4. Right to Extra Compensation

A partner who invests more capital, brings in more business, or works longer and harder than associates is entitled to no extra pay or share of the profits - unless all the partners so agree.

Answer the questions:

1. What rights do partners have? Name these rights.

2. What is tenancy in partnership?

3. What is the right to extra compensation?

Task 1

Solve the problem

Alan Gallagher and Norma Kendall each contribute $20,000 to begin their partnership. At one point, the venture is in trouble, so Gallagher lends the partnership an additional $10,000. Eventually, the partnership is dissolved. After the creditors are paid, $50,000 of assets remain. Kendall claims that each of them should receive $25,000. Is Kendall correct? Why or why not?

TEXT 5.

AUTHORITY OF PARTNERS

Each partner has an equal right to participate in management and act as an agent for the firm, unless otherwise agreed. Generally the law implies to each member the authority necessary to carry on the business. This includes the right to:

1. Make Binding Contracts, for the Firm

Acting within the scope of the particular business, each partner can make binding contracts deemed necessary or desirable, regardless of the possible folly of the deals. Any internal agreement limiting powers of a partner is binding on the partners, but not on third parties who do not know about the limitation. However, a partner who violates such internal agreement is liable to the other partners for any resulting loss.

2. Receive Money Owed to the Firm and Settle Claims against the Firm

All partners are bound by payments received, even if the recipient steals the money. Also, each partner may adjust debts of the firm by agreement with creditors. Each may compromise firm claims against debtors, setting for less than is due. Understandably, however, a partner may not discharge a personal debt by agreeing to offset it against a debt owed to the partnership.

Problem: Ascot, Digress, and Kilmer were partners in a service business. They obtained a $275,000 contract to install units in a car factory. Long before the job was complete, Kilmer accepted the final payment of $100,000 and disappeared with the money. Must Ascot and Digress absorb the loss and complete the job for the $175,000 already paid to them, without being paid an additional $100,000 by the car factory?

Answer to the problem: The partnership claim against the factory owners ended when Kilmer accepted the final payment. Ascot and Digress must complete the job. Their claim is against Kilmer if he can be found.

3. Borrow Money in the Firm Name

In a trading partnership, any partner can borrow for partnership purposes. In such borrowing, the partner can execute promissory notes binding the firm and can pledge or mortgage partnership property as security.

Partners in a nontrading partnership generally do not have such power.

4. Sell

A partner can sell in the regular course of business any of the firm's goods and give customary warranties.

Acting alone, however, a partner may not sell the entire inventory in a bulk transfer because this could end the business.

5. Buy

Any partner can buy for cash or credit any property within the scope of the business.

6. Draw and Cash Checks and Drafts

A partner can draw checks and drafts for partnership purposes and indorse and cash checks payable to the firm.

7. Hire and Fire Employees and Agents

Each partner has the authority to hire and fire employees and agents to help carry on the business.

8. Receive Notices of Matters Affecting the Partnership

When one partner is served with a summons and complaint against the firm, all are deemed to have received the notice, even if not informed. Likewise, one partner's declarations and actions in carrying on the business bind all partners even when contrary to the best interests of the firm.

Answer the questions:

1. How are the authorities divided among partners?

2. In what way are money questions settled among partners?

3. May a partner discharge a personal debt using the assets of a partnership?

Task 1

Solve the problem

Ruth Drummond, a general partner, purchases all merchandise for the partnership. A manufacturer gives Drummond a 10-percent discount on goods she purchases for the partnership. Drummond never tells the other partners about the discount and keeps the difference for herself. When the other partners learn of the discount, they demand that Drummond turn over the money she pocketed. Are the partners correct in their demand? Explain your answer.

TEXT 6.

PARTNERS’ LIABILITIES

Among themselves, partners may make any agreement they so choose with regard to authority in running the business. Others, however, may not be aware of such internal agreements. If so, the partnership and all partners are liable without limit for all obligations of the firm, which arise out of contracts, made by any partner within the scope of the firm's business.

The partnership and all partners are liable when any partner commits a tort (for example, negligence or fraud) while acting within the ordinary course of the business.

The wrongdoer would be obligated to indemnify the partnership for any damages it had to pay to the injured party. Of course, if the other partners had authorized or participated in the tort, all would share the blame and no indemnity would be payable. Liability for certain crimes committed in the course of business, such as selling alcoholic beverages to minors, is also imposed on the partnership and all the partners.

When a judgment is obtained against a partnership, and the partnership assets are exhausted, the individually owned property of the general partners may be seized and sold under process of law for the satisfaction of the debt. Creditors of the individual partners, however, have first claim to such property. Any partner who pays in obligation of the firm with personal assets is entitled to recover a proportionate share from each of the other partners.

A partner cannot escape responsibility for firm debts by-withdrawing from the partnership. After withdrawing, one remains liable for all debts incurred while a member. A new partner who joins the firm is liable for both existing and new debts of the business. However, creditors with claims, which arose before the new partner joined the firm, cannot seize the new partner’s nonbusiness property. Such creditors are limited to action against the new partner's share of partnership property.

Answer the questions:

1. Who is liable without limit, for all obligations of the partnership?

2. What can be done for the satisfaction of the partnership's debt?

3. Is a new partner who joins the firm liable for existing debts of the partnership?

Task 1

Put your legal skills in action

Partnership Liability Clay, who is a general partner in Harrington Enterprises, believes he will not be liable for a tort committed by Ian, another partner in the firm. Write a letter to Clay explaining whether he will be liable for Ian’s tort.

TEXT 7.

DISSOLVING A PARTNERSHIP

A dissolution is a legal detachment. The dissolution of a partnership is a change in the relationship of the partners that occurs when any partner stops being associated with the business. Dissolution is not the same as the termination of the business. When a partner dies or voluntarily withdraws from the firm, the firm is dissolved. The firm also may be dissolved by court decree. The partners then are no longer carrying on as co-owners of a business for profit. In contrast, dissolution occurs at the moment that one partner ceases to be associated with the firm. The business operations, however, cannot be stopped on a moment’s notice. It takes time to close the firm’s affairs and formally bring the firm to an end. During this period, the partners are not carrying on business.

Effects of Dissolution

Dissolution does not necessarily bring the business to an end. Other partners may want to continue in business together. If so, there must be an accounting of the old firm’s affairs. New financial arrangements must be made regarding the new firm. A new agreement must be drawn up regarding the conduct of the new firm. Public notice must usually be given to relieve retiring partners from liability for any new debts.

Distribution of Assets

Upon dissolution, an accounting of the firm’s financial affairs is necessary to determine how the firm’s assets will be distributed or divided. The firm’s liabilities are paid in the following order:

1. Money owed to creditors other than partners

2. Money lent by partners to the firm

3. The original money paid into the partnership by each partner

4. The surplus, if any, owed to the partners

Example: Suppose that one year after forming JAC Industries, Cecilia loans $50,000 to the business. If JAC Industries is dissolved, the firm’s creditors would be the first to be paid. Cecilia would be next in line for payment. After Cecilia’s loan was repaid, the three partners could then recover their initial contributions to the partnership.

If the business is insolvent, its assets must be sold to pay the creditors. In addition, the partners are individually liable for any unpaid balance that the sale of the assets will not cover. If both the business and one or more of its partners are insolvent, liability for debts is distributed differently. The firm’s creditors have the first claim on the partnership’s assets; the personal creditors of the individual insolvent partners have first claim on the insolvent partner’s personal assets.

Answer the questions:

1. What is dissolution?

2. What can be the reasons of dissolution?

Task 1

Solve the problem

As a partner, Hanes contributed $19,875 to a new partnership as his capital contribution. The other partners, Giambrone, Hayes, and Medley, made no capital contribution, although they had agreed to do so. Medley withdrew some of the money contributed by Hanes without the unanimous consent of the partners, although such consent was required by the articles. Medley also failed to make mortgage payments which caused the firm to default on the loan. Hanes asked a court for a dissolution. Is Hanes entitled to a dissolution? Why or why not?

TEXT 8.

CORPORATIONS.

Although partnerships and sole proprietorships are excellent forms of organization for some kinds of businesses, about 90 percent of all business in the United States is done by corporations. A corporation is a legal entity that is created by government grant. Courts speak of the corporation as an artificial person with an existence separate from the persons who organize, own, and run it. However, a corporation is created by people and can do nothing without the aid of people who act for it.

Although corporations are far outnumbered by sole proprietorships and partnerships, corporations do most of the business in this country. This is because the corporation has the following attributes, which are essential for large-scale enterprises: