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Chapter 41
PARTNERSHIPS
RESTATEMENT
The Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act (RUPA) are in effect in 49 states, and
govern partnerships and the rights of partners.
A partnership is a voluntary association of two or more persons to carry on as co-owners of a business for profit.
In a general partnership, the parties contribute capital or services or both. A general partnership is not always
regarded as a separate entity.
For income and tax purposes, the partnership is simply an aggregate of the partners and the income and losses
simply flow through to the partners. Partners ’ rights are determined by agreement, or, if they have not provided
for such in their agreement, by the UPA.
The name of the partnership may require registration for protection. There are various classifications of partners
including general partners, nominal partners, silent partners, secret partners and dormant partners. Any person
competent to enter into contracts may be a partner.
The creation of a partnership may be by agreement or by implication. An agreement should carefully spell out all
terms and rights of the parties. However, often individuals create a partnership and partnership liability by their
conduct and its appearance to third parties. Several factors can influence the determination of whether a
partnership exists but, the sharing of profits creates a prima facie presumption that a partnership exists.
Partnership liability can arise through estoppel as when an individual allows himself to be held out as a partner so
that third persons are led to believe that the individual and his assets and credit worthiness are part of a
partnership.
Partners in a partnership have express authority as provided in their agreement and customary authority
according to the nature of the partnership business. There can be limitations on partner ’s authority provided in
the partnership agreement, but third parties must be aware of the limitations. There are also prohibited
transactions for partners including an agreement to cease business, to act as a surety, to submit the partnership
to arbitration, to confess a judgment or to assign for the benefit of creditors. All of these actions require
unanimous consent.
Duties of partners include loyalty and good faith, obedience, reasonable care, information sharing and
accounting of the financial status of the partnership. The rights of partners include management authority,
inspection of books, sharing of profits, contributions and indemnity. In the absence of an agreement, partners are
not entitled to compensation.
Partners are jointly liable on all partnership contracts and liable to other partners for any breach of duty. New
partners are liable to the extent of their capital contributions for obligations in existence at the time of their
admission and have full liability for any obligations incurred after admission.
Partnership creditors have priority on partnership assets and individual partners ’ creditors must first exhaust the
personal assets of the partner.
Partnership property consists of all property contributed by the partners or acquired for the firm or with its funds.
Title to partnership property may be carried in the name of the partnership or one or more of the partner ’s
individual names. Title to partnership property is held in tenancy in partnership which is similar to joint tenancy
for passage of title upon the death of one of the partners.
Creditors of individual partners can attach the value of a partner ’s interest, but not the partnership property itself.
Dissolution occurs when the partnership ceases to exists as a going concern. Dissolution can occur through the
conduct of the parties or by operation of law (death; bankruptcy of the partnership or any partner; or illegality, or
by decree of the court). Upon dissolution, the parties may continue in certain circumstances or wind up the firm ’s
obligation, liquidate and terminate. Distribution of partnership assets upon liquidation is controlled by the UPA.
STUDENT LEARNING OUTCOMES
LO.1: Explain how partnerships are created by agreement, and understand that only when the partnership
agreement does not resolve an issue does partnership law apply.
LO.2: Understand that no writing is needed to form a partnership, nor a tax ID number, nor a partnership name.
All that is needed is clear evidence that the partners carried on as co-owners of a business for profit.
LO.3: Distinguish between express authority and customary authority of a partner to act for a partnership.
LO.4: List the duties of partners to one another.
LO.5: Explain the nature and extent of a partner's liability on firm contracts and torts.
LO.6: Describe how a partnership may be dissolved by the acts of partners, by operation of law, and by order
of the court.
INSTRUCTOR’S INSIGHTS
Break the chapter down into four components – related Learning Outcomes are indicated in ( ):
1. What is the nature of partnerships and how are they created?
Define partnership (LO.1)
List the characteristics of a partnership
Cover the rights, classification and nature of partners
2. What are the authorities of partners?
Discuss the authority of partners including express and customary authority (LO.3)
3. What are the duties, rights, and liabilities of partners?
Explain the duties and rights of partners (LO.4)
4. How do dissolution and termination of a partnership occur? (LO.6)
Define dissolution
List the methods of dissolution: by act of the parties; by operation of law; by court decree of dissolution
CHAPTER OUTLINE
I. What is the Nature of Partnerships and How are They Created?
A. Definition
CASE BRIEF: Ford v. Mitcham
298 So. 2d 34 (Ala. Civ. App. 1974)
FACTS: Ford and Mitcham were partners engaged in construction. Ford was killed at work. His widow
made a claim for workers’ compensation against the partnership. Mitcham opposed the claim
on the ground that Ford was a partner and not an employee.
ISSUE: Is Ford a partner or employee?
REASONING: While a working partner does work, a partner is not an employee. The essential element of an
employment relationship is the right of the employer to control the employee. Although a
partner is required to act in a proper manner, a partner is not subject to the control of the
partnership in the same sense as an employee and therefore is not an “employee ” of the
partnership for the purpose of workers’ compensation.
B. Characteristics of a partnership
1. Voluntary agreement
2. Contributions of capital, services, or both
C. Rights of partners – determined by their agreement and the Uniform Partnership Act or the Revised
Uniform Partnership Act
D. Partnership agreement (See Figure 41-1)
1. Can be oral or written
E. Determining existence of partnership
3. When partnership relationship is not clear, the following rules can help determine if a partnership
exists
a. Control – significant in determining whether an individual is a partner
b. Sharing profits and losses – strong evidence of partnership
CASE BRIEF: Byker v. Mannes
641 N.W. 2d 210 (Mich. 2002)
FACTS: Byker and Mannes agreed to engage in an ongoing business enterprise, to raise and
invest funds and share equally in the profits, losses and expenses of such enterprise. Over the
years, the parties pursued limited partnerships, sharing equally in commissions, financing fees
and termination costs. Byker and Mannes then created a subsequent entity, Pier 1000, Ltd., to
own and manage a marina. This venture was not successful, and they took profits from a prior
entity and borrowed money to continue its operations. The unsuccessful marina was later
returned to its previous owners in exchange for assumption of Byker’s and Mannes’ direct
obligations to that business. The nine year business relationship between plaintiff and
defendant ceased. Byker approached Mannes for him to share in the payments resulting from
losses that were incurred from their various entities. Mannes refused payment. Byker sued
contending there was a general partnership underlying all their business affairs. Mannes
asserted that he merely invested in separate business ventures with Byker and there were no
other understandings between them.
ISSUE: Do individuals have to be aware of their status as partners in order to have a legal partnership?
REASONING: Partnership is defined as an association of two or more persons, which may consist of husband
and wife, to carry on as co-owners of a business for profit. The intent to create a partnership is
not required if the acts and the conduct of the parties otherwise evidence that the parties
carried on as co-owners of a business for profit.
DISCUSSION POINTS: Have the students discuss the Byker v. Mannes case where one individual, who carried
on a business for profit, was dumfounded to find out that he was, by law, a partner.
F. Partners as to third persons
1. Partnership liability by estoppel
G. Partnership property
Often, as a business operates, the partners bring some of their personal items for use by the partnership
so that the partnership does not have to incur the expense of buying these items. These items are then
extensively used by the partnership, and over time, some of the partners forget whether these were
H. Tenancy in partnership
1. There is an equal right to use firm property for partnership business
2. Partners have no interest in specific items
I. Assignment of partner’s interest
1. Assignment is acceptable if it does not violate the partnership agreement
II. What are the Authorities of Partners?
A. Authority of majority of partners
1. Ordinary business functions
B. Express authority of individual partners
C. Customary authority of individual partners
1. Contracts
2. Sales
CASE BRIEF: Omnicom v. Giannetti Investment Co.
561 N.W. 2d 138 (Mich. App. 1997)
FACTS: Silvio Giannetti and his daughter and son-in-law, Anne Marie and Jerry Pruzinsky, are partners
in a general partnership known as Giannetti Investment Company (GIC) which owns and
operates Braugham Manor Apartments. Jerry entered into an access agreement with
Omnicom, a provider of cable television services, giving Omnicom the right to enter Braugham
Manor for purposes of installing, maintaining, and promoting cable service. Some time later,
when Silvio learned of the contract, he denied Omnicom access to the property, and Omnicom
was unable to repair a signal leakage problem and was forced to discontinue cable service.
Omnicom sued GIC for breach of contract. GIC contended that Jerry did not sign the agreement
in the partnership name, and thereby failed to bind GIC.
ISSUE: Did Jerry have the authority to contract with Omnicom?
REASONING: A contract executed in the name of a partner is binding on the partnership. The contract was
executed by Jerry in the usual course of GIC’s business, for it is a typical activity for an
apartment complex to contract for cable television.
D. Limitations on authority
1. Discuss limitations on liability in a partnership agreement
2. Third persons should check the partner’s authority
3. Secret limitations among partners are very seldom binding on outsiders. Use an example of a
partnership in which only one partner is authorized to make certain purchases on behalf of the
E. Prohibited transactions (See Figure 41-2 in text)
1. Remind the students that the relationships between the partner and the partnership and the principal
and the agent both contain fiduciary duties. Point out that the transactions discussed in this section
CASE BRIEF: Patel v. Patel
260 Cal. Rptr. 255 (Cal. App. 1989)
FACTS: The Patel family, consisting of parents and a son, was a partnership that owned and operated a
motel. The parents made a contract to sell the motel, but the son refused to sell. He claimed
that the contract of sale was not binding.
ISSUE: Did two partners have the authority to sell the hotel?
REASONING: The motel was not an asset held by the partnership for sale. It was an asset that was essential
for the running of the partnership/business. Accordingly, neither one partner nor a majority had
implied authority to sell the motel. To the contrary, the unanimous consent of all the partners
was required for the sale of the motel because such a sale would make it impossible to
continue the partnership business.
2. Cessation of business
3. Suretyship
III. What are the Duties, Rights, and Liabilities of Partners?
A. Duties of partners
1. Loyalty and good faith – owed to the partners and the partnership
B. Rights of partners as owners – unless agreed otherwise
1. Management – equal right
2. Inspection of books – equal right
3. Share of profits – by agreement or equal
4. Compensation – no compensation for work for partnership unless agreed
5. Repayment of loans – point out the risk of a partner's payment of money into the partnership. The
C. Liability of partners and partnership
CASE BRIEF: PNC Bank, N.A. v. Farinacci
964 N.E. 2d 1124 (Ohio. App. 2011)
FACTS: Plaintiff, PNC Bank, sued defendants, two of the eight partners of Washington Square
Enterprises, for not paying the balance on their partnership’s line of credit, of $33,500. Joint and
several liability would allow the bank to obtain payment of the entire debt from either of the two
partners. Joint liability apportions the debt equally among all eight partners, allowing the bank to
collect just $4,190 from each of the two defendants.
ISSUE: Should the two partners be held jointly liable or jointly and severally liable for
the debt?
REASONING: In 2007 Ohio adopted the Revised Uniform Partnership Act (RUPA) effective January 1, 2010,
which provides that all partners are liable jointly and severally for the obligations of the
partnership. However, the new law states that the RUPA language does not apply to
partnerships formed prior to January 1, 2009; and the Washington Square Partnership was
formed in 1978. Under the applicable partnership law the two defendant partners are held jointly
liable for the debt.
3. Liability of new partners
a. Liability is limited as to existing debts and unlimited as to new debts – a new partner must buy
into the partnership because the new partner is acquiring a piece of the existing partners'
b. Finally, the new partner should pay careful attention to any clauses in the partnership
agreement that deal with the amount of time the partner must spend with the partnership. A
4. Effect of dissolution on partner's liability – still liable unless released by creditors
D. Enforcement and satisfaction of creditor's claim
IV. How do Dissolution and Termination of a Partnership Occur?
A. Effect of dissolution
