The Law of Corporations and Other Business Organizations

Lecture Notes

An Introduction to General Partnerships

1. A partnership is an “association of two or
more persons to carry on as co-owners of a
business for profit.”
2. All partners of a general partnership are
considered general partners. Limited partnerships
consist of general partners and
limited partners.
3. General partners have personal liability for
the debts and obligations of the partnership.
4. The partnership may be viewed as both a
separate entity and as an aggregate of its
partners. States that have adopted the UPA
1997 treat the partnership as a separate entity
for most purposes.
5. Statutes of most states provide that partnerships
may file a special election to be treated
as a limited liability partnership (LLP).
Limited liability partnerships are discussed
in Chapter 5.
6. There are fewer partnerships in the United
States than either sole proprietorships or
corporations, and their income per year is
less than that of either sole proprietorships
or corporations.
7. The UPA 1914 was originally approved
in nearly every state in the country. Most
states have now adopted the UPA 1997
with limited liability partnership
provisions.
8. Partnerships are also governed by common
law and the partnership agreement. As long
as the provisions of the partnership agreement
do not conflict with the law, the partnership
agreement governs the partnership.
The Relationship between Partners and
Others
9. Partners are considered agents of the partnership
and other partners.
10. With few exceptions, each partner may act
on behalf of the partnership and has actual
authority to bind the partnership to contractual
relationships with third parties.
11. An act of any one partner is binding on the
partnership as long as the partner’s act is
apparently undertaken for the purpose of
carrying on the ordinary course of the partnership
business.
12. A partner’s act may bind the partnership
even if the partner is not acting in good
faith.
13. Certain acts require unanimous consent of
the partners. These acts may be specified
by state statute or the partnership
agreement.
14. Under the UPA 1914, the following acts
require unanimous consent of the partners:
• Acts undertaken with a third party who
has knowledge that the act is not authorized
• Acts not apparently undertaken for carrying
on the business of the partnership
• The assignment of partnership property
in trust for creditors
• Acts to dispose of the goodwill of the
business
• Acts that make it impossible to carry on
the business of the partnership
• The confession of a judgment on behalf
of the partnership
• The submission of a partnership claim
or liability to arbitration or reference
• The admission of new partners to the
partnership
15. The UPA 1997, which relies more on provisions
in the partnership agreement than
the UPA 1914, provides that the following
actions must have the unanimous consent
of partners:
• Acts undertaken with a third party who
has knowledge or has received notification
that the act is not authorized
• Acts not apparently undertaken for the
purpose of carrying on the ordinary
course of the partnership business
• Amending the partnership agreement
(unless otherwise specified in the partnership
agreement)
• Adopting limited liability partnership
status (unless otherwise specified in the
partnership agreement)
16. In states that follow the UPA 1997 in this
regard, the partnership may file a statement
of authority with the secretary of state or
other appropriate state official to give public
notice of the authority granted or denied
certain partners. Persons transacting business
with the partnership are not necessarily
deemed to know of a limitation of authority
because the limitation is contained
in the filed statement.
17. A statement of denial may be filed to revoke
authority granted in a previously filed
statement of authority.
18. The full extent of the personal liability of
partners may vary depending on state statute
and the partnership agreement. Generally,
partners have joint and several liability
for all debts and obligations of the partnership,
and creditors may look to the personal
property of the individual partners to satisfy
the partnership’s obligations.
The Relationship among Partners and between
Partners and the Partnership
19. When a partnership enters into an agreement
with a third party, the agreement often
includes provisions specifying the
limitations of each partner to act on behalf
of the partnership. Actions taken outside
of that authority will not be binding
on the partnership.
20. Under the UPA 1914, partnership property
is held in a tenancy in partnership. When
property is held in a tenancy in partnership,
each partner has an equal right to possess
specific partnership property for partnership
purposes, but has no right to possess
such property for any other purpose without
consent of the other partners.
21. With regard to partnership property, the
UPA 1997 treats the partnership as a separate
entity. Partnership property is owned
by the partnership. The individual partners
own the right to receive income or profits
from the partnership property. A partner’s
right to receive income or profits from the
partnership property can be transferred. A
partner’s right in specific partnership property
is generally not assignable.
22. State statutes and partnership agreements
generally grant each partner the right to
have a separate account that reflects their
contributions, share of the gains, and share
of the losses in the partnership assets.
23. Partners are granted by statute the right to
an equal share of the partnership profits unless
that right is amended by the partnership
agreement. Partners are also responsible for
a proportionate share of the partnership’s
losses.
24. Unless otherwise specified in the partnership
agreement, partners have the right to
be repaid contributions and to share equally
in the surplus remaining after partnership
liabilities are satisfied.
25. Partners have the right to reimbursement
for certain money they spend on behalf of
the partnership.
26. Unless otherwise specified in the partnership
agreement, each partner has the right
to share equally in the management and
conduct of the partnership business. The
partnership agreement may provide for a
managing partner or committee to oversee
the management of the partnership.
27. Partners are granted, by statute, access to
the books and records of the partnership.
28. Partners are entitled to reasonable compensation
for their services in winding up the
affairs of the partnership.
29. State statutes and the partnership agreement
may provide that each partner has a
right to have his or her partnership interest
purchased by the remaining partners after a
permissible dissociation from the partnership.
30. State statutes and most partnership agreements
generally provide that partners owe
each other and the partnership the following
duties:
• The duty to contribute toward losses
sustained by the partnership according
to each partner’s share in the profits,
unless the partnership agreement provides
otherwise
• The duty to work for the partnership
without pay, unless such remuneration
is provided for in the partnership
agreement
• The duty to submit to a vote of the majority
of the partners when differences
arise among the partners
• The duty to provide information to the
other partners concerning the partnership
31. Partners owe a fiduciary duty to each other.
The UPA 1997 specifically states that the
fiduciary duty partners owe each other includes
the duty of loyalty and the duty of
care (as defined in the UPA 1997).

Advantages of Doing Business as a Partnership
32. Some of the possible advantages of doing
business as a partnership compared to other
types of business organization include the
following:
• Partners have flexibility in managing
the partnership, including the ability of
all partners to participate in the management.
• Partnerships are subject to fewer formalities
and regulatory and reporting
requirements than corporations, especially
publicly held corporations.
• The cost of organization of the partnership
is relatively low compared to other
types of business organizations. Generally,
partnership documents are not required
to be filed at the state level, so
no filing fees are assessed.
• The flow-through income taxation of
the partnership is probably the biggest
advantage the partnership offers over
most other types of business organizations.
• Compared with sole proprietorships,
partnerships generally have diversified
capital resources because more than
one owner is involved.

Disadvantages of Doing Business as a
Partnership
33. Some of the possible disadvantages of doing
business as a partnership, rather than as
another type of business organization, include
the following:
• Partners are generally personally liable
for the debts and obligations of the
partnership.
• Compared to corporations, partnerships
have a very loosely structured management
under state statutes. Unless the
partnership agreement is worded very
carefully, it can be difficult for the
partnership to take action in the event
of disputes among the partners.
• Compared to corporations, which have
stock that may be freely transferred,
partnerships present a lack of business
continuity and difficulty in transferring
partnership interests.
• Compared to corporations that may
raise capital by selling stock on the
open market, partnerships have a limited
ability to raise capital to run the
partnership business.
• Compared to sole proprietors, partners
may incur significant expenses in organizing
their businesses due mainly to
legal fees to draft partnership agreements.

Management and Control of a General Partnership
34. Unless otherwise specified in the partnership
agreement, all partners have an equal
right to manage the partnership business.
35. The partnership may be managed by a designated
managing partner or by a management
committee.
36. In the event of a dispute, decisions are
made by a majority of the partners, unless
some other method of resolving the dispute
is agreed on.

The General Partnership Agreement
37. A partnership may be formed by an oral
agreement as long as all the elements of a
partnership are present. A written partnership
agreement is generally recommended
for all partnerships.
38. The partnership agreement is entered into
by all partners.
Financial Structure of a General Partnership
39. The partnership capital consists of all assets
of the partnership, including the contributions
of the partners and the undistributed
income earned by the partnership.
40. Unless otherwise provided for in the partnership
agreement, partners share equally
the profits and losses of the partnership.
The partnership agreement may provide a
different formula for sharing the profits and
losses based on (1) the amount of the initial
capital contributions, (2) additional capital
contributions, or (3) services rendered on
behalf of the partnership by the individual
partners.

Dissociation, Dissolution, Winding Up, and
Termination of the General Partnership
41. Under the UPA 1914, whenever one partner
quits the partnership for any reason, the
partnership is dissolved. Under the UPA
1997, one or more partners may be dissociated
from a partnership without causing its
dissolution.
42. A partner’s dissociation can be caused by
agreement, by statute, or wrongfully.
43. Partners who dissociate from the partnership
contrary to provisions of the partnership
agreement and/or state statute cause a
wrongful dissociation and may be liable to
the partnership and other partners for damages
caused by the wrongful dissociation.
44. In most instances, when the dissociation is
not wrongful, the dissociating partner has
the right to have his or her interest in the
partnership purchased for a buyout price set
forth in the partnership agreement or by
statute.
45. Under the UPA 1914, the following acts
cause a partnership dissolution:
• Expiration of the term or completion of
a particular undertaking specified in the
partnership agreement
• The express will of any partner when
no definite term or particular undertaking
is specified
• The express will of all the partners who
have not assigned their interests in the
partnership
• The expulsion of any partner from the
business pursuant to the partnership
agreement
• The express will of any partner at any
time, if contrary to the agreement, but
circumstances do not permit a dissolution
under any other statutory provision
• Any event that makes it unlawful for
the business of the partnership to be
carried on
• The death of a partner
• The bankruptcy of any partner or the
partnership
• The order of a court
46. Only the following events cause a partnership
to dissolve under the UPA 1997:
• Notice given by a partner to the partnership
of that partner’s express will to
withdraw (in a partnership at will)
• In a partnership for a definite term or
particular undertaking, when (1) a 90-
day period expires after a partner’s dissociation
by death or otherwise or
through wrongful dissociation, unless a
majority of the remaining partners
agree to continue the partnership; (2)
the express will of all of the partners to
wind up the partnership business; (3)
the expiration of the term or the completion
of the undertaking
• An event set forth in the partnership
agreement resulting in the winding up
of the partnership business
• An event that makes it unlawful for the
partnership business to be continued
• A judicial determination to dissolve the
partnership
47. Upon dissolution of the partnership, the
partnership relation terminates and the
winding-up process begins.
48. Guidelines for distributing the assets of the
partnership on dissolution are usually set
forth in the partnership agreement. These
guidelines must not violate the statutes of
the partnership’s state of domicile with regard
to partnership distributions.
49. The debts and obligations of the partnership
owing to third parties must be paid in
full before distributions may be made to the
partners in respect of profits.
50. The partners must contribute to the assets
of a dissolving partnership to the extent
necessary to meet the financial obligations
of the partnership.
51. In states that follow the UPA 1914, all
nonpartner creditors must be paid before
partner-creditors may be paid.
52. In states that follow the UPA 1997, the assets
of the partnership must first be applied
to discharge the partnership obligations to
creditors, including partners who are creditors.
53. If any, but not all, of the partners are insolvent
or unable to pay their share of the
partnership’s liabilities, that partner’s share
must be paid by the remaining partners.
54. Any partner who is required to pay in excess
of his or her fair share to settle the affairs
of the partnership has the right to enforce
contribution of other partners pursuant
to statute and the partnership agreement.
Other Types of Partnerships
55. Joint ventures are very similar, but not
identical, to partnerships. Joint ventures are
usually formed for a single transaction or
an isolated enterprise, rather than for an
ongoing concern.

The Paralegal’s Role
56. Paralegals who assist attorneys representing
partnerships often assist by researching
state partnership law and drafting the partnership
agreement. They may also assist
with filing documents such as a statement
of authority and with adopting an assumed
name on behalf of the partnership.
57. The resources most often used by paralegals
when assisting with partnership matters
include state statutes, legal form books,
and information available from the secretary
of state’s office and the offices of other
appropriate state agencies.

CASE BRIEFS
Cleland v. Thirion, 268 A.D. 842 (704 N.Y.S. 2d 316)
Purpose: This case is an example of how a court
may view the elements of a partnership discussed
in the text when determining whether a
partnership does, in fact, exist.
Cause of Action: Breach of agreement
Facts: In this case, heard in 2000, the plaintiff
Jennifer Cleland (“Cleland”) brought suit against
her former lover, Christian Thirion (“Thirion”).
Cleland and Thirion lived together at Cleland’s
residence for approximately three years. When
they moved in together, Thirion was already established
as an artisan glassblower, doing business
under the trade name of “Glassart,” and he
had recently purchased a building that he intended
to convert into a studio and personal living
quarters. Cleland assisted Thirion with his business
in various ways when they lived together.
In 1994, after the parties had been together
for about a year, they executed a onepage
document intended to establish the parties’
financial and personal relationship. Cleland initially
brought this suit in 1997, seeking a declaration
that the agreement constituted a partnership
agreement for “ownership and operation”
of the Glassart business; seeking damages for
breach of the agreement and an accounting of
the profits, losses, and assets of Glassart; and
imposing a constructive trust upon the assets of
Glassart. The New York Supreme Court found
that the parties never entered into a partnership
and that it was unenforceable due to the absence
of any material terms. Cleland appealed.
Issue: Did the agreement between the parties
form a partnership to own and operate the
Glassart business?
Holding: The Court of Appeals upheld the lower
court’s decision in favor of the defendant, indicating
that there was no partnership agreement
between the parties.
Reasoning: In determining whether a partnership
existed, the court considered the following
elements of a partnership:
1. The intent of the parties (express or implied)
2. Joint control and management of the
business
3. Sharing of the profits and losses
4. A combination of property, skill, or
knowledge
The court found that there was no evidence
that any of those factors existed. Some of
the reasons given included the following:
• The studio property was owned solely by
Thirion.
• The plaintiff’s name was never placed on a
certificate of doing business as partners indicating
joint control and management of
the business. This would indicate that a
partnership was not the intent of the parties.
• No partnership tax returns were ever filed
evidencing a sharing of profits and losses.
• Although the plaintiff contributed some financial
support to the business, her support
was characterized by both parties as a loan,
further indicating there was no sharing of
the profits and losses.
• Plaintiff contributed some services to the
business, but then sought compensation in
the form of wages, portraying herself as an
employee rather than a partner.