CHAPTER 48

PARTNERSHIPS
I. Nature

II. Formation

III. Relations Among

Partners

IV. Relations With Third

Persons

V. Dissociation

VI. Limited Partnerships

VII Limited Liability

. Companies
I. Nature
A. Revised Uniform Partnership Act (RUPA)
RUPA defines a partnership as an association of two or more persons to carry on a business for
profit as co-owners.

1. Business "To carry on a business" includes almost any type of profitable, legal activity.
2. Co-Ownership The persons engaged in a partnership must be co-owners. This
requirement distinguishes a partnership from an agency. An agent may at times receive a
share of the profits of a business. However, an agent does not have a partner's proprietary
interest in the business. There is a fiduciary relationship among the partners, and between
them and the partnership. Thus, each partner is an agent for the partnership and for all
other partners.
3. For Profit Nonprofit, unincorporated associations such as religious or charitable groups,
labor unions, or clubs, are not partnerships.
4. Capacity Generally, any person (entity) who is competent to contract may be a partner.
a. An infant may be a partner, but only to the extent of the infant's power to
contract. Therefore, an infant may at any time withdraw her/his investment
unless, and to the extent that, the partnership is subject to creditors' claims.
Furthermore, if liable for debts, an infant is liable only up to the amount of
her/his contribution.
b. A corporation may become a partner only where permitted by state
corporation laws.
c. A partnership may become a partner in another partnership provided all the
partners agree to the arrangement.
d. A trustee may become a partner if to do so would be prudent and in the best
interest of the trust.
e. RUPA allows general partnerships to convert to limited partnerships and
vice versa. RUPA also allows general partnerships to merge with other
general partnerships and with limited partnerships.

B. Partnership Theories

1. Entity RUPA embraces the entity theory of the partnership for some purposes, but it
does away with the marshalling of assets. The entity theory is used for such matters as
title to partnership property, legal actions by and against the partnership, and continuity
of existence.

All property acquired by a partnership, by transfer or otherwise, becomes

partnership property and belongs to the partnership as an entity, rather than to the
individual partners. RUPA abolishes the Uniform Partnership Act (UPA) concept of
tenants in partnership. Generally, under RUPA, partners and third parties dealing
with partnerships will be able to rely on the record to determine whether property is
 owned by the partnership. A partner's interest is the partner's share of the profits
and losses of the partnership and the partner's right to receive distributions. This
interest is personal property and can be transferred (RUPA uses the word transfer
instead of assign) by the partner. The partners, by unanimous vote, may expel a
partner who has transferred all of the partner's interest in the partnership.

2. Aggregate For some purposes, a partnership still is treated as a collection of individuals;

the partnership itself is not taxed; rather, each partner pays income tax on her/his share of
the profits or losses, regardless of whether cash or other property is received.

C. Distinguished From Other Entities

1. Corporations
a. Advantages of a corporation as compared to a general partnership are:
1. The liability of stockholders is limited to the amount of their
investment, whereas partners have unlimited liability.
 2. A corporation allows continuity of business operations despite
changes in ownership or management; a partnership is of limited
duration (for example, the death of a partner results in a dissociation
of the partnership).
3. A corporation may utilize a centralized management of professional
managers, whereas a partnership is run equally by all the partners.
4. The ownership rights in a corporation are readily transferable;
however, a partner may not transfer interest and rights in the
partnership without the approval of all other partners.
b. Advantages of a partnership as compared to a corporation are:
1. A partnership may be organized easily and cheaply, whereas a
corporation must be organized in accordance with specific statutory
procedures and must have sufficient capitalization.
2. A partnership generally is burdened less than a corporation by
government supervision and reporting requirements.
2. Joint Ventures A joint venture is a special form of partnership that is formed for only
one transaction or series of transactions, rather than for a general purpose.
3. Sole Proprietorship A sole proprietorship is one individual engaged in business. A sole
proprietorship is not a separate legal entity, distinct from its owner. A transfer of the
interest of the proprietor causes a dissolution of the proprietorship. A partial transfer of a
proprietor's interest requires another form of entity. A transfer of the whole interest of the
proprietor in a proprietorship typically has an attendant non-competition agreement. Due
to the disadvantages of the sole proprietorship form of entity, sole proprietorships tend to
be small.
a. Advantages of a sole proprietorship as compared to other forms of business
are:
1. A sole proprietorship generally may be formed more easily and
cheaply than any other entity, at the will of the proprietor. Generally,
there are no requirements relating to a sole proprietorship, per se,
although a sole proprietorship must abide by laws that relate to all
businesses, such as employment, zoning, licensing, and fictitious name
laws. Ordinarily, a sole proprietorship with a nationwide business
need not register to do business in each state, in the manner of a
corporation or limited liability company.
2. A sole proprietor receives all profits.
3. Control and accountability are centralized. A sole proprietor makes
all decisions without answering to other owners. Control can change
only with the proprietor's consent.
4. The duration of a sole proprietorship is at the owner's will. The
ownership rights in the entity's assets are transferable, although not
always readily.
b. Disadvantages of a sole proprietorship as compared to other forms of
business are:
1. A sole proprietor has unlimited liability, placing the proprietor's
personal assets at risk.
 2. By definition, a sole proprietorship's equity financing is limited to the
proprietor's personal resources. Typical debt financing sources are
banks and the Small Business Administration. Because a sole
proprietorship is not a separate legal entity, lenders for either
business or personal credit typically consider both business and
personal assets and debts, which may complicate or, at least, lengthen
application processes. Creditors effectively may place significant
restrictions on the proprietor's financial decisions, both personal and
business.
3. A sole proprietor may lack the expertise to make sound decisions in
all areas of the business. The checks and balances in more complex
entities might remedy this lack or, at least, bring it to light.
4. A sole proprietorship has no continuity of existence; it automatically
terminates upon the proprietor's death.

D. Classifications

1. General Partnership An ordinary partnership formed under RUPA or common law and
consists only of general partners. A general partner has the right to share in the
management and profits of the partnership and has unlimited liability to partnership
creditors.
2. Limited Partnership An arrangement specially created under the Revised Uniform
Limited Partnership Act (RULPA) which consists of one or more general partners and
one or more limited partners. A limited partner is one who contributes capital to the
partnership but does not have any authority or voice in the management of the business.
The limited partner's liability to partnership creditors is limited to the amount of her/his
capital contributed.
3. Silent Partner One who has unlimited liability but does not share in the management of
the partnership.
4. Ostensible or Nominal Partner One who is not actually a partner, but who may become
a partner by estoppel insofar as s/he is held out to appear to be a partner.
5. Dormant Partner One who is a partner with the right to management participation, but
who is undisclosed and generally inactive. Once disclosed, the dormant partner has the
same liability as any other general partner.
6. Secret Partner One who actually participates in the management of the partnership but
is undisclosed. If the secret partner's connection with the business is disclosed, s/he has
unlimited liability.
7. Limited Liability Partnership (LLP) Limited liability partnerships afford liability
protection to general partners. This is vastly different from traditional general
partnerships. In essence, an LLP is merely a general partnership which has made an
election to invoke the limited liability protection of the enabling state statute. Some states
allow most professional partnerships to use LLPs; others allow most operating businesses
to use LLP.
E. Federal Income Tax Ramifications
The individual partners are taxed on their distributive shares of partnership gain and income
regardless of whether the distributive share actually is distributed. The partnership's return is
made on Form 1065 and is for information purposes only.

1. Conduit General and limited partnerships, as well as LLCs, are not tax-paying entities.
Rather, they are reporting entities which pass through distributive shares of gain and loss
as well as partnership ordinary income or loss to the individual partners.
2. Entity Status The general rule is that if an entity with two or more persons is formed
under state law that is not a state law corporation, the entity is taxed as a partnership. A
one-person LLC is disregarded for federal tax purposes and no separate return is required,
yet it does not lose its liability shield.

F. Property
All property originally brought into the partnership, or subsequently acquired by purchase or
otherwise on account of the partnership, is partnership property. Included within this description
is the partnership's capital, name, and goodwill. The direct property rights of a partner are the
partner's interest in the partnership and the partner's right to participate in the management of the
partnership.

1. Intent of Parties In construing the phrase "acquired…on account of the partnership," the
courts look to the intent of the parties as evidenced by the facts and circumstances
surrounding each acquisition. The following are of particular importance.
a. Title The fact that an asset is acquired or held in the partnership name may be
considered by the court, but is not usually a major indication.
b. Partnership Improvement The fact that partnership funds were used to improve
an asset may be considered, but it is not a major indication.
c. Property Use The fact that an asset is used in the partnership business is
indicative of partnership ownership if that fact, combined with others, tends to
establish the asset as partnership property.
d. Partnership Purpose The fact that an asset is connected closely with the
operation of a partnership is of particular importance when there is a dispute
between one of the partners and the firm. In recognition of the fiduciary
responsibilities inherent in a partnership, courts often view assets acquired by a
partner which are necessary for or related to partnership operations as actually
held in trust for the firm.
2. Acquisition & Conveyance Under RUPA, any estate in real property may be acquired
in the partnership name, and title so acquired may be conveyed in the partnership name.
A partner may convey title to the property by a conveyance executed in the partnership
name. If the partner in fact has no authority to so convey and the person with whom the
partner is dealing has knowledge of the fact that s/he has no authority, the partnership
may recover the property conveyed. However, when the purchaser or the purchaser's
assignee is a holder for value who is without knowledge that the partner has exceeded
her/his authority, then the partnership may not recover the property.
3. Interest in Partnership A partner's interest in the partnership is her/his share of the
profits and surplus. This interest is classified as personal property.
a. Profits & Losses Profits and losses are shared equally unless the agreement
specifies otherwise, even if the amount of contributed capital is not equal. If the
partners agree on unequal profit sharing percentages, but are silent as to loss
sharing percentages, losses are to be shared using the profit sharing proportions.
b. Inheritance On her/his death, a partner's interest descends as personal property
regardless of the form in which the firm's assets exist.
c. Assignment Unless otherwise agreed, a partner's interest is freely assignable.
The assignee is entitled only to receive the profits and capital to which the partner
would have been entitled. s/he does not become a partner and is not entitled to
exercise control over the partnership or use partnership property. The assignor
remains liable on all partnership debts. An assignment does not cause a
dissociation.
d. Rights of Individual Partner's Creditor to Partnership Assets The creditor of
an individual partner may not execute on or attach partnership assets. The
creditor's only remedy, once her/his claim has been reduced to a judgment, is to
obtain a charging order against the debtor-partner's interest. The creditor then is
entitled to all future distributions of assets or surplus due the partner until the
judgment is satisfied.
e. Family Rights Generally, the partner's interest is treated as community property
and is subject to a family allowance (statutory right of a widow to certain portions
of the deceased husband's property).
4. Right to Participate in Management Unless there is a specific agreement to the
contrary, all partners have equal rights in the management and control of the partnership
business.
5. Rights to Partnership Property Each partner in a partnership has the right to possess
and use the partnership property for partnership purposes.
a. This right is not assignable except in connection with the assignment of rights
of all the partners in the same property.
b. This right is not subject to execution or attachment on a claim arising against
the individual partner.
c. This right is not community property, nor is it subject to family allowance or
dower rights.
d. On the death of the partner, the surviving partners are then under a duty to
account to the estate of the deceased for the value of the deceased partner's
rights in the property.
II. Formation
A. Overview
A partnership may be formed by either an express or implied agreement.

1. Writing Except in specific instances, there is no need for a partnership agreement to be

in writing, and the acts of the parties alone may establish a partnership. A writing is
needed in the formation of a partnership only when the partnership would otherwise be in
violation of the Statute of Frauds. For example, any partnership agreement which
necessitates the transfer of real property or to carry on a business for a term in excess of
one year must be in writing.
2. Articles of Partnership Important provisions contained in the Articles of Partnership
are the following.
a. Firm name
b. Names and addresses of all the partners
c. Date the partnership becomes effective, as well as the intended duration of
the partnership
d. Nature, purpose, and scope of partnership activity
e. Procedure for admission of new partners
f. Computation of interest on partnership capital
g. Computation of profits and the proportionate share of profits and losses
attributable to each partner
h. Powers and duties of the partners
i. Dissolution procedures and rights
j. Procedure for distribution of surplus, including the disposition of the firm
name and goodwill
3. Certificate In most states, when a partnership is doing business under a fictitious name,
it must file a certificate with the Secretary of State. This certificate must list the names
and addresses of the partners and the fictitious name of the business. Failure to comply
with the statutes does not invalidate the partnership, but may result in fines. The purpose
of requiring registration is to allow third parties to know who is in the partnership.
4. Filing A statement may be filed in the state-specified office. A certified copy of a
statement that is filed in the specified office of another state may be filed in the state-
specified office. Either filing has the effect provided in RUPA with respect to partnership
property located in or transactions that occur in that state. RUPA provides for a single,
central filing of all statements (as is the case with corporations, limited partnerships, and
limited liability companies). No filings are mandatory under RUPA; in all cases, the
filing of such statements is optional and voluntary. Only statements that are executed,
filed, and, if appropriate (such as the authority to transfer real property), recorded in
conformity with RUPA have the legal consequences accorded to such statements by
RUPA.
B. Determining Partnership Existence
The determining test is whether or not the parties intended to carry on together, as partners, a
business for profit. It must appear that the parties intended joint responsibility in the management
and operation of the business and intended to share in its profits and losses.

1. Share The sharing of gross revenues, by itself, does not establish a partnership. The
receipt by a person of a share of the profits of a business is prima facie evidence that the
person is a partner in the business, but no such inference shall be drawn if the profits
were received in payment of any one of several items.
a. Of a debt by installments or otherwise.
b. As wages of an employee or rent to a landlord.
c. As an annuity to a widow or representative of a deceased partner.
d. As interest on a loan, though the amount of payment varies with the profits
of the business.
e. As the consideration for the sale of goodwill of a business or other property
by installments or otherwise.
2. Ownership Joint tenancy, tenancy in common, tenancy by the entireties, or any other
type of joint ownership of property does not in itself establish a partnership. This is true
regardless of whether the co-owners share any profits made through use of the property.
3. Capital The contribution of capital to a business endeavor does not establish a
partnership, and it is not essential to the existence of a partnership that all the partners
contribute capital.
4. Designation The designation of a business relationship as a "partnership" does not
conclusively establish a partnership, nor can the parties avoid partnership liability merely
by denouncing the existence of a partnership.

C. Estoppel
The relationship among the partners is governed by the express or implied partnership
agreement. In dealings with third parties, however, the conduct of parties may bind them as
partners.

1. Appearance One who holds her/himself out as a partner in an actual or apparent

partnership is liable to another who in good faith, and in reliance on the
misrepresentation, extends credit to the apparent partner. An actual partner who either
expressly or impliedly consents to a misrepresentation is likewise liable to third parties.
2. Agent When an actual partner represents that another is a member of the partnership,
when in fact s/he is not, the partner makes the other person her/his agent. The "agent"
then has the power to bind the partner to third parties as though the "agent" were actually
a partner. Any liability resulting from such a misrepresentation extends only to the
partners who consented to the misrepresentation.
III. Relations Among Partners
A. Fiduciary
The only fiduciary duties a partner owes to the partnership and the other partners are the duty of
loyalty and the duty of care. Those duties may not be waived or eliminated in the partnership
agreement, but the agreement may identify activities and determine standards for measuring
performance of the duties, if not manifestly unreasonable. RUPA establishes the duty of care that
partners owe to the partnership and to the other partners. The standard of care imposed by RUPA
is that of gross negligence. RUPA requires a partner to refrain from competing with the
partnership in the conduct of its business, but that duty is not violated merely because the
partner's conduct furthers her/his own interest if certain requirements are met. RUPA also
provides that partners have an obligation of good faith and fair dealing in the discharge of all
their duties.

B. Mandatory Rule
Agreement cannot change certain requirements under RUPA. Some rights and duties, and
implicitly the corresponding liabilities and remedies, are mandatory and cannot be waived or
varied by agreement beyond what is authorized. The partnership agreement may not do any of
the following.

1. Vary the requirements for executing, filing, and recording partnership statements,
except the duty to provide copies to all the partners.
2. Unreasonably restrict partners' or former partners' access rights to books and
records.
3. Entirely eliminate the fiduciary duties of loyalty or care, or the obligation of good
faith and fair dealing. However, the statutory requirements of each can be modified
by agreement, subject to limitations. Exculpatory agreements drafted by partners
may be drafted in terms of types or categories of activities or transactions, but
should be reasonably specific. The partners may determine the standards by which
the performance of the obligation of good faith and fair dealing is to be measured.
RUPA permits the partnership agreement to identify specific types or categories of
partnership activities that do not violate the duty of loyalty.
4. Unreasonably reduce the partners' duty of care below the statutory standard, that
is, to refrain from engaging in grossly negligent or reckless conduct, intentional
misconduct, or a knowing violation of law. The standard may be increased by
agreement to a higher standard of care.
5. Eliminate the obligation of good faith and fair dealing under RUPA, except the
partnership agreement may prescribe the standards by which the performance of
obligations is to be measured.
6. Bargain away the traditional rule that every partner has the power to withdraw
from the partnership at any time. The partnership may require that the notice of
withdrawal be in writing. (UPA was silent with respect to requiring a written notice
of withdrawal.)
 7. Vary the right of partners to have the partnership dissolved and its business wound
up.
8. Vary the right of a court to expel a partner.
9. Vary the requirement to wind up the partnership business in certain cases.
10. Vary the law applicable to a limited liability partnership (LLP).
11. Restrict the rights of third parties under RUPA.

C. Default Agreement
The rights and duties of each partner in relation to the partnership are governed by any
agreement among them. If there is no agreement, RUPA imposes the following rules.

1. Equal Rights All partners have equal rights in the management and conduct of the
partnership business. Any differences concerning ordinary matters connected with the
partnership business may be decided by a majority of the partners, but no act in
contravention of any agreement among the partners may be done rightfully without the
consent of all the partners.
2. Share in Profits, Losses & Assets A partner has a share in profits and losses and rights
to assets upon dissolution of the partnership as follows.
a. Each partner is entitled to repayment of her/his capital contributions or
advances made to the partnership. All partners are entitled to an equal share
in profits and any surplus remaining after all liabilities (including those to
the partners) are satisfied. A partner must contribute to the losses sustained
by the partnership proportionately according to the partner's share in the
profits.
b. The partnership must indemnify every partner for payments made or
liabilities incurred by her/him in the ordinary conduct of the partnership
business or in the preservation of its business or property.
c. A partner is entitled to interest on any sums advanced by her/him in
furtherance of partnership business beyond the amount of capital the
partner agreed to contribute.
d. A partner is not entitled to compensation for acting in the partnership
business other than sharing in its profits, unless otherwise agreed. However,
a surviving partner is entitled to reasonable compensation for her/his
services in winding up the partnership affairs.
3. Books & Information The partnership must keep its books at a central, agreed-to
location. Each partner is entitled to have access to them at all times. A partner has the
right to demand from the other partners full and true information of all things affecting
the partnership. A partner's legal representative has the same right to such information.
4. Formal Accounting Any partner has the right to a formal accounting of partnership
affairs:
a. When the partner is wrongfully excluded from the partnership or possession
of its property,
b. If the right is provided for under the agreement,
c. When another partner breaches her/his fiduciary duty, or
d. At any other reasonable time.
D. Actions Between Partner & Partnership

1. Suit in Equity The principal remedy available to a partner against her/his co-partners is
a suit in equity for a dissolution and an accounting.
2. Action at Law Disputes between partners almost invariably involve a conflict as to
partnership assets, which necessitates an accounting of assets. Additionally, any suit by a
partner against the partnership creates a conflict of interest for the plaintiff partner
between her/his individual interest as plaintiff and her/his interest as a defendant member
of the partnership. For these reasons, actions at law are seldom permitted except in a few
situations. Typically, these situations involve controversies in which no complex
accounting is necessary or in which the partner's activity is outside the scope of the
partnership business. Thus, the courts will allow an action at law involving a dispute
which arose at the outset of the partnership, a suit between partners not related to
partnership business, or a suit for fraud or conversion of partnership assets.
IV. Relations With Third Persons
A. Authority to Bind Partnership
Generally, the rules of agency apply in determining whether or not the partnership is bound by
the dealings of one of its members with a third party. Thus, for the purpose of conducting
partnership business, every partner is an agent for the partnership and for every other partner.
The act of a partner committed within the scope of the partner's actual or apparent authority,
therefore, will bind the partnership.

1. Actual
a. Express A partner's express authority includes that authority specifically set forth
in an agreement among the partners. It also may arise from decisions made by a
majority of the partners regarding the conduct of the partnership business. The
partnership may file a statement of authority outlining the authority that particular
partner or partners may have.
b. Implied This type of authority has not been granted expressly to a partner, but
instead arises from the nature and business of the partnership. It is essentially that
type of authority which is reasonably necessary for a partner to perform her/his
duties. For example, if a partner is in charge of the partnership's personnel, it
would be reasonable and necessary to imply that s/he has the power to hire and
fire employees even though this authority is not granted expressly.
2. Apparent The actions of a partner which are apparently for the carrying on of the
partnership's business in the usual way, but which are not actually authorized, still will
bind the partnership if the third party does not know of the partner's lack of actual
authority. However, if the third party knows that a partner's dealings exceed the partner's
authority or is outside of the scope of the partner's apparent authority, the other partners
are not liable.

3. Limitations Without authorization to the contrary, no partner may do any of the

following. Additional limitations may be imposed by the partnership agreement.
a. Assign the partnership property in trust for the benefit of creditors or on the
assignee's promise to pay the debts of the partnership.
b. Dispose of the goodwill of the business or do any other act that would make it
impossible to carry on the ordinary business of a partnership.
c. Confess a judgment.
d. Submit a partnership claim or liability to arbitration.
 4. Termination The majority of partners may terminate the authority of a partner, or
minority of partners, unless this action would be contrary to a previous agreement. Some
cases have allowed one partner to terminate the authority of a co-partner when the
partnership is limited to two persons.
5. Notice In regard to any matter affecting partnership affairs, notice to any individual
partner is imputed to all other partners.
6. Knowledge The knowledge of any partner gained while working on partnership matters
is imputed to all other members of the partnership. However, any knowledge gained by a
partner who is engaged in a fraud as to the partnership is not imputed to the partnership.
Normally, knowledge acquired by one before s/he becomes a partner is not imputed to
the partnership.
7. Admissions An admission or representation made by any partner while the partner is
acting within the scope of her/his authority is admissible as evidence against the
partnership.

B. Partnership Liability
Partners are jointly and severally liable for contracts and all actions in tort or fraud against any
partnership member where the partnership is not a limited liability partnership. The other
partners are liable only when the cause of action arises out of partnership business. A person
with a cause of action against a partnership may sue any number of partners s/he wishes,
collectively or separately. Each partner is liable for the entire amount of damages arising out of
such a cause of action. However, a partner may have either a right to contribution from the other
partners or a right to indemnification from a wrongdoing partner.

1. Contract Liability Partners are jointly and severally liable for all debts and contract
obligations of the partnership.
a. This liability extends to all "in fact" partners (for example, dormant
partners) whether or not the creditor relied upon the fact that such a person
was a partner.
b. An incoming partner is not personally liable for debts of the partnership
incurred before the partner's admission. The partner's liability as to pre-
existing claims may be satisfied only out of partnership property. Thus, an
incoming partner's liability for pre-existing claims is limited to that partner's
capital contribution.
2. Tort Liability All partners are liable jointly and severally for actions in tort.
a. Tort liability may arise from the wrongful act or omission of a partner
arising out of activity which was authorized by the other partners or within
the partner's normal course of business. The partnership is also liable for
funds misapplied by one of the partners.
b. Since the partners are severally liable, an action may be brought against any
one of the partners.
c. Any partner adjudicated guilty of tortious conduct towards an outsider is
liable to her/his co-partner(s). Generally, a partnership has no right to
recover from third persons who inflict injuries on an individual partner.
V. Dissociation
A. Causes
Dissociation is the result of the change in the relation of the partners when a partner ceases to be
associated with the carrying on of the business. A partner's dissociation always will result in
either a buyout of the dissociated partner's interest or a dissolution and winding up of the
business. The partnership does not terminate on dissolution, but continues until the winding up of
the partnership is complete. Dissociation may be accomplished either without violating the
partnership agreement or in violation of the partnership agreement. The entity theory of
partnership provides a conceptual basis for continuing the firm itself despite a partner's
dissociation from the firm, if there is a buyout of that partner's interest. A dissociated partner
remains a partner for some purposes and still has some residual rights, duties, powers, and
liabilities.

1. Accordance With Partnership Agreement

a. Completion of Term or Particular Project When the partnership agreement
specifies that the partnership will terminate on a certain date or when a particular
project is completed, the expiration of the term or completion of the undertaking
dissolves the partnership. The partners, if they choose, may continue beyond the
term as partners at will.
b. Partner's Express Decision (at Will) When the partnership is at will, a partner
may dissociate from the partnership at anytime without liability to the other
partners even if the dissociation causes a loss to the firm. However, pursuant to
the partner's fiduciary duty, a partner must act in good faith. Thus, if a partner
chooses to exercise her/his right to dissociate from the partnership in order to
exclude the partner's co-partners from a lucrative business opportunity, the act of
dissociation would be wrongful, and her/his rights on dissociation would change
accordingly.
c. All Partners' Express Will When all the partners who have not assigned their
interests or had them claimed in satisfaction of a personal debt agree to dissolve,
it is immaterial that the partnership is for a term and not at will.
d. Expulsion The expulsion of a partner from the firm must be both authorized by
the agreement and bona fide. Under these circumstances, the expelling partners
are not liable for any resulting damages.
2. Violating Partnership Agreement
a. Partner's Express Decision (not at Will) Every partner has the power to
dissociate from the partnership whether or not the partner has that right under the
partnership agreement. When the dissociating partner acts in violation of the
agreement, the partner may be held liable for any losses caused by the
dissociation. The following acts by a partner have been construed by the courts as
evidencing the partner's intent to discontinue.
 1. Assignment of Partnership Interests A partner's transfer of her/his
partnership property to a third party may be indicative, but is not
conclusive, of an intent to dissociate.
2. Levy of Charging Order The levy of a charging order on the partnership
interest of a debtor/partner does not by itself produce a dissociation.
However, the assignee or holder of a charging order can obtain a judicial
dissociation of a partner from the partnership after expiration of the term
or, if it is a partnership at will, whenever the interest is acquired.
b. Illegality Dissolution of a partnership results automatically upon the occurrence
of any event that makes it unlawful for the partnership business to be conducted.
The partners may change their business to avoid the illegality and thus continue
the partnership relationship.
c. Partner Death, Withdrawal, Bankruptcy, or Incompetency Unless the
partnership agreement provides otherwise, a partner's death, withdrawal,
bankruptcy, or incompetency will result in the partner's dissociation from the
partnership. The other partners may agree to continue or terminate the
partnership.
d. Judgment The court has the power to adjudicate dissolution on application by or
for a partner when any of the following circumstances exist.
1. A partner has been declared insane in a judicial proceeding or is
otherwise shown to be of unsound mind.
2. A partner otherwise becomes incapable of performing her/his part of
the partnership contract (generally, the incapacity must be of such a
nature as to materially affect the partner's ability to discharge her/his
duties).
3. A partner has been guilty of conduct that tends to prejudicially affect
the conduct of the business.
4. A partner willfully or persistently commits a breach of the
partnership agreement.
5. The business of the partnership can be conducted only at a loss.
6. Whenever the dissolution would be equitable.
e. Charging Order Upon the application of a partner's assignee or creditor with a
charging order, the court may adjudge dissolution. Normally, the following
procedures are followed when a court decrees dissolution.
1. Accounting A suit for dissolution generally is a suit in equity for
dissolution and accounting. An accounting is necessary so that the court
can determine the credits or debits of each partner and supervise the
distribution of partnership assets.
2. Distribution Method Usually, the court orders a sale of all partnership
assets and applies the proceeds first to satisfy debts, and then to repay each
partner's capital account. Any proceeds still remaining are paid to the
partners as current earnings in proportion to each partner's share of the
profits.
a. If there are no debts, the court may distribute the partnership
assets in kind.
 b. If there are losses, each partner must contribute in proportion
to her/his share of the profits. If one partner is insolvent or
refuses to contribute, the remaining partners are liable for
her/his share. They then have a cause of action against the
noncontributing partner.

B. Continuing Business
If a partner is dissociated from a partnership without resulting in a dissolution and winding up of
the partnership business, the partnership shall cause the dissociated partner's interest in the
partnership to be purchased for a buyout price. RUPA provides for a statement of dissociation.

1. Authority Every partner has apparent authority to bind the partnership by any act for
carrying on the partnership business in the ordinary course, unless the other party knows
that the partner has no actual authority to act for the partnership or has received a
notification of the partner's lack of authority. RUPA continues that the general rule is for
two years after a partner's dissociation, subject to limitations.
2. Liability A partner's dissociation does not, of itself, discharge the partner's liability for a
partnership obligation incurred before dissociation. A dissociated partner is not liable for
a partnership obligation incurred after dissociation, except as otherwise provided. In
general, under RUPA, as a result of the adoption of the entity theory, relationships
between a partnership and its creditors are not affected by the dissociation of a partner or
by the addition of a new partner, unless otherwise agreed. RUPA provides that a
dissociated partner is not liable for the debts of the continuing business simply because of
continued use of the partnership name or the dissociated partner's name as a part of the
partnership name.
3. Continuing Liability Generally, anytime a partner dissociates from a partnership and
the same business is conducted by a newly formed partnership, creditors of the dissolved
partnership are also creditors of the partnership continuing the business. The liability of a
third person who becomes a partner in the new partnership for debts owed to creditors of
the dissolved partnership may be satisfied only out of partnership property.
4. Retiring or Deceased Partner When a partner retires or dies and the business is
continued without any settlement of accounts, the partner, her/his estate, or her/his legal
representative has the option of taking the value of the partner's partnership interest as of
the date of dissolution of either of the following.
a. Interest Any interest accruing until the date of discharge.
b. Profits Instead of interest, the profits attributable to the use of that partner's
interest in continuing the business.
5. Conversion & Mergers RUPA Article 9 rules regarding conversions and mergers are
not mandatory. Partnerships may be converted and merged in any other manner provided
by law. The effect of compliance with Article 9 is to provide a "safe harbor" assuring the
legal validity of such conversions and mergers. Under UPA, unanimous consent was
required for conversion or merger; in certain circumstances, RUPA requires less than
unanimous consent.
a. Conversion RUPA authorizes the conversion of a partnership to a limited
partnership and a limited partnership to a partnership. (RUPA limits the usual
 RUPA definition of "partnership" to general partnerships.) RUPA sets forth the
effect of a conversion; the converted partnership is for most purposes the same
entity as before the conversion.
b. Merger RUPA provides for the merger of a general partnership and one or more
general or limited partnerships and states the effect of a merger on the
partnerships that are parties to the merger and on the individual partners. The
surviving entity may be either a general or a limited partnership. RUPA provides
that the surviving entity may file a statement of merger.

C. Winding Up Business
RUPA provides that a partnership continues after dissolution only for the purpose of winding up
its business, after which it is terminated. The partners who have not dissociated wrongfully may
participate in winding up the partnership business. Even after termination, if a previously
unknown liability is asserted, all of the partners are still liable.

1. Continuation RUPA makes explicit the right of the remaining partners to continue the
business after an event of dissolution, if all of the partners [including the dissociating
partner(s)] waive the right to have the business wound up and the partnership terminated.
2. Asset Distribution RUPA changes the distribution of assets to provide that partnership
assets must be applied to discharge the obligations of partners who are creditors on parity
with other creditors. Also, RUPA's distribution does not distinguish between amounts
owed to partners for capital and for profit.
3. Filing RUPA provides that, after dissolution, any partner who has not dissociated
wrongfully may file a statement of dissolution on behalf of the partnership. After 90 days,
this notice gives constructive notice to creditors that the apparent authority of the
partnership is ended for all purposes except winding up.

D. Partners' Rights & Authority

Unless otherwise agreed, any nonbankrupt partner who has not dissociated from the partnership
wrongfully, or the legal representative of the last surviving partner, has the right to wind up the
partnership affairs. Any partner, the partner's legal representative, or the partner's assignee may
petition for a winding up by the court.

1. Accordance With Partnership Agreement As against the partner's co-partners and

persons claiming through them, each partner has the right (unless otherwise agreed) to
have the partnership property applied to discharge its liabilities and the surplus applied to
pay in cash the amount owing to the partner. An expelled partner who is discharged from
all partnership liabilities receives only the net amount due the partner from the
partnership.
2. Contravention of Partnership Agreement Partners who have not dissociated
wrongfully from the partnership have all their ordinary rights, and the right to damages
from the breaching partner or partners. If all nonbreaching partners desire to continue the
business in the same name, they may do so. They are entitled to possess the partnership
property, but must pay the value of that partner's interest to any partner who dissociated
from the partnership wrongfully.
 a. When the business is not continued, a partner who dissociated from the
partnership wrongfully has the previously discussed rights and liabilities.
b. When the business is continued by the nonbreaching partners, a partner who
dissociates from the partnership wrongfully is liable for all damages to the
partnership caused by the partner's action.
3. Fraud When a partnership contract is rescinded on the grounds of fraud or
misrepresentation, the partner(s) entitled to rescission has(have) the following rights.
a. The right to a lien on, or a right to retention of, the surplus of the
partnership to secure her/his capital investment and any advances.
b. After all liabilities to third persons have been satisfied, the right to stand in
the place of creditors for her/his payments made on partnership liabilities.
c. The right to be indemnified by the person who is guilty of the fraud or the
misrepresentation. This indemnity is good against all the debts and liabilities
of the partnership.
4. Contribution From Co-Partners After Dissociation When a partner's dissociation is
caused by the act, death, or bankruptcy of a partner, each partner is liable to her/his co-
partners as though the partnership had not been dissociated. However, the nondealing
partners are not liable to any partner who has actual knowledge of the dissociation from
the partnership before the partner acts on "behalf of the partnership."
5. Third Persons A partner has the power to bind the partnership as to third persons by
either an act appropriate for winding up partnership affairs or completing unfinished
transactions or a transaction that would bind the partnership if dissociation had not taken
place, provided the third party has no knowledge of the dissociation.
6. Acts of Partners The partnership is not bound by any partner's acts after dissociation
when either of the following apply.
a. The partnership is dissolved because it is unlawful to carry on the business,
except when the act is appropriate to wind up partnership affairs.
b. The partner is bankrupt or has no authority to wind up partnership affairs.

E. Partner's Liability
Generally, a dissociation from a partnership does not discharge the existing liability of any
partner.

1. Agreement A partner may be discharged from any existing liability upon dissociation
from the partnership by an agreement to that effect. The agreement must include as
parties the partner her/himself, the partnership creditor, and the person or partnership
continuing the business. The agreement may be inferred from the course of dealing
between the creditor having knowledge of the dissociation and the person or partnership
continuing the business.
2. Assumption Discharges Partner's Liability When a person agrees to assume the
existing obligations of a partnership from which a former partner has dissociated
her/himself, the withdrawing partner thereby is discharged from any liability to creditors
who agree to the substitution.
3. Deceased Partner's Nonpartnership Property A deceased partner's nonpartnership
property is subject to all the partnership's obligations which were incurred while s/he was
 a partner. However, the claims of a decedent's individual creditors have priority over
those of any partnership creditors as against the nonpartnership property.

F. Asset Distribution
Subject to any agreement among the partners, the following rules apply.

1. Priority The partnership's assets (which are the partnership property and the
contributions of the partners necessary for the payment of all liabilities) are applied in the
order of partnership liabilities. The liabilities of the partnership rank in order of payment
as follows.
a. Those owing to creditors including partners.
b. Those owing to partners other than for capital and profits.
c. Those owing to the partners for capital and profits.
2. Contribution The partners are liable for the amount necessary to satisfy all the claims. If
a partner is insolvent or beyond the reach of judicial process, the other partners are
responsible for her/his liabilities. Such contributing partners are liable in the proportion in
which they share in the profits.
a. An assignee for the benefit of creditors or any person appointed by the court
may enforce the contributions.
b. Any partner or the partner's legal representative may enforce the
contributions, to the extent of the amount the partner has paid in excess of
her/his share.
c. The individual property of a deceased partner is liable for contributions.
3. Sources Once the partnership property and the property of the individual partners are in
the hands of the court for distribution, the priorities are as follows.
a. Partnership creditors have priority as to partnership property.
b. Individual creditors generally have priority as to individual property, except
for a partnership bankruptcy, wherein the partnership creditors share pro
rata with partners' personal creditors.
c. The rights of secured or lien creditors are provided for as previously
discussed.
4. Partner Insolvency If a partner becomes bankrupt or if the partner's estate is insolvent,
the claims against her/his separate property rank as follows.
a. Those owing to personal creditors.
b. Those owing to partnership creditors.
c. Those owing to partners who have made advances for the benefit of the
partnership.
VI. Limited Partnerships
A. Nature
A limited partnership is a partnership formed by two or more persons having as members one or
more general partners and one or more limited partners. The purpose of a limited partnership is
to allow persons, who do not have the desire or ability to assume the responsibilities of a general
partner, to invest in a partnership business. A limited partnership can be created only by
complying with the appropriate local statute.

1. General A general partner is analogous to a partner in a general partnership. The partner

is responsible for the management and control of the partnership and is personally liable
for its debts. There must be at least one general partner in any limited partnership.
2. Limited A limited partner is one who makes a capital contribution to the partnership and
thereby obtains an interest in that partnership.
a. Services Under the ULPA, limited partners may contribute cash or property, but
not services. However, under the RULPA, limited partners are allowed to
contribute services, including future services.
b. Rights A limited partner has all the rights of a general partner except that the
partner has no right to manage or control the partnership. Nevertheless, the
partner has the right to inspect the books, demand an accounting, and have a
dissolution and winding-up decree by the court.
c. Name A limited partner's surname may not appear in the partnership name unless
there is sufficient designation attached to the partner's name to indicate that s/he is
a limited partner.
d. Liability A limited partner's liability ordinarily is limited to the amount of the
partner's contribution in the partnership unless s/he takes part in the management
of the business or violates name restrictions.
e. Under Capitalization A limited partner is liable to the partnership for any
difference between her/his contribution as actually made and that which the
partner agreed to make in the certificate. A limited partner holds, as trustee for the
partnership, property stated in the certificate as contributed by the partner, but
which in fact s/he possesses, and any money or property wrongfully paid or
conveyed to the partner on account of her/his contribution.
f. Withdrawals A limited partner may receive a share of the profits or other
compensation as stipulated in the certificate, provided, however, that after such
payment, the partnership assets are in excess of all liabilities to creditors.
g. Separate Entity A limited partner may loan money to and transact other
business with the partnership. The partner also receives payment on any resulting
claims on an equal, pro rata basis with third party creditors.
h. Liquidation Generally, a limited partner may demand or receive cash in
repayment of her/his contribution. However, the partner may not do so until all
partnership liabilities to creditors have been paid or the partnership has sufficient
assets to pay them.
 i. Interest A limited partner's interest is considered personal property and it is
freely assignable. A limited partner's rights are not assignable unless they are
assigned to a substituted limited partner. For a person to become a substituted
limited partner, all partners must be in agreement, and the certificate must be
amended to reflect the substitution of limited partners.
j. Death The death of a limited partner does not dissolve the partnership.
k. Creditor Any creditor of a limited partner may obtain, through the court, a
charge against the debtor's interest in the partnership.

B. Formation & Dissolution

In contrast to the formation of a general partnership, the formation of a limited partnership must
be in accordance with strict statutory requirements. Additionally, limited partnerships may be
formed only in those jurisdictions which have enacted enabling statutes. Some states have
adopted the Uniform Limited Partnership Act (ULPA). Others have adopted the Revised
Uniform Limited Partnership Act (RULPA) as amended in 1985. A limited partnership may be
dissolved in any of the ways discussed for general partnerships, except the death or assignment
of interest of a limited partner does not dissolve the partnership.

1. Elements The partners must execute a certificate which states the following: the name of
the partnership, the character of the business, the location of the business, the term for
which the partnership is to exist, a description of the capital, and the name and residence
of each partner or limited partner together with a list of each member's status and rights.
2. Filing The certificate must be filed with the Secretary of State, and a copy must be filed
with the clerk of the court in the county of the principal place of business. The certificate
may be amended or canceled only if the above formalities are observed. The purpose of
the certificate is to put creditors on notice of the limited liability of the limited partners.
3. Loss The certificate must comply substantially with the requirements. If a certificate
contains a false statement, anyone who suffers a loss through reliance thereon may hold
all the partners liable.

C. Revised Uniform Limited Partnership Act (RULPA)

A limited partnership is not a RUPA general partnership, but RUPA governs limited partnerships
to the extent RULPA fails to provide for a circumstance. RULPA requires a limited partnership
to name an office and agent for service of process. If not designated in the agreement, RULPA
allocates profits and losses according to capital contributions. RULPA requires foreign
partnerships to register.

1. Distribution RULPA provides for the following distribution of partnership assets.

a. First, to partnership creditors including partners (general and limited) who
are creditors, except for "unpaid distributions" to partners.
b. Second, to partners who previously have withdrawn from the partnership,
payments to these partners for "unpaid distributions" plus the return of
capital. Unpaid distributions are any distributions a partner is entitled to
upon withdrawal from the firm.
 c. Third, to partners (general and limited) to the extent of their capital
contribution and profits.
2. Services RULPA allows limited partners to contribute services, including future
services. Section 303 of RULPA provides "safe harbors" for limited partners to
participate in management, including the following.
a. Being a contractor for, or an agent or employee of, the limited partnership or
of a general partner.
b. Consulting with and advising a general partner regarding the partnership
business.
c. Acting as a surety for the limited partnership.
d. Voting on partnership matters such as dissolution and winding up the limited
partnership or the removal of a general partner.
3. Certificate RULPA requires less information in the certificate than ULPA. The names
of the limited partners are not required. New investors may be admitted as limited
partners without amending the certificate as is required under the ULPA. The certificate
need only include (a) the limited partnership's name, (b) the address of the partnership's
registered office and the name and business address of its agent for service of process, (c)
the name and business address of each general partner, (d) its mailing address, and (e) the
latest date on which the limited partnership is to dissolve.
VII. Limited Liability Companies
A. Nature
A limited liability company (LLC) is a hybrid of corporate and partnership law.

1. Members An LLC is a company formed by one or more members. Owners in LLCs

usually are referred to as members. Members are equivalent to partners in a general
partnership. That is, they manage the company unless expressly agreed otherwise.
2. Individual Owners A single individual may form an LLC.
3. Manager The members may elect what commonly is referred to as a manager to operate
the business. The manager is the equivalent of the president of a corporation. A manager
does not have to be a member in the LLC.
4. Liability Shield There are no restrictions on members of LLCs like restrictions on
limited partners. Members may be involved fully in the business and not lose the liability
shield.

B. Formation & Termination

LLCs must be created in accordance with the applicable state statute.

1. Articles of Organization The members or organizers of the LLC must file what
commonly is referred to as articles of organization. These are similar to articles of
incorporation and require the name of the company, the character of the business, the
location of the business, the term for which the company is to exist, and the name and
address of each member. The articles or certificate normally is filed with the Secretary of
State and clerk of the court in the county of the principal place of business. The articles or
certificate may be amended or canceled. The purpose of the filings is to put creditors on
notice.
2. Operating Agreement Members commonly enter into what is also known as an
operating agreement, company agreement, or regulations. This is a private contract
between the members which generally outlines how they will conduct the business and
what rights each member in the company may have in the event a member leaves the
company.
3. Dissolution Formerly, LLCs were dissolved upon the events that would traditionally
dissolve general partnerships. Now, however, the trend is to state that such events will
not dissolve the LLC. Even if there are no members, statutes provide that holders of
financial rights may elect members and continue the business of the LLC.
4. Distribution In settling accounts after dissolution, liabilities of the LLC are paid in the
following order.
a. Creditors To creditors, except claims by members on account of capital
contributions.
b. Capital To members in respect to their capital contributions.
c. Profits To members with respect to their share of undistributed profits.