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General Partnerships Contrasted with Corporations
- 1. Governance
- Partners have equal rights to manage business. Shareholders have no right to manage the corporation; management is centralized by statute in a Board of Directors.
- 2. Agency Authority Partners have apparent authority to contract for the business. Shareholders don't have apparent authority.
- 3. Profit Distribution
- Partnership profits are shared per capita and no partner entitled to a salary. Corporate distributions are shared in proportion to stock ownership.
- 4. Taxation of Profit Distribution and Deductibility of Losses
- Partners pay taxes on their share of the profits and take the tax deduction on their share of the loses (no double taxation). Corporations pay taxes on the profits and takes the deductible losses; if dividends are declared, shareholders pay tax on the distribution (double taxation).
- 5. Transferability of Ownership (Equity) Interest in Partnership
- No single partner can transfer any portion of his ownership interest to a non-partner without unanimous consent of all partners. Shares of stock, and the ownership rights conferred, are freely transferable.
- 6. Length of Existence and Ease or Difficulty of Dissolution
- Partnerships are generally created for a limited term and dissolution is easy. Corporations are generally created for a perpetual term and dissolution is relatively difficult (majority or 2/3 of the outstanding shares to vote for it).
- 7. Fiduciary Duties
- Partners stand in a fiduciary relationship to each other. Shareholders don't owe eac other a fiduciary duty.
- 8. Personal Liability
- Partners have personal liability. Shareholders don't have personal liability.
- 9. Organizing DocumentsPartnerships do not require articles of incorporation. Corporations must file organizing docs (articles of incorporation) to exist.
Organizational Features Usually Desired by Owners of Small Start-Up Businesses
1) Management Rights in the Owners in Their Capacity as Owners
2) Limited Liability of the Owners
3) Taxation Like a General Partnership (owners pay the taxes and get the deductions)
4) Easy dissolution (relative ease to owners in getting their portion of the net worth of the business at retirement or partner's death)
5) Ability of Individual Owners to Prevent OUtsiders from Becoming New Owners in the Business Without Their Consent
7 Most Common Form of Business Organizations
1) Sole Proprietorship
2) General Partnership
4) Limited Partnership
5) Limited Liability Limited Partnership
6) Limited Liability Company
7) Limited Liability Partnership
The recurring question in the study of the law of agency is under what circumstances a principal can be held liable in tort or contact for the actions of the agent
Requirements for an Agency Relationship to Exist
The principal must:
1) Consent to the relationship with the agent.
2) Expect to receive some benefit from the services provided by the agent; and
3) Control (or have the right to control) the manner and method in which the agent performs his work on behalf of the principal.
What are the usual fiduciary relations?
Trustees owe a fiduciary duty to the trust's beneficiaries.
Guardians owe a fiduciary duty to the wards they represent.
Agents owe a fiduciary duty to the principal for whom they act.
Attorneys owe their client's a fiduciary duty
Executors named in wills of a deceased person owe a fiduciary duty to the legatees named in a will.
Administrators of the estates of persons who die intestate owe a fiduciary duty to the next of kin of the deceased.
The directors and officers of a corporation owe a fiduciary duty to the corporation and to some extent the corporation's shareholders.
Anyone who has manifested consent to act in a fiduciary relation on behalf of another and subject to his control
A person who has authorized another to act on his accout and subject to his/her control
A master is a principal who employs an agent to perform service in his/her affairs and who controls or has the right to control the physical conduct of the other in the performance of the service.
A servant is an agent employed by a master to perform service in his affairs whose physical conduct in the performance of the service is controlled or subject to the right to control by the master.
An independent contractor is a person who contracts with another to do something for him but who is not controlled by the other nor subject to the other's right to control with respect to his physical conduct in the performance of the undertaking.
Express actual authority is that authority, whether written or oral, from the principal to the agent. Generally, the grant of authority need not be in writing.
Implied authority is a form of actual authority. It refers to that authority which the agent reasonably believes he has based upon the actual authority. Such authority arises if incidental to express actual authority, it is the custom or usage in a business, emergency situations, and by acquiescence.
Arises from a principal's representation to a 3rd person that an agent has authority to act on his behalf. This representation may be active or passive.
Arises even though there is no express or apparent authority because in balancing the equities between the principal and the 3rd party.
One of the means by which parties create an agency relationship.
In this situation, even though the agent had no prior authority to act, the principal will be liable because he has subsequently affirmed the agent's unauthorized act, either expressly or impliedly.
UPA & RUPA
- UPA: Uniform Partnership Act
- Establishes certain basic principles of law that operate regardless of agreement among the partners (mandatory rules). §§ 11-15
Establishes certain principles that are subject to change by agreement among the partners (default rules). § 18
Still used in about a third of the states.
- RUPA: Revised Uniform Partnership Act
- Same definition of a partnership from UPA. § 202
All rules are declared default in nature in § 103(a) except a list of 10 set forth in §103(b).
Replaced UPA in most states.
UPA and Corresponding RUPA Provisions
UPA §18(a): Profits and losses divided equally in the absence of an agreement to the contrary. RUPA §401(b)
UPA §18((b): Expenses incurred individually by partners in the partnership shall be reimbursed in the absence of an agreement to the contrary. RUPA § 401(d)
Issue: Whether expenditures of a partner are reimbursable expenses or disguised as salaries.
UPA § 18(c): A partner who contributes capital beyond the amount he/she agreed to contribute shall be paid interest from the date of such payment or advance. RUPA §§ 401(d) and 401(e) (same payment is a loan to the partnership which accrues interest from the date of payment or advance)
UPA 18(d): A partner shall receive interest on the capital contributed by him only from the date when repayment should have been made. RUPA § 401(e)
UPA 18(e): Partners have an equal right in management in the absence of an agreement to the contrary. RUPA § 401(f)
UPA 18(f): No partner entitled to remuneration for acting in the partnership except the surviving partner entitled to remuneration for winding up the partnership. RUPA § 401(h)
UPA 18(g): No person can become a member of the partnership without unanimous consent of all the partners in the absence of an agreement to the contrary. RUPA § 401(i)
UPA 18(h): Majority rules controls in the absence of an agreement to the contrary. RUPA § 401(j)
UPA 19: Partners have right of access to partnership books and may inspect and copy them for a proper purpose. RUPA 403
UPA 20: Duty of partners to render information. RUPA 403
UPA § 40(b)/RUPA § 807
Priorities of Assets of a Partnership
1) Outside creditors
2) Partners for obligations owed other than for capital and profits
3) Partner recovers capital
4) Partner gets his/her share of the profits
Effect of a Partnership Agreement v. Nonwaivable Statutory Provisions under RUPA §103
RUPA §103 essentially provides that, except as otherwise provided in §103(b), relations among the partners and between the partners and the partnership are governed by the partnership agreement.
Things that cannot be waived under the partnership agreement according to RUPA §103(b)
1) Rights and duties under §105 (execution, filing, and recording of statements) except to eliminate the duty to provide copies of statements to all partners.
2) Cannot unreasonably restrict the right of access to books and records under §403(b).
3) Can't eliminate the duty of loyalty under §401(b) or 603(b), but may identify categories of activities that don't violate the duty of loyalty if not MANIFESTLY UNREASONABLE; and may allow all or a percentage of the partners, as specified in the partnership agreement,, to ratify a specific transaction that otherwise would violate the duty of loyalty but only after full disclosure of all material facts.
4) Can't unreasonably reduce the duty of care under §404(c) and or 603(b)(3).
5) Can't eliminate the obligation of good faith and fair dealing, but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable.
6) Can't vary the power of a partner to dissociate as a partner, except to require the notice to be in writing.
7) Can't vary the right of a court to expel a partner in the events listed in §601(5).
8) Can't vary the requirement to wind up the partnership in cases specified in §801(4), (5), or (6).
9) Can't restrict rights of 3rd parties under RUPA.