A partners authority to act for the partnership is similar to the authority of a(n):

Sole Proprietorships

and

Partnerships

������ Sole Proprietorship: A business owned by a single person or family, for which the owner reports business income and expenses on his or her personal income tax return and is legally responsible for all debts and obligations incurred by the business, even if it requires that the debts and obligations be paid from other sources that the owner may have personally.� This is the most common form of business organization, but they generally have low dollars in total assets.

�       General Partnership:� An agreement by two or more persons (or entities) to carry on, as co-owners, a business for profit.� There is unlimited liability (joint and/or several- more on this later) in this business arrangement to the other partners of their partners torts and decisions- and not just limited to their investment in the partnership.� (This is commonly called unlimited liability.)� Death of a partner ends the partnership.�

o     Also, a general partner has a right to manage the partnership business [4237.01]

������ Limited Partnership: A partnership consisting of one or more general partners, who manage the business and are personally liable for the partnerships debts, and one or more limited partners, who contribute only assets, do not participate in the management of the business, and whose liability is limited to the amount of assets contributed. In other words, an investor. [4237.02] More later�.

������ Corporation: A legal entity formed in compliance with the statutory requirements of its state of incorporation, owned by shareholderswhose liability is limited to their investment in the corporation, and managed by (i) a board of directorselected by the shareholders and (ii) officersemployed by the board of directors.� More on the corporation in another lecture.

������ "S� Corporation: A closely-held corporation that has met the statutory requirements set out by the Internal Revenue Code and, thus, is taxed like a partnership, while enjoying the limited liability afforded by a corporation.� The precursor of the LLC, but quite viable even today.

������ Limited Liability Company ("LLC"):A hybrid form of business which, like an "S"corporation is taxed like a partnership while offering owners the limited liability of a corporation; but, unlike an "S" corporation, an LLC can be owned, in whole or in part, by corporations, partnerships, and/or foreign investors, and need not be "closely-held" --meaning that it may have unlimited investors.

������ Limited Liability Partnership ("LLP"):Similar to an LLC, a LLP is designed for professionals who historically have done business as partners (e.g., accountants, attorneys) but who want to limit their liability for their partners' (but not the partnership�s) misdeeds.

������ Joint Venture: A business venture where two or more persons or entities combine their interests in a particular enterprise and agree to share in the losses or profits equally or in proportion to their capital and asset contributions.

�������� A joint venture resembles a partnership and is taxed like a partnership. However, there are some differences:

�������� Joint venturers have less implied and apparent authority because the activities of a joint venture are more limited, as a matter of law, than those of a partnership.� Usually a joint venture is established to perform one task, such as building a bridge or tunnel.� But, it can be much broader than that.

�        The death of a joint venturer generally does not terminate the joint venture.� More below�

PARTNERSHIP: DEFINITION AND STATUS

�������� Partnership: A VOLUNTARY agreement by two or more persons to carry on, as co-owners, a business for profit. [4231]

���������

��������� Courts often look to the following to determine whether a partnership exists:

(1)���� sharing of profits and losses;

(2)���� joint ownership of the business; and

(3)���� equal right in the management of the business.

�������� The term "persons," for purposes of a partnership, includes corporations in Texas, although some states' partnership statutes exclude corporations from owning partnership interests.

�        A partnership, while treated as an aggregate of the individual partners for federal income tax purposes, may be treated as a separate entity for other purposes, such as bringing and defending lawsuits, bankruptcy, and ownership of property. However, it does NOT generally shield the partners from any form of liability in a lawsuit or other obligation. [4234]

�        A partnership is a �pass- through� entity for tax purposes.

PARTNERSHIP FORMATION [4235]

������ Partnership Agreement: A written agreement -- sometimes called "Articles of Partnership" -- that sets forth the rights and obligations of each partner with respect to the partnership.� Notice, however, a partnership may be established by a mere handshake or other �agreement� between the parties.� It can even be an ORAL agreement. Notice, while obviously a written agreement is preferable, many informal partnerships exist based on oral understandings.� [4238]

������� TESTS of Existence of a partnership include:

�        Sharing of profits

������������������������������������� But, this presumption can be rebutted (disputed) by:

����������������������������������������������� Showing the funds received are actually repayment of debt or

����������������������������������������������� Wages or rent owed or

����������������������������������������������� An annuity payment or

����������������������������������������������� Interest of a loan or

����������������������������������������������� Consideration for sale of goods paid from profits.� [4235.03]

������� Why would you want to rebut the presumption of partnership? So you would not be liable for partnership debts or liabilities.

�        Co ownership of property

�        Joint control and management.

�       Who can be a Partner? Maybe it is easier to say who cannot: [4239]

������������������ A minor �may� be a partner, but may disaffirm (say no). Thus, dangerous to allow a minor as a P.

������������������ An insane person may not be a partner.

������������������ In some states, a corporation may not be a partner (but in Texas, they may).

�������� Partnership Duration: The partnership agreement may specify the duration of the partnership in terms of a date or the completion of some undertaking.

�������� A partnership whose term is limited is a partnership for a term. Any dissolution of the partnership prior to the term, without the consent of all of the partners, will leave the partner or partners responsible for the dissolution personally liable for any resulting losses.

�������� A partnership agreement silent as to duration implies a partnership at will. The partnership may be dissolved by any partner at any time without incurring liability.

�������� Partnership by Estoppel: Whenever a third party has reasonably and detrimentally relied on the representation, by a partner, that a non-partner was part of the partnership, the non-partner is deemed to be the partnership's agent and the partnership is liable for his or her acts. [4236.01]

MANAGEMENT & VOTING RIGHTS ( aka Authority) [4241]

�       Authority of a partner is merely an extension of agency law.

�       Recall actual (real) authority versus apparent authority.

�       Under the UPA, UNLESSOTHERWISE AGREED BETWEEN THE PARTNERS:

(1)���� all partners have equal management rights;

(2)���� each partner has an equal vote, regardless of the relative size of his or her capital contribution; and

(3)���� partnership decisions require a majority vote of the partnership, unless otherwise agreed,

���������

��������� �except in the following cases, which require unanimous consent:

(a)����� altering the essential nature of the partnership's business or entering a wholly new business;

(b)���� admitting new partners or altering the capital structure of the partnership;

(c)���� assigning partnership property into a trust for the benefit of creditors, disposing of goodwill, or undertaking any act that would make conduct of the partnership's business impossible;

(d)���� confessing judgment against the partnership (saying we did wrong); or

(e)������ amending the partnership agreement.

Why? It�s obviously a major change in the previously existing agreement, business, or financial underpinnings of the business, and thus all need to agree to the changes.

PARTNERSHIP INTEREST & COMPENSATION

�������� Partnership Interest: An individual partner's personal asset consisting of a proportionate share of the profits earned and a return of initially-invested capital upon termination.

�������� Assignment of Partnership Interest:A partner may assign his or her interest in the partnership to another party, who will then be entitled to receive the partner's share of profits and, upon termination, the partner's capital contribution. However, the assignee does not become a partner, and thus has no say in management and no right to inspect the partnership's books.

�������� Lien on Partnership Interest: A partner's interest may also be subject to a judgment creditor's lien. If so, the judgment creditor may obtain a charging order which will entitle the judgment creditor to the partner's share of profits and, upon termination, the partner's capital contribution.� Again, the judgment creditor does NOT become a partner.

�������� Compensation: Generally speaking, partners do not receive a salary for any work they do for the benefit of the partnership; rather, they are paid a share of the partnership's profits. However, the partnership can agree otherwise.

ACCOUNTING RIGHTS

�������� Partnership Books: Partnership books and records must be kept accessible to all partners. This often becomes a point of dispute in the �real world.�

�������� Each partner has the right to receive, and each partner has a corresponding duty to produce, full and complete information concerning the conduct of all aspects of partnership business.

�������� Right to Inspect and Copy: Every partner, whether active or inactive, is entitled to inspect all books and records on demand and may copy any materials.

�������� A partner can demand a formal accounting of the partner�ship's assets when:

(1)���� provided for in the partnership agreement;

(2)���� a partner is wrongfully denied access to the business and/or the partnership's books;

(3)���� another partner has breached his or her fiduciary duties to the partnership; or

(4)���� "just and reasonable."

PROPERTY RIGHTS [4247]

A partner has the following property rights:

(1)���� an interest in the partnership, entitling the partner to share in the partnership's profits and to receive a return of capital upon the termination of the partnership, in proportion to the partner's investment;

(2)���� a right in partnership property; and

(3)���� a right to participate in the management of the partnership.

�������� Partnership Property includes:

�������� all property originally brought into the partnership and

�������� all property subsequently acquired, by purchase or otherwise, on account of the partnership.

�������� Every partner is co-owner with the other partners of all partnership property, and no partner can sell, assign, or in any way deal with any item of partnership property except for the purposes of the partnership.

PARTNERSHIP DUTIES AND AUTHORITY

�������� Fiduciary Duties: Partners stand in a fiduciary relationship to one another just as principals and agents do.

�������� Each partner has a duty to act in good faith and for the benefit of the partnership.

�������� Each partner must also subordinate his or her personal interests to those of the partnership. [4248]

�������� Authority of Partners: Each partner is an agent of the partnership and of each other partner; therefore, agency concepts of actual and apparent authority and ratification apply to acts of a partner.� [4241]

�������� Any act within the scope of a partner's authority binds the partnership. � NOTICE THE IMPLICATIONS!!

�        The knowledge of one partner regarding partnership affairs is imputed to all other partners.

�        What one partner does binds the others to the outside world if the partner has apparent authority, and most do.� The partners may have agreed that the other partners cannot bind them, but this gives them an action only against the partner that bound them and doesn�t give them the right to disavow the �bad� agreement the partner set up.

PARTNERSHIP LIABILITY [4242]

�������� Joint Liability:� All partners incur joint liability for partnership obligations and debts. However, a partner is not liable for his or her partner's personal debts.

�������� Joint and Several Liability: Some states including Texas permit a plaintiff to sue one or more individual partners, and to collect a judgment arising from the partnership's acts or omissions from one or more of the individual partners. In other words, if one partner cannot pay a judgment that all partners have to pay, the others have to pay for the nonpaying partner and then try to get the funds from the nonpaying partners!!!� Say 5 partners are broke and only one is solvent, the solvent partner gets to pay for the sins of the others!� NOW YOU SEE WHY YOU SHOULD BE SO TERRIBLY CONCERNED ABOUT LIABILITY AND WITH WHOM YOU ARE A PARTNER!!!

�������� Incoming Partners: Newly-admitted partners are liable for debts and obligations incurred before they joined the partnership only to the extent of their capital contribution.

PARTNERSHIP TERMINATION [4250-51]

Dissolution: The formal disbanding of a partnership, which can be brought about by:������

(1)����� the terms of the partnership agreement;

(2)����� voluntary or involuntary withdrawal;

(3)����� the addition of on or more new partners;

(4)����� death of a partner;

(5)����� bankruptcy of a partner or of the partnership; or

(6)����� judicial decree.

Why? Again, the basic notion under which you agreed to be in business together has changed�

�

�������� Winding Up: Once dissolution is formalized and notice has been given to all partners and all creditors of the partnership, the partners are only authorized to (i) complete transactions begun but not completed as of the dissolution and (ii) wind up the partnership�s affairs i.e., collect and preserve partnership assets, pay partnership debts, and account to each partner for the value of his or her interest in the partnership.

DISTRIBUTING PARTNERSHIP ASSETS [4252]

�������� When a partnership terminates, creditors of the partnership, as well as creditors of individual partners, may make claims on the partnership�s assets.

������ Creditors of the partnership, however, take priority over creditors of individual partners.� �

�������� Partnership assets are distributed as follows:

(1)����� Payment of third party debts; then

(2)����� Refunds of loans or advances made by partners to or for the partnership; then

(3)���� Return of partner�s capital contribution; then

(4)����� Distribution of the remaining assets to the partners in proportion to their ownership interest or pre-termination share of profits (if different).

LIMITED PARTNERSHIPS [4254]

�

�������� Formation: Forming a limited partnership requires comply�ing with relevant statutes and preparing a certificate of limited partnership and filing it with the appropriate authorities.

�������� Rights of Limited Partners: Limited partners enjoy most of the same rights as general partners, including the right to inspect the partnership�s books and to demand other information about the partnership�s operations; and, upon dissolution, limited partners are entitled to the return of their capital contribution as provided for in the certificate of limited partnership.

�������� Liabilities of Limited Partners: A limited partner�s liability is limited to the amount of his or her capital contribution as long as he or she does not participate in management.� In this sense, the LP partner is like a shareholder in that only a certain amount of capital is at risk. A limited partner who actively participates in management is subject to the same liability as a general partner.

�������� Dissolution: A limited partnership will dissolve for most of the same reasons as a general partnership, but only in the event that a general partner, e.g., dies, goes bankrupt, etc.

Joint Ventures [4255]

�       Very similar in nature to a GP, but are usually set up to handle a particular business purpose and then disband. For example, drilling an oil well, building a building, a bridge, or a tunnel.� Usually used in cases where the activity is very capital intensive and the parties want to share the risk, both financial and operational.

LIMITED LIABILITY PARTNERSHIPS [4257]

�������� Limited Liability Partnership (�LLP�): A form of partner�ship that allows professionals (e.g., accountants, attorneys) to enjoy the tax benefits of partnership while avoiding personal liability for the malpractice of other partners.

�������� Family Limited Liability Partnership (�FLLP�): An LLP in which the majority of the partners are persons related by blood or marriage or fiduciaries of persons so related. All of the partners must be natural persons.

�������� Limited Liability Limited Partnership (�LLLP�): An LLP in which the liability of the general partner, as well as the limited partners, is limited to the amount of his investment in the firm.

As noted earlier, LLC�s will be discussed more under corporations.� Generally it is a mix of the best of partnerships and corporations.

What is partnership authority?

What is the level of authority and liability in a general partnership?

Who can be a partner in a partnership?

What is the partner of a company?