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Chapter 37
All Forms of Partnerships
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 BACKGROUND—
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.
2 UNIT EIGHT: BUSINESS ORGANIZATIONS
As with other commercial law, English partnership law developed form the law merchant, according to the
realities of how merchants did business. In 1353, the Statute of the Staple provided that law was to be
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
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
Corporation Act and the UPA permit a corporation to be a partner.
D. ESSENTIAL ELEMENTS OF A PARTNERSHIP
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.
1. The Sharing of Profits and Losses
Sharing both profits and losses creates a presumption that a partnership exists unless the profits
are received as payment of— [UPA 202(c)(3)]
• A debt by installments or interest on a loan.
2. Joint Property Ownership
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 3
Joint ownership of property does not alone create a partnership. The parties’ intentions are key.
ENHANCING YOUR LECTURE—
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 partnership a partner or partners who live in the host country.
FOR CRITICAL ANALYSIS
Do local participation rules benefit countries in the long run?
E. 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.
F. TAX TREATMENT OF PARTNERSHIPS
For at least one purpose—federal income taxes—a partnership is regarded as an aggregate of individual
partners.
II. Formation and Operation
A partnership statement may (or may not) be filed with the appropriate state office.
A. THE PARTNERSHIP AGREEMENT
A partnership agreement may be implied unless its terms require a writing (such as a land transfer).
B. DURATION OF THE PARTNERSHIP
A partnership for a term ends on a specific date or the completion of a particular project. Dissolution
C. PARTNERSHIP BY ESTOPPEL
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1. Liability Imposed
2. Nonpartner as Agent
When a partner represents that a nonpartner is a member of the firm, the nonpartner is regarded as
an agent of the firm.
D. RIGHTS OF PARTNERS
1. Management Rights
• All partners have equal rights in management [UPA 401(f)]. Each partner has one vote, and
the majority rules in ordinary matters.
2. Interest in the Partnership
Unless provided otherwise, profits and losses are shared equally, regardless of the amount of a
partner’s capital contribution [UPA 401(b)].
3. Compensation
Conducting partnership business is a partner’s duty and generally not compensable.
4. Inspection of the Books
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
E. DUTIES AND LIABILITIES OF PARTNERS
Every act of a partner concerning partnership business and every contract signed in the partnership
name bind the firm [UPA 301(1)].
1. Fiduciary Duties
A partner owes the firm and its partners duties of care and loyalty [UPA 404].
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 5
• Duty of care—a partner must refrain from figrossly negligent or reckless conduct, intentional
misconduct, or a knowing violation of law” [UPA 404(c)].
CASE SYNOPSIS—
Case 37.1: Meinhard v. Salmon
fiWalter 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.
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Notes and Questions
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Breach of Fiduciary Duties
Cases in which partners were considered to have breached their fiduciary duties owed to other
partners include the following.
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• McBeth v. Carpenter, 565 F.3d 171 (5th Cir. 2009): (general partner in partnership formed to buy property
falsely assured limited partners that any issues stemming from negotiations with city to secure property’s
water entitlements were not significant obstacles to closing the deal).
• Magellan Morada Investments, L.P. v. Miller, __ P.3d __ (Ariz.App. Div. 1 2008) (the finance managers of
the general partner of a limited liability partnership that sold condominiums breached their fiduciary duty to the
other partners when they invested funds from the sale of partnership assets in violation of the limited
partnership agreement).
2. Breach and Waiver of Fiduciary Duties
These duties cannot be waived and partners must comply with the obligations of good faith and fair
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.
a. Limitations on Authority
A partnership may limit a partner’s capacity to act as the firm’s agent by filing a fistatement of
partnership authority” in a designated state office—though this is normally effective only with
respect to third parties who know of it.
b. The Scope of Implied Powers
4. Liability of Partners
a. Joint Liability
At one time, partners were jointly liable for partnership obligations. A creditor had to sue all of
b. Joint and Several Liability
Partners are jointly liable and severally liable for partnership obligations, including contracts,
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 7
c. Indemnification
A tortious partner is liable to the partnership for damages it pays.
d. Liability of Incoming Partners
A new partner to an existing partnership is liable only to the extent of his or her capital
contribution for preexisting partnership debts and obligations [UPA 306(b)].
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Liability of Partners
Cases considering the liability of partners 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).
III. Dissociation and Termination
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.
• The occurrence of an event specified in the partnership agreement can cause dissociation.
B. WRONGFUL DISSOCIATION
This can occur if dissociation is in breach of a partnership agreement, before the expiration of its term or
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C. EFFECTS OF DISSOCIATION
1. Rights and Duties
2. Buyouts
The partner’s interest in the firm must be purchased according to the rules in UPA 701.
3. Liability to Third Parties
To avoid liability for obligations under a theory of apparent authority, a partnership should notify its
D. PARTNERSHIP TERMINATION
1. Dissolution
• A partnership may be dissolved by the partners’ agreement or dissociation of a partner [UPA
801, 802].
2. Illegality or Impracticality
A court can dissolve a partnership for commercial impracticality, improper conduct, or other
circumstances [UPA 801(5)].
3. Good Faith
Each partner must act in good faith when dissolving a partnership.
E. WINDING UP AND DISTRIBUTION OF ASSETS
After dissolution and notice, partners complete transactions begun and not finished (but they can create
no new obligations).
1. Duties and Compensation
2. Creditors’ Claims
Under UPA 807, the priorities for the distribution of partnership assets are payment of debts, return
of capital, and distribution of profits.
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 9
F. PARTNERSHIP BUY-SELL AGREEMENTS
One or more partners may agree to buy out the other or others, if the situation warrants. To agree
CASE SYNOPSIS—
Case 37.2: Shamburger v. Shamburger
Three married couples—six individual partners—executed partnership agreements in connection with five
limited liability partnerships. The partners also executed partnership buy-sell agreements to require certain
procedures through which the partners could transfer their interests. Each buy-sell agreement contained a
provision setting out general procedures for the transfer of an interest (fiParagraph 1”) and a separate
provision for the transfer of an interest in the specific situation of a divorce or death (fiParagraph 3”). The two
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Notes and Questions
What lesson might the partners in other partnerships learn from the events of this case and its
IV. 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
B. LIABILITY IN AN LLP
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An LLP allows professionals to avoid personal liability for the malpractice of other partners (but of course
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 11
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
C. FAMILY LIMITED LIABILITY PARTNERSHIPS
A family limited liability partnership is a limited liability partnership (LLP) in which the majority of the
V. 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.
CASE SYNOPSIS—
Case 37.3: DeWine v. Valley View Enterprises, Inc.
Valley View Enterprises, Inc. built Pine Lakes Golf Club and Estates in Trumbull County, Ohio. Valley
View Properties, Ltd., a limited partnership, cut out the roadways and constructed sewer lines, water lines,
and storm water lines with water inlets. Joseph Ferrara is the owner and president of Valley View Enterprises
and the sole general partner of Valley View Properties. Ferrara failed to obtain the proper state wetlands-fill
A state intermediate appellate court reversed. In relation to Valley View Properties, Ferrara is not a
corporate officer—he is a general partner. fiTherefore, he is not, in the course of his conduct as the general
partner of that limited partnership, entitled to the insulation from liability of a corporate officer.”
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Notes and Questions
Did any of the parties involved in this case commit an ethical violation? Ferrara might be viewed as
12 UNIT EIGHT: BUSINESS ORGANIZATIONS
ADDITIONAL BACKGROUND—
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
A. FORMATION OF AN LP
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 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
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 13
In 2002, Werner sued MTM and ITP’s advisory board, claiming a pattern of self-dealing in breach of their
fiduciary duties of care, disclosure, and loyalty. As it turned out, in three years of operation, ITP had invested
fiMINIMUM 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 fiminimum contacts” 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?
a. 831 A.2d 318 (Del. 2003).
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
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.
D. DISSOCIATION AND DISSOLUTION
1. Events That Cause Dissolution
14 UNIT EIGHT: BUSINESS ORGANIZATIONS
2. Distribution of Assets
3. Valuation of Assets
4. Buy-Sell Agreements
One or more partners may agree to buy out the other or others, if the situation warrants. To agree
E. LIMITED LIABILITY LIMITED PARTNERSHIPS
The difference between a limited partnership and a limited liability limited partnership (LLLP) is that the
liability of the general partner in an LLLP is the same as the liability of the limited partner. That is, the
liability of all partners is limited to the amount of their investment.
TEACHING SUGGESTIONS
1. Obtain copies of several partnership agreements and distribute them to students. Ask the students to
indicate which passages reflect the fiduciary duties owed by each of the partners to the other partners.
3. A court has the power to order the dissolution of a partnership when it believes that such an action is war-
ranted. Ask students to discuss some of the situations in which a court might order that a partnership be ter-
minated. Do adequate guidelines exist to help courts make informed decisions in such matters?
4. Explain that creditors are often reluctant to permit a debtor such as a partnership to contract out of
personal liability due to the fact that a partnership’s assets following dissolution may be insufficient to satisfy
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 15
5. There are two important points that might be emphasized regarding the formation of a partnership. First,
one of the essential elements is that a partnership must be carried on for a profit. Nonprofit entities do not
6. Ask students whether the roles played by general partners and limited partners in a limited partnership
are truly distinct or instead merely arbitrary designations. Is it reasonable to assume that limited partners
at least indirectly fimanage” the business of a limited partnership by funding the partnership and
paying the salary of the general partner? Would it be more useful to make all limited partners
7. Tell students that to remember the distinction between general partners and limited partners, they might
find it helpful to think of a general partner’s management and control rights as general and a limited partner’s
Cyberlaw Link
What are the legal and policy issues for the design, development, and operation of a partnership’s
Web site? Should online businesses adopt a limited liability form of business organization? Why or
why not?
DISCUSSION QUESTIONS
1. What are the three essential elements necessary (but not necessarily sufficient) to form a partnership?
The Uniform Partnership Act defines a partnership as fian association of two or more persons to carry on as co-
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
3. When will majority rule not govern decisions connected with partnership business? Although majority
rule controls decisions in ordinary matters connected with partnership business unless otherwise specified in the
16 UNIT EIGHT: BUSINESS ORGANIZATIONS
4. When may a partner withdraw from a partnership? A partner has the power to dissociate from a partnership
at any time. Note that although a partner always has the power to withdraw from the partnership, he or she may not
5. Can a partnership be bound to new obligations after it has been dissolved? Yes, this is possible. To avoid
6. What is the difference between a general partnership and a limited partnership? A partnership is a joint
undertaking that arises from an agreement between two or more persons to carry on a business for profit. Because
partners are co-owners of the enterprise and have joint control of the operation, their personal net worths are subject
7. What consequences result from a limited partner’s attempt to manage the affairs of the limited partner-
ship? A limited partner is not personally liable for the debts of the partnership so long as he or she refrains from
8. What are the characteristics of a limited liability partnership (LLP)? An LLP is similar to an LLC. The
difference between them is that an LLP is designed more for professionals who normally do business as partners in a
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
10. Why does the law impose fiduciary obligations on general partners? General partners operate partnerships
with little input from the limited partners, whose liability would be affected if they offered much advice but whose
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 17
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ACTIVITY AND RESEARCH ASSIGNMENTS
1. Ask students to compare the differences in the typical agency and partnership relationships. Although the law of
2. Ask students to discuss any of their own experiences working as employees (or partners) for a partnership. In
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 6: Clyde Webster, James Theis, and Larry Thomas formed T&T Agri-Partners to own and farm
180 acres in Christian County, Illinois. Under the partnership agreement, the firm was to continue until 2010 unless it
was dissolved, any withdrawing partner was to sell his interest to the firm according to specific terms, and the death of
any partner would dissolve the partnership. Webster died in 2002, but when Theis and Thomas did not liquidate T&T
and distribute its assets, Webster’s estate filed a complaint in an Illinois state court. The trial occurred in 2011. The
court ordered the liquidation and distribution of the assets, to be valued at the time of liquidation, with payment of
attorneys’ fees to the estate. The defendants appealed.
In Estate of Webster v. Thomas, a state intermediate appellate court affirmed. fiThe circuit court properly
determined that the defendants had failed to liquidate and distribute the partnership assets pursuant to agreement
and court order.”
What did the partnership agreement at the center of this case require on the death of a partner and
the dissolution of the firm? The parties to the partnership agreement at the center of this case were Clyde Webster,
James Theis, and Larry Thomas, who formed T&T Agri-Partners Company to own and farm 180 acres in Christian
What conduct by which parties triggered this litigation? There were a number of events that led to the
litigation in this case. Initially, the death of Clyde Webster triggered the provision in the partnership agreement that
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 19
On what did the court base its order regarding attorneys’ fees? After a trial, the court in the Webster
case based its order regarding attorney fees on the provision in the partnership agreement that stated fiAny Partner
What might the defendants have done to avoid the dispute that arose from the circumstances of this
case? To avoid the dispute that arose from the circumstances of this case, partners James Theis and Larry
Thompson, with the personal representative of Webster’s estate, could have voted to continue the partnership after
Footnote 7: Russell Realty Associates was a partnership in the business of buying, holding, leasing, and
selling investment properties. The firm’s partners were members of the Russell family. At one point, Eddie and his
sister Nina began to disagree over the conduct of the firm’s business. Delays due to their disagreements undercut the
firm’s success. Eddie filed a complaint in a Virginia state court, seeking dissolution of Russell Realty. The court
granted the request. Nina appealed
In Russell Realty Associates v. Russell, the Virginia Supreme Court affirmed. Russell Realty’s economic
purpose was unreasonably frustrated because it could no longer conduct its business fiin an efficient and productive
Did any of the parties involved in this case commit an ethical violation? Both brother and sister might be
viewed as violating ethical principles when their disputes became so heated that the partnership business was
Does the judicial power to dissolve partnerships encourage partners to be more respectful toward
each other? Why or why not? Most people do not want courts to dissolve their businesses. If partners honor their
Eddie petitioned for the dissolution of Russell Realty rather than dissociating from the firm because the
partnership agreement prohibited the withdrawal of any partner. How might Eddie have divested himself of
his interest in the firm without petitioning for its dissolution? There may have been other options set out in the
20 UNIT EIGHT: BUSINESS ORGANIZATIONS
