1. Introduction to Forms of Business and Formation of Partnerships
Operation of Partnerships and Related Forms
Partners’ Dissociation & Partnerships’ Dissolution and Winding Up
Limited Liability Companies, Limited Partnerships, and
Limited Liability Limited Partnerships
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

2. Operation of Partnerships
and Related Forms
It is not the individual but the team
that is the instrument of sustained and
enduring success in management.
Anthony Jay, quoted in
Management Teams – Why They
Succeed (R. Meredith Belbin,
1984)
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.

3. Learning Objectives
 Duties of partners to the partnership
and each other
 Compensation of partners
 Management powers of partners
 Liability for torts and crimes
 Lawsuits by and against partnerships
and partners
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4. Duties of Partners to
Partnership and Each Other
 Revised Uniform Partnership Act
(RUPA) states that partners owe
to the partnership and each other
the highest degree of loyalty and
must act consistently with the
obligation of good faith and fair
dealing (a fiduciary relationship)
 Same duty for all partnership
forms
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5. General Duties
 General duties include duties to serve,
account for use or disposal of partnership
funds, act within actual authority, avoid
interests adverse to the partnership, disclose
material information, and maintain the
confidentiality of partnership information
 “Silent” partners do not serve
 Partners may compete with the partnership
only upon the consent of partners
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6. Example
 Ann and Elkie own the Ann Elk Tavern as
general partners. Ann wants to invest in her
boyfriend Brock’s auto shop and neighbor
Carol’s Bar N’ Grill. Ann could invest in
Brock’s shop without competing with the
Ann Elk Tavern partnership, but should not
invest in Carol’s Bar N’ Grill without first
getting Elkie’s consent
 A tavern and a bar are too similar and may
give rise to a breach of duty claim
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7. Example
 Ann is general manager of Ann Elk Tavern
and Elkie handles the company’s finances
and accounting. Ann wants to help Brock
run his auto shop instead of working for Ann
Elk Tavern. While reviewing the books, Ann
discovered Elkie used company funds for a
down payment on her car. Ann also found
out that Elkie hired two waiters yesterday.
 What issues are raised by this scenario?
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8. Duty of Care
 Each partner owes a duty of care in doing
partnership business
 A partner isn’t liable to the partnership for
honest errors in judgment (negligence), but is
liable for losses resulting from gross
negligence, reckless conduct, intentional
misconduct, or a knowing violation of law
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9. Duty of Care
 A partner must make business decisions
that s/he has a reasonable belief are in the
best interests of the partnership
 A partnership agreement may alter the duty
of care, but may not eliminate the duty
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10. Spector v. Konover
 Partners agreed to build shopping plazas
under a particular entity
 No written agreement
 Managing partner Konover diverted partnership
funds to other entities and commingled funds
 Appellate court found Konover liable for
breach of fiduciary duty by misusing
partnership funds, self-dealing, and failing
to disclose material information
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11. Compensation of Partners
 RUPA states that a partner is not entitled to
salary or wages, even if disproportionate
time spent conducting partnership business
 A monthly draw is allowable
 Instead, partner compensation is a share of
business profits, offset by shared losses
 Shared equally unless agreement to the contrary
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12. Management Powers
 Every partner in a partnership or LLP is a
general manager of the business
 Thus, by implied authority, a partner binds the
partnership and partners for acts within the
ordinary course of business
 Agreement among partners may expand,
restrict, or eliminate a partner’s implied
authority
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13. Management Powers
 A partner’s implied authority may not
contradict a partner’s express authority
created by agreement of the partners
 A partner’s express and implied authority
together constitute actual authority
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14. Restricting Implied Authority
 When a partner’s implied authority is
restricted or eliminated, the partnership risks
the possibility that apparent authority to do
a denied act will remain
 Partners may give notice of a partner’s
authority or limitation of authority by filing
a Statement of Partnership Authority or
Statement of Denial with the secretary of state
or the real estate recording office
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15. Power to Convey Real Property
 An individual partner’s transfer of real
property owned by a partnership will bind
the partnership if expressly, impliedly, or
apparently authorized, or ratified by the
partnership
 A partner has implied and apparent
authority to sell real property if the
partnership sells real property in the usual
course of the partnership business
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16. Borrowing Money
 A partner may not borrow money in the
partnership’s name without express,
implied, or apparent authority
 A partner in a trading partnership (with
inventory) has implied and apparent
authority to borrow money for partnership
 A partner of a nontrading partnership
(services) has no implied or apparent
authority to borrow money
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17. Negotiable Instruments
 A partner with authority to borrow money
has authority to issue negotiable instruments
(e.g., promissory notes) for that purpose
 If a partner’s name is on a checking account
signature card filed with a bank, the partner
has express authority to draw checks
 Partners have authority to negotiate or
transfer instruments (e.g., checks) for the
partnership
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18. Management Decisions
 In general, management decisions in the
ordinary course of partnership business are
by majority rule, one vote per partner
 Unless otherwise expressed by agreement
 Some decisions not in the ordinary course of
business require unanimous consent
 Example: a decision to expand or bring in
another partner
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19. The Partnership Agreement
 Partners may modify management rules by
their unanimous agreement: limiting or
expanding authority, delegating powers, or
creating classes of partners with special or
weighted voting rights
 NBN Broadcasting, Inc. v. Sheridan Broadcasting N
: a lesson in the necessity of careful
drafting of an agreement
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20. Liability for Torts & Crimes
 Agency law respondeat superior
doctrine is applied to determine the
liability of the partnership and
other partners for torts of a partner
and partnership employees
 Partnership and partners are liable
jointly and severally for torts of a
partner committed within ordinary
course of partnership business
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21. General Partnership as Entity
 Under RUPA, a partnership may sue or be
sued in its own name
 Partners also may be sued since they are
jointly and severally liable for partnership
obligations (contract or tort)
 If partnership and individual partners sued,
any judgment must first be satisfied from
partnership assets, then from personal assets
of the partners sued
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22. General Partnership
Liability for Torts & Crimes
 A partnership and partners are liable:
 When a partner commits a breach of trust
 For a partner’s negligence (generally)
 Generally not for a partner’s intentional torts
 When a partnership and partners are held
liable for a partner’s tort, they may recover
the amount of their vicarious liability from
the wrongdoing partner.
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23. The LLP & Tort Liability
 The limited liability partnership (LLP) was
created to reduce personal liability of
professional partners
 An innocent partner of an LLP has no
liability for malpractice of partners
 LLP partners also have no personal liability
for debts of the business, such as an invoice,
leases, or loans
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24. LLP as Entity
 For contract obligations, only LLP is liable
 For tort obligations, LLP is liable as well as
the partner who committed the tort
 Innocent LLP partners bear no liability
 However, in Moren v. JAX Restaurant, the
court found a partnership liable to a
partner’s child who was injured as a result
of the parent-partner’s negligence
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25. Test Your Knowledge
 True=A, False = B
 Partners owe to the partnership and each
other an ordinary degree of loyalty
 Partners may compete with the partnership
as long as it does not harm the partnership.
 A partner is liable to the partnership for
losses resulting from gross negligence or
reckless conduct.
 A partnership may sue in its own name.
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26. Test Your Knowledge
 True=A, False = B
 In general, management decisions in a
partnership are decided by majority rule.
 A general partnership is liable for a partner’s
negligence.
 For contract obligations of an LLP, only the
partners are liable.
 A partner with authority to borrow money
has authority to issue negotiable instruments.
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27. Test Your Knowledge
 Multiple Choice
 Two accountants formed Caine & Able, LLP.
The partnership and each partner was sued
for Able’s alleged negligence. Who might be
liable?
(a) Only Able due to his negligence
(b) Only the partnership, Caine & Able
(c) The partnership and Able
(d) The partnership and either partner, jointly
or severally
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28. Test Your Knowledge
 Multiple Choice
 A partner in a trading partnership has
what type(s) of authority for borrowing
money?
(a) Express authority
(b) Implied and apparent authority
(c) Actual authority
(d) Implied authority
(e) All of the above
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29. Thought Questions
 Do you think the
result in the
Moren v. JAX
Restaurant case
was correct?
Would you have
handled things
differently?
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