ULC

Partnership Act Summary

UNIFORM PARTNERSHIP ACT (1994)

- A Summary -


Introduction

Partnership law in the United States has been derived from one source, the Uniform Partnership Act, since it was originally promulgated by the Uniform Law Commissioners in 1914.  The Uniform Act is the law of partnership in the United States.


But 78 years is a long time in the reckonings of the law, and in 1992 the Uniform Law Commissioners promulgated the first revision of the Uniform Partnership Act.  Some clarifying amendments were added in 1993 and 1994.  The new Act reflects both continuity and change.  On the one hand, it refurbishes a venerable form.  Partnership as a form of business organization precedes corporations, limited partnerships, business trusts, and just about everything else except the most basic business organization of all, the sole proprietorship.  And, in UPA (1994), a partnership retains its basic, historic character.


But, at the same time, the partnership form has to be adapted to the changes in the way business is done and the way it is expected to be done far into the next century.  The change reflected in UPA (1994) is of an evolutionary sort.  The distilled experience of the past 80 years is the basis for the new text.


A partnership is a form of business organization.  It exists whenever more than one person associates for the purpose of doing business for profit.  The notion is that the partners join their capital and share accordingly in profits and losses.  They also  share control over the enterprise and subsequent liabilities.  Historically, every partner is equally able to transact business on behalf of the partnership.  Creditors of the partnership are entitled to rely upon the assets of the partnership and those of every partner in the satisfaction of the partnership's debts.  The character of any partnership depends upon the agreement of the partners.


A partnership may be as simple as two people meeting on a street corner and deciding to conduct some business together, arising from no more than verbal agreement and a handshake.  A partnership may also be as complex as a large law firm, with tiers of partners and varying rights and obligations, memorialized in extensive written agreements.  Partnership law must accommodate them all.


 UPA governs the creation of a partnership, establishes what the nature of this business organization is, and provides some rules respecting the rights and obligations of partners among themselves, and those between partners and other parties that do business with the partnership and the partners.  It provides the rules that govern the dissolution of a partnership when the appropriate time comes to dissolve it.  The original Act did this, and UPA (1994) is designed to do the essential task much better.  UPA (1994) adds, as well, concepts not ever contemplated in the 1914 Act, the concepts of merger and conversion.


This summary is an effort to highlight the essential differences between the 1914 Act and UPA (1994).  It cannot be a comprehensive review, but is designed to point out to the reader the progress of 1994 over 1914.

Nature of a Partnership

The first essential change in UPA (1994) over the 1914 Act that must be discussed as a prelude to the rest of the revision concerns the nature of a partnership.  There is age-long conflict in partnership law over the nature of the organization.  Should a partnership be considered merely an aggregation of individuals or should it be regarded as an entity by itself?  The answer to these questions considerably affects such matters as a partner's capacity to do business for the partnership, how property is to be held and treated in the partnership, and what constitutes dissolution of the partnership.  The 1914 Act made no effort to settle the controversy by express language, and has rightly been characterized as a hybrid, encompassing aspects of both theories.


It is not necessary to go into the dispute with much detail here, because UPA (1994) makes a very clear choice that settles the controversy.  To quote Section 201:  "A partnership is an entity."  All outcomes in UPA (1994) must be evaluated in light of that clearly articulated language.


What are some of the outcomes of this decision to treat a partnership as an entity in UPA (1994) that are not part of the hybrid 1914 Act?  The 1914 Act expressly permits a partnership to hold property as a partnership.  The difference is the interest that each partner holds.  In the 1914 Act, a partner is treated "as a co-owner with his partners of specific partnership property holding as a tenant in partnership."  In UPA (1994), a partner has his or her partnership interest, but is not a co-owner of specific partnership property.  The entity holds the specific property.  The partners have their interest in the entity.

The 1914 Act approach, which reflects the retention of aggregate theory in that hybrid Act, constitutes a serious impediment to transferring property to and from the partnership.  The 1914 Act has to provide rules that carefully limit and restrict the transfer powers of partners so that individual partners cannot convey their ownership rights in ways to injure and inevitably defeat the partnership.  Even so, subsequent cases have revealed the co-ownership aspect of partnership to be a serious weakness in partnership structure.  That serious weakness is not continued into UPA (1994).


Dissolution of the partnership is another area in which selection of entity versus aggregate theory makes a big difference.  Dissolution will be discussed a little later, but dissolution occurs whenever a partner disassociates under the 1914 Act, but not necessarily every time he or she dissociates from the entity under UPA (1994).  Partnerships based upon aggregate theory are simply more fragile than partnerships based upon entity theory.

Creation of a Partnership

Creation of a partnership requires association of two or more persons to do business for profit.  The concept is not materially different between the 1914 Act and UPA (1994).  What UPA (1994) does is to put expressly what has been regarded as implied in the 1914 Act.  By and large the rules of the 1914 Act have been regarded as default rules, rules that apply in the event that there is no express provision in the partnership agreement.  The reliance upon implication leaves certain gray areas that have caused problems.  How far can a partnership agreement go in abrogating the fiduciary responsibilities of a partner to other partners, for example?


UPA (1994) clearly expresses the primacy of the partnership agreement.  The agreement applies, and the rules of UPA (1994) are regarded as default rules, with the exception of certain rules that protect partners.  For example, a partner's duties of loyalty and good faith cannot be abrogated by agreement.  The agreement cannot take away a partner's right of access to the partnership books.  In general, however, the partnership agreement expressly controls over the language of the statute in UPA (1994).

Statement of Authority

A partnership is created anytime individuals associate together to do business.  Under UPA (1994) the partnership formed is an entity, not an aggregation of individuals.  UPA (1994) makes it clear the partnership is controlled by the agreement of the partners.  But the partnership must function to do business, and the 1914 Act treats partners as co-equal in the conduct of that business.  Any partner is an agent of the partnership.  Any partner has the capacity to transfer property on the partnership's behalf.  Any person doing business with a partnership is entitled to rely upon these basic rules to bind the partnership.  To a large extent, these rules continue to apply in UPA (1994).


But UPA (1994) adds a new partnership capacity to the rules of the 1914 Act.  The adoption of entity theory, again, provides some different perspective.  Entities such as corporations and limited partnerships are founded upon the filing of a certificate in the appropriate state office.  UPA (1994) does not require filing a certificate to found a partnership, preserving the availability of the partnership form of organization to both large and the small entities.  However, it permits the filing of a statement of partnership authority.  The statement can be used to limit the capacity of a partner to act as an agent of the partnership, and limit a partner's capacity to transfer property on behalf of the partnership.  The statement is voluntary.  No partnership need file such a statement, nor is the existence of the partnership dependent upon the filing of any statement.  But the statement, if filed, has an impact upon a third party dealing with the partnership.


The main effect is to assure any third party that the business of the partnership can be conducted and the partnership will be bound, if the third party deals with a partner with authority provided in a statement.  Any limitation upon a partner's authority, however, does not affect any third party who does not know about the statement, except as to real estate transactions.  If there is a limitation in a filed statement, that is also filed in the real property records of the locale, then a third party dealing with that partner in a real estate transaction is held to know of the limitation.

 

Other Statements Available

UPA (1994) provides for other statements that may be filed, as well, pertaining to the partnership.  A partner may file a statement of denial respecting facts, including limitation upon partnership authority, found in a statement of partnership authority.  A partner or the partnership may file a statement of dissociation for the partner.  And there is a statement of dissolution that may be filed when a partnership is dissolving.  Each of these statements has a notice function.  Third parties are held to have knowledge of these last two statements 90 days after they are filed.


If there is a merger, a statement also may be filed.  A merger statement establishes the property relationships of the new entity with respect to property of the merged entities.


Although these statements are not essential to either the creation or dissolution of a partnership, they have impact upon third parties transacting business with a partnership.  They give necessary flexibility to the partnership in the conduct of business, and are important advances over the 1914 Act for that reason.  They are also artifacts of the overall shift to entity theory in partnership law, the essential underlying shift in UPA (1994) over the 1914 Act.

Fiduciary Responsibilities

When a partnership is viewed as an aggregate of interests and an organization in which every partner is absolutely able to conduct the business of the partnership with third parties, and is able to conclude the partnership by any act of withdrawal, express treatment of partners' responsibilities to each other in the conduct of business may not be so important.  All partners are assumed to be participating in the conduct of the business with knowledge of what other partners are doing on a daily basis.


The 1914 Act has very little to say about a partner's responsibilities to the other partners.  A partner is a fiduciary who "must account to the partnership for any benefit, and hold as a trustee for it any profit derived by him without the consent of the other partners..."  There is a full duty of disclosure between partners, but the 1914 Act is otherwise silent on the fiduciary responsibilities of each partner to the other partners.


UPA (1994) is not so silent.  It articulates duties of loyalty and care to which each partner is to be held.  There are baseline standards of conduct, therefore, that a partner has to meet.  No agreement can abrogate these baselines.  In addition, there is an express good faith obligation to which each partner is subject.


The duty of loyalty includes the duty expressed in the 1914 Act, but adds to it.  There is a duty not to do business on behalf of someone with an adverse interest to the partnership's.  A partner must refrain from business in competition with the partnership.


The standard of care with respect to other partners is gross negligence or reckless conduct.  A partner would be liable to another partner for such conduct, but not for ordinary negligence.  The good faith obligation simply requires honest and fair dealing.


A partner may be sued more broadly in UPA (1994) than is the case in the 1914 Act.  The earlier Act limited legal action to an action for an accounting.

Dissolution

A partnership dissolves under the 1914 Act upon the happening of specific events, either the end of the prescribed term of the partnership, as agreed by the partners, or when a partner dissociates, rightfully or wrongfully, from the partnership.  At dissolution, the business of the partnership has to be wound up and fruits of the enterprise distributed to the partners ─ after the creditors are paid, of course.


Automatic dissolution of the partnership after dissociation of a partner does not take place under UPA (1994).  In a partnership at will only a partner who dissociates with notice of "express will" to dissolve causes the dissolution of the partnership.  Thus, if a partner is simply bought out, there is not automatic dissolution.


In a partnership for a term or for a particular purpose, dissolution and winding up are required unless a majority in interest of the remaining partners agree to continue the partnership within 90 days after a partner's triggering dissociation before the expected expiration of the term of the partnership.  Again, a dissociation that triggers a buy out of the dissociating partner's interest does not imperil the partnership with dissolution.


Of the changes that UPA (1994) makes over the 1914 Act, these rules may be the most significant.  The ordinary dissociation of a partner does not mean the dissolution of the entity.  It takes something more under UPA (1994).


Dissociation normally entitles the partner to have his or her interest purchased by the partnership, and terminates his or her authority to act for the partnership and to participate with the partners in running the business.  Otherwise the entity continues to do business without the dissociating partner.  No other characteristic of a partnership under UPA (1994) better illustrates the adoption of entity theory.

Conversion and Merger

UPA (1994) has absolutely new provisions on "conversion" and "merger."  A partnership may convert to a limited partnership or a limited partnership may convert to a partnership under these new statutory rules.  A partnership may merge with another partnership or limited partnership, forming an entirely new entity, under the new rules of UPA (1994).


Since a partnership is really a matter of agreement of the partners, there is no absolute barrier to either conversion or merger for a partnership under the 1914 Act.  It would require unanimous consent of the partners, and a winding down process for the prior partnership or partnerships.  What the statutory provisions of UPA (1994) do is to provide a process, and to permit agreement to less than unanimous consent of all partners to accomplish either conversion or merger.  Under UPA (1994), a partnership agreement can specify that either conversion or merger can be accomplished with less than unanimous consent.  The agreement controls.

Conclusion

These are some of the principal advances of UPA (1994) over the 1914 Act.  Partnership, as a fundamental form of business organization, needs to be updated for the next century.  UPA (1994) provides the needed update.


Founded in 1892, the National Conference of Commissioners on Uniform State Laws is a confederation of state commissioners on uniform laws.  Its membership comprises more than 300 attorneys, judges, and law professors, who are appointed by each of the 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, to draft uniform and model state laws and work toward their enactment.

Limited Liability Partnerships:
The 1996 Amendments to the Uniform Partnership Act (1994)

- A Summary -

The Uniform Partnership Act (UPA) was approved by the Uniform Law Commissioners in 1994.  It is a complete revision of the Uniform Partnership Act of 1914, which was adopted in every state except Louisiana.  UPA updates partnership law to meet the needs of modern business, clearly establishing that a partnership is an entity rather than an aggregate of partners.

The 1996 Amendments to UPA add a significant option to partnership law:  limited liability for all partners in a partnership when the entity chooses the registered limited liability partnership form.  A partner in a limited liability partnership has nearly the same level of limited liability as a shareholder in a business corporation.

One of the historic principles of general partnership law is that each individual partner is personally liable for all partnership obligations.  This means that partners may be required to discharge partnership obligations from their own personal assets once partnership assets are exhausted.

However, limited liability for participants in a business organization can have an important economic impact.  Whether an individual or entity invests in or participates in a business may very well depend upon the quality of limited liability—for obvious reasons.  Much of the current development in unincorporated organization law has been devoted to combining the flexibility of a partnership with limited liability for the participants in the business.  The limited liability company and certain kinds of business trusts are examples.

But the search for an even simpler form has continued.  Texas pioneered the concept of a limited liability partnership in 1991.  The notion of a partnership that obtains limited liability for partners by a simple registration on the public record provides an even simpler form than a limited liability company, for example.  The Texas experiment lead directly to the Amendments to UPA.

The 1996 Amendments to UPA provide for a limited liability partnership with complete limitation of liability.  Some of the pioneer legislation posed limitation of liability only for professional malpractice.  The UPA Amendments provide for immunity from personal liability for any partnership obligation.  A partner who personally incurs an obligation in the conduct of partnership business is fully liable.  Immunity is granted only for liability that is imputed simply because a partner is a partner, not for liability directly incurred.

 Limited liability is an election that requires partners to register to become a limited liability partnership.  Corporations, limited partnerships, and limited liability companies, which provide members or participants with some level of limitation of liability, all are registered entities.  A limited liability partnership must also identify itself as an L.L.P. to those with whom it does business.  The registration and identification requirements are to provide clear notice of its limited liability status to those who do business with a partnership.  Creditors may and will adjust their assessments of credit-worthiness, accordingly.

The Amendments provide an option.  The traditional partnership remains intact as the "residual" business organization for those who join to do business together.  The continuity of partnership law that comes from the 1914 Uniform Partnership Act remains unsullied.  A limited liability partnership is a partnership, and the rules that govern such matters as partners' obligations to each other, distributions, dissociation from the partnership, dissolution of the partnership, and the like, remain the same for limited liability partnerships as they do for traditional partnerships.

The objective of the 1996 Amendments to UPA is to increase choices for those who join to do business together.  This should have a positive impact on the formation of new businesses.  Tax consequences have always been a major factor in decisions about which form of business organization to choose.  This impact upon choice appears likely to become less important in the future with the promulgation of new regulations by the Internal Revenue Service.  Therefore, the appearance of the Amendments to UPA could not come at a more propitious time.
Uniform Partnership Act (1997)

- A Summary of Summaries -


Because of the complex chronology of the Uniform Partnership Act since its initial revision in 1992, this short summary does two things, 1) it provides a short history of the revision process, and 2) it provides a short summary of the 1997 Amendment.  An initial revision of the 1914 Uniform Partnership Act was promulgated in 1992.  It was officially amended in both 1993 and 1994.  In 1996, the Limited Liability Partnership Amendments to the Uniform Partnership Act were promulgated.  In 1997, a short amendment was added to Section 801.  This progression through revision and amendment is now all together in one final act called the Uniform Partnership Act (1997). 

A summary of both the Uniform Partnership Act (1994) and the Limited Liability Partnership Amendments to the Uniform Partnership Act were prepared as separate documents.  Both of these summaries are part of the materials explaining the Uniform Partnership Act (1997), and should accompany this document.  If you do not find the two summaries accompanying this document, call the ULC national office at 312 450 6600 or FAX it at 312 450 6612 or send an e-mail to nccusl@nccusl.org.  Any of these modes of communication will get you the full array of summaries.

The 1997 amendment to Section 801 of the Uniform Partnership Act reflects the changes in tax policy unveiled by the Internal Revenue Service in late 1996.  Section 801 is the basic section in the Uniform Partnership Act governing dissolution of the partnership.  The Uniform Partnership Act (1994) provided a safe harbor for a term or particular purpose partnership from dissolution when a partner dissociated.  A majority in interest of the remaining partners could agree to continue the partnership within 90 days after the dissociation.  This agreement saved the partnership from dissolution and winding up.  In 1994, this was considered the most that could be done for the continuation of the partnership under the tax rules at that time.

Under the 1997 amendment, a partner’s dissociation in a term or particular purpose partnership no longer triggers a dissolution and winding up, unless a majority in interest of partners agree to continue.  The partnership continues under the 1997 amendment unless at least half the remaining partners move by express will to dissolve the partnership within 90 days after the initial dissociation.  Only then is there a dissolution and winding up.  The new rule favors the continuity of the partnership more than the old rule does.  The new tax rules have simply eliminated the old concern for continuity of life as a corporate characteristic, making the new rule favoring continuity of a partnership feasible.