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CHAPTER 2: PARTNERSHIPS AND LIMITED LIABIITY PARTNERSHIPS 17
whole or in part.
1. What are the three essential elements necessary (but not necessarily sufficient) to form a part-
nership? The Uniform Partnership Act defines a partnership as “an association of two or more persons to carry on as
co-owners a business for profit.” In resolving disputes over whether partnership status exists, courts will look for the
following three elements implicit in this definition: (1) a sharing of profits or losses; (2) a joint ownership of the
business; and (3) an equal right in the management of the business.
2. What is a partnership by estoppel? Parties who are not partners can hold themselves out as partners and
make representations that third persons rely on in dealing with the alleged partners. In such a situation, a court may
conclude that a partnership by estoppel exists and impose liability on the alleged partner or partners. The person
representing himself or herself to be a partner is liable to any third person who extends credit in good faith reliance on
managerial activities.
whole or in part.
9. What is the difference between an LLP and a limited liability limited partnership (LLLP)? The difference
between a limited partnership and an LLLP is that the liability of the general partner in an LLLP is the same as the
liability of a limited partner. That is, the liability of all of the partners in an LLLP is limited to the amount of their
investment in the firm.
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Ask students to compare the differences in the typical agency and partnership relationships. Although the law
of partnerships includes many concepts of agency, the two areas do have significant differences such as the fact that
3. Obtain copies of partnership agreement forms and ask students to discuss the significant provisions. What
sorts of concerns are addressed in each agreement? How might these agreements be improved? How do
these agreements differ from what a sole proprietor might be able to do?
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 7: “Jax Restaurant” is a partnership that operates Jax Restaurant in Minnesota. Nicole Moren,
one of the partners, brought her two-year-old son Remington into the restaurant kitchen, set him on a counter, and
whole or in part.
whole or in part.
CHAPTER 2: PARTNERSHIPS AND LIMITED LIABIITY PARTNERSHIPS 21
whole or in part.
permanently unable to handle livestock. Manny therefore hired additional laborers to tend the livestock,
causing the Cowboy Palace to incur significant debt. In September 2014, Al’s Feed Barn filed a lawsuit
against Jason to collect $32,400 in unpaid debts. Ask your students to answer the following questions, using
the information presented in the chapter.
1. Was this relationship a partnership for a term or a partnership at will? This is a general partnership,
and the facts in the problem indicate that it is a partnership at will. A partnership agreement can limit the
duration of a partnership to a certain date or a particular project, in which case it would be considered to be a
partnership for a term. If no fixed duration is specified, as in this problem, a partnership is a partnership at will.
2. Did Manny have the authority to hire additional laborers to work at the ranch after his injury? Why
or why not? In a general partnership, all partners have equal rights in managing the partnership. Often, in a
large partnership, partners will delegate daily responsibilities to a management committee made up of one or
more of the partners. The partnership in this problem is not large, although the management did appear to be
split among the partners. In that division of labor, it was Manny’s responsibility to handle the livestock. After
his injury, the responsibility was apparently still his, and he acted on it. Unanimous consent of all of the
partners is required in some circumstances, but none of those circumstances appear to exist here.
3. Under the UPA, can Al’s Feed Barn bring an action against Jason individually for Cowboy
Palace’s debt? Why or why not? Al’s Feed Barn can bring action against Jason or Cowboy Palace. A
partner is jointly and severally (separately, or individually) liable for all partnership obligations, including such
debts as the one in this question, even if the partner did not participate in, ratify, or know about whatever it
was that gave rise to the obligation. Nevertheless, Al’s Feed Barn would have to take several steps before
succeeding in a suit against Jason individually. Generally, a creditor cannot collect a partnership debt from a
partner of a non-bankrupt partnership without first attempting to collect from the partnership,
4. Suppose that after his back injury in 2013, Manny sent his mother and brother a notice indicating
his intent to withdraw from the partnership. Can he still be held liable for the debt to Al’s Feed Barn?
Why or why not? A dissociated partner may be liable for partnership obligations entered into during a two-
year period following dissociation. In other words, the partner may be liable to a third party with whom the firm
enters into a transaction if the third party reasonably believed that the dissociated partner was still a partner.
This same principle applies to the liability of the firm for transactions entered into by dissociated partners
within two years after their withdrawal. To avoid this possible liability, a partnership can notify its creditors,
customers, and clients of a partner’s dissociation. The partnership or former partner can also file a statement
of dissociation in the appropriate state office, limiting the dissociated partner’s authority to ninety days after
the filing.
DEBATE THIS
A partnership should automatically end when one partner disassociates from the firm. Before a
change in the UPA, when a partner left the partnership, it had to be dissolved. That makes sense, given that
any partnership is an association of named partners. A new partnership can be created without the partner
who left. After all, one of the major distinctions between a corporation and a partnership used to be that the
corporation was not dependent on people who owe shares in it. Now, it seems as if a partnership can live
forever, too, even if partners come and go.
It was an inefficient legal requirement before when the departure of a partner required the dissolution of
22 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
the partnership. If we returned to the former law, we would again see partners wasting partnership assets,
including the remaining partners’ time, to dissolve the partnership and create a new one every time a partner
left the firm. In any event, partnerships now survive for decades after one or more partners leave the firm,
which shows that they are viable with a different set of partners.
EXAMPREP—
ISSUE SPOTTERS
1. Darnell and Eliana are partners in D&E Designs, an architectural firm. When Darnell dies, his
widow claims that as Darnell’s heir, she is entitled to take his place as Eliana’s partner or to receive a
share of the firm’s assets. Is she right? Why or why not? No. A widow (or widower) has no right to take a
dead partner’s place. A partner’s death causes dissociation after which the partnership must purchase the
dissociated partner’s partnership interest. Therefore, the surviving partners must pay the decedent’s estate
(for his widow) the value of the deceased partner’s interest in the partnership.
2. Finian and Gloria are partners in F&G Delivery Service. When business is slow, without Gloria’s
knowledge, Finian leases the delivery vehicles as moving vans. Because the vehicles would
otherwise be sitting idle in a parking lot, can Finian keep the income resulting from the leasing of the
delivery vehicles? Explain your answer. No. Under the partners’ fiduciary duty, a partner must account to
the partnership for any personal profits or benefits derived without the consent of all the partners in
connection with the use of any partnership property. Here, the leasing partner may not keep the funds.
whole or in part.
9. What is the difference between an LLP and a limited liability limited partnership (LLLP)? The difference
between a limited partnership and an LLLP is that the liability of the general partner in an LLLP is the same as the
liability of a limited partner. That is, the liability of all of the partners in an LLLP is limited to the amount of their
investment in the firm.
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Ask students to compare the differences in the typical agency and partnership relationships. Although the law
of partnerships includes many concepts of agency, the two areas do have significant differences such as the fact that
3. Obtain copies of partnership agreement forms and ask students to discuss the significant provisions. What
sorts of concerns are addressed in each agreement? How might these agreements be improved? How do
these agreements differ from what a sole proprietor might be able to do?
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 7: “Jax Restaurant” is a partnership that operates Jax Restaurant in Minnesota. Nicole Moren,
one of the partners, brought her two-year-old son Remington into the restaurant kitchen, set him on a counter, and
whole or in part.
whole or in part.
CHAPTER 2: PARTNERSHIPS AND LIMITED LIABIITY PARTNERSHIPS 21
whole or in part.
permanently unable to handle livestock. Manny therefore hired additional laborers to tend the livestock,
causing the Cowboy Palace to incur significant debt. In September 2014, Al’s Feed Barn filed a lawsuit
against Jason to collect $32,400 in unpaid debts. Ask your students to answer the following questions, using
the information presented in the chapter.
1. Was this relationship a partnership for a term or a partnership at will? This is a general partnership,
and the facts in the problem indicate that it is a partnership at will. A partnership agreement can limit the
duration of a partnership to a certain date or a particular project, in which case it would be considered to be a
partnership for a term. If no fixed duration is specified, as in this problem, a partnership is a partnership at will.
2. Did Manny have the authority to hire additional laborers to work at the ranch after his injury? Why
or why not? In a general partnership, all partners have equal rights in managing the partnership. Often, in a
large partnership, partners will delegate daily responsibilities to a management committee made up of one or
more of the partners. The partnership in this problem is not large, although the management did appear to be
split among the partners. In that division of labor, it was Manny’s responsibility to handle the livestock. After
his injury, the responsibility was apparently still his, and he acted on it. Unanimous consent of all of the
partners is required in some circumstances, but none of those circumstances appear to exist here.
3. Under the UPA, can Al’s Feed Barn bring an action against Jason individually for Cowboy
Palace’s debt? Why or why not? Al’s Feed Barn can bring action against Jason or Cowboy Palace. A
partner is jointly and severally (separately, or individually) liable for all partnership obligations, including such
debts as the one in this question, even if the partner did not participate in, ratify, or know about whatever it
was that gave rise to the obligation. Nevertheless, Al’s Feed Barn would have to take several steps before
succeeding in a suit against Jason individually. Generally, a creditor cannot collect a partnership debt from a
partner of a non-bankrupt partnership without first attempting to collect from the partnership,
4. Suppose that after his back injury in 2013, Manny sent his mother and brother a notice indicating
his intent to withdraw from the partnership. Can he still be held liable for the debt to Al’s Feed Barn?
Why or why not? A dissociated partner may be liable for partnership obligations entered into during a two-
year period following dissociation. In other words, the partner may be liable to a third party with whom the firm
enters into a transaction if the third party reasonably believed that the dissociated partner was still a partner.
This same principle applies to the liability of the firm for transactions entered into by dissociated partners
within two years after their withdrawal. To avoid this possible liability, a partnership can notify its creditors,
customers, and clients of a partner’s dissociation. The partnership or former partner can also file a statement
of dissociation in the appropriate state office, limiting the dissociated partner’s authority to ninety days after
the filing.
DEBATE THIS
A partnership should automatically end when one partner disassociates from the firm. Before a
change in the UPA, when a partner left the partnership, it had to be dissolved. That makes sense, given that
any partnership is an association of named partners. A new partnership can be created without the partner
who left. After all, one of the major distinctions between a corporation and a partnership used to be that the
corporation was not dependent on people who owe shares in it. Now, it seems as if a partnership can live
forever, too, even if partners come and go.
It was an inefficient legal requirement before when the departure of a partner required the dissolution of
22 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
the partnership. If we returned to the former law, we would again see partners wasting partnership assets,
including the remaining partners’ time, to dissolve the partnership and create a new one every time a partner
left the firm. In any event, partnerships now survive for decades after one or more partners leave the firm,
which shows that they are viable with a different set of partners.
EXAMPREP—
ISSUE SPOTTERS
1. Darnell and Eliana are partners in D&E Designs, an architectural firm. When Darnell dies, his
widow claims that as Darnell’s heir, she is entitled to take his place as Eliana’s partner or to receive a
share of the firm’s assets. Is she right? Why or why not? No. A widow (or widower) has no right to take a
dead partner’s place. A partner’s death causes dissociation after which the partnership must purchase the
dissociated partner’s partnership interest. Therefore, the surviving partners must pay the decedent’s estate
(for his widow) the value of the deceased partner’s interest in the partnership.
2. Finian and Gloria are partners in F&G Delivery Service. When business is slow, without Gloria’s
knowledge, Finian leases the delivery vehicles as moving vans. Because the vehicles would
otherwise be sitting idle in a parking lot, can Finian keep the income resulting from the leasing of the
delivery vehicles? Explain your answer. No. Under the partners’ fiduciary duty, a partner must account to
the partnership for any personal profits or benefits derived without the consent of all the partners in
connection with the use of any partnership property. Here, the leasing partner may not keep the funds.
