3.

BUSINESS ORGANISATIONS-
PARTNERSHIPS

3.1. General partnerships

Two important advantages:

 They are easy to form
 they do not pay taxes.

Major disadvantages:
 Liability. Each partner is personally liable for the debts of the enterprise
whether or not she caused them.
 Funding. Financing a partnership may be difficult because the firm cannot sell
shares as a corporation does. The capital needs of the partnership must be
met by contributions from partners or by borrowing.
 Management. Managing a partnership can also be difficult because, in the
absence of an agreement to the contrary, all partners have an equal say in
running the business.
 Transferability. A partner only has the right to transfer the value of her
partnership interest, not the interest itself.
Thus a mother who is a partner in a law firm can pass on to her son the value
of her partnership interest, not the right to be a partner in the firm (or even
the right to work there).

3.2. FORMATION
A partnership is an association of two or more co-owners
 who carry on a business
 for profit.
Each co-owner is called a general partner.
Partnerships are very easy to form and they don’t pay taxes (the partner pay the
taxes, since the general partnership is just a manifestation of intent).
Although, practically speaking, a partnership should have a written agreement, the law
generally does not require anything in the way of forms or filings or agreements

3.3. TAXES
(as seen above) A partnership is not a taxable entity, which means it does not pay
taxes itself.

3.4. LIABILITY

 Every partner is an agent of the partnership. Thus, the entire partnership is

liable for the act of one partner in, say, signing a contract.
 A partnership is also liable for any TORTS that a partner commits in the
ordinary course of the partnership’s business.
  It gets worse. If a partnership does not have enough assets to pay its debts,
creditors may go after the personal property of individual partners,
whether or not they were in any way responsible for the debt.

 Because partners have joint and several liability, creditors can sue the
partnership and the partners together or in separate lawsuits or in any
combination.

 The partnership and the partners are all individually liable for the full
amount of the debt, but, obviously, the creditor cannot keep collecting after
he has already received the total amount owed.

 Even if creditors have a judgment against an individual partner, they

cannot go after that partner’s assets until all the partnership’s assets are
exhausted

 Letitia, one of the world’s wealthiest people, enters into a partnership with
penniless Harry to drill for oil on her estate.
 While driving on partnership business, Harry crashes into Rama, seriously
injuring him.
 Rama can sue any combination of the partnership, Letitia, and Harry for the
full amount, even though Letitia was 2,000 miles away on her Caribbean island
when the accident occurred and she had many times cautioned Harry to drive
carefully.
 Even if Rama obtains a judgment against Letitia, however, he cannot recover
against her while the partnership still has assets (ATIVOS).
 So, for all practical purposes, he must try to collect first against the partnership.
 If the partnership is bankrupt and he manages to collect the full amount from
Letitia, he cannot then try to recover against Harry.

3.5. MANEGEMENT RIGHTS AND DUTIES

Management Rights
Unless the partnership agrees otherwise, partners share both profits and losses
equally, and each partner has an equal right to manage the business.
 In a large partnership, with hundreds of partners, too many cooks can
definitely spoil the firm’s profitability.
 That is why large partnerships are almost always run by one or a few
partners who are designated as managing partners or members of the
executive committee.
  It need to exist an operating agreement of the partnership, because if
you don’t have one, every partner has an equal say

Management Duties
• Partners have a fiduciary duty to the partnership (because partners are agent of the
partnership, which means that the partnership is the principal). This duty means that:

– Partners are liable to the partnership for gross negligence or intentional

misconduct.

– Partners cannot compete with the partnership

– A partner may not take an opportunity away from the partnership unless
the other partners consent.

– If a partner engages in a conflict of interest, he must turn over to the

partnership any profits he earned from that activity.
Thus, someone who bid on partnership assets at auction without telling his
partner was in violation of his fiduciary duty to the partnership.

3.6. TERMINATING A PARTNERSHIP

• A partnership begins with an association of two or more people.

• Appropriately, the end of a partnership begins with a dissociation.

DISSOCIATION
A dissociation occurs when a partner quits.

A partner always has the power to leave a partnership but may not have the right
(you can still be liable for the debts of the partnership)
In other words, a partner can always dissociate, but he may have to pay damages for
any harm that his departure causes.

A dissociation is a fork in the road:

The partnership can either:
 buy out the departing partner(s) and continue in business or
 wind up the business and terminate the partnership.

If the partnership chooses to terminate the business, it must

follow Three steps to Termination:

1. Dissolution

The rules on dissolution depend, in part, on the type of partnership:

  If the partners have agreed in advance how long the partnership will last, it is
a term partnershipAt the end of the specified term, the partnership
automatically ends.

 Otherwise, it is a partnership at will, which means that any of the partners

can leave at any time, for any reason.

A partnership AUTOMATICALLY dissolves:

– In a partnership at will, when a partner withdraws.
– In a term partnership when:
• A partner is dissociated and half of the remaining
partners vote to wind up the partnership business.

• All the partners agree to dissolve. The term expires or the

partnership achieves its goal.
– In any partnership when:
• An event occurs that the partners had agreed would
cause dissolution.

• The partnership business becomes illegal.

• A court determines that the partnership is unlikely to

succeed.

• If the partners simply cannot get along or they cannot

make a profit, any partner has the right to ask a court to dissolve
the partnership.

2. Winding up

During the winding up process, all debts of the partnership are paid, and the
remaining proceeds are distributed to the partners.

3. Termination

Termination happens automatically once the winding up is finished.

The partnership is not required to do anything official; it can go out of the

world even more quietly and simply than it came in.

3.7. LIMITED LIABILITY PARTNERSHIPS (LLP)

Similar structure but enjoys limited liability BUT in needs to be registered (a

partnership has to be in compliance with the registration statutory requirements) as limited
liability partnership, so that the partners can be protected from individual
liability
A limited liability partnership (LLP) is a type of general partnership that most states
now permit.

There is a very important distinction, however, between these two forms of

organization:

 in an LLP, the partners are not liable for the debts of the partnership.
 They are, naturally, liable for their own misdeeds, just as if they were a
member of an LLC (Limited Liability Corporation) or a shareholder of a
corporation (VER PONTO 4.). (they are still personally liable if they behave
badly)

3.7.1. FORMATION

To form an LLP, the partners must file a statement of qualification with state officials
(Extra step comparing to the “normal”/general partnership)
 LLPs must also file annual reports.
 The other attributes of a partnership remain the same (VER PONTO 3.2)
 Thus, an LLP is not a taxable entity.
 Although an LLP can be much more advantageous for partners than a general
partnership.

3.8. LIMITED PARTNERSHIPS AND LIMITED LIABILITY LIMITED

PARTNERSHIPS

 Although limited partnerships and limited liability limited partnerships sound

confusingly similar to limited liability partnerships and general partnerships, like many
siblings, they operate very differently.
 And truth to tell, limited partnerships and limited liability limited partnerships are
relatively RARE—they are generally only used for estate planning purposes (usually,
to reduce estate taxes) and for highly sophisticated investment vehicles.

3.8.1. LIMITED PARTNERSHIP

Structure

Limited partnerships must have at least one limited partner and one general partner.

Liability

Limited partners are not personally liable BUT general partners are
(personally liable).

 LIMITED PARTNERS
Like corporate shareholders, limited partners risk only their investment in
the partnership (which is called their “capital contribution”).

 GENERAL PARTNERS
  In contrast, general partners of the limited partnership are personally
liable for the debts of the organization.
Taxes
 Limited partnerships are not taxable entities.
 Income is taxed only once before landing in a partner’s pocket.

Formation

The general partners must file a certificate of limited

Partnership with their Secretary of State.
Although most limited partnerships do have a partnership
agreement, it is not required.

Management

General partners have the right to manage a limited partnership.

Limited partners are essentially passive investors with few management rights
beyond the right to be informed about the partnership business.

Transfer of Ownership

Limited partners have the right to transfer the value of their partnership interest, but
they can only sell or give away the interest itself if the partnership agreement
permits.

Duration
Unless the partnership agreement provides otherwise, limited partnerships enjoy
perpetual existence—they continue even as partners come and go.

3.8.2. LIMITED LIABILITY LIMITED PARTNERSHIP

However, the revised version of the Uniform Limited Partnership Act (ULPA) permits
a limited partnership, in its CERTIFICATE OF FORMATION AND PARTNERSHIP
AGREEMENT, simply to declare itself a limited liability limited partnership.

In a limited liability limited partnership, the general partner is not personally

liable for the debts of the partnership This provision effectively removes the major
disadvantage of limited partnerships.
Although, at this writing, fewer than 20 states have actually passed the revised version
of the ULPA, this revision would seem to indicate the trend for the future.