The Legal Environment of Business Meiners, Roger E.

2018

Reference # 1: Partnerships

 A partnership is defined as an association of two or more persons to carry on a business for

profit.

 The partners, or more accurately, general partners, share control over the business’ operations
and profits.

 Partnership by profession (firms)

o Attorneys
o Doctors
o Accountants
o Auditors

 A partner may be a:
o Person
o Another partnership
o Corporation or some entity

 A partnership is treated as an independent legal entity. Thus, a partnership may sue or be sued
and collect judgments in its own name.

 There are many forms of partnerships, including joint ventures.

Joint venture- is defined as an association of two or more persons to carry out a single business
enterprise for profit; also, as a common undertaking in which two or more combine their
property, money, efforts, skills or knowledge.

How is partnership formed?

 A partnership may begin with an oral agreement between two or more persons to do business
as partners or begin by an implied agreement that may be inferred from the conduct of the
partners as they do business together.

Ex.) If you and your friend start selling t-shirts together on the internet, you have formed a
partnership, although you may not think about it that way.

However, if the business grows or a problem arises, it could become an issue.

 Typically, parties in partnership formalize their relationship by a written agreement that may
cover the following issues:

1. Basics – name of the business, place and date of formation, nature of business
2. Finances / resources / - kind of contributions (money, property or industry)
3. Management – roles and responsibilities

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4. Dissolution – procedures to be followed if the partnership is terminated; right of

partners to shares, etc.

 Partnerships may be informal, and some come about by oral agreement; but court prefer to
follow documentary evidence of a partnership to make sure the parties have followed the
requirements of the law.

Duty of Partners

 A partnership is a relationship based on extraordinary trust and loyalty. Partners owe a fiduciary
duty to one another.

A fiduciary relationship requires that each partner act in good faith for the benefit of the
partnership. The partners must place their personal interests beneath those of the partnership.

 It is well-settled that a partner cannot:

a) Directly or indirectly use partnership assets for his own benefit
b) Conduct business of the partnership and take any profit clandestinely for himself
c) Carry on business for his personal benefits
d) Carry on another business in rivalry or in competition of the partnership

Controls by Partners

 Unless otherwise specified in the partnership agreement, the presumption is that each partner
has an equal voice in partnership management.

 Partners are free to agree on whatever control mechanisms they wish to adopt.
 In most large partnerships, the partners often delegate most management responsibilities to
one person or group, often referred to as the “managing partners”.

 Regardless of who runs a partnership, the partners have a duty to one another to disclose all
financial aspects of the business and to be completely honest, regardless of personal
differences.

Termination of the Partnership

 A change in the relationship of the partners that shows unwillingness or inability to continue
with business may bring about termination or end of the partnership,

 By agreement, partners can allow partnership interests to be sold or assigned, usually with the
approval of existing partners.
 A complete termination comes about only after the partnership has been dissolved and its
affairs have been wound up.

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Dissolution of partnership – occurs when an event take place that precludes the partners from

engaging in any new business

Winding up of partnership – involves completing any unfinished business and then collecting and

distributing partnership assets

 Dissolution can come about in several ways:

a) Change in the composition of partners
a. Withdrawal, bankruptcy,
b. Death of a partner

LIMITED PARTNERSHIP – is a special form of a general partnership

- is a business organization made up of two or more persons who have agreed

to carry on a business for a profit

- has at least one general partner and one or more limited partners

a.) general partners in a limited partnership – are treated like partners in general partnership

- they have responsibility in managing the business and are personally

liable to the partnership’s creditor

b.) limited partners – are investors who may not participate in managing the business

- although they have the right to see the partnership books and to participate in
the dissolution of the business, limited partners are not liable for the debts or
torts of the limited partners beyond their capital contributions

- lose their limited liability and become general partners if they take an active
role in managing the business

- as long as limited partners maintain their investor position, they are not liable
for debts owed by the limited partnership

Terminating a Limited Partnership

 A limited partnership is terminated in much the same way as a general partnership.

 The business of limited partnership continues to operate while it is winding up, but it may
not enter into any new commitments.
 In the final dispersal of the assets of the limited partnership, creditors’ rights precede partners’
rights. The limited partners receive their share of the profits and their capital contributions
before general partners receive anything, unless the LP agreement holds otherwise.