Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Partnership law is largely found in the Uniform Partnership Act (UPA). The UPA defines partnership as an association of two or more persons to carry on a business for profit. The Nature of Partnership Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership more capital and credit available burden of work is shared responsibility for losses shared Advantages of Partnerships Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership partners share in the liabilities each partner is responsible for the others actions must share profits disagreements among partners death of a partner dissolves the partnership Disadvantages of Partnerships Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership When two or more competent parties combine their money, labor, and skills for the purpose of carrying on a lawful business, they create a general partnership. Forming a General Partnership Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership General partnerships can be formed in one of three ways: Forming a General Partnership 1.by agreement 2.by proof of existence 3.by estoppel Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership 27.2 Partnership Formation Partnership by contract Partnership by proof of existence Partnership by estoppel Express agreement drawn up by partners Articles of partnership Individuals form partnership because of their method of doing business Sharing of profits is prima facie evidence Third party led to believe a partnership exists No true partnership created Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Forming a general partnership by agreement requires the valid assent of all parties. Such an agreement is usually express and may be written or oral. By Agreement Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Under the Statue of Frauds, if a partnership is to last more than a year or if the partnership is formed to sell, buy, or lease real property, it must be evidenced in writing. By Agreement Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership The partnership agreement is known as the articles of partnership, or as the articles of copartnership. By Agreement Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership parties to the agreement specific nature, scope, and limits of the business planned duration of the business Important Points Covered in an Agreement Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership amount of each partners original investment and procedure for future investments provisions regarding salaries, withdrawal of funds, and the division of profits Important Points Covered in an Agreement Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership terms under which a partner may withdraw from the partnership Important Points Covered in an Agreement Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Sometimes a partnership can be formed because of the way that two or more people conduct their business together. By Proof of Existence Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Such a partnership, which forms regardless of the label given to the enterprise or the intent of the parties involved, is termed a partnership by proof of existence. By Proof of Existence Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership If someone does or says something that leads a third party to believe that a partnership exists, then a court may treat the arrangement as a partnership by estoppel. By Estoppel Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership This type of partnership is not a real partnership. It is a way for the court to prevent injustice because someone has relied on the words or actions of another party and has acted accordingly. By Estoppel Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership There are five types of partners: Types of Partners 1.general 2.secret 3.silent 4.dormant 5.limited Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Each of these partners is a co-owner of the business and has some liability for the debts of the firm. Types of Partners Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership 27.2 Types of Partners Type of PartnerParticipation in the Business Relationship to the Public Degree of Liability GeneralActiveKnownUnlimited SecretActiveUnknownUnlimited SilentNot activeKnownUnlimited DormantNot activeUnknownUnlimited LimitedNot activeKnownLimited Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership It is important to distinguish between property that belongs to the partnership and property that belongs to individual partners. Partnership Property Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership is property contributed directly to the partnership when the partnership is created is property that is bought with partnership funds Partnership Property Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership In addition, the court may ask certain questions to determine whether or not certain property belongs to the partnership. Partnership Property Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Certain rights arise regarding property that belongs to the partnership. These include Property Rights of the Partners the right to use the property the right to manage the firm the right to share in the profits Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Partners are co-owners of all the real and personal property included in the partnership. This co-ownership is called tenancy in partnership by the UPA. Right to Use Property Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership As a result, the partners can use the property for partnership business; however, there are limitations. For example, a partner cannot, on his or her own, transfer ownership of the property. Right to Use Property Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Unless a partners rights are limited in the partnership agreement, each partner has an equal voice in managing the partnerships business. Right to Manage the Firm Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Unless there is an agreement to the contrary, partners share equally in the profits, regardless of their initial capital contribution or the time devoted by each partner to the business. Right to Share in the Profits Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Partners must trust one another. Each partner is an agent of the other partner and has duties comparable to those of an agent. Duties to the Partners Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership 1.To always act in good faith and in the best interests of the firm. Duties to the Partners Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership 2.To always use their best skill and judgment in looking after the firms affairs. Duties to the Partners Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership 3.To be loyal to the firm and put the firms interests first. Duties to the Partners Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Partners have unlimited liability for all of the debts of the partnership incurred while they are partners, even to the extent of their personal assets. Liability of the Partners Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Partners are liable to other members of the firm for their share of the firms debts. Partners share losses in the same proportion that they share profits. Liability of the Partners Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Partners are jointly liable with their partners on contracts entered into by any member of the firm acting within the actual or apparent scope of the firms business. Liability of the Partners Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Joint liability means that in the event of a lawsuit, all the partners must be sued together. Partners are jointly and severally (separately) liable for torts committed within the scope of the firms business. Liability of the Partners Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership A dissolution is a legal detachment. The dissolution of a partnership is a change in the relationship of the partners that occurs when any partner stops being associated with the business. Dissolving a Partnership Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Dissolution does not necessarily bring the business to an end. Other partners may want to continue in business together. Effects of Dissolution Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership If so, Effects of Dissolution new financial arrangements need to be made. a new agreement must be drawn up. Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership public notice is usually given to relieve retiring partners from liability for any new debts. Effects of Dissolution Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Upon dissolution, an accounting of the firms financial affairs is necessary to determine how the firms assets will be distributed or divided. Distribution of Assets Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Liabilities are paid in this order. Distribution of Assets 1.Money owed to creditors other than partners 2.Money lent by partners to the firm Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership 3.The original money paid into the partnership by each partner 4.The surplus, if any, owed to the partners Distribution of Assets Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership If the business is insolvent: Distribution of Assets Assets are sold to pay the creditors. Partners are individually liable for any unpaid balance that the sale of the assets will not cover. Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Since the UPA was written in 1914, it has undergone extensive revision. This new variation of the act is referred to as the Revised Uniform Partnership Act (RUPA). The Revised Uniform Partnership Act Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership A registered limited liability partnership (RLLP) is a new type of partnership designed to eliminate a major disadvantage of the general partnershipjoint and several liability. Registered Limited Liability Partnerships Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Partners of an RLLP can escape joint and several liability for the torts, wrongful acts, negligence, or misconduct of other partners by registering with the appropriate state office. Registered Limited Liability Partnerships Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership According to RUPA, a limited partnership is a partnership formed by two or more persons... having one or more general partners and one or more limited partners. Limited Partnership Understanding Business and Personal Law The Partnership Section 27.2 Sole Proprietorship and Partnership Limited partnerships are often used in real estate ventures and tax shelter investments. Limited Partnership