Business

1. PARTNERSHIPS
I N T R O D U C T I O N TO F O R M S
O F B U S I N E S S A N D
F O R M AT I O N O F
PA RT N E R S H I P S
O P E R AT I O N O F
PA RT N E R S H I P S
D I S S O L U T I O N & W I N D I N G U P
L I M I T E D L I A B I L I T Y
C O M PA N I E S & L I M I T E D
PA RT N E R S H I P S
9

2. INTRODUCTION TO FORMS OF
BUSINESS AND FORMATION
OF PARTNERSHIPS
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“It sounds boring, but anything is easy to start –
starting a novel, starting a business…it’s
keeping the thing going that is difficult.”
Prue Leith, author and executive, quoted in The Adventure
Capitalists (Grout and Curry, 1998)

3. LEARNING OBJECTIVES
Choosing a form of business
Creation of partnership
Purported partners
Partnership capital and property
Partnership interests
37 - 3

4. Choosing a form of business is
important because the business
owner’s liability and control of the
business vary greatly among the
many forms of business
Overview
37 - 4
What you choose depends on where you
want to go

5. Sole proprietorship
Partnership
General, limited, limited liability, or limited
liability limited partnership
Corporation
Regular “C”, Subchapter “S”, nonprofit,
professional
Limited liability company
Including professional form
Basic Forms
37 - 5

6. A sole proprietorship has only one owner
and is an extension of its owner
It is not a legal entity and cannot sue or be
sued, so creditors/claimants sue the
owner
Advantages: no formalities, taxes flow to
owner, owner takes all profit and control
Disadvantage: owner bears all risk of loss
Sole Proprietorship
37 - 6

7. A partnership has two or more owners or
partners and includes several forms:
general, limited (LP), limited liability
(LLP), limited liability limited (LLLP), or
professional
Though a legal entity, a partnership is not
a federal tax-paying entity, thus all
income or loss must be reported on the
individual partner’s federal income tax
return whether or not distributed or
allocated to partners
Partnership
37 - 7

8. Advantages: relatively easy to create,
has a legal entity but individual
taxation, partners control the
business, partners take all gain,
flexible structure
Disadvantages: partners bear all risk
of loss jointly and severally, different
levels of liability to partners
depending on sub-form
Partnership
37 - 8

9. A corporation is owned by shareholders
who elect a board of directors to
manage the business, thus ownership
and management of a corporation may
be separate
Shareholders have limited liability for the
obligations of the corporation
The corporation is a legal and tax-paying
entity for federal income tax purposes
Exception: Subchapter S corporations
Corporation
37 - 9

10. Advantages: shareholders enjoy
limited liability for corporate
obligations, perpetual existence,
ability to raise large amounts of
capital
Disadvantages: greater formality
required for formation and operation,
double-taxation, complexity of
structure
Corporation
37 - 10

11. A limited liability company (LLC)
combines the nontax advantages of
corporations with favorable tax
treatment of partnerships
An LLC is owned by members, who
may manage themselves or retain a
manager to run the business
Members have limited liability for the
obligations of the LLC
Limited Liability Company
37 - 11

12. Many nations share
similar forms of
business, including
partnership and
corporation, though
details vary widely
Business Forms Worldwide
37 - 12

13. Every state has enacted partnership
laws
The Revised Uniform Partnership Act
(RUPA) of 1994, with the 1997
amendments, is a model partnership
statute
The General Partnership
37 - 13

14. RUPA defines partnership as an
“association of two or more persons
to carry on as co-owners a business
for profit.”
Partners share profit and loss
A partnership is a voluntary and
consensual relationship and may
exist by law even if the parties
entered it inadvertently, without
considering whether they had created
a partnership
Partnership Creation
37 - 14

15. Several musicians
agree to form a band
and share profits
Two students stand in
line for hours to buy
10 concert tickets.
They sell 8 tickets for
a $5 fee per ticket and
splitting the profits.
Partnership Creation -- Examples
37 - 15

16. Unlike an ordinary partnership,
creating a limited liability partnership
(LLP) must comply with a state’s
limited liability partnership statute
Formation of an LLP requires filing a
form with the secretary of state,
paying an annual fee, and using
proper terminology
Registered Limited Liability Partnership, RLLP,
Limited Liability Partnership, LLP
Partnership Creation – The LLP
37 - 16

17. If a third person deals with two or more
people who seem to be partners and is
harmed, the third person may sue to
recover damages from both of the
apparent partners
RUPA Section 308(e): “persons who are
not partners as to each other are not
liable as partners to other persons.”
Non-Partners Not Liable
to Third Parties
37 - 17

18. However, under the doctrine of
purported partners, if the third party
proves that one apparent partner
misled him to believe that the two (or
more) people were partners, the third
party may sue the partner that
caused the deception for damages
suffered when the apparent
partnership failed to perform as
agreed
Purported Partners
37 - 18

19. When a partnership or limited liability
partnership is formed, partners
contribute cash or other property –
partnership capital – to the
partnership
Belongs to partnership as an entity
Tangible and intangible property
acquired by a partnership
presumptively belongs to the
partnership as an entity rather than
individual partners
Partners and Ownership
37 - 19

20. As owner of a partnership or LLP, a
partner has an ownership interest in
the partnership
The partnership interest includes
partner’s:
1.Transferable interest
 Partner’s share of profits and losses and
right to receive partnership distributions
2.Management and other rights
A Partner’s Partnership Interest
37 - 20

21. Generally, partnership law applies to
joint ventures, but a court may
distinguish the two if the business
purpose is limited to a single project
rather than series of related
transactions
 Reason: joint venturers usually held to
have less implied and apparent
authority than partners due to limited
scope of the enterprise
Partnership or Joint Venture?
37 - 21

22. LEARNING OBJECTIVES
Limited Liability Companies
Limited Partnerships and Limited
Liability Limited Partnerships
Creation of Limited Partnerships
Right and liabilities of members
and partners
Dissociation and dissolution
40 - 22

23. The limited liability company (LLC)
combines advantages of the
corporation with regard to protection
from personal liability and favorable
tax status of the partnership
The Uniform Limited Liability Company
Act of 1996 (ULLCA) offers default
rules similar to RUPA that govern an
LLC in the absence of a contrary
agreement of its owners

Overview
40 - 23

24. An LLC may elect to be taxed like a
partnership or a corporation for
federal income tax purposes
Election as partnership more common
Therefore, the LLC pays no federal
income tax and all income and losses
of the LLC are reported by the LLC’s
owner-members on their individual
income tax returns
Taxation of the LLC
40 - 24

25. At least one person (organizers)
must file articles of organization
with a secretary of state
Articles must include LLC name, its duration,
and the name and address of its registered
agent
Owners of an LLC are members
An individual, partnership, corporation, or
another LLC may be a member of an LLC
 An LLC is an entity separate from its members
Creation of the LLC
40 - 25

26. Articles of organization must state
whether the LLC is member-managed
or manager-managed
If manager-managed, initial managers must be
named
An LLC probably will have an operating
agreement covering how members
will share profits, manage the LLC,
and withdraw from the LLC
Management of the LLC
40 - 26

27. An LLC member has no individual
liability on LLC contracts, unless LLC
contracts signed in a personal
capacity (e.g., as a surety)
A member’s liability is usually limited to
the member’s capital contributions
A member is liable for torts s/he
committed while acting for the LLC
Liability of Members
40 - 27

28. Under the ULLCA, an LLC must choose
to be member-managed or manager-
managed
Each member in a member-managed
LLC shares equal rights in the
management of the business and
each member is an agent of the LLC
with implied authority to carry on its
ordinary business
A Member-Managed LLC
40 - 28

29. The LLC operating agreement may
modify ULLCA default rules by
granting more power to some
members
Creating a class of members whose
approval is required for certain contracts
Members share power based on capital
contributions
A Member-Managed LLC
40 - 29

30. Managers in a manager-
managed LLC are
elected and removed by
a vote of a majority of
LLC members
A manager’s powers to
act for the LLC are
similar to a member’s
power in a member-
managed LLC
A Member-Managed LLC
40 - 30
A team effort.

31. An LLC is liable for the contractual
obligations incurred by its
members or managers acting
within their express, implied, or
apparent authority
An LLC is also liable for the torts and
other wrongful acts of managing
members and other managers
acting within their authority
Tort and Contract Liability
40 - 31

32. Each member in a member-managed
LLC and each manager in a manager-
managed LLC is a fiduciary of the
LLC and its members with duties
similar to the duties of partners,
including the duty of care
Nonmanaging members of a manager-
managed LLC owe no fiduciary duties
But owe a duty of good faith and fair dealing when
exercising rights as members
Duties of Members
40 - 32

33. A member’s ownership interest in an
LLC is the member’s personal
property
Limited ability to sell or transfer LLC rights
A member may transfer the
distributional interest in the LLC to
another person
Transferee not a member, but receives right to
partnership distributions
Limited right of transfer may be altered in the
operating agreement
Ownership Interest of Members
40 - 33

34. A member in an LLC has the right is
to receive distributions (usually
profits)
ULLCA states that members share
profits and other distributions
equally, regardless of differences
in their capital contributions
This may be altered by the operating
agreement
Distributions to Members
40 - 34

35. Under the ULLCA, members
dissociate from an LLC in ways
similar to those by which a partner
dissociates from a partnership or
LLP under RUPA
Under the ULLCA, a partner has the
power to dissociate by withdrawing from
the LLC at any time
Dissociation
40 - 35

36. As in partnership, a member’s
dissociation may be wrongful or
nonwrongful
Dissociation terminates a member’s
status as a member, and a
dissociated member is treated as a
transferee of a member’s
distributional interest
In Re Garrison-Ashburn, LC concerns dissociation
Dissociation
40 - 36

37. Dissolution of an LLC is similar to
that of an LLP or partnership
When an LLC dissolves, any
member who has not wrongly
dissociated may wind up the
business
LLC bound by reasonable acts of members
during winding up
Dissolution
40 - 37

38. After all the LLC assets
sold, proceeds
distributed first to LLC
creditors, then members’
contributions are
returned
Any remaining proceeds
are distributed in equal
shares to the members
Dissolution
40 - 38

39. Substantially similar to RUPA, the ULPA
of 2001 is the first comprehensive
statement of American limited
partnership law
Only ULPA applies to limited partnerships
The limited partnership (or LLLP) form
is perpetual and used primarily in tax
shelter ventures, real estate ventures,
oil and gas drilling, and professional
sports
Uniform Limited Partnership Act
40 - 39

40. Limited partnerships has two owner
classes:
General partners contribute capital, manage
the business, share in profits, and possess
unlimited liability for its obligations
Limited partners contribute capital and share
profits, but possess no management powers
Liability limited up to the amount of their
investments in the business
Limited partnership agreements
common
The Limited Partnership
40 - 40

41. A variant of a limited partnership is the
limited liability limited partnership
(LLLP) which offers limited liability
status for all its partners, including
general partners
Except for liability of general partners,
limited partnerships and LLLPs are
identical
Limited Liability Limited
Partnership
40 - 41

42. A limited partnership (or LLLP) may
be created only by complying with
the applicable state statute, but
requirements are minimal
A certificate of limited partnership
must be executed (signed by all
general partners) and submitted to
the secretary of state
Creating the LP or LLLP
40 - 42

43. A partner may contribute any property
or other benefit to the limited
partnership
Under ULPA, profits and losses are
shared on the basis of the value of
each partner’s capital contribution
unless there is a written agreement to
the contrary
ULPA of 2001 requires few actions to be
approved by all the partners
Rights of LP and LLLP Partners
40 - 43

44. ULPA is clear that limited partners
have no inherent right to vote on
any matter
Default rule is that no new partner
may be admitted unless each
partner has consented to the
admission
Limited partnership agreement may provide for
other admission procedures
Rights of LP and LLLP Partners
40 - 44

45. Each partner in a limited partnership
owns a transferable interest in the
limited partnership as personal
property
A partner’s transfer of his transferable
interest has no effect on his status
as a partner, absent a contrary
agreement
Transferable Interest
40 - 45

46. A general partner of a limited partnership
or LLLP has same right to manage and
same agency powers as a partner in an
ordinary partnership, including the
duty of care
A general partner of a limited partnership
or LLLP is in a position of trust and
therefore owes fiduciary duties to the
limited partnership and the other
partners
Management & Duties
40 - 46

47. Through a derivative
action or derivative
suit, a partner may
sue to enforce a
limited partnership
right of action
against a person
who has harmed
the limited
partnership
Derivative Actions
40 - 47

48. Partners have the power to withdraw
from the limited partnership at any
time, but ULPA gives the partners no
right to withdraw, absent a contrary
provision in the limited partnership
agreement
Under ULPA, a withdrawing partner has
no right to receive the value of the
partnership interest
Withdrawing
40 - 48

49. ULPA of 2001 adopts terminology and
the framework of partnership law,
thus ULPA establishes dissociation
and dissolution rules
A limited partner dissociates upon
limited partner’s death, withdrawal,
or expulsion from the partnership
Dissociation of the LP and LLLP
40 - 49

50. A dissociated limited partner is not a
limited partner, has no rights as a
limited partner, and is treated as a
mere transferee of the dissociated
limited partner’s transferable interest
ULPA treats dissociation of general
partners as RUPA treats partner
dissociations in a partnership
Dissociation of the LP and LLLP
40 - 50

51. A general partner’s express and implied
authority to act for the limited
partnership terminates upon
dissociation, the partner may retain
apparent authority
A dissociated general partner will
remain liable on a limited partnership
obligation incurred while a partner
unless creditor agrees to a release of
liability
No liability for post-dissociation obligations
Dissociation of the LP and LLLP
40 - 51

52. ULPA provides that a limited
partnership (or LLLP) is not
dissolved, wound up, or
terminated merely because a
partner dissociated from the
limited partnership
When a limited partnership
dissolves, winding up follows
automatically by the general
partners
Dissolution of the LP and LLLP
40 - 52

53. After general partners
have liquidated the
assets, proceeds are
distributed first to
creditors and if
proceeds exceed
creditors’ claims, the
remainder is paid to
the partners in the
same proportions that
they shared
distributions
Dissolution of the LP and LLLP
40 - 53