1. C H A P
Operation of Partnerships and
T E R
38
Related Forms
It is not the individual but the team that is the instrument
of sustained and enduring success in management.
Anthony Jay, quoted in Management Teams – Why They
Succeed (R. Meredith Belbin, 1984)
38-1

2. Learning Objectives
• List and explain duties partners owe
to the partnership and each other
• Explain why partnership agreements
can resolve issues about partners’
management and compensation
rights
• Describe the liability of partners for
torts and contracts
38-2

3. Duties of Partners to
Partnership and Each Other
• Revised Uniform Partnership
Act (RUPA) states that partners
owe to the partnership and
each other the highest degree
of loyalty and must act
consistently with the obligation
of good faith and fair dealing
(a fiduciary relationship)
• Same duty applies to all forms
of partnership
38-3

4. General Duties
• Partners have duties to serve, account for
use or disposal of partnership funds, act
within actual authority, avoid interests
adverse to the partnership, disclose
material information, and maintain the
confidentiality of partnership information
– Exception: “silent” partners do not serve
– Partners may compete with the partnership
only upon the consent of other partners
38-4

5. Example of Partnership Duties
• Ann and Elkie own the Ann Elk Tavern as
general partners. Ann wants to invest in
her boyfriend Brock’s auto shop and
neighbor Carol’s Bar N’ Grill. Ann could
invest in Brock’s shop without competing
with the Ann Elk Tavern partnership, but
should not invest in Carol’s Bar N’ Grill
without first getting Elkie’s consent
– A tavern and a bar are too similar and
may give rise to a breach of duty claim
38-5

6. Example of Partnership Duties
• Monty is general manager of Python Inc. and
Brian handles the company’s finances and
accounting. Monty wants to help Arthur run
his auto shop instead of working for Python
Inc. While reviewing the books, Monty
discovered Brian used company funds for a
down payment on his car. Monty also found
out that Brian hired two employees yesterday
without consulting Monty.
– What issues are raised by this scenario?
38-6

7. Duty of Care
• Each partner owes a duty of care in
doing partnership business
• A partner isn’t liable to the partnership
for honest errors in judgment
(negligence), but is liable for losses
resulting from gross negligence, reckless
conduct, intentional misconduct, or a
knowing violation of law
38-7

8. Duty of Care
• A partner must make business decisions
that s/he has a reasonable belief are in
the best interests of the partnership
• A partnership agreement may alter the
duty of care, but may not eliminate duty
38-8

9. Spector v. Konover
• Partners agreed to build shopping plazas
under a particular entity
– No written agreement
– Managing partner Konover diverted
partnership funds to other entities and
commingled funds
• Appellate court found Konover liable for
breach of fiduciary duty by misusing
partnership funds, self-dealing, and
failing to disclose material information
38-9

10. Compensation of Partners
• RUPA states that a partner is not entitled
to salary or wages, even if
disproportionate time spent conducting
partnership business
– A monthly draw is allowable
• Instead, partner compensation is a share
of business profits, offset by shared losses
– Shared equally unless agreement to
the contrary
38-10

11. Management Powers
• Every partner in a partnership or LLP is
a general manager of the business
• Thus, by implied authority, a partner
binds the partnership and partners for
acts within the ordinary course of
business
• Agreement among partners may
expand, restrict, or eliminate a
partner’s implied authority
38-11

12. Management Powers
• A partner’s implied authority may not
contradict a partner’s express authority
created by agreement of the partners
• A partner’s express and implied
authority together constitute actual
authority
38-12

13. Restricting Implied Authority
• When a partner’s implied authority is
restricted or eliminated, the partnership
risks the possibility that apparent authority
to do a denied act will remain
• Partners may give notice of a partner’s
authority or limitation of authority by filing
a Statement of Partnership Authority or
Statement of Denial with the secretary of
state or the real estate recording office
38-13

14. Power to Convey Real Property
• An individual partner’s transfer of real
property owned by a partnership will
bind the partnership if expressly,
impliedly, or apparently authorized, or
ratified by the partnership
• A partner has implied and apparent
authority to sell real property if the
partnership sells real property in the usual
course of the partnership business
38-14

15. Borrowing Money
• A partner may not borrow money in the
partnership’s name without express,
implied, or apparent authority
• A partner in a trading partnership (with
inventory) has implied and apparent
authority to borrow money for partnership
• A partner of a nontrading partnership
(services) has no implied or apparent
authority to borrow money
38-15

16. Negotiable Instruments
• A partner with authority to borrow money has
authority to issue negotiable instruments
(e.g., promissory notes) for that purpose
• If a partner’s name is on a checking account
signature card filed with a bank, the partner
has express authority to draw checks
• Partners have authority to negotiate or
transfer instruments (e.g., checks) for the
partnership
38-16

17. Management Decisions
• In general, management decisions in the
ordinary course of partnership business are
by majority rule, one vote per partner
– Unless otherwise expressed by agreement
• Some decisions not in the ordinary course
of business require unanimous consent
– Example: a decision to expand or bring
in another partner
38-17

18. The Partnership Agreement
• By unanimous agreement, partners may
modify management rules such as limiting
or expanding authority, creating classes of
partners with special or weighted voting
rights, or delegating powers
• NBN Broadcasting, Inc. v. Sheridan Broadcasting
is a lesson in the necessity of
careful drafting of an agreement
38-18

19. Liability for Torts & Crimes
• Respondeat superior doctrine of
agency law may be applied to
determine liability of partners and
the partnership for torts of a partner
and partnership employees
• Partnership and partners are liable
jointly and severally for torts of a
partner committed within ordinary
course of partnership business
38-19

20. General Partnership as Entity
• Under RUPA, a partnership may sue or be
sued in its own name
• Partners also may be sued since they are
jointly and severally liable for partnership
obligations (contract or tort)
• If partnership and individual partners
sued, any judgment must first be satisfied
from partnership assets, then from
personal assets of the partners sued
38-20

21. General Partnership
Liability for Torts & Crimes
• Partners and the partnership are liable:
– When a partner commits a breach of trust
– For a partner’s negligence (generally)
• Generally not for a partner’s intentional
torts
• When a partnership and partners are held
liable for a partner’s tort, they may
recover the amount of their vicarious
liability from the wrongdoing partner.
38-21

22. The LLP & Tort Liability
• The limited liability partnership (LLP)
was created to reduce personal
liability of professional partners
– An innocent partner of an LLP has no
liability for malpractice of partners
• LLP partners also have no personal
liability for debts of the business, such
as an invoice, leases, or loans
38-22

23. LLP as Entity
• For contract obligations, only LLP is liable
• For tort obligations, LLP is liable as well as
the partner who committed the tort
– Innocent LLP partners bear no liability
• Ederer v. Gursky: New York’s LLP law,
while mostly shielding LLP partners from
liability to LLP creditors, did not shield LLP
partners from liability to each other for
breaches of contract or partner duties
38-23

24. Test Your Knowledge
• True=A, False = B
– Partners owe to the partnership and each
other an ordinary degree of loyalty
– Partners may compete with the
partnership as long as it does not harm
the partnership.
– A partner is liable to the partnership for
losses resulting from gross negligence or
reckless conduct.
– A partnership may sue in its own name.
38-24

25. Test Your Knowledge
• True=A, False = B
– In general, management decisions in a
partnership are decided by majority rule.
– A general partnership is liable for a
partner’s negligence.
– For contract obligations of an LLP, only
the partners are liable.
– A partner with authority to borrow money
has authority to issue negotiable
instruments.
38-25

26. Test Your Knowledge
• Multiple Choice
– Two accountants formed Caine & Able,
LLP. The partnership and each partner
was sued for Able’s alleged negligence.
Who might be liable?
a) Only Able due to his negligence
b) Only the partnership, Caine & Able
c) The partnership and Able
d) The partnership and either partner, jointly
or severally
38-26

27. Test Your Knowledge
• Multiple Choice
– A partner in a trading partnership has
what type(s) of authority for borrowing
money?
a) Express authority
b) Implied and apparent authority
c) Actual authority
d) Implied authority
e) All of the above
38-27

28. Thought Questions
• When drafting the
partnership agreement,
should duties and
compensation be
allocated evenly or
according to each
partner’s contribution
and skill? Should
partners be shielded
from personal liability?
38-28