Chapter 36: Partnerships

Business Law, Sixth Edition
© 2019 BVT Publishing. All rights reserved.
S-1
Chapter 36:
Partnerships

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Learning Objectives
• Explain when partnership exists.
• Discuss provisions of partnership agreement.
• Understand rights of partners.
• Describe powers and duties of partners.
• Explain methods of dissolving a partnership.
• Discern the effects of dissolution on partners.
• Understand the distribution of property after
dissolution.

S-3
36.0 In the News
6 Things to Consider Before Partnering
Up: http://bvtlab.com/7r9P2
These entrepreneurs, and members of The
Oracles, share their hard-won wisdom about
what to watch out for before joining forces with
a business partner.
• Discuss the definition and requirements of a
partnership.
• What would you look for in a business partner?

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36.1a Introduction
Intention to create a partnership may be
expressed or implied.
Three requirements of partnership:
– Two or more parties involved
– Common interest to conduct business
activities
– Understanding to share profits and losses

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36.1a Critical Thinking
CASE: Blumberg
The court examines whether the conduct and
intent of the parties, acting together to carry on a
business for profit as co-owners, creates an
implied partnership, despite the absence of an
express partnership agreement.
• What conduct by each party indicates a partnership
should be implied?
• What factors did the court find determinative that a
partnership existed?

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36.2 The Partnership Agreement(Slide 1 of 2)
• Names of the partners and of the
partnership
• Purpose and duration of the
partnership
• Capital contributions of each partner
• Method of sharing profits and losses

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36.2 The Partnership Agreement(Slide 2 of 2)
• Effect of advances, the salaries (if any)
to be paid the partners
• Method of accounting and the fiscal year
• Rights and liabilities of the parties upon
the death or withdrawal of a partner
• Procedures to be followed upon
dissolution

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36.3 The Rights of Partners (Slide 1 of 2)
• To Participate in Management
– All partners have equal rights in
management.
• To Be Compensated for Services
– No partner is entitled to payment unless in
agreement.
• To Interest on Loan to the Partnership
– Interest to be paid only on advances above
original contribution.

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36.3 The Rights of Partners (Slide 2 of 2)
• To Information and Inspection of Books
• To an Accounting
• To Partnership Property
- Equal right to possess partnership
property for partnership purpose
• To Interest in the Partnership
• Right to share in the profits earned
• Right to receive distributions upon
dissolution and liquidation

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36.4a Duties
A partnership is a fiduciary relationship.
• Duty of care
• Duty of loyalty
- Each partner owes the duty of undivided
loyalty to the other.

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36.4b Power to Contract
Each partner has authority to bind the
partnership with contractual liability.
• Implied powers
– To compromise, adjust, and settle claims/debts
– To sell goods in the regular course of business
– To buy property within scope of the business
– To buy insurance
– To hire employees
– To enter into contracts within scope of the firm
– To receive notices

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36.4c Power to Impose Tort Liability
• A partner has the power to impose tort
liability on the partnership through the
doctrine of respondeat superior.
• Each partner is liable for the torts of
fellow partners.
• Firm may have the right to collect its
losses from the partner at fault.

S-13
36.4c Critical Thinking
CASE: Moren
A partner’s son was injured as a result of the
partner working at the business. Questions whether
the partnership owes indemnity to the partner for
the partner’s negligence.
• Why did the partnership owe indemnity to the
negligent partner?
• Is this a fair result to other partners? To the negligent
partner? To the injured plaintiff?
Why or why not?

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36.4d Powers over Property
• Each partner has implied authority to
sell personal property.
• Under the RUPA, title to real property
may be taken in the firm name as a
tenancy in partnership.

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36.4e Financial Powers
• A trading partnership
– Primary purpose is buying and selling of
merchandise.
– Each partner has an implied power to borrow
money and extend credit.
• A non-trading partnership
– Primary purpose is production of
commodities or selling services.
– Partner does not have implied power to
borrow money.

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36.5 Methods of Dissolution
• By Acts of Partners
• By Operation of Law
• By Court Decree

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36.5a Terminology of Dissolution
Three steps necessary to end a partnership:
• Dissolution
– Legal destruction of the partnership relation
• Winding up
– Process of reducing the assets to cash
– Paying off the creditors
– Distributing the balance to the partners
• Termination
– Winding up or liquidation is completed
– End of the organization and its business

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36.6 The Effect of Dissolution
On Powers of Partners
• Terminates the actual authority of the partners
On Rights of Partners
• Right to receive value of interest in partnership
On New Partners
• Liable only to the extent of capital contribution
and obligations incurred after admission
On Third Parties
• Entitled to actual notice of the dissolution

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36.6c Critical Thinking (Slide 1 of 2)
CASE: Moseley
A partnership note was executed by a partnership.
Thereafter, a new partner came into the partnership,
and the original note was then renewed. The
question is whether the new partner is liable for the
renewed note.
• When did Southern Distilleries originally borrow
money from the Commercial State Bank?

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36.6c Critical Thinking (Slide 2 of 2)
• When did Moseley become a partner in
Southern Distilleries? What was the amount
of his capital contribution?
• When did Southern Distilleries “pay off the
original loan” and obtain a new loan with
Commercial State Bank?
• What was the extent of Moseley’s increased
liability as a result of obtaining the new
loans?

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36.7 Distributions on Termination
(Slide 1 of 2)
Solvent Partnerships
• All firm creditors to be paid before the
partners
• Assets are distributed as follows:
- Loans from partners reimbursed first
- Then return of capital
- Then distribution of excess

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36.7 Distributions on Termination
(Slide 2 of 2)
Insolvent Partnerships
• Assets are distributed in accordance with a
rule known as marshaling of assets.
• A principle in equity for a fair distribution of a
debtor’s assets among creditors.

Chapter 36: Partnerships

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