{"id":157,"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=157"},"modified":"2015-04-16T19:59:54","modified_gmt":"2015-04-16T19:59:54","slug":"19-2-operation-the-partnership-and-third-parties","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/chapter\/19-2-operation-the-partnership-and-third-parties\/","title":{"raw":"Operation: The Partnership and Third Parties","rendered":"Operation: The Partnership and Third Parties"},"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>Understand the partners\u2019 and partnership\u2019s contract liability.<\/li>\r\n\t<li>Understand the partners\u2019 and partnership\u2019s tort and criminal liability.<\/li>\r\n\t<li>Describe the partners\u2019 and partnership\u2019s tax liability.<\/li>\r\n<\/ul>\r\n<\/div>\r\nBy express terms, the law of agency applies to partnership law. Every partner is an agent of the partnership for the purpose of its business. Consequently, the following discussion will be a review of agency law, covered in Chapter 18 \"Partnerships: General Characteristics and Formation\" as it applies to partnerships. The Revised Uniform Partnership Act (RUPA) adds a few new wrinkles to the liability issue.\r\n<div id=\"mayer_1.0-ch41_s02_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Contract Liability<\/h2>\r\n<div id=\"mayer_1.0-ch41_s02_s01_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Liability of the Partnership<\/h3>\r\nRecall that an agent can make contracts on behalf of a principal under three types of authority: express, implied, and apparent. <em class=\"im_emphasis\">Express authority<\/em> is that explicitly delegated to the agent, <em class=\"im_emphasis\">implied authority<\/em> is that necessary to the carrying out of the express authority, and <em class=\"im_emphasis\">apparent authority<\/em> is that which a third party is led to believe has been conferred by the principal on the agent, even though in fact it was not or it was revoked. When a partner has authority, the partnership is bound by contracts the partner makes on its behalf. Section 19.4.2 \"Partnership Authority, Express or Apparent\", <em class=\"im_emphasis\">Hodge v. Garrett<\/em>, discusses all three types of authority.\r\n<div id=\"mayer_1.0-ch41_s02_s01_s01_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">The General Rule<\/h3>\r\nSection 305 of RUPA restates agency law: \u201cA partnership is liable for loss or injury, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course\u201d<span id=\"mayer_1.0-fn41_021\" class=\"im_footnote\">RUPA Section 305.<\/span> of partnership business or with its authority. The ability of a partner to bind the partnership to contract liability is problematic, especially where the authority is apparent: the firm denies liability, lawsuits ensue, and unhappiness generally follows.\r\n\r\nBut the firm is not liable for an act not apparently in the ordinary course of business, unless the act was authorized by the others.<span id=\"mayer_1.0-fn41_022\" class=\"im_footnote\">RUPA, Section 301(2); UPA, Section 9(2).<\/span> Section 401(j) of RUPA requires the unanimous consent of the partners for a grant of authority outside the ordinary course of business, unless the partnership agreement provides otherwise.\r\n\r\nUnder the Uniform Partnership Act (UPA) Section 9(3), the firm is not liable for five actions that no single partner has implied or apparent authority to do, because they are not \u201cin the ordinary course of partnership.\u201d These actions are: (1) assignment of partnership property for the benefit of creditors, (2) disposing of the firm\u2019s goodwill (selling the right to do business with the firm\u2019s clients to another business), (3) actions that make it impossible to carry on the business, (4) confessing a judgment against the partnership, and (5) submitting a partnership claim or liability. RUPA omits that section, leaving it to the courts to decide the outer limits of the agency power of a partner. In any event, unauthorized actions by a partner may be ratified by the partnership.\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s02_s01_s01_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Partnership \u201cStatements\u201d<\/h3>\r\nNew under RUPA is the ability of partnerships, partners, or even nonpartners to issue and file \u201cstatements\u201d that announce to the world the establishment or denial of authority. The goal here is to control the reach of apparent authority. There are several kinds of statements authorized.\r\n\r\nA <span class=\"im_margin_term\"><span class=\"im_glossterm\">statement of partnership authority<\/span><\/span> is allowed by RUPA Section 303. It specifies the names of the partners authorized, or not authorized, to enter into transactions on behalf of the partnership and any other matters. The most important goal of the statement of authority is to facilitate the transfer of real property held in the name of the partnership. A statement must specify the names of the partners authorized to execute an instrument transferring that property.\r\n\r\nA <span class=\"im_margin_term\"><span class=\"im_glossterm\">statement of denial<\/span><\/span>, RUPA Section 304, operates to allow partners (and persons named as partners) an opportunity to deny any fact asserted in a statement of partnership authority.\r\n\r\nA <span class=\"im_margin_term\"><span class=\"im_glossterm\">statement of dissociation<\/span><\/span>, RUPA Section 704, may be filed by a partnership or a dissociated partner, informing the world that the person is no longer a partner. This tells the world that the named person is no longer in the partnership.\r\n\r\nThere are three other statements authorized: a <em class=\"im_emphasis\">statement of qualification<\/em> establishes that the partnership has satisfied all conditions precedent to the qualification of the partnership as a limited liability partnership; a <em class=\"im_emphasis\">statement of foreign qualification<\/em> means a limited liability partnership is qualified and registered to do business in a state other than that in which it is originally registered; and a <em class=\"im_emphasis\">statement of amendment or cancellation<\/em> of any of the foregoing.<span id=\"mayer_1.0-fn41_023\" class=\"im_footnote\">RUPA, Section 1001(d); RUPA, Section 1102.<\/span> Limited liability partnerships are taken up in Chapter 20 \"Hybrid Business Forms\".\r\n\r\nGenerally, RUPA Section 105 allows partnerships to file these statements with the state secretary of state\u2019s office; those affecting real estate need to be filed with (or also with) the local county land recorder\u2019s office. The notices bind those who know about them right away, and they are constructive notice to the world after ninety days as to authority to transfer real property in the partnership\u2019s name, as to dissociation, and as to dissolution. However, as to other grants or limitations of authority, \u201conly a third party who knows or has received a notification of a partner\u2019s lack of authority in an ordinary course transaction is bound.\u201d<span id=\"mayer_1.0-fn41_024\" class=\"im_footnote\">RUPA, Section 303, Comment 3.<\/span>\r\n\r\nSince RUPA is mostly intended to provide the rules for the small, unsophisticated partnership, it is questionable whether these arcane \u201cstatements\u201d are very often employed.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s02_s01_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Personal Liability of Partners, in General<\/h2>\r\nIt is clear that the <em class=\"im_emphasis\">partnership<\/em> is liable for contracts by authorized partners, as discussed in the preceding paragraphs. The bad thing about the partnership as a form of business organization is that it imposes liability on the partners <em class=\"im_emphasis\">personally and without limit<\/em>. Section 306 of RUPA provides that \u201call partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.\u201d<span id=\"mayer_1.0-fn41_025\" class=\"im_footnote\">RUPA, Section 306.<\/span> Section 13 of UPA is in accord.\r\n<div id=\"mayer_1.0-ch41_s02_s01_s02_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Liability of Existing Partners<\/h3>\r\nContract liability is joint and several: that is, all partners are liable (\u201cjoint\u201d) and each is \u201cseveral.\u201d (We usually do not use <em class=\"im_emphasis\">several<\/em> in modern English to mean \u201ceach\u201d; it\u2019s an archaic usage.) But\u2014and here\u2019s the intrusion of entity theory\u2014generally RUPA requires the judgment creditor to exhaust the partnership\u2019s assets before going after the separate assets of a partner. Thus under RUPA the partners are <em class=\"im_emphasis\">guarantors<\/em> of the partnership\u2019s liabilities.<span id=\"mayer_1.0-fn41_026\" class=\"im_footnote\">RUPA Section 306.<\/span>\r\n\r\nUnder UPA, contract liability is joint only, not also several. This means the partners must be sued in a joint action brought against them all. A partner who is not named cannot later be sued by a creditor in a separate proceeding, though the ones who were named could see a proportionate contribution from the ones who were not.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s02_s01_s02_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Liability of Incoming Partners<\/h3>\r\nUnder RUPA Section 306(b), a new partner has no personal liability to existing creditors of the partnership, and only her capital investment in the firm is at risk for the satisfaction of existing partnership debts. Sections 17 and 41(7) of UPA are in accord. But, again, under either statute a new partner\u2019s personal assets are at risk with respect to partnership liabilities incurred after her admission as a partner. This is a daunting prospect, and it is the reason for the invention of hybrid forms of business organization: limited partnerships, limited liability companies, and limited liability partnerships. The corporate form, of course, also (usually) obviates the owners\u2019 personal liability.\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s02_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Tort and Criminal Liability<\/h2>\r\n<div id=\"mayer_1.0-ch41_s02_s02_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Partnership Liability for Torts<\/h3>\r\nThe rules affecting partners\u2019 tort liability (discussed in Section 19.2.1 \"Contract Liability\") and those affecting contract liability are the same. Section 13 of UPA says the partnership is liable for \u201cany wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners.\u201d<span id=\"mayer_1.0-fn41_027\" class=\"im_footnote\">UPA, Section 13.<\/span>A civil \u201cwrongful act\u201d is necessarily either a tort or a breach of contract, so no distinction is made between them. (Section 305 of RUPA changed the phraseology slightly by adding after <em class=\"im_emphasis\">any wrongful act or omission<\/em> the words <em class=\"im_emphasis\">or other actionable conduct<\/em>; this makes the partnership liable for its partner\u2019s no-fault torts.) That the principal should be liable for its agents\u2019 wrongdoings is of course basic agency law. RUPA does expand liability by allowing a partner to sue during the term of the partnership without first having to get out of it, as is required under UPA.\r\n\r\nFor tortious acts, the partners are said to be jointly and severally liable under both UPA and RUPA, and the plaintiff may separately sue one or more partners. Even after winning a judgment, the plaintiff may sue other partners unnamed in the original action. Each and every partner is separately liable for the entire amount of the debt, although the plaintiff is not entitled to recover more than the total of his damages. The practical effect of the rules making partners personally liable for partnership contracts and torts can be huge. In his classic textbook <em class=\"im_emphasis\">Economics<\/em>, Professor Paul Samuelson observed that unlimited liability \u201creveals why partnerships tend to be confined to small, personal enterprises.\u2026When it becomes a question of placing their personal fortunes in jeopardy, people are reluctant to put their capital into complex ventures over which they can exercise little control.\u2026In the field of investment banking, concerns like JPMorgan Chase used to advertise proudly \u2018not incorporated\u2019 so that their creditors could have extra assurance. But even these concerns have converted themselves into corporate entities.\u201d<span id=\"mayer_1.0-fn41_028\" class=\"im_footnote\">Paul A. Samuelson, <em class=\"im_emphasis\">Economics<\/em> (New York: McGraw-Hill, 1973), 106.<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s02_s02_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Partners\u2019 Personal Liability for Torts<\/h3>\r\nOf course, a person is always liable for his own torts. All partners are also liable for any partner\u2019s tort committed in the scope of partnership business under agency law, and this liability is\u2014again\u2014personal and unlimited, subject to RUPA\u2019s requirement that the judgment creditor exhaust the partnership\u2019s assets before going after the separate assets of the partners. The partner who commits a tort or breach of trust must indemnify the partnership for losses paid to the third party.<span id=\"mayer_1.0-fn41_029\" class=\"im_footnote\">RUPA, Section 405(a).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s02_s02_s03\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Liability for Crimes<\/h3>\r\nCriminal liability is generally personal to the miscreant. Nonparticipating copartners are ordinarily not liable for crimes if guilty intent is an element. When guilty intent is not an element, as in certain regulatory offenses, all partners may be guilty of an act committed by a partner in the course of the business.\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s02_s03\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Liability for Taxes<\/h3>\r\nCorporate income gets taxed twice under federal law: once to the corporation and again to the shareholders who receive income as dividends. However, the partnership\u2019s income \u201cpasses through\u201d the partnership and is distributed to the partners under the <span class=\"im_margin_term\"><span class=\"im_glossterm\">conduit theory<\/span><\/span>. When partners get income from the firm they have to pay tax on it, but the partnership pays no tax (it files an information return). This is perceived to be a significant advantage of the partnership form.\r\n<div id=\"mayer_1.0-ch41_s02_s03_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\r\n<h3 class=\"im_title\">Key Takeaway<\/h3>\r\nThe partnership is generally liable for any contract made by a partner with authority express, implied, or apparent. Under RUPA the firm, partners, or even nonpartners may to some extent limit their liability by filing \u201cstatements\u201d with the appropriate state registrar; such statements only affect those who know of them, except that a notice affecting the right of a partner to sell real estate or regarding dissociation or dissolution is effective against the world after ninety days.\r\n\r\nAll partners are liable for contracts entered into and torts committed by any partner acting in or apparently in the normal course of business. This liability is personal and unlimited, joint and several (although under UPA contract liability it is only joint). Incoming partners are not liable, in contract or in tort, for activities predating their arrival, but their capital contribution is at risk. Criminal liability is generally personal unless the crime requires no intention.\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>What is the partnership\u2019s liability for contracts entered into by its partners?<\/li>\r\n\t<li>What is the personal liability of partners for breach of a contract made by one of the partnership\u2019s members?<\/li>\r\n\t<li>Why would people feel more comfortable knowing that JPMorgan Bank\u2014Morgan was at one time the richest man in the United States\u2014was a partnership and not a corporation?<\/li>\r\n\t<li>What is the point of RUPA\u2019s \u201cstatements\u201d? How can they be of use to a partner who has, for example, retired and is no longer involved in the firm?<\/li>\r\n\t<li>Under what circumstances is the partnership liable for crimes committed by its partners?<\/li>\r\n\t<li>How is a partnership taxed more favorably than a corporation?<\/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>","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>Understand the partners\u2019 and partnership\u2019s contract liability.<\/li>\n<li>Understand the partners\u2019 and partnership\u2019s tort and criminal liability.<\/li>\n<li>Describe the partners\u2019 and partnership\u2019s tax liability.<\/li>\n<\/ul>\n<\/div>\n<p>By express terms, the law of agency applies to partnership law. Every partner is an agent of the partnership for the purpose of its business. Consequently, the following discussion will be a review of agency law, covered in Chapter 18 &#8220;Partnerships: General Characteristics and Formation&#8221; as it applies to partnerships. The Revised Uniform Partnership Act (RUPA) adds a few new wrinkles to the liability issue.<\/p>\n<div id=\"mayer_1.0-ch41_s02_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Contract Liability<\/h2>\n<div id=\"mayer_1.0-ch41_s02_s01_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Liability of the Partnership<\/h3>\n<p>Recall that an agent can make contracts on behalf of a principal under three types of authority: express, implied, and apparent. <em class=\"im_emphasis\">Express authority<\/em> is that explicitly delegated to the agent, <em class=\"im_emphasis\">implied authority<\/em> is that necessary to the carrying out of the express authority, and <em class=\"im_emphasis\">apparent authority<\/em> is that which a third party is led to believe has been conferred by the principal on the agent, even though in fact it was not or it was revoked. When a partner has authority, the partnership is bound by contracts the partner makes on its behalf. Section 19.4.2 &#8220;Partnership Authority, Express or Apparent&#8221;, <em class=\"im_emphasis\">Hodge v. Garrett<\/em>, discusses all three types of authority.<\/p>\n<div id=\"mayer_1.0-ch41_s02_s01_s01_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">The General Rule<\/h3>\n<p>Section 305 of RUPA restates agency law: \u201cA partnership is liable for loss or injury, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course\u201d<span id=\"mayer_1.0-fn41_021\" class=\"im_footnote\">RUPA Section 305.<\/span> of partnership business or with its authority. The ability of a partner to bind the partnership to contract liability is problematic, especially where the authority is apparent: the firm denies liability, lawsuits ensue, and unhappiness generally follows.<\/p>\n<p>But the firm is not liable for an act not apparently in the ordinary course of business, unless the act was authorized by the others.<span id=\"mayer_1.0-fn41_022\" class=\"im_footnote\">RUPA, Section 301(2); UPA, Section 9(2).<\/span> Section 401(j) of RUPA requires the unanimous consent of the partners for a grant of authority outside the ordinary course of business, unless the partnership agreement provides otherwise.<\/p>\n<p>Under the Uniform Partnership Act (UPA) Section 9(3), the firm is not liable for five actions that no single partner has implied or apparent authority to do, because they are not \u201cin the ordinary course of partnership.\u201d These actions are: (1) assignment of partnership property for the benefit of creditors, (2) disposing of the firm\u2019s goodwill (selling the right to do business with the firm\u2019s clients to another business), (3) actions that make it impossible to carry on the business, (4) confessing a judgment against the partnership, and (5) submitting a partnership claim or liability. RUPA omits that section, leaving it to the courts to decide the outer limits of the agency power of a partner. In any event, unauthorized actions by a partner may be ratified by the partnership.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s02_s01_s01_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Partnership \u201cStatements\u201d<\/h3>\n<p>New under RUPA is the ability of partnerships, partners, or even nonpartners to issue and file \u201cstatements\u201d that announce to the world the establishment or denial of authority. The goal here is to control the reach of apparent authority. There are several kinds of statements authorized.<\/p>\n<p>A <span class=\"im_margin_term\"><span class=\"im_glossterm\">statement of partnership authority<\/span><\/span> is allowed by RUPA Section 303. It specifies the names of the partners authorized, or not authorized, to enter into transactions on behalf of the partnership and any other matters. The most important goal of the statement of authority is to facilitate the transfer of real property held in the name of the partnership. A statement must specify the names of the partners authorized to execute an instrument transferring that property.<\/p>\n<p>A <span class=\"im_margin_term\"><span class=\"im_glossterm\">statement of denial<\/span><\/span>, RUPA Section 304, operates to allow partners (and persons named as partners) an opportunity to deny any fact asserted in a statement of partnership authority.<\/p>\n<p>A <span class=\"im_margin_term\"><span class=\"im_glossterm\">statement of dissociation<\/span><\/span>, RUPA Section 704, may be filed by a partnership or a dissociated partner, informing the world that the person is no longer a partner. This tells the world that the named person is no longer in the partnership.<\/p>\n<p>There are three other statements authorized: a <em class=\"im_emphasis\">statement of qualification<\/em> establishes that the partnership has satisfied all conditions precedent to the qualification of the partnership as a limited liability partnership; a <em class=\"im_emphasis\">statement of foreign qualification<\/em> means a limited liability partnership is qualified and registered to do business in a state other than that in which it is originally registered; and a <em class=\"im_emphasis\">statement of amendment or cancellation<\/em> of any of the foregoing.<span id=\"mayer_1.0-fn41_023\" class=\"im_footnote\">RUPA, Section 1001(d); RUPA, Section 1102.<\/span> Limited liability partnerships are taken up in Chapter 20 &#8220;Hybrid Business Forms&#8221;.<\/p>\n<p>Generally, RUPA Section 105 allows partnerships to file these statements with the state secretary of state\u2019s office; those affecting real estate need to be filed with (or also with) the local county land recorder\u2019s office. The notices bind those who know about them right away, and they are constructive notice to the world after ninety days as to authority to transfer real property in the partnership\u2019s name, as to dissociation, and as to dissolution. However, as to other grants or limitations of authority, \u201conly a third party who knows or has received a notification of a partner\u2019s lack of authority in an ordinary course transaction is bound.\u201d<span id=\"mayer_1.0-fn41_024\" class=\"im_footnote\">RUPA, Section 303, Comment 3.<\/span><\/p>\n<p>Since RUPA is mostly intended to provide the rules for the small, unsophisticated partnership, it is questionable whether these arcane \u201cstatements\u201d are very often employed.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s02_s01_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Personal Liability of Partners, in General<\/h2>\n<p>It is clear that the <em class=\"im_emphasis\">partnership<\/em> is liable for contracts by authorized partners, as discussed in the preceding paragraphs. The bad thing about the partnership as a form of business organization is that it imposes liability on the partners <em class=\"im_emphasis\">personally and without limit<\/em>. Section 306 of RUPA provides that \u201call partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.\u201d<span id=\"mayer_1.0-fn41_025\" class=\"im_footnote\">RUPA, Section 306.<\/span> Section 13 of UPA is in accord.<\/p>\n<div id=\"mayer_1.0-ch41_s02_s01_s02_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Liability of Existing Partners<\/h3>\n<p>Contract liability is joint and several: that is, all partners are liable (\u201cjoint\u201d) and each is \u201cseveral.\u201d (We usually do not use <em class=\"im_emphasis\">several<\/em> in modern English to mean \u201ceach\u201d; it\u2019s an archaic usage.) But\u2014and here\u2019s the intrusion of entity theory\u2014generally RUPA requires the judgment creditor to exhaust the partnership\u2019s assets before going after the separate assets of a partner. Thus under RUPA the partners are <em class=\"im_emphasis\">guarantors<\/em> of the partnership\u2019s liabilities.<span id=\"mayer_1.0-fn41_026\" class=\"im_footnote\">RUPA Section 306.<\/span><\/p>\n<p>Under UPA, contract liability is joint only, not also several. This means the partners must be sued in a joint action brought against them all. A partner who is not named cannot later be sued by a creditor in a separate proceeding, though the ones who were named could see a proportionate contribution from the ones who were not.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s02_s01_s02_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Liability of Incoming Partners<\/h3>\n<p>Under RUPA Section 306(b), a new partner has no personal liability to existing creditors of the partnership, and only her capital investment in the firm is at risk for the satisfaction of existing partnership debts. Sections 17 and 41(7) of UPA are in accord. But, again, under either statute a new partner\u2019s personal assets are at risk with respect to partnership liabilities incurred after her admission as a partner. This is a daunting prospect, and it is the reason for the invention of hybrid forms of business organization: limited partnerships, limited liability companies, and limited liability partnerships. The corporate form, of course, also (usually) obviates the owners\u2019 personal liability.<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s02_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Tort and Criminal Liability<\/h2>\n<div id=\"mayer_1.0-ch41_s02_s02_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Partnership Liability for Torts<\/h3>\n<p>The rules affecting partners\u2019 tort liability (discussed in Section 19.2.1 &#8220;Contract Liability&#8221;) and those affecting contract liability are the same. Section 13 of UPA says the partnership is liable for \u201cany wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners.\u201d<span id=\"mayer_1.0-fn41_027\" class=\"im_footnote\">UPA, Section 13.<\/span>A civil \u201cwrongful act\u201d is necessarily either a tort or a breach of contract, so no distinction is made between them. (Section 305 of RUPA changed the phraseology slightly by adding after <em class=\"im_emphasis\">any wrongful act or omission<\/em> the words <em class=\"im_emphasis\">or other actionable conduct<\/em>; this makes the partnership liable for its partner\u2019s no-fault torts.) That the principal should be liable for its agents\u2019 wrongdoings is of course basic agency law. RUPA does expand liability by allowing a partner to sue during the term of the partnership without first having to get out of it, as is required under UPA.<\/p>\n<p>For tortious acts, the partners are said to be jointly and severally liable under both UPA and RUPA, and the plaintiff may separately sue one or more partners. Even after winning a judgment, the plaintiff may sue other partners unnamed in the original action. Each and every partner is separately liable for the entire amount of the debt, although the plaintiff is not entitled to recover more than the total of his damages. The practical effect of the rules making partners personally liable for partnership contracts and torts can be huge. In his classic textbook <em class=\"im_emphasis\">Economics<\/em>, Professor Paul Samuelson observed that unlimited liability \u201creveals why partnerships tend to be confined to small, personal enterprises.\u2026When it becomes a question of placing their personal fortunes in jeopardy, people are reluctant to put their capital into complex ventures over which they can exercise little control.\u2026In the field of investment banking, concerns like JPMorgan Chase used to advertise proudly \u2018not incorporated\u2019 so that their creditors could have extra assurance. But even these concerns have converted themselves into corporate entities.\u201d<span id=\"mayer_1.0-fn41_028\" class=\"im_footnote\">Paul A. Samuelson, <em class=\"im_emphasis\">Economics<\/em> (New York: McGraw-Hill, 1973), 106.<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s02_s02_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Partners\u2019 Personal Liability for Torts<\/h3>\n<p>Of course, a person is always liable for his own torts. All partners are also liable for any partner\u2019s tort committed in the scope of partnership business under agency law, and this liability is\u2014again\u2014personal and unlimited, subject to RUPA\u2019s requirement that the judgment creditor exhaust the partnership\u2019s assets before going after the separate assets of the partners. The partner who commits a tort or breach of trust must indemnify the partnership for losses paid to the third party.<span id=\"mayer_1.0-fn41_029\" class=\"im_footnote\">RUPA, Section 405(a).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s02_s02_s03\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Liability for Crimes<\/h3>\n<p>Criminal liability is generally personal to the miscreant. Nonparticipating copartners are ordinarily not liable for crimes if guilty intent is an element. When guilty intent is not an element, as in certain regulatory offenses, all partners may be guilty of an act committed by a partner in the course of the business.<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s02_s03\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Liability for Taxes<\/h3>\n<p>Corporate income gets taxed twice under federal law: once to the corporation and again to the shareholders who receive income as dividends. However, the partnership\u2019s income \u201cpasses through\u201d the partnership and is distributed to the partners under the <span class=\"im_margin_term\"><span class=\"im_glossterm\">conduit theory<\/span><\/span>. When partners get income from the firm they have to pay tax on it, but the partnership pays no tax (it files an information return). This is perceived to be a significant advantage of the partnership form.<\/p>\n<div id=\"mayer_1.0-ch41_s02_s03_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\n<h3 class=\"im_title\">Key Takeaway<\/h3>\n<p>The partnership is generally liable for any contract made by a partner with authority express, implied, or apparent. Under RUPA the firm, partners, or even nonpartners may to some extent limit their liability by filing \u201cstatements\u201d with the appropriate state registrar; such statements only affect those who know of them, except that a notice affecting the right of a partner to sell real estate or regarding dissociation or dissolution is effective against the world after ninety days.<\/p>\n<p>All partners are liable for contracts entered into and torts committed by any partner acting in or apparently in the normal course of business. This liability is personal and unlimited, joint and several (although under UPA contract liability it is only joint). Incoming partners are not liable, in contract or in tort, for activities predating their arrival, but their capital contribution is at risk. Criminal liability is generally personal unless the crime requires no intention.<\/p>\n<\/div>\n<div class=\"bcc-box bcc-info\">\n<h3>Exercises<\/h3>\n<section id=\"self-check-questions\">\n<ol>\n<li>What is the partnership\u2019s liability for contracts entered into by its partners?<\/li>\n<li>What is the personal liability of partners for breach of a contract made by one of the partnership\u2019s members?<\/li>\n<li>Why would people feel more comfortable knowing that JPMorgan Bank\u2014Morgan was at one time the richest man in the United States\u2014was a partnership and not a corporation?<\/li>\n<li>What is the point of RUPA\u2019s \u201cstatements\u201d? How can they be of use to a partner who has, for example, retired and is no longer involved in the firm?<\/li>\n<li>Under what circumstances is the partnership liable for crimes committed by its partners?<\/li>\n<li>How is a partnership taxed more favorably than a corporation?<\/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\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-157\">\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":125,"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-157","chapter","type-chapter","status-publish","hentry"],"part":765,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/157","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\/157\/revisions"}],"predecessor-version":[{"id":1017,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/157\/revisions\/1017"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/parts\/765"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/157\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/media?parent=157"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapter-type?post=157"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/contributor?post=157"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/license?post=157"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}