Learning Objectives
Define dissociation and identify actions that cause wrongful and nonwrongful dissociations
Understand the causes of dissolution and the process of winding up
Identify issues involved in adding new partners to existing partnerships
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Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin9Introduction to Forms of Business and Formation of PartnershipsOperation of Partnerships and Related FormsPartners’ Dissociation and Partnerships’ Dissolution and Winding UpLimited Liability Companies, Limited Partnerships, and Limited Liability Limited PartnershipsPartnershipsPARTPartners’ Dissociation and Partnerships’ Dissolution and Winding UpPAETRHC39Change is inevitable, but it is in us to control its content and directions.Indira Ghandhi , Indian Prime Minister, speech (Jan. 8, 1967)Learning ObjectivesDefine dissociation and identify actions that cause wrongful and nonwrongful dissociationsUnderstand the causes of dissolution and the process of winding upIdentify issues involved in adding new partners to existing partnershipsSometimes even the best-laid plans go awry and a business failsSometimes, it is simply time to make a change by modifying a partnership business to re-emerge as another partnership form, such as a Limited Liability Company, or a corporationWhether an ending or new beginning, this chapter is about controlling a changeOverviewThe Revised Uniform Partnership Act (RUPA) defines dissociation as a change in the relation of partners caused by any partner ceasing to be associated in the carrying on of the business:A partner’s retirement, death, or expulsionA bankruptcy filingDissociationDissociation starts the process of dissolution, winding up (liquidation), and termination of a partnershipA partner has the power – but not necessarily the right – to dissociate from the partnership at any time, such as by withdrawing from the partnershipA partnership agreement may provide for a right of dissociationDissociationNonwrongful dissociation does not violate a partnership agreement and includes events such as death or retirement of a partner, or partner’s withdrawal in accordance with partnership agreementWrongful dissociation includes withdrawal that violate the partnership agreement or occurs before end of partnership’s term, filing bankruptcy, or judicial expulsionNonwrongful and Wrongful DissociationWhen a partner dissociates, dissolution may be the next step, but RUPA allows the partnership business to continue after a partner’s dissociationThus dissolution is not automaticRUPA provides a list of events that force a partnership to be dissolved and wound upAfter DissociationDissolution begins the winding up process:Orderly liquidation of partnership assets and the distribution of proceeds to those having claims against the partnershipWinding up partner has implied authority to do those acts appropriate for winding up the partnership business and apparent authority to conduct business as s/he did before dissolution DissolutionAfter partnership assets have been sold during winding up, proceeds are distributed to those who have claims against the partnership, including partners; creditor claims satisfied firstRemaining proceeds from sale of assets will be distributed to the partners according to the net amounts in their capital accounts Winding Up and Distribution of AssetsAsset distribution rules modified for limited liability partnership since in an LLP most partners have no liability for partnership obligationsIf a partner committed malpractice or another wrong for which LLP statutes do not provide liability protection, the partner must contribute funds to the partnershipDistribution of Assets For an LLPAfter partnership assets have been distributed, termination of the partnership occurs automaticallyTerminationPartners may choose not to seek dissolution and winding up after dissociation When the business of a partnership is continued, creditors of the partnership continue as creditors of the person or partnership continuing the business. Original partners remain liable for obligations incurred prior to dissociationIncluding dissociated partnersIf Business ContinuedA partnership agreement generally states terms under which a new partner is admitted to a partnershipIn absence of a partnership agreement, RUPA sets rules for partner’s admission and rights and duties upon admission:New partner fully liable for all partnership obligations incurred after admission as partner, but no liability for obligations incurred before admission as partnerPartners Joining PartnershipRUPA states that a new partner in an LLP incurs no liability for any LLP obligations, whether incurred before or after admission, beyond new partner’s capital contribution unless new partner committed malpractice or other wrong (and incurs personal liability)Partners Joining LLPThought QuestionsHow would you deal with a partner who was mismanaging the firm or committed malpractice? How would you deal with a partner who had a substance abuse problem?