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Business Associations
University of Kentucky School of Law
Campbell, Rutheford "Biff"

CAMPBELL

BUSINESS ASSOCIATIONS

FALL 2016

Partnerships

Partnership Formation

RUPA 202(a) – except as otherwise provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intended to form a partnership

Comment 1 to 202(a) – A partnership is created by the association of persons whose intent is to carry on as co-owners a business for profit, regardless of their subjective intention to be partners. Indeed, they may inadvertently create a partnership dispute their expressed subjective intent not to do so. The attribute of co-ownership distinguishes a partnership from a mere agency relationship. A business is a series of acts directed toward an end. Ownership involves the power of ultimate c m nontrol. To state that partners are co-owners of a business is to state that they each have the power of ultimate control.

Once an individual becomes a partner, he picks up the entire construct of legal rights

Profits, losses, etc AND
Subject to tort liability, subject to creditor liabilities, etc.

Unlimited liability – individual partners are liable for the partnerships’ obligations

Elements per RUPA 202(a)

Association – Did parties intend a relationship that includes essential elements of a partnership?

Must be 2+ people
Voluntariness

Must consent to be a partner, no one can force you into one
It is not the language that matters but the relationship
If all elements are present, the parties are partners even though they have not described themselves as partners or even if they have manifested an intent not to become a partnership

Business – series of acts directed towards an end

Must be engaged in a business activity
Includes every trade, occupation, or profession, but does not include investments
Criterion for decided when co-ownership becomes a business is the degree of activity carried on or contemplated

202(c)(1) – joint tenancy, tenancy in common, tenancy by the entirely, joint property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property

Purchasing land and holding it (without improvements) is not a business

Profit

Must have purpose of making a profit

Most non-profits are not partnerships, they are joint ventures

202(c)(2) – sharing gross receipts does not create a rebuttable presumption of partnership
Loss Sharing

Agreements to share losses offer very strong evidence of a partnership. RUPA treats loss sharing as a consequence of being in a partnership

Co-ownership (easiest to negate and most important part)

Must have PROFIT SHARING and CONTROL SHARING (but intensity of each varies)

Sharing of Profits

For participants in a business to be partners they must have the right to share in the profits of the business. It is not necessary that the business actually have profits
Profit sharing is not irrefutable evidence of partnership status
DOES NOT have to be equal
RUPA 202(c)(3) – a person who receives profits is presumed to be a partner unless the profits were received in payment of a debt, for services as an independent contractor or wages, of rent, of an annuity, or for the sale of the goodwill of the business

Sharing of Control

RUPA 202, Comment 1 – Ownership involves the power of ultimate control. To state that partners are co-owners…is to state that they each have the power of ultimate control
Martin v. Peyton – Peyton loaned money to the partnership. The loan contained several rights and controls. Was this enough to make them partners?

Not sufficient control to justify co-ownership
These control provisions were reasonable for the loan/investment, and it looked like a loan
A lot of negative control
In no way could they bind the partnership or initiate transactions by or on behalf of the partnership – LACK OF ULTIMATE CONTROL
Share of profits alone is not sufficient to give rise to partnership

Lupien v. Malsbenden – Plaintiff entered into an agreement with Cragin for construction of a Bradley car. Defendant told Plaintiff that it would be necessary for him to sign over ownership of his truck, which would constitute the balance under the contract. Defendant provided Plaintiff with a rental car, but Plaintiff never received and sued. Defendant claimed that his only interest in the car business was a loan he made to Cragin without interest to finance the business

The court said there was sufficient control (positive)

The loan carried no interest
He had the right to participate and did participate in the control of the business
He was a primary point of contact for Cragin

This case is a good illustration of the principle that actions of the partners is what is important here – not subjective intent

There was terminology in the loan agreement that in no way was this a partnership but all the elements were met

Operation of Partnerships

Accounting

RUPA 401(a)(1): Each partner is deemed to have an account that is credited with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, the partner contributes to the partnership and the partner’s share of partnership profits

Each partner has a capital account that is kept separate.

RUPA 401(b): Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner’s share of the profits.
Partners share equally in profits (RUPA 401(a)(1)) and losses (RUPA 401(a)(2)) à DEFAULT

Profits à Credit
Losses à Debit

Distributions are deducted from the partner’s capital account (DEFAULT à shared equally) (RUPA 401(b))
RUPA 103 tells what can be opted out of via the partnership agreement except what is in 103(b)

DEFAULT à majority vote of partners decides when distributions will be made, but this may be opted out of in the agreement

Balance Sheet

Assets = Liabilities + Owner’s Equity

Partnerships are NOT tax paying entities (they are pass through entities), but they must file an information return. The partners are taxed on their share of income (whether distributed or not). They also get their share of capital gains, other gains and losses, charitable contributions, dividends, taxes, and other items of income, gain, loss, deduction, and credit.

NOTE à NOT affected by distributions.

A partner’s proportionate share of losses (allowable to the amount of the partner’s adjusted basis) may be offset against business and individual income.
Partnerships typically distribute enough to cover tax liability at highest marginal rate.

Management

RUPA 401: Partner’s Rights and Duties (DEFAULT RULES)

401(f): Each partner has equal rights in the management and conduct of the partnership business

One partner, one vote (per capita voting) (capital contributions are irrelevant)

401(j): A difference arising a

ENT authority

Actual à is it reasonable for the partner to infer that he had the authority?
Apparent à is it reasonable for the third person to infer that the partner has the authority?

A partner with actual or apparent authority who is acting in the ordinary course of partnership business binds the partner UNLESS:

The partner lacked the authority, AND
The third person knew or had reason to know the partner lacked authority

This section allows for termination/limitation of apparent authority through knowledge or notification:

Knowledge:

May file a Statement of Partnership Authority (RUPA 303), which puts third parties on constructive notice

Notification

Comes to person’s attention or is delivered to the place of business (RUPA 102(d))

(2) An act of a partner which is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership only if the act was authorized by the other partners.

Applies only to ACTUAL authority

Apparent à Would it be reasonable for the third party to infer the partner in that business had the authority to agree to do something outside the ordinary course of business? NO

In the partnership context, the principal is a fictitious entity. Manifests intent through:

Governance mechanisms that control management:

Partnership agreement
Voting
Course of conduct

Hypos:

A, B, and C are partners in partnership X. Z is the third party. C has been X’s agent in the past.

A writes to Z before the sale, authorizing C to act as X’s agent. C as no actual authority because A is only 1/3 of partnership.
A and B tell C that he has actual authority. A write to Z to say that C has no authority. C still has actual authority because the “entity” hasn’t withdrawn authority. A only represents 1/3.
A and B tell C he has no authority. A and B tell Z that C has no authority. C has no authority.
Z receives letter from X on X letterhead, saying C has no authority. Z never reads letter.

C has no actual authority. The issue is whether manifestations from X would make it reasonable for Z to believe that C has authority. This is a reasonableness issue:

Notification would probably cover the partnership X here. The loss would need to be allocated, and Z appears more blameworthy.

Owens v. Palos Verdes Monaco

Fink, acting on behalf of MLH, enters into contract with Kajima to sell partnership land – Owen balks at the last minute
There seems to be actual and apparent authority for Fink to act when looking at the fact
Title positions can create manifestations and therefore authority à apparent and actual