Dynamic business law 4e kubasek 4e CH37

Chapter 37
Partnerships: Termination and Limited Partnerships

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Overview

• LO37-1: What are the steps in the termination of a partnership?
• LO37-2: How is a limited partnership formed?
• LO37-3: What are the rights and privileges of a limited partner and a
general partner?

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Chapter 37 Hypothetical Case 1
•

Attorneys Allison Harper, Reed Atkins, and Steven Hellman have decided to dissolve their general partnership. Each
will establish a solo practice. Harper, Atkins, and Hellman were equal partners, enjoying profits and bearing losses in
like shares.

As part of the dissolution and winding-up phase of partnership termination, the attorneys have liquidated all of the
partnership assets. Those assets total $275,000. Each partner had contributed $10,000 as a capital contribution for
the firm's start-up. During a financially difficult time of the partnership's existence, Harper had loaned the firm
$25,000 of her own money. The partnership owes its other creditors, all banks, a total of $160,000.

•

How must the partnership assets be distributed during the winding-up phase?

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Chapter 37 Hypothetical Case 2
•

Morrison, Harrison, and Willfort is a general partnership law firm located in Los Angeles, California. The partnership
was formed in 1967, the year Robbie Morrison, John Harrison, and Raymond Willfort graduated from the University
of California at Los Angeles (UCLA) School of Law.

Morrison's desk had sat empty for the past two weeks. Harrison and Willfort had no idea where he was. The day
before he left, Morrison had told his fellow partners he was tired of the practice of law and wanted to do something
else with his life. Concerned about their partner, especially since he had never disappeared like this before, Harrison
and Willfort drove to Morrison's house, where he lived with his common-law wife, Loretta Kennedy.

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Chapter 37 Hypothetical Case 2 (cont'd)
•

Kennedy answered the door. When asked of Morrison's whereabouts, Kennedy responded that she did not know
where he was. She did say that he had said something about going to the desert and had left in his 1967 Shelby
GT500 Mustang. He had not returned home in the past two weeks, nor had she seen him since he left.

Harrison and Willfort consider Morrison's disappearance strange, and given the fact that he had, by Kennedy's
account, chosen to leave, they considered his absence inexcusable. They are considering partnership dissolution.

•

Do Harrison and Willfort have the legal right to dissolve the Morrison, Harrison, and Willfort general partnership?

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Partnership Termination and Dissolution

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•

Termination

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•

Begins when partnership dissolves
Once partnership dissolved and assets liquidated and distributed ("winding-up"), partnership terminated

Dissolution

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•

Partnership cessation
Partnership dissolution can result from:

•
•
•

Partner actions
Operation of law
Court action

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The Life Cycle of a Partnership
•
•

Formation: Partnership formed either by written agreement, articles of partnership, or by estoppel

•
•

Dissolution: Partnership dissolves either by act of court, act of partners, or operation of law

•

Performance: Business conducted as partners work for benefit of partnership, in accordance with
partnership agreement
Winding-up: Partners complete unfinished partnership business, collect and pay debts, collect partnership
assets, and take inventory
Termination or continuation: Partnership terminates, or continues by creation of continuation agreement

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Events Resulting in
Partnership Dissolution

•
•
•
•
•

Fulfillment of established (agreed-upon) partnership objective
Expiration of term stated in partnership agreement
Partner withdraws from partnership at will (partnership that does not specify
objective/duration of partnership)
Partner withdraws in accordance with partnership agreement
Partner expelled from partnership in accordance with partnership agreement

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Examples of Partnership Dissolution by Operation of Law

• Partner dies
• Partner adjudicated bankrupt
• Partnership engages in illegal activity

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Examples of Partnership Dissolution By Court Action

• Partner adjudicated insane
• Impractical to continue partnership business
• Partner incapable of fulfilling his/her duties established by partnership
•

agreement
Partner disagreement as to how to conduct partnership business

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Winding-Up

• Definition: Activity of completing unfinished partnership business,

collecting and paying debts, collecting partnership assets, and taking
inventory

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Order of Distribution of Partnership Assets upon Winding Up

• Payment to partnership creditors
• Payment of refunds/loans to partners for loans made to partnership
• Payment of partners for invested capital
• Payment of profits distributed to partners per terms of partnership
agreement

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Limited Partnership

• Definition: Agreement between at least one general partner and at least
•
•

one limited partner
Allows investor (limited partner) to share in profits of partnership
Limited partner's liability limited to amount he/she invests in business

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Requirements for Limited Liability of Limited Partner

• Limited partner has complied in good faith with certificate of limited
•
•

partnership filing requirement
Limited partner does not participate in control of business
Limited partner's surname is not part of partnership name

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General Partners and
Limited Partners

•

General partner

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•
•

•

Has all rights associated with controlling business
Has unlimited personal liability for all partnership debts
Acts as agent of partnership

Limited partner

•
•
•

Has no right to participate in management and control of business
Liability limited to amount of capital partner has contributed to business
Is not an agent of the partnership

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Reasons For Dissolution of
Limited Partnership

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•
•
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Expiration of term established in certificate of limited partnership
Completion of objective established in certificate of limited partnership
Unanimous written consent of all partners (limited and general)
Withdrawal of general partner (unless certificate establishes that other general partners
will continue operation of business)
Court action

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Limited Liability Company (LLC)

• Similar to limited partnership, since each member has limited liability
•
•
•

(dependent on investment he/she makes)
Tax advantages similar to partnership (single taxation)
Created based on agreement between members
Each member can participate in management

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Chapter 37 Hypothetical Case 3
•

Harris, Pendleton, and McRae, certified public accountants, have operated their general partnership accounting firm since the
1970s. Thom Harris is 68 years old, Lee Pendleton is 66, and Roberta McRae is 65. They have operated their partnership by way of
an old-school approach, a handshake agreement, since their professional association was first formed (in spite of strong advice
from legal counsel to the contrary).

Harris has been acting rather strange in recent months. Clients and support staff have been asking questions. Six weeks ago, Harris
was discovered standing on top of his desk singing the 1970s Rick Dees tune "Disco Duck," interspersing quacking sounds
throughout his rendition of the disco classic. Harris no longer wears conservative business attire; instead, he has opted for a light
blue leisure suit with white patent leather shoes. Currently, he can be found again standing on his desk, this time offering up his
version of the 1979 Sister Sledge anthem "We Are Family."

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Chapter 37 Hypothetical Case 3 (cont'd)
•

Pendleton and McRae are in the conference room considering their options and the future of their
accounting business. They would like to terminate Harris's partnership, but they are unsure whether they
have the legal right to do so. They are also struggling with the notion of an ethical obligation to try to work
things out with Harris; after all, he has been their partner for over 30 years. Finally, they wonder whether
they could end their professional relationship with Harris, without being required to dissolve the existing
partnership and wind-up the financial affairs of the business.

•

Advise Pendleton and McRae of their legal rights, as well as their ethical responsibilities.

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Chapter 37 Hypothetical Case 4
•

Recall the Chapters 35 and 36 Hypothetical Case involving tailoring experts Frieda Oglesby, Rena Fitts, and Will Bertrand, who decided to go into
business together. Their business, FitzWellby, is one that provides in-home measuring and fittings, and even on-site stitching, for busy executives
who don't have time to take their clothing to tailor shops. The business was formed as a general partnership. Bob Strahan joined the partnership as a
fourth general partner only one day before Bertrand inadvertently left a client's home unlocked while dropping off a garment; client Veronica
Treadwell's home was subsequently robbed.

Treadwell prevails in the lawsuit she filed against FitzWellby; the three original individual partners are also deemed to be individually liable. Faced
with the financial realities of this catastrophe, Oglesby, Fitts, Bertrand, and Strahan decide to dissolve the business.

•

What would have been the outcome of the Treadwell lawsuit for Oglesby and Fitts if FitzWellby had been a limited partnership, with Bertrand as the
general partner? What will be the distribution of the assets of FitzWellby, the general partnership? How, if at all, would the distribution of assets be
different if FitzWellby had been a limited partnership? Explain your answer.

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