901
Chapter 37
Partnerships and
Limited Liability Partnerships
See Separate Lecture Outline System
INTRODUCTION
The most common forms of business organization are the sole proprietorship and, when two or more persons are
involved, the partnership and the corporation, with the limited liability company becoming increasingly popular. In this chapter,
the basic features of partnerships are explained, and some of their advantages and disadvantages are spelled out.
ADDITIONAL RESOURCES—
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VIDEO SUPPLEMENTS
The following video supplements relate to topics discussed in this chapter—
PowerPoint Slides
To highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slides compiled for
Chapter 37.
ADDITIONAL BACKGROUND—
A History of Partnership Law
Partnerships can be traced to the earliest records of history. The Code of Hammurabi, from 2300 B.C., includes
references to partnerships. Around 2000 B.C., the Jews developed a form of partnership, known as a shutolin, for
agricultural purposes. Commercial Jewish partnerships developed later.
In the Roman Code of Jusitinian, there were provisions for partnerships that resemble current American
partnership law. The Romans also developed the rules of agency, which serve as the basis for much partnership law.
Under Roman law, the essence of a partnership was the choosing of partners.
In civil law countries, partnership law is similar to partnership law in common law countries, because in civil law
countries, partnership law also developed from the customs of the merchants.
CHAPTER OUTLINE
I. Basic Partnership Concepts
A. AGENCY CONCEPTS AND PARTNERSHIP LAW
Partnership law is based on agency law: the fiduciary ties that bind agent and principal also bind partners. In a
non-partnership agency relationship, the agent usually does not have an ownership interest in the business nor is
the agent obligated to bear a portion of the ordinary business losses.
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B. THE UNIFORM PARTNERSHIP ACT
The Uniform Partnership Act (UPA), as adopted by the states, governs the operation of partnerships in the
absence of an express agreement among the partners to the contrary.
C. DEFINITION OF A PARTNERSHIP
Under the UPA, a partnership is “an association of two or more persons to carry on as co-owners a business for
profit” [UPA 101(6)]. Intent is a key element [UPA 401(g)]. The Revised Model Business Corporation Act and the
UPA permit a corporation to be a partner.
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D. WHEN DOES A PARTNERSHIP EXIST?
Sharing profits alone does not qualify, but sharing both profits and losses might. The three essential elements
implicit in the definition of partnership are—
• A sharing of profits or losses.
• A joint ownership of the business.
• An equal right in the management of the business.
A partnership does not exist if profits are received as payment of— [UPA 202(c)(3)]
E. JOINT PROPERTY OWNERSHIP AND PARTNERSHIP STATUS
Joint ownership of property, or a sharing of profits or losses does not alone create a partnership. Sharing both
profits and losses may qualify, however.
F. ENTITY V. AGGREGATE
A partnership is sometimes called a firm or a company, terms that connote an entity separate and apart from its
aggregate members. Generally, the law treats a partnership as an independent entity.
G. TAX TREATMENT OF PARTNERSHIPS
For at least one purpose—federal income taxes—a partnership is regarded as an aggregate of individual partners.
II. Partnership Formation
A. THE PARTNERSHIP AGREEMENT
Partners may agree to virtually any terms, as long as they are not illegal or contrary to public policy. A partnership
statement may (or may not) be filed with the appropriate state office. Common terms are noted in the text.
ENHANCING YOUR LECTURE—
DOING BUSINESS WITH FOREIGN PARTNERS
Businesspersons from the United states who wish to operate a partnership in another country should always check
to see whether that country requires local participation. Such a requirement means that nationals of the host U.S. must
own a specific share of the business. In other words, the American businesspersons would need to admit to the
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partnership a partner or partners who live in the host country.
Sometimes, U.S. businesspersons are reluctant to establish partnerships in a country that requires local
participation. They fear that if the partnership breaks up, the technology and expertise developed by the partnership
business may end up in the hands of a future competitor. In that event, the U.S. parties may have little recourse under
the host country’s law against their former partners’ use of the intellectual property.
FOR CRITICAL ANALYSIS
Do local participation rules benefit countries in the long run?
B. DURATION OF THE PARTNERSHIP
A partnership for a term ends on a specific date or the completion of a particular project. Dissolution without
consent of all partners before the end of the term is a breach of the agreement. If there is no fixed term, a
partnership is at will, and any partner can dissolve the firm at any time.
C. PARTNERSHIP BY ESTOPPEL
III. Partnership Operation
A. RIGHTS OF PARTNER
1. Management
All partners have equal rights in management [UPA 401(f)]. Each partner has one vote, and the majority
rules in ordinary matters. Extraordinary matters may require unanimous consent to [UPA 301(2), 401(j)]—
2. Interest in the Partnership
3. Compensation
Conducting partnership business is a partner’s duty and generally not compensable.
4. Inspection of the Books
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5. Accounting of Partnership Assets or Profits
6. Property Rights
Property acquired in the name of the partnership or a partner, or with partnership funds, is normally
1. Fiduciary Duties
A partner owes the firm and its partners duties of care and loyalty [UPA 404].
Case 37.1: Meinhard v. Salmon
“Walter Salmon negotiated a twenty-year lease for Hotel Bristol in New York City. To pay for the conversion of the
building into shops and offices, Salmon entered into an agreement with Morton Meinhard to assume half of the cost.
They agreed to share the profits and losses from the venture. Before the end of the lease, the building’s owner Elbridge
Gerry approached Salmon about a project to raze the converted structure, clear five adjacent lots, and construct a
single building across the whole property. Salmon agreed and signed a new lease in the name of his own business.
When Meinhard learned of the deal, he filed a suit in a New York state court against Salmon. From a judgment in
Meinhard’s favor, Salmon appealed.
The Court of Appeals of New York held that Salmon breached his fiduciary duty by failing to inform Meinhard of
the business opportunity and secretly taking advantage of it himself. “Many forms of conduct permissible in a
workaday world for those acting at arm’s length are forbidden to those bound by fiduciary ties. . . . Not honesty alone,
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but the punctilio of an honor the most sensitive, is then the standard of behavior.” Thus “a man obtaining [an] . . .
opportunity . . . by the position he occupies as a partner is bound by his obligation to his copartners in such dealings
not to separate his interest from theirs, but, if he acquires any benefit, to communicate it to them.” The court granted
Meinhard an interest “measured by the value of half of the entire lease.”
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Notes and Questions
Would the reasoning and result in this case have been the same under the principles of agency law? Possibly. An
agent, like a partner, owes his or her principal a duty of loyalty. This duty requires the agent to refrain from self-dealing
without the principal’s consent. In circumstances similar to the situation in this case, an agent who engaged in the
same conduct as Salmon would have violated the agent’s duty of loyalty. The remedy might have been different,
however. In the context of an agency relationship, the entire contract might have been awarded to the principal.
ANSWER TO “WHAT IF THE FACTS WERE DIFFERENT?” IN CASE 37.1
Suppose that Salmon had disclosed Gerry’s proposal to Meinhard, who had said that he was not interested. Would
the result in this case have been different? Explain. Yes, because telling Meinhard about the offer would have met
Salmon’s fiduciary duty of loyalty to his partner. Without a breach of the duty, there would not have been the same
ground on which to award Meinhard “the value of half of the entire lease.”
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases considering the rights and liabilities of a partnership include the following.
• Peter v. GC Services L.P., 310 F.3d 344 (5th Cir. 2002) (a collection agency’s general partners were jointly and
severally liable for the agency’s violations of law in attempting to collect a student loan debt).
debtor and her husband, in connection with a company that the debtor formed and to which the husband channeled
and thus, it was appropriate to impute the husband’s fraud to the debtor).
partners were jointly and severally liable for the debts of their partnership).
2. Breach and Waiver of Fiduciary Duties
3. Authority of Partners
Each partner is a general agent of the partnership in carrying out the usual business of the firm, unless
designated otherwise.
4. Liability of Partners
a. Joint Liability
At one time, partners were jointly liable for partnership obligations. A creditor had to sue all of the
partners as a group, but each could be liable for the entire judgment. Partnership assets had to be
exhausted before individual partners’ assets could be reached.
b. Joint and Several Liability
IV. Dissociation of a Partner
When a partner ceases to be associated in the carrying on of the partnership business, he or she can have his or her
interest bought by the firm, which otherwise continues to do business.
A. EVENTS THAT CAUSE DISSOCIATION
Under UPA 601—
• A partner may give notice and withdraw.
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B. WRONGFUL DISSOCIATION
This can occur if dissociation is in breach of a partnership agreement, before the expiration of its term or
completion of its undertaking [UPA 602]. A partner who wrongfully dissociates is liable to the partnership and to
the other partners for damages caused by the dissociation
C. EFFECTS OF DISSOCIATION
1. Rights and Duties
On dissociation, a partner’s right to participate in the firm’s business ends [UPA 603]. The duty of loyalty
2. Liability to Third Parties
To avoid liability for obligations under a theory of apparent authority, a partnership should notify its
creditors of a partner’s dissociation and file a statement of dissociation in the appropriate state office [UPA
704].
V. Partnership Termination
A. DISSOLUTION
1. Dissolution by Acts of the Partners
2. Dissolution by Operation of Law
3. Dissolution by Judicial Decree
A court can dissolve a partnership for commercial impracticality, improper conduct, or other circumstances
[UPA 801(5)].
B. WINDING UP AND DISTRIBUTION OF ASSETS
After dissolution and notice, partners complete transactions begun and not finished (but they can create no new
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are accounted for, and profits and losses distributed. Under UPA 807, the priorities are payment of debts, return
of capital, and distribution of profits.
VI. Limited Liability Partnerships
Family businesses and professional services often use the limited liability partnership (LLP) form.
A. FORMATION OF AN LLP
An LLP is formed in compliance with state statutes by filing in a central office an initial form and later annual
reports. The business name must include “limited liability partnership” or “LLP” [UPA 1001, 1002]. The statutory
rules (UPA) and common law of partnership apply.
B. LIABILITY IN AN LLP
An LLP allows professionals to avoid personal liability for the malpractice of other partners (but of course not
their own). The UPA exempts partners from personal liability for any partnership obligation, “whether arising in
contract, tort, or otherwise” [UPA 306(c)].
1. Liability outside the State of Formation
2. Sharing Liability among Partners
When the partners are members of an LLP, and more than one member is negligent (as when one partner is
a negligent partner’s supervisor), there is a question as to how liability is to be shared. Some states provide
for proportionate liability—that is, for separate determinations of the negligence of the partners.
C. FAMILY LIMITED LIABILITY PARTNERSHIPS
A family limited liability partnership is a limited liability partnership (LLP) in which the majority of the partners are
VII. Limited Partnerships
Most states and the District of Columbia have adopted the Revised Uniform Limited Partnership Act (RULPA). The key
difference between general and limited partnerships is, of course, the limited liability of limited partners.
ADDITIONAL BACKGROUND—
A History of Limited Partnerships
Limited partnerships were first used in Pisa and Florence, Italy, in the twelfth century, as a method for parties—
usually priests and nobles—to invest their money anonymously. The limited partnership spread to France and was
brought to America by French explorers and settlers in Louisiana and Florida. Known as société en commandite, the
French limited partnership served as the idea for the drafters of the original statutes in the United States. The first
A. FORMATION OF A LIMITED PARTNERSHIP
Formation of a limited partnership is a public, formal proceeding: there must be two or more partners (at least
one of whom must be a general partner), and a certificate of limited partnership must be signed and filed with a
designated state official.
ENHANCING YOUR LECTURE—
JURISDICTION ISSUES IN LIMITED PARTNERSHIPS
Numerous business and investment opportunities are organized as limited partnerships. Often, especially when
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the business involves the Internet and technology, the limited partners live in different states and have little contact
with each another. In this situation, significant jurisdiction issues can arise. Which court has jurisdiction in the event of
a dispute? Do the courts of the state in which a limited partnership is organized have jurisdiction over all members of
the partnership, regardless of they live?
THE WERNER CASE
The question of jurisdiction over limited partners came before the court in Werner v. Miller Technology
Management, L.P.a A New York resident, Marc Werner, invested $250,000 as a limited partner in Interprise Technology
Partners (ITP), a Delaware limited partnership. ITP was formed in 1999 to invest in information technology companies
(companies engaged in creating, storing, and exchanging information on computers). Under the partnership
agreement, the general partner, Miller Technology Management (MTM), was to manage the business with the advice
and assistance of an advisory board that consisted of five of ITP’s limited partners.
board held top positions in Answerthink for which they were paid salaries of over $500,000 per year. These conflicts of
interest were never disclosed to Werner or to any of the other limited partners in ITP.
“MINIMUM CONTACTS” REQUIRED
Werner contended that the defendants used their positions of control and influence over ITP to engage in
transactions that benefited them personally but were detrimental to ITP. Although the self-dealing nature of these
transactions seems apparent, the court first had to determine whether Delaware had jurisdiction over the defendants.
The advisory board defendants claimed that they did not have “minimum contacts” (discussed in Chapter 2) with
Delaware because they were not residents and did not transact any business in that state. Werner argued that
because the advisory board was created to participate in the management of a Delaware limited partnership, Delaware
had jurisdiction.
FOR CRITICAL ANALYSIS
Given that the general partner and the limited partners on the advisory board engaged in the same pattern of self–
dealing and nondisclosure, why did the court have jurisdiction only over the general partner? What policy
considerations underlie the court’s decision?
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B. LIABILITIES OF PARTNERS IN A LIMITED PARTNERSHIP
The liability of a limited partner for the firm’s obligations is limited to the capital that the partner contributes to
the firm [RULPA 502]. A limited partner who participates in the management of the firm will be as liable as a
general partner, however [RULPA 303]. If the sole general partner is a corporation, no one is personally liable for
the firm’s obligations.
C. RIGHTS AND DUTIES IN A LIMITED PARTNERSHIP
Limited partners have essentially the same rights as general partners except for the right to participate in
management.
CASE SYNOPSIS—
Case 37.2: 1515 North Wells, LP v. 1513 North Wells, LLC
Bracken, Mark Sutherland, and Alex Pearsall were limited partners in 1515 North Wells, L.P. Sutherland and
Pearsall’s company, SP Development Corp. was 1515’s general partner. The partnership was formed to build a
condominium with residential and commercial space. Wells Street Athletic Club was to occupy some of the space. SP
chose another Sutherland and Pearsall company, Sutherland and Pearsall Development, to be the general contractor
for the 1515 project. Meanwhile, Bracken borrowed $250,000 from 1515. When he did not repay the loan, 1515 filed a
suit in an Illinois state court to collect. In response, Bracken filed a claim that included SP, alleging breach of fiduciary
duty. The court ordered Bracken to repay the loan and SP to pay Bracken $900,000. SP appealed, arguing that a
provision in 1515’s partnership agreement, which allowed all partners to engage in “whatever activities they choose,”
“relaxed” SP’s fiduciary duty.
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Notes and Questions
Bracken did not allege that he was deceived by any misrepresentation or concealment by Sutherland and Pearsall.
He did not claim that he failed to understand there were close interrelationships between Sutherland and Pearsall, and
the general partner and the general contractor. Bracken had full knowledge of the relationships among the parties.
Despite this knowledge, could he have successfully asserted that the firm’s “veil” should have been pierced, with
liability for Sutherland and Pearsall? No, at least not in Illinois. Where there is no evidence of any misrepresentation, no