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Part Six:
Unincorporated Business Associations
CONTENTS
Chapter 30 Formation and Internal Relations of General Partnerships
Chapter 31 Operation and Dissolution of General Partnerships
Chapter 32 Limited Partnerships and Limited Liability Companies
ETHICS QUESTIONS RAISED IN THIS PART
1. From an ethical perspective what obligations does one partner have toward her fellow partners? Are the
ethical obligations of a partner to her fellow partners the same as her legal obligations? What moral
obligations does a partner have to her fellow partners in dealing with third parties?
2. A partnership is defined as "an association of two or more persons to carry on as co-owners a business for
ACTIVITIES AND RESEARCH PROBLEMS
1. Have students get together with one or more other students and draft the necessary papers to create (a) a
general partnership (b) a limited partnership and (c) a limited liability company to carry on a business of
some type.
2. Have students find the relative number of new business entities that are formed as partnerships, limited
partnerships, limited liability companies, limited liability partnerships, limited liability limited partnerships,
and corporations.
Chapter 30
FORMATION & INTERNAL RELATIONS OF GENERAL
PARTNERSHIPS
NOTE: the following outline reflects the contents of the student’s textbook. This instructor’s manual is
in a slightly different order because it presents a side-by-side comparison of UPA and RUPA where
appropriate.
I. Choosing a Business Association
A. Factors Affecting the Choice
1. Ease of Formation
2. Taxation
3. External Liability
4. Management and Control
5. Transferability
6. Continuity
B. Forms of Business Associations
1. Sole Proprietorship
2. General Partnership
3. Joint Venture
4. Limited Partnership
5. Limited Liability Company
6. Limited Liability Partnership
7. Limited Liability Limited Partnership
8. Corporation
9. Business Trusts
II. Formation of General Partnerships
A. Nature of Partnership
1. Definition
2. Entity Theory
a. Partnership as a Legal Entity
b. Partnership as a Legal Aggregate
B. Formation of a Partnership
1. Partnership Agreement
a. Statute of Frauds
b. Firm Name
2. Tests of Partnership Existence
a. Association
b. Business for Profit
c. Co-ownership
3. Partnership Capital and Property
III. Relationships Among Partners
A. Duties Among Partners
1. Fiduciary Duty
2. Duty of Obedience
3. Duty of Care
B. Rights Among Partners
1. Rights in Specific Partnership Property
2. Partner’s Transferable Interest in the
Partnership
a. Assignability
b. Creditors’ Rights
3. Right to Share in Distributions
a. Right to Share in Profits
b. Right to Return of Capital
c. Right to Indemnification
d. Right to Compensation
4. Right to Participate in Management
5. Right to Choose Associates
6. Enforcement Rights
a. Right to Information &
Inspection of the Books
b. Legal Action
Cases in This Chapter
In Re KeyTronics
Thomas v. Lloyd
Enea v. The Superior Court of Monterey County
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Identify the various types of business associations and explain the factors
relevant to deciding which form to use.
Distinguish between a legal entity and a legal aggregate and identify
a partner’s interest in the partnership.
Identify and explain the duties owed by a partner to her copartners.
Identify and describe the rights of partners.
TEACHING NOTES
Various factors such as ease of formation, type of control, and taxation are
considered when the owners of a business enterprise decide what type of entity
they wish to become. Choices include sole proprietorship, an unincorporated
I. CHOOSING A BUSINESS ASSOCIATION
*** Chapter Objective***
Identify various types of business associations & explain the factors relevant to deciding
which to use.
A. FACTORS AFFECTING THE CHOICE
Ease of Formation
Some business associations are created with no formalities, some require filing
of documents with the state.
Taxation
Some business associations are considered separate taxable entities; others are
not. Income from a business which is not a taxable entity is “credited” to the
owners and taxed on their personal returns. Separate taxable entitles, such as
corporations, are directly taxed. Funds distributed to the owners are then also
taxed on the owners’ personal returns. All businesses that have publicly traded
ownership interests must be taxed as a corporation.
External Liability
The most common types of external liability are tort and contract liability. In
some business, owners have unlimited liability, meaning their entire estate may
be liable for some or all of the business’ debts. In other businesses, the owner’s
Management and Control
Owners may share fully in the control of the business or their right to control
may be restricted.
Transferability
In some businesses, owners may transfer their financial interest, but not their
managerial interest; in other businesses, ownership is freely transferable.
Continuity
Low continuity in a business means that the death or withdrawal of an owner will
dissolve the business. High continuity ensures that the business will continue
through an ownership change.
Note: See Figure 30-1: General Partnership, Limited Partnership, Limited Liability Company and
Corporation
B. FORMS OF BUSINESS ASSOCIATIONS
Sole Proprietorship
An unincorporated business owned by just one person; formed with no formality
and no documents to be filed. If one person conducts a business and does not
file with the state to form an LLC or corporation, a sole proprietorship will result
by default. It is not a separate taxable entity. Owners have unlimited liability for
all debts. Ownership is freely transferable, but the business dissolves upon the
owner’s death.
General Partnership
An unincorporated business formed for profit, owned by two or more persons;
formed with no formality and no documents to be filed. If two or more people
conduct a business and do not file with the state to form another type of
Joint Venture
An unincorporated business established by two or more persons, usually for a
short time period and for a specific purpose. In most cases, joint ventures are
governed by the law of partnerships.
Limited Partnership
An unincorporated business formed for profit, owned by at least one general
partner and at least one limited partner; requires filing of certificate of limited
partnership with the state. A limited partnership may elect not to be a separate
taxable entity, in which case only the partners are taxed. Publicly traded limited
partnerships, however, are subject to corporate income taxation. General
partners have unlimited liability for all debts; limited partners have limited
Limited Liability Company
A limited liability company (LLC) is an unincorporated business association that
provides limited liability to all of its owners and permits all of its members to
participate in management. It may elect not to be a separate taxable entity. As
noted previously, publicly traded LLCs are subject to corporate income taxation.
If an LLC has only one member, then it will be taxed as a sole proprietorship,
unless separate entity tax treatment is elected. The LLC provides many of the
Limited Liability Partnership
A general partnership that, by making the statutorily required filing, limits the
liability of its partners for some or all of the partnership's obligations. To become
an LLP, a general partnership must file with the state an application containing
specified information. All of the States have enacted LLP statutes.
Limited Liability Limited Partnership
An unincorporated business similar to a limited partnership, except that the
general partners have limited liability as in an LLP. An existing limited
partnership may be able to register as an LLLP without having to form a new
organization, as would be required to form an LLC.
Corporation
A legal entity distinct and separate from its owners. Formed by filing its articles
of incorporation with the state. A corporation is taxed on its earnings and the
shareholders are taxed on distributions they receive from the corporation. (Some
Business Trusts
Created by voluntary agreement between parties, with no state consent
required. Has three distinguishing characteristics: 1) is devoted to the conduct
II. FORMATION OF A GENERAL PARTNERSHIP
Partnerships as a form of business can be traced as far back in time as ancient
Babylonia, classical Greece and the Roman Empire. Partnerships are important
because they allow people with di>erent expertise, backgrounds, resources, and
interests to combine their skills to form a more competitive enterprise. It should
be recalled that except for the filing requirements and the partners’ liability
shield, the law governing LLPs is identical to the law governing general
partnerships.
A. NATURE OF PARTNERSHIP
The National Conference of Commissioners on Uniform State Laws promulgated
the Uniform Partnership Act (UPA) in 1914. In August 1986, the UPA Revision
Subcommittee of the Committee on Partnerships and Unincorporated Business
Organizations of the American Bar Association's Section of Corporation, Banking
and Business Law and the National Conference of Commissioners on Uniform
State Laws decided to undertake a complete revision of the UPA. The revision
was approved in August 1992 and was amended in 1993, 1994, 1996, and 1997.
More than 60% of the States have adopted the Revised Act (RUPA).
This Instructor’s Manual will discuss both UPA and RUPA, with a
side-by-side comparison when appropriate. Note that the chapter in the
text discusses the RUPA but, where the RUPA has made signi.cant
changes, the UPA is also discussed. The chapter summary in the text
re/ects only the RUPA.
Definition
RUPA and UPA both define a partnership as “an association of two or more
persons to carry on as co-owners a business for profit.” Section 101(6). The
RUPA broadly defines “person” to include individuals, partnerships, corporations,
joint ventures, business trusts, estates, trusts, and any other legal or commercial
entity.” Section 101(10). The comments indicate that this definition would
include a limited liability company. Also defined by Section 101, a business
includes every trade, occupation, and profession. [UPA Sections 2, 6]
*** Chapter Objective***
Distinguish between a legal entity and a legal aggregate. Identify those purposes for which
a partnership is treated as a legal entity and those purposes for which it is treated as a legal
aggregate.
Entity Theory
Partnership as a Legal Entity — A legal entity is a unit capable of
possessing legal rights and of being subject to legal duties. A legal entity may
acquire, own, and dispose of property. It may enter into contracts, commit
wrongs, sue, and be sued. A partnership is an entity distinct from its partners,
but what this means exactly depends on whether UPA or RUPA is ruling.
UPA RUPA
Under UPA, a partnership is a legal
entity with regard to (1) holding title
to real estate, (2) assets of
Under the Revised Act a
partnership is a legal entity in
these ways: (1) The assets of the
is an agent of partnership, and (5)
marshaling of assets.
of the members. (2) A partner is
accountable as a fiduciary to the
partnership. (3) Every partner is
considered an agent of the
partnership. (4) A partnership may
sue and be sued in the name of the
partnership.
Partnership as a Legal Aggregate — The common law regarded a
partnership as a legal aggregate, a group having no legal existence apart from
that of its individual members. The Internal Revenue Code treats a partnership
as an aggregate. The partnership does not pay federal income tax; but the
partners are taxed on the income each derives from the partnership.
UPA RUPA
The UPA partially rejected the
common law view and treats
partnerships as legal aggregates for
some purposes but as legal entities
for others. The UPA continues
The Revised Act has greatly
increased the extent to which
partnerships are treated as entities.
It applies aggregate treatment to
very few aspects of partnerships,
B. FORMATION OF A PARTNERSHIP
Forming a partnership is simple. A partnership may result from an oral or written
agreement between the parties or simply from the conduct of the parties.
Persons become partners by agreeing to associate themselves in a business as
co-owners. If two or more individuals share the control and profits of a business,
the law may deem them partners regardless of how they themselves
characterize their relationship.
Partnership Agreement
A “partnership agreement” is “the agreement, whether written, oral, or implied,
among the partners concerning the partnership, including amendments to the
partnership agreement.” This definition does not include other agreements
between some or all of the partners, such as a lease or a loan agreement.
Partners should put their agreement to associate as partners in writing, although
they are not usually required to do so by law.
UPA RUPA
Any partnership agreement
(sometimes called articles of
partnership) should include:
Any partnership agreement
should include
1. the firm name and identity of
the partners,
2. the nature and scope of the
partnership business,
3. the duration of the partnership,
4. the capital contributions of each
desired,
8. the restrictions, if any, on the
authority of particular partners to
bind the firm,
9. the right, if desired, of a partner
to withdraw from the firm, and the
terms, conditions, and notice such
withdrawal would require, and
10. a provision for continuation of
1. The firm name and the
identity of the partners;
2. The nature and scope of
the partnership business;
3. The duration of the
partnership;
7. A provision for salaries, if
desired;
8. Restrictions, if any, upon
the authority of particular
partners to bind the firm;
9. Any desired variations from
the partnership statute’s
default provisions governing
dissolution; and
Statute of Frauds – Partnership agreements required to be in writing are: a
contract to form a partnership to exist longer than one year; a contract for the
transfer of an interest in real estate to or by a partnership.
Firm Name – A partnership should have a firm name, which may not be
identical with or deceptively similar to the name of any other existing business
concern; it may be the name of the partners or of any one of them, or a fictitious
or assumed name. In most states, statutes require anyone conducting business
under an assumed or fictitious name to file in a designated public oLce a
certificate with the business name and the real names and addresses of all
persons conducting the business. The name must not be likely to indicate to the
public that it is a corporation.
Tests of Partnership Existence
not the parties intend to form a partnership
Business for Pro.t — The partners must co-own a business for profit. Not a
partnership because not for profit are: social clubs, charitable organizations,
fraternal orders and civic societies.
Also not a partnership: an association of people for financial gain on a temporary
basis or for relatively few isolated transactions, although they may have formed
a joint venture.
Co-ownership — The co-ownership of a business is essential for the existence
of a partnership; the co-ownership of property used in a business is not
necessary. The two most important factors in business ownership are (a) sharing
of profits and (b) right to manage and control the business.
