would find it ethical to
to the LLP’s profitability.
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A utilitarian would consider the impact of limited liability on society as a whole,
finding that society benefits when business people protected by limited liability
A rights theorist, especially someone who believes in Kant’s categorical imperative,
would consider the effect of a rule that allows a business person to escape liability for
A believer in justice theory will respond to that last argument by agreeing that
contract creditors have the ability to make contracts with the owners to protect the
b. An analysis of the ethics of tax treatment is similar to the analysis of the ethics of
limited liability. See Chapter 4 for additional guidance.
B. Introduction to Partnership
1. History of Partnerships. We tend to allow students to cover this in their reading, except
of years.
2. The RUPA is the dominant partnership law in the United States. Note the number of
going online at www.nccusl.org.
3. Characteristics of Partnerships. When beginning your lecture on partnerships, write on
losses. You may wish to refer merely to Figure 2 on page 997.
C. Creation of Partnership
1. Consequence of Being a Partner.
a. Begin with a summary of the consequences of being held to be another’s partner and
when a partnership is created.
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b. Example: Two students agree to buy basketball tickets, to resell them (scalping), and
to share the profits. They may not intend to create a partnership, but they have. As a
power to decide what tickets to buy.
2. Definition of Partnership.
a. List the four elements on the chalkboard and explain them briefly before covering
each in detail.
b. Association of Two or More Persons
c. Co-ownership
1) Students have the most problems with the co-ownership element. Stress that
sharing profits is prima facie proof of a partnership, because usually only owners
a) Example: Problem Cases ## 4, 6, 7, and 8.
b) Additional Example: Two business consultants share the revenues of a
business and the expenses of the business. Are they partners? Yes. Since
revenues minus expenses are profits, the consultants are sharing profits and,
therefore, presumed to be partners. This is similar to Problem Case # 5.
additional borrowing by Karen and to veto her decision to expand her business.
Joe has the right to receive, as interest on the loan, the greater of $5,000 per year
Stress here the importance of a creditor documenting his creditor status by having
a written promissory note with a principal amount, interest rate, and maturity
date.
Additional Example: Problem Cases # 5. Sharing profits as compensation to an
employee creates no presumption of partnership.
3. Intent of the Parties
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Students are surprised to learn that they can be partners even if they tell each other that
they are not partners. Stress that it is their intent as evidenced by their relationship with
others—not their stated intent—that determines whether a partnership has been created.
That is, actions speak louder than words.
Be careful to point out that the first two reasons, even if the facts proved the opposite,
would not presumptively create a partnership. The rationale behind the third reason,
sharing profits, is the most important basis for finding a partnership. Note also that the
court did not consider two other very important factors, the sharing of control and making
equipment and Rasmussen contributed land.
Why was the court not convinced that the two parties jointly owned the property of the
business? Rasmussen owned the land where Jackson grazed the bison, and Rasmussen
never had title to any of the bison. Moreover, new equipment that maintained the bison
was titled only in Rasmussen’s name. You may want to point out here—and the court
agreed to that relationship, he would have been agreeing to share profits, as revenue
minus expenses is profits. That would have been strong proof of partnership.
The court probably was greatly persuaded by a clause in Rasmussen and Jackson’s
agreement that there is no partnership between them. Such statements are not always
conclusion that there is no partnership.
D. Purported Partners
1. Essence. This concept is nearly the same as the old UPA’s concept of partnership by
misled me, you will be liable on contracts and torts arising from that transaction.
2. Consequences. Students have trouble distinguishing the consequences of being an actual
partner from the consequences of being a purported partner. They seem to confuse
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a person entered in reliance upon the appearance of partnership and torts that arose in the
course of the performance of those contracts.
3. Purporting to be a Partner. Use a demonstration to define purporting to be a partner.
partner. I am holding him out to you as my partner. I am representing that he is my
my partner.”
4. Consent to Being Represented as a Partner. Note that a person is not liable for someone
actions—to the holding out.
Example: Helen retires from her partnership, but frequently visits the office to pass the
5. Reliance Resulting in a Transaction with the Partnership. Most courts have little
difficulty finding that a person has relied on the appearance of partnership. Often it is
and transacting with a purported partner.
Example: Problem Cases ## 8 and 9.
McGregor v. Crumley (p. 1002). The court concluded that Clint and Paige were neither
purchase cattle.
Points for Discussion: For what reasons did the court conclude that Paige was not Clint’s
partner? McGregor presented no evidence that Paige shared in the title to the farm they
was Clint’s purported partner? Again, McGregor presented no evidence that Paige
caused him to believe that she was Clint’s partner. Paige’s giving McGregor a check of
discuss bills.
6. Ethics in Action (p. 1004): The doctrine of purported partnership can be justified by
Kant’s categorical imperative because it reflects a rule that that you would want others to
each other’s actions.
E. Partnership Property and Partners’ Property Rights
1. Distinguishing Partnership Property from Partners’ Property.
1) what is the partners’ intent;