Chapter 3 – General Partnerships

Concept

• General Partnerships – A voluntary association of two or more persons who agree to carry on business together for profit.
• Unlimited Personal Liability – Liability for business debt, which extends beyond what is invested in a business to an individual’s personal assets
• Laws Governing Partnerships
  
  • UPA:  Uniform Partnership Act, model for partnership legislation in about one-fourth of the states
  • RUPA:  Revised Uniform Partnership Act, model for partnership legislation in about three-fourths of the states
• Partnership Property
  • Partners may contribute almost any type of property—cash, real estate, office furniture, a car, a trademark—or services such as legal, accounting, or decorating services, to the partnership.
  • Once contributed, and unless a partner specifies otherwise, the property then becomes the property of the partnership itself.
  • The partner who contributed it cannot change her mind.
• Property Rights of Partners
  • Under the original UPA, partners, as individuals, generally have three property rights:
  • their rights to specific partnership property,
  • their interest in the partnership,
  • their right to participate in management.
• Property Rights Under RUPA
  • The 1997 RUPA simplifies the three-tiered approach to property rights by eliminating the concept of “specific partnership property” and providing that a partner’s only personal property right is the partner’s share of profits and losses.
• Partnership Profits
  • A partner has an “interest in the partnership.” Simply put, a partner’s interest in the partnership usually refers to a partner’s share of partnership profit (and loss).
  • The right to profit is a personal property right, and a partner may transfer or assign this right to another and it can be seized by a partner’s creditor.
  • UnderRUPA§502,the only transferable interest of a partnership or her share of partnership profit and the right to receive distributions. 
• Management
  
  • Partners also have the right to participate in management of the partnership.
  • This right to manage and control the affairs of the partnership is typically exercised through voting at partnership meetings.
  • A partner cannot assign or transfer this right to another, even if the partner believes another is more competent to act.
• Advantages of General Partnerships
  • Ease of formation
  • Flexible management
  • Ease of raising capital
  • Pass-through taxation
• Disadvantages of General Partnerships
  • Unlimited personal liability
  • Lack of continuity
  • Difficulty in transferring partnership interest
• Joint and Several Liability
  • Principle that each partner and the partnership are liable for all debts and wrongful acts
• Formation of General Partnership
  • Formation of a general partnership is easily accomplished because the essence of a general partnership is a voluntary agreement to conduct business for profit. 
• Partnership Agreement
  • Name of the partnership
  • Names and addresses of the partners
  • Recitals
  • Purpose
  • Address
  • Term
  • Financial provisions
  • Profits and losses
  • Management and control
  • Admission of new partners and withdrawal of partners
  • Dissolution
  • Miscellaneous provisions
  • Signature and dates
• Transferability of Partnership Interest
  • Transfer of profits does not carry with it the right to be a partner.
  • The transferor partner retains partnership rights and duties until he or she is dissociated or withdraws.
  • New partners may be admitted only upon the consent of all existing partners (unless partnership agreement calls for less than unanimous consent)
• Dissolution
  
  • Under the UPA, dissolution of the partnership triggers a winding up, namely a wrapping up of the business affairs of a partnership.
  • Under the RUPA, a partnership may buy out the interest of a partner who leaves the partnership, and the partnership will continue its business.
• Dissociation
  • A withdrawal of a partner from a partnership; does not necessarily cause a dissolution or termination of partnership
  • Wrongful dissociation:  a dissociation caused by a breach of partnership agreement
• Taxation of Partnerships
  • Although a partnership is an entity and can sue and be sued in its own name, it is not a taxpaying entity.
  • All profits or losses earned are “passed through” to the partners, whose respective income or losses are reported on a separate form called Schedule K-1.
  • Thus, the taxation of partners is much like the taxation of sole proprietors.
• Check the Box
  • Method by which businesses may elect how they wish to be taxed, namely, as a corporation.
• Joint Ventures
  • A type of partnership formed to carry out a single enterprise.
• Key Features of General Partnerships
  • Partnerships are formed by agreement, either oral or written.
  • All partners share rights to manage the partnership.
  • Partners share profits and losses according to their agreement; if no agreement, profits and losses are shared equally, regardless of capital contribution.
  • Partners have unlimited personal liability for partnership obligations.
  • Partners’ liability is joint and several, meaning that any partner is completely liable for any debt.
  • Partnerships are easily and inexpensively formed.
  • Partners owe each other fiduciary duties and are agents of the partnership.
  • Under the UPA, nearly any withdrawal by a partner causes a dissolution of the partnership.
  • Under the RUPA, withdrawal of a partner may not necessarily cause a dissolution and winding up of the partnership; in most instances the departing partner is bought out.
  • Partnerships file information tax returns but do not pay federal taxes; all income, whether distributed or not, is passed through to the partners who pay tax at their appropriate individual rates.