{"id":151,"date":"2014-09-17T00:42:05","date_gmt":"2014-09-17T00:42:05","guid":{"rendered":"https:\/\/courses.candelalearning.com\/buslegalenv\/?post_type=chapter&#038;p=151"},"modified":"2015-04-16T20:23:05","modified_gmt":"2015-04-16T20:23:05","slug":"18-1-introduction-to-partnerships-and-entity-theory","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/chapter\/18-1-introduction-to-partnerships-and-entity-theory\/","title":{"raw":"Introduction to Partnerships and Entity Theory","rendered":"Introduction to Partnerships and Entity Theory"},"content":{"raw":"<div class=\"bcc-box bcc-highlight\">\r\n<h3>Learning Objectives<\/h3>\r\nBy the end of this section, you will be able to:\r\n<ul id=\"mayer_1.0-ch52_s02_l01\" class=\"im_orderedlist\">\r\n\t<li>Describe the importance of partnership.<\/li>\r\n\t<li>Understand partnership history.<\/li>\r\n\t<li>Identify the entity characteristics of partnerships.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch40_s01_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Importance of Partnership Law<\/h2>\r\nIt would be difficult to conceive of a complex society that did not operate its businesses through organizations. In this chapter we study partnerships, limited partnerships, and limited liability companies, and we touch on joint ventures and business trusts.\r\n\r\nWhen two or more people form their own business or professional practice, they usually consider becoming partners. Partnership law defines a <span class=\"im_margin_term\"><span class=\"im_glossterm\">partnership<\/span><\/span> as \u201cthe association of two or more persons to carry on as co-owners a business for profit\u2026whether or not the persons intend to form a partnership.\u201d<span id=\"mayer_1.0-fn40_001\" class=\"im_footnote\">Revised Uniform Partnership Act, Section 202(a).<\/span> In 2011, there were more than three million business firms in the United States as partnerships (see Table 18.1 \"Selected Data: Number of US Partnerships, Limited Partnerships, and Limited Liability Companies\", showing data to 2006), and partnerships are a common form of organization among accountants, lawyers, doctors, and other professionals. When we use the word <em class=\"im_emphasis\">partnership<\/em>, we are referring to the <em class=\"im_emphasis\">general business partnership<\/em>. There are also limited partnerships and limited liability partnerships, which are discussed in Chapter 20 \"Hybrid Business Forms\".\r\n<div id=\"mayer_1.0-ch40_s01_s01_t01\" class=\"im_table im_block\">\r\n\r\n<span class=\"im_title-prefix\">Table 18.1<\/span> Selected Data: Number of US Partnerships, Limited Partnerships, and Limited Liability Companies\r\n<table cellspacing=\"0\" cellpadding=\"0\">\r\n<thead>\r\n<tr>\r\n<th><\/th>\r\n<th>2003<\/th>\r\n<th>2004<\/th>\r\n<th>2005<\/th>\r\n<th>2006<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Total number of active partnerships<\/td>\r\n<td>2,375,375<\/td>\r\n<td>2,546,877<\/td>\r\n<td>2,763,625<\/td>\r\n<td>2,947,116<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Number of partners<\/td>\r\n<td>14,108,458<\/td>\r\n<td>15,556,553<\/td>\r\n<td>16,211,908<\/td>\r\n<td>16,727,803<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Number of limited partnerships<\/td>\r\n<td>378,921<\/td>\r\n<td>402,238<\/td>\r\n<td>413,712<\/td>\r\n<td>432,550<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Number of partners<\/td>\r\n<td>6,262,103<\/td>\r\n<td>7,023,921<\/td>\r\n<td>6,946,986<\/td>\r\n<td>6,738,737<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Number of limited liability companies<\/td>\r\n<td>1,091,502<\/td>\r\n<td>1,270,236<\/td>\r\n<td>1,465,223<\/td>\r\n<td>1,630,161<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Number of partners<\/td>\r\n<td>4,226,099<\/td>\r\n<td>4,949,808<\/td>\r\n<td>5,640,146<\/td>\r\n<td>6,361,958<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<div class=\"im_copyright\">\r\n\r\nSource: IRS, <a class=\"im_link\" href=\"http:\/\/www.irs.gov\/pub\/irs-soi\/09sprbul.pdf\" target=\"_blank\">http:\/\/www.irs.gov\/pub\/irs-soi\/09sprbul.pdf<\/a>.\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\nPartnerships are also popular as investment vehicles. Partnership law and tax law permit an investor to put capital into a limited partnership and realize tax benefits without liability for the acts of the general partners.\r\n\r\nEven if you do not plan to work within a partnership, it can be important to understand the law that governs it. Why? Because it is possible to become someone\u2019s partner without intending to or even realizing that a partnership has been created. Knowledge of the law can help you avoid partnership liability.\r\n<div id=\"mayer_1.0-ch40_s01_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">History of Partnership Law<\/h2>\r\n<div id=\"mayer_1.0-ch40_s01_s02_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Through the Twentieth Century<\/h3>\r\nPartnership is an ancient form of business enterprise, and special laws governing partnerships date as far back as 2300 BC, when the Code of Hammurabi explicitly regulated the relations between partners. Partnership was an important part of Roman law, and it played a significant role in the law merchant, the international commercial law of the Middle Ages.\r\n\r\nIn the nineteenth century, in both England and the United States, partnership was a popular vehicle for business enterprise. But the law governing it was jumbled. Common-law principles were mixed with equitable standards, and the result was considerable confusion. Parliament moved to reduce the uncertainty by adopting the Partnership Act of 1890, but codification took longer in the United States. The Commissioners on Uniform State Laws undertook the task at the turn of the twentieth century. The Uniform Partnership Act (UPA), completed in 1914, and the Uniform Limited Partnership Act (ULPA), completed in 1916, were the basis of partnership law for many decades. UPA and ULPA were adopted by all states except Louisiana.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch40_s01_s02_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">The Current State of Partnership Law<\/h3>\r\nDespite its name, UPA was not enacted uniformly among the states; moreover, it had some shortcomings. So the states tinkered with it, and by the 1980s, the National Conference of Commissioners on Uniform Laws (NCCUL) determined that a revised version was in order. An amended UPA appeared in 1992, and further amendments were promulgated in 1993, 1994, 1996, and 1997. The NCCUL reports that thirty-nine states have adopted some version of the revised act. This chapter will discuss the Revised Uniform Partnership Act (RUPA) as promulgated in 1997, but because not all jurisdictions have not adopted it, where RUPA makes significant changes, the original 1914 UPA will also be considered.<span id=\"mayer_1.0-fn40_002\" class=\"im_footnote\">NCCUSL, Uniform Law Commission, \u201cActs: Partnership Act,\u201d <a class=\"im_link\" href=\"http:\/\/www.nccusl.org\/Act.aspx?title=Partnership%20Act\" target=\"_blank\">http:\/\/www.nccusl.org\/Act.aspx?title=Partnership%20Act<\/a>. The following states <em class=\"im_emphasis\">have<\/em> adopted the RUPA: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Puerto Rico, South Dakota (substantially similar), Tennessee, Texas (substantially similar), US Virgin Islands, Vermont, Virginia, and Washington. Connecticut, West Virginia, and Wyoming adopted the 1992 or 1994 version. Here are the states that have <em class=\"im_emphasis\">not<\/em> adopted RUPA (Louisiana never adopted UPA at all): Georgia, Indiana, Massachusetts, Michigan, Mississippi, New Hampshire, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, and Wisconsin.<\/span> The NCCUL observes in its \u201cprefatory note\u201d to the 1997 act: \u201cThe Revised Act is largely a series of \u2018default rules\u2019 that govern the relations among partners in situations they have not addressed in a partnership agreement. The primary focus of RUPA is the small, often informal, partnership. Larger partnerships generally have a partnership agreement addressing, and often modifying, many of the provisions of the partnership act.\u201d<span id=\"mayer_1.0-fn40_003\" class=\"im_footnote\">University of Pennsylvania Law School, Biddle Law Library, \u201cUniform Partnership Act (1997),\u201d NCCUSL Archives, <a class=\"im_link\" href=\"http:\/\/www.law.upenn.edu\/bll\/archives\/ulc\/fnact99\/1990s\/upa97fa.pdf\" target=\"_blank\">http:\/\/www.law.upenn.edu\/bll\/archives\/ulc\/fnact99\/1990s\/upa97fa.pdf<\/a>.<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch40_s01_s03\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Entity Theory<\/h2>\r\n<div id=\"mayer_1.0-ch40_s01_s03_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Meaning of \u201cLegal Entity\u201d<\/h3>\r\nA significant difference between a partnership and most other kinds of business organization relates to whether, and the extent to which, the business is a legal entity. A legal entity is a person or group that the law recognizes as having legal rights, such as the right to own and dispose of property, to sue and be sued, and to enter into contracts; the <span class=\"im_margin_term\"><span class=\"im_glossterm\">entity theory<\/span><\/span> is the concept of a business firm as a legal person, with existence and accountability separate from its owners. When individuals carry out a common enterprise as partners, a threshold legal question is whether the partnership is a legal entity. The common law said no. In other words, under the common-law theory, a partnership was but a convenient name for an aggregate of individuals, and the rights and duties recognized and imposed by law are those of the individual partners. By contrast, the mercantile theory of the law merchant held that a partnership is a legal entity that can have rights and duties independent of those of its members.\r\n\r\nDuring the drafting of the 1914 UPA, a debate raged over which theory to adopt. The drafters resolved the debate through a compromise. In Section 6(1), UPA provides a neutral definition of partnership (\u201can association of two or more persons to carry on as co-owners a business for profit\u201d) and retained the common-law theory that a partnership is an aggregation of individuals\u2014the <span class=\"im_margin_term\"><span class=\"im_glossterm\">aggregate theory<\/span><\/span>.\r\n\r\nRUPA moved more toward making partnerships entities. According to the NCCUL, \u201cThe Revised Act enhances the entity treatment of partnerships to achieve simplicity for state law purposes, particularly in matters concerning title to partnership property. RUPA does not, however, relentlessly apply the entity approach. The aggregate approach is retained for some purposes, such as partners\u2019 joint and several liability.\u201d<span id=\"mayer_1.0-fn40_004\" class=\"im_footnote\">University of Pennsylvania Law School, Biddle Law Library, \u201cUniform Partnership Act (1997),\u201d NCCUSL Archives, <a class=\"im_link\" href=\"http:\/\/www.law.upenn.edu\/bll\/archives\/ulc\/fnact99\/1990s\/upa97fa.pdf\" target=\"_blank\">http:\/\/www.law.upenn.edu\/bll\/archives\/ulc\/fnact99\/1990s\/upa97fa.pdf<\/a>.<\/span> Section 201(a) provides, \u201cA partnership is an entity distinct from its partners.\u201d<span id=\"mayer_1.0-fn40_005\" class=\"im_footnote\">RUPA, Section 201(a).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch40_s01_s03_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Entity Characteristics of a Partnership<\/h3>\r\nUnder RUPA, then, a partnership has entity characteristics, but the partners remain guarantors of partnership obligations, as always\u2014that is the partners\u2019 joint and several liability noted in the previous paragraph (and discussed further in Chapter 19 \"Partnership Operation and Termination\"). This is a very important point and a primary weakness of the partnership form: all partners are, and each one of them is, ultimately personally liable for the obligations of the partnership, without limit, which includes personal and unlimited liability. This personal liability is very distasteful, and it has been abolished, subject to some exceptions, with limited partnerships and limited liability companies, as discussed in Chapter 20 \"Hybrid Business Forms\". And, of course, the owners of corporations are also not generally liable for the corporation\u2019s obligations, which is a major reason for the corporate form\u2019s popularity.\r\n<div id=\"mayer_1.0-ch40_s01_s03_s02_s01\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">For Accounting Purposes<\/h4>\r\nUnder both versions of the law, the partnership may keep business records as if it were a separate entity, and its accountants may treat it as such for purposes of preparing income statements and balance sheets.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch40_s01_s03_s02_s02\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">For Purposes of Taxation<\/h4>\r\nUnder both versions of the law, partnerships are <em class=\"im_emphasis\">not<\/em> taxable entities, so they do not pay income taxes. Instead, each partner\u2019s distributive share, which includes income or other gain, loss, deductions, and credits, must be included in the partner\u2019s personal income tax return, whether or not the share is actually distributed.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch40_s01_s03_s02_s03\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">For Purposes of Litigation<\/h4>\r\nIn litigation, the aggregate theory causes some inconvenience in naming and serving partnership defendants: under UPA, lawsuits to enforce a partnership contract or some other right must be filed in the name of all the partners. Similarly, to sue a partnership, the plaintiff must name and sue each of the partners. This cumbersome procedure was modified in many states, which enacted special statutes expressly permitting suits by and against partnerships in the firm name. In suits on a claim in federal court, a partnership may sue and be sued in its common name. The move by RUPA to make partnerships entities changed very little. Certainly it provides that \u201ca partnership may sue and be sued in the name of the partnership\u201d\u2014that\u2019s handy where the plaintiff hopes for a judgment against the partnership, without recourse to the individual partners\u2019 personal assets.<span id=\"mayer_1.0-fn40_006\" class=\"im_footnote\">RUPA, Section 307(a).<\/span> But a plaintiff must still name the partnership and the partners individually to have access to both estates, the partnership and the individuals\u2019: \u201cA judgment against a partnership is not by itself a judgment against a partner. A judgment against a partnership may not be satisfied from a partner\u2019s assets unless there is also a judgment against the partner.\u201d<span id=\"mayer_1.0-fn40_007\" class=\"im_footnote\">RUPA, Section 307(c).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch40_s01_s03_s02_s04\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">For Purposes of Owning Real Estate<\/h4>\r\nAggregate theory concepts bedeviled property co-ownership issues, so UPA finessed the issue by stating that partnership property, real or personal, could be held in the name of the partners as \u201ctenants in partnership\u201d\u2014a type of co-ownership\u2014or it could be held in the name of the partnership.<span id=\"mayer_1.0-fn40_008\" class=\"im_footnote\">Uniform Partnership Act, Section 25(1); UPA, Section 8(3).<\/span> Under RUPA, \u201cproperty acquired by the partnership is property of the partnership and not of the partners.\u201d<span id=\"mayer_1.0-fn40_009\" class=\"im_footnote\">RUPA, Section 203.<\/span> But RUPA is no different from UPA in practical effect. The latter provides that \u201cproperty originally brought into the partnership stock or subsequently acquired by purchase\u2026on account of the partnership, is partnership property.\u201d<span id=\"mayer_1.0-fn40_010\" class=\"im_footnote\">UPA, Section 8(1).<\/span> Under either law, a partner may bring onto the partnership premises her own property, not acquired in the name of the partnership or with its credit, and it remains her separate property. Under neither law can a partner unilaterally dispose of partnership property, however labeled, for the obvious reason that one cannot dispose of another\u2019s property or property rights without permission.<span id=\"mayer_1.0-fn40_011\" class=\"im_footnote\">UPA, Sections 9(3)(a) and 25; RUPA, Section 302.<\/span> And keep in mind that partnership law is the default: partners are free to make up partnership agreements as they like, subject to some limitations. They are free to set up property ownership rules as they like.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch40_s01_s03_s02_s05\" class=\"im_section\">\r\n<h4 class=\"im_title im_editable im_block\">For Purposes of Bankruptcy<\/h4>\r\nUnder federal bankruptcy law\u2014state partnership law is preempted\u2014a partnership is an entity that may voluntarily seek the haven of a bankruptcy court or that may involuntarily be thrust into a bankruptcy proceeding by its creditors. The partnership cannot discharge its debts in a liquidation proceeding under Chapter 7 of the bankruptcy law, but it can be rehabilitated under Chapter 11 (see Chapter 13 \"Bankruptcy\").\r\n<div id=\"mayer_1.0-ch40_s01_s03_s02_s05_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\r\n<h3 class=\"im_title\">Key Takeaway<\/h3>\r\nPartnership law is very important because it is the way most small businesses are organized and because it is possible for a person to become a partner without intending to. Partnership law goes back a long way, but in the United States, most states\u2014but not all\u2014have adopted the Revised Uniform Partnership Act (RUPA, 1997) over the previous Uniform Partnership Act, originally promulgated in 1914. One salient change made by RUPA is to directly announce that a partnership is an entity: it is like a person for purposes of accounting, litigation, bankruptcy, and owning real estate. Partnerships do not pay taxes; the individual partners do. But in practical terms, what RUPA does is codify already-existing state law on these matters, and partners are free to organize their relationship as they like in the partnership agreement.\r\n\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\">\r\n<h3>Exercises<\/h3>\r\n<section id=\"self-check-questions\">\r\n<ol>\r\n\t<li>When was UPA set out for states to adopt? When was RUPA promulgated for state adoption?<\/li>\r\n\t<li>What does it mean to say that the partnership act is the \u201cdefault position\u201d? For what types of partnership is UPA (or RUPA) likely to be of most importance?<\/li>\r\n\t<li>What is the aggregate theory of partnership? The entity theory?<\/li>\r\n<\/ol>\r\n<\/section><\/div>\r\n<div id=\"mayer_1.0-ch52_s02_s06_n02\" class=\"im_exercises im_editable im_block\"><\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>","rendered":"<div class=\"bcc-box bcc-highlight\">\n<h3>Learning Objectives<\/h3>\n<p>By the end of this section, you will be able to:<\/p>\n<ul id=\"mayer_1.0-ch52_s02_l01\" class=\"im_orderedlist\">\n<li>Describe the importance of partnership.<\/li>\n<li>Understand partnership history.<\/li>\n<li>Identify the entity characteristics of partnerships.<\/li>\n<\/ul>\n<\/div>\n<div id=\"mayer_1.0-ch40_s01_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Importance of Partnership Law<\/h2>\n<p>It would be difficult to conceive of a complex society that did not operate its businesses through organizations. In this chapter we study partnerships, limited partnerships, and limited liability companies, and we touch on joint ventures and business trusts.<\/p>\n<p>When two or more people form their own business or professional practice, they usually consider becoming partners. Partnership law defines a <span class=\"im_margin_term\"><span class=\"im_glossterm\">partnership<\/span><\/span> as \u201cthe association of two or more persons to carry on as co-owners a business for profit\u2026whether or not the persons intend to form a partnership.\u201d<span id=\"mayer_1.0-fn40_001\" class=\"im_footnote\">Revised Uniform Partnership Act, Section 202(a).<\/span> In 2011, there were more than three million business firms in the United States as partnerships (see Table 18.1 &#8220;Selected Data: Number of US Partnerships, Limited Partnerships, and Limited Liability Companies&#8221;, showing data to 2006), and partnerships are a common form of organization among accountants, lawyers, doctors, and other professionals. When we use the word <em class=\"im_emphasis\">partnership<\/em>, we are referring to the <em class=\"im_emphasis\">general business partnership<\/em>. There are also limited partnerships and limited liability partnerships, which are discussed in Chapter 20 &#8220;Hybrid Business Forms&#8221;.<\/p>\n<div id=\"mayer_1.0-ch40_s01_s01_t01\" class=\"im_table im_block\">\n<p><span class=\"im_title-prefix\">Table 18.1<\/span> Selected Data: Number of US Partnerships, Limited Partnerships, and Limited Liability Companies<\/p>\n<table cellpadding=\"0\" style=\"border-spacing: 0px;\">\n<thead>\n<tr>\n<th><\/th>\n<th>2003<\/th>\n<th>2004<\/th>\n<th>2005<\/th>\n<th>2006<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Total number of active partnerships<\/td>\n<td>2,375,375<\/td>\n<td>2,546,877<\/td>\n<td>2,763,625<\/td>\n<td>2,947,116<\/td>\n<\/tr>\n<tr>\n<td>Number of partners<\/td>\n<td>14,108,458<\/td>\n<td>15,556,553<\/td>\n<td>16,211,908<\/td>\n<td>16,727,803<\/td>\n<\/tr>\n<tr>\n<td>Number of limited partnerships<\/td>\n<td>378,921<\/td>\n<td>402,238<\/td>\n<td>413,712<\/td>\n<td>432,550<\/td>\n<\/tr>\n<tr>\n<td>Number of partners<\/td>\n<td>6,262,103<\/td>\n<td>7,023,921<\/td>\n<td>6,946,986<\/td>\n<td>6,738,737<\/td>\n<\/tr>\n<tr>\n<td>Number of limited liability companies<\/td>\n<td>1,091,502<\/td>\n<td>1,270,236<\/td>\n<td>1,465,223<\/td>\n<td>1,630,161<\/td>\n<\/tr>\n<tr>\n<td>Number of partners<\/td>\n<td>4,226,099<\/td>\n<td>4,949,808<\/td>\n<td>5,640,146<\/td>\n<td>6,361,958<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<div class=\"im_copyright\">\n<p>Source: IRS, <a class=\"im_link\" href=\"http:\/\/www.irs.gov\/pub\/irs-soi\/09sprbul.pdf\" target=\"_blank\">http:\/\/www.irs.gov\/pub\/irs-soi\/09sprbul.pdf<\/a>.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<p>Partnerships are also popular as investment vehicles. Partnership law and tax law permit an investor to put capital into a limited partnership and realize tax benefits without liability for the acts of the general partners.<\/p>\n<p>Even if you do not plan to work within a partnership, it can be important to understand the law that governs it. Why? Because it is possible to become someone\u2019s partner without intending to or even realizing that a partnership has been created. Knowledge of the law can help you avoid partnership liability.<\/p>\n<div id=\"mayer_1.0-ch40_s01_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">History of Partnership Law<\/h2>\n<div id=\"mayer_1.0-ch40_s01_s02_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Through the Twentieth Century<\/h3>\n<p>Partnership is an ancient form of business enterprise, and special laws governing partnerships date as far back as 2300 BC, when the Code of Hammurabi explicitly regulated the relations between partners. Partnership was an important part of Roman law, and it played a significant role in the law merchant, the international commercial law of the Middle Ages.<\/p>\n<p>In the nineteenth century, in both England and the United States, partnership was a popular vehicle for business enterprise. But the law governing it was jumbled. Common-law principles were mixed with equitable standards, and the result was considerable confusion. Parliament moved to reduce the uncertainty by adopting the Partnership Act of 1890, but codification took longer in the United States. The Commissioners on Uniform State Laws undertook the task at the turn of the twentieth century. The Uniform Partnership Act (UPA), completed in 1914, and the Uniform Limited Partnership Act (ULPA), completed in 1916, were the basis of partnership law for many decades. UPA and ULPA were adopted by all states except Louisiana.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch40_s01_s02_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">The Current State of Partnership Law<\/h3>\n<p>Despite its name, UPA was not enacted uniformly among the states; moreover, it had some shortcomings. So the states tinkered with it, and by the 1980s, the National Conference of Commissioners on Uniform Laws (NCCUL) determined that a revised version was in order. An amended UPA appeared in 1992, and further amendments were promulgated in 1993, 1994, 1996, and 1997. The NCCUL reports that thirty-nine states have adopted some version of the revised act. This chapter will discuss the Revised Uniform Partnership Act (RUPA) as promulgated in 1997, but because not all jurisdictions have not adopted it, where RUPA makes significant changes, the original 1914 UPA will also be considered.<span id=\"mayer_1.0-fn40_002\" class=\"im_footnote\">NCCUSL, Uniform Law Commission, \u201cActs: Partnership Act,\u201d <a class=\"im_link\" href=\"http:\/\/www.nccusl.org\/Act.aspx?title=Partnership%20Act\" target=\"_blank\">http:\/\/www.nccusl.org\/Act.aspx?title=Partnership%20Act<\/a>. The following states <em class=\"im_emphasis\">have<\/em> adopted the RUPA: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Puerto Rico, South Dakota (substantially similar), Tennessee, Texas (substantially similar), US Virgin Islands, Vermont, Virginia, and Washington. Connecticut, West Virginia, and Wyoming adopted the 1992 or 1994 version. Here are the states that have <em class=\"im_emphasis\">not<\/em> adopted RUPA (Louisiana never adopted UPA at all): Georgia, Indiana, Massachusetts, Michigan, Mississippi, New Hampshire, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, and Wisconsin.<\/span> The NCCUL observes in its \u201cprefatory note\u201d to the 1997 act: \u201cThe Revised Act is largely a series of \u2018default rules\u2019 that govern the relations among partners in situations they have not addressed in a partnership agreement. The primary focus of RUPA is the small, often informal, partnership. Larger partnerships generally have a partnership agreement addressing, and often modifying, many of the provisions of the partnership act.\u201d<span id=\"mayer_1.0-fn40_003\" class=\"im_footnote\">University of Pennsylvania Law School, Biddle Law Library, \u201cUniform Partnership Act (1997),\u201d NCCUSL Archives, <a class=\"im_link\" href=\"http:\/\/www.law.upenn.edu\/bll\/archives\/ulc\/fnact99\/1990s\/upa97fa.pdf\" target=\"_blank\">http:\/\/www.law.upenn.edu\/bll\/archives\/ulc\/fnact99\/1990s\/upa97fa.pdf<\/a>.<\/span><\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch40_s01_s03\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Entity Theory<\/h2>\n<div id=\"mayer_1.0-ch40_s01_s03_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Meaning of \u201cLegal Entity\u201d<\/h3>\n<p>A significant difference between a partnership and most other kinds of business organization relates to whether, and the extent to which, the business is a legal entity. A legal entity is a person or group that the law recognizes as having legal rights, such as the right to own and dispose of property, to sue and be sued, and to enter into contracts; the <span class=\"im_margin_term\"><span class=\"im_glossterm\">entity theory<\/span><\/span> is the concept of a business firm as a legal person, with existence and accountability separate from its owners. When individuals carry out a common enterprise as partners, a threshold legal question is whether the partnership is a legal entity. The common law said no. In other words, under the common-law theory, a partnership was but a convenient name for an aggregate of individuals, and the rights and duties recognized and imposed by law are those of the individual partners. By contrast, the mercantile theory of the law merchant held that a partnership is a legal entity that can have rights and duties independent of those of its members.<\/p>\n<p>During the drafting of the 1914 UPA, a debate raged over which theory to adopt. The drafters resolved the debate through a compromise. In Section 6(1), UPA provides a neutral definition of partnership (\u201can association of two or more persons to carry on as co-owners a business for profit\u201d) and retained the common-law theory that a partnership is an aggregation of individuals\u2014the <span class=\"im_margin_term\"><span class=\"im_glossterm\">aggregate theory<\/span><\/span>.<\/p>\n<p>RUPA moved more toward making partnerships entities. According to the NCCUL, \u201cThe Revised Act enhances the entity treatment of partnerships to achieve simplicity for state law purposes, particularly in matters concerning title to partnership property. RUPA does not, however, relentlessly apply the entity approach. The aggregate approach is retained for some purposes, such as partners\u2019 joint and several liability.\u201d<span id=\"mayer_1.0-fn40_004\" class=\"im_footnote\">University of Pennsylvania Law School, Biddle Law Library, \u201cUniform Partnership Act (1997),\u201d NCCUSL Archives, <a class=\"im_link\" href=\"http:\/\/www.law.upenn.edu\/bll\/archives\/ulc\/fnact99\/1990s\/upa97fa.pdf\" target=\"_blank\">http:\/\/www.law.upenn.edu\/bll\/archives\/ulc\/fnact99\/1990s\/upa97fa.pdf<\/a>.<\/span> Section 201(a) provides, \u201cA partnership is an entity distinct from its partners.\u201d<span id=\"mayer_1.0-fn40_005\" class=\"im_footnote\">RUPA, Section 201(a).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch40_s01_s03_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Entity Characteristics of a Partnership<\/h3>\n<p>Under RUPA, then, a partnership has entity characteristics, but the partners remain guarantors of partnership obligations, as always\u2014that is the partners\u2019 joint and several liability noted in the previous paragraph (and discussed further in Chapter 19 &#8220;Partnership Operation and Termination&#8221;). This is a very important point and a primary weakness of the partnership form: all partners are, and each one of them is, ultimately personally liable for the obligations of the partnership, without limit, which includes personal and unlimited liability. This personal liability is very distasteful, and it has been abolished, subject to some exceptions, with limited partnerships and limited liability companies, as discussed in Chapter 20 &#8220;Hybrid Business Forms&#8221;. And, of course, the owners of corporations are also not generally liable for the corporation\u2019s obligations, which is a major reason for the corporate form\u2019s popularity.<\/p>\n<div id=\"mayer_1.0-ch40_s01_s03_s02_s01\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">For Accounting Purposes<\/h4>\n<p>Under both versions of the law, the partnership may keep business records as if it were a separate entity, and its accountants may treat it as such for purposes of preparing income statements and balance sheets.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch40_s01_s03_s02_s02\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">For Purposes of Taxation<\/h4>\n<p>Under both versions of the law, partnerships are <em class=\"im_emphasis\">not<\/em> taxable entities, so they do not pay income taxes. Instead, each partner\u2019s distributive share, which includes income or other gain, loss, deductions, and credits, must be included in the partner\u2019s personal income tax return, whether or not the share is actually distributed.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch40_s01_s03_s02_s03\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">For Purposes of Litigation<\/h4>\n<p>In litigation, the aggregate theory causes some inconvenience in naming and serving partnership defendants: under UPA, lawsuits to enforce a partnership contract or some other right must be filed in the name of all the partners. Similarly, to sue a partnership, the plaintiff must name and sue each of the partners. This cumbersome procedure was modified in many states, which enacted special statutes expressly permitting suits by and against partnerships in the firm name. In suits on a claim in federal court, a partnership may sue and be sued in its common name. The move by RUPA to make partnerships entities changed very little. Certainly it provides that \u201ca partnership may sue and be sued in the name of the partnership\u201d\u2014that\u2019s handy where the plaintiff hopes for a judgment against the partnership, without recourse to the individual partners\u2019 personal assets.<span id=\"mayer_1.0-fn40_006\" class=\"im_footnote\">RUPA, Section 307(a).<\/span> But a plaintiff must still name the partnership and the partners individually to have access to both estates, the partnership and the individuals\u2019: \u201cA judgment against a partnership is not by itself a judgment against a partner. A judgment against a partnership may not be satisfied from a partner\u2019s assets unless there is also a judgment against the partner.\u201d<span id=\"mayer_1.0-fn40_007\" class=\"im_footnote\">RUPA, Section 307(c).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch40_s01_s03_s02_s04\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">For Purposes of Owning Real Estate<\/h4>\n<p>Aggregate theory concepts bedeviled property co-ownership issues, so UPA finessed the issue by stating that partnership property, real or personal, could be held in the name of the partners as \u201ctenants in partnership\u201d\u2014a type of co-ownership\u2014or it could be held in the name of the partnership.<span id=\"mayer_1.0-fn40_008\" class=\"im_footnote\">Uniform Partnership Act, Section 25(1); UPA, Section 8(3).<\/span> Under RUPA, \u201cproperty acquired by the partnership is property of the partnership and not of the partners.\u201d<span id=\"mayer_1.0-fn40_009\" class=\"im_footnote\">RUPA, Section 203.<\/span> But RUPA is no different from UPA in practical effect. The latter provides that \u201cproperty originally brought into the partnership stock or subsequently acquired by purchase\u2026on account of the partnership, is partnership property.\u201d<span id=\"mayer_1.0-fn40_010\" class=\"im_footnote\">UPA, Section 8(1).<\/span> Under either law, a partner may bring onto the partnership premises her own property, not acquired in the name of the partnership or with its credit, and it remains her separate property. Under neither law can a partner unilaterally dispose of partnership property, however labeled, for the obvious reason that one cannot dispose of another\u2019s property or property rights without permission.<span id=\"mayer_1.0-fn40_011\" class=\"im_footnote\">UPA, Sections 9(3)(a) and 25; RUPA, Section 302.<\/span> And keep in mind that partnership law is the default: partners are free to make up partnership agreements as they like, subject to some limitations. They are free to set up property ownership rules as they like.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch40_s01_s03_s02_s05\" class=\"im_section\">\n<h4 class=\"im_title im_editable im_block\">For Purposes of Bankruptcy<\/h4>\n<p>Under federal bankruptcy law\u2014state partnership law is preempted\u2014a partnership is an entity that may voluntarily seek the haven of a bankruptcy court or that may involuntarily be thrust into a bankruptcy proceeding by its creditors. The partnership cannot discharge its debts in a liquidation proceeding under Chapter 7 of the bankruptcy law, but it can be rehabilitated under Chapter 11 (see Chapter 13 &#8220;Bankruptcy&#8221;).<\/p>\n<div id=\"mayer_1.0-ch40_s01_s03_s02_s05_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\n<h3 class=\"im_title\">Key Takeaway<\/h3>\n<p>Partnership law is very important because it is the way most small businesses are organized and because it is possible for a person to become a partner without intending to. Partnership law goes back a long way, but in the United States, most states\u2014but not all\u2014have adopted the Revised Uniform Partnership Act (RUPA, 1997) over the previous Uniform Partnership Act, originally promulgated in 1914. One salient change made by RUPA is to directly announce that a partnership is an entity: it is like a person for purposes of accounting, litigation, bankruptcy, and owning real estate. Partnerships do not pay taxes; the individual partners do. But in practical terms, what RUPA does is codify already-existing state law on these matters, and partners are free to organize their relationship as they like in the partnership agreement.<\/p>\n<\/div>\n<div class=\"bcc-box bcc-info\">\n<h3>Exercises<\/h3>\n<section id=\"self-check-questions\">\n<ol>\n<li>When was UPA set out for states to adopt? When was RUPA promulgated for state adoption?<\/li>\n<li>What does it mean to say that the partnership act is the \u201cdefault position\u201d? For what types of partnership is UPA (or RUPA) likely to be of most importance?<\/li>\n<li>What is the aggregate theory of partnership? The entity theory?<\/li>\n<\/ol>\n<\/section>\n<\/div>\n<div id=\"mayer_1.0-ch52_s02_s06_n02\" class=\"im_exercises im_editable im_block\"><\/div>\n<\/div>\n<\/div>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-151\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Business and the Legal Environment. <strong>Authored by<\/strong>: Anonymous. <strong>Provided by<\/strong>: Anonymous. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/\">http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\/\">CC BY-NC-SA: Attribution-NonCommercial-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":5,"menu_order":120,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Business and the Legal Environment\",\"author\":\"Anonymous\",\"organization\":\"Anonymous\",\"url\":\"http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/\",\"project\":\"\",\"license\":\"cc-by-nc-sa\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-151","chapter","type-chapter","status-publish","hentry"],"part":766,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/151","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/users\/5"}],"version-history":[{"count":4,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/151\/revisions"}],"predecessor-version":[{"id":1027,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/151\/revisions\/1027"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/parts\/766"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/151\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/media?parent=151"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapter-type?post=151"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/contributor?post=151"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/license?post=151"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}