Partnerships: Termination and Limited Partnerships

Chapter 37 Partnerships: Termination and Limited PartnershipsCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.37-2Exhibit 37-1: The Life Cycle of a PartnershipFormation--Partnership formed either by written agreement, articles of partnership, or by estoppelPerformance—Business conducted as partners work for benefit of partnership, in accordance with partnership agreementDissolution—Partnership dissolves either by act of court, act of partners, or operation of lawWinding Up—Partners complete unfinished partnership business, collect and pay debts, collect partnership assets, and take inventoryTermination or Continuation—Partnership terminates, or continues by creation of continuation agreement37-3Partnership TerminationBegins when partnership dissolvesOnce partnership dissolved and assets liquidated and distributed (“winding up”), partnership terminated37-4Partnership DissolutionDefinition: Partnership cessationPartnership dissolution can result from:Partner actionsOperation of lawCourt action37-5Events Resulting in Partnership DissolutionFulfillment of established (agreed-upon) partnership objectiveExpiration of term stated in partnership agreementPartner withdraws from “partnership at will” (partnership that does not specify objective/duration of partnership)Partner withdraws in accordance with partnership agreementPartner expelled from partnership in accordance with partnership agreement37-6Examples of Partnership Dissolution By “Operation of Law”Partner diesPartner adjudicated bankruptPartnership engages in illegal activity37-7Examples of Partnership Dissolution By “Court Action”Partner adjudicated insaneImpractical to continue partnership businessPartner incapable of fulfilling his/her duties established by partnership agreementPartner disagreement as to how to conduct partnership business“Winding Up” of Partnership (Definition):Activity of completing unfinished partnership business, collecting and paying debts, collecting partnership assets, and taking inventory37-837-9Order of Distribution of Partnership Assets (Upon “Winding Up”)Payment to partnership creditorsPayment of refunds/loans to partners for loans made to partnershipPayment of partners for invested capitalPayment of profits distributed to partners per terms of partnership agreement37-10Limited PartnershipDefinition: Agreement between at least one general partner and at least one limited partnerAllows investor (limited partner) to share in profits of partnershipLimited partner’s liability limited to amount he/she invests in business37-11Requirements for Limited Liability (of Limited Partner)Limited partner has complied in good faith with certificate of limited partnership filing requirementLimited partner does not participate in control of businessLimited partner’s surname is not part of partnership name37-12Comparison of General Partners and Limited PartnersGeneral Partner:Has all rights associated with controlling businessHas unlimited personal liability for all partnership debtsActs as agent of partnershipLimited Partner:Has no right to participate in management and control of businessLiability limited to amount of capital partner has contributed to businessIs not an agent of the partnership37-13Reasons For Dissolution of Limited PartnershipExpiration of term established in certificate of limited partnershipCompletion of objective established in certificate of limited partnershipUnanimous 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 action37-14Limited 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 membersEach member can participate in management