Reference no: EM132183015

Write up to 2 pages:

Background Reading:

Partnership and Limited Partnerships

A business partnership has many similarities to a marriage – easy to form, usually with friends, confusing to dissolve, acrimonious during the dissolution, resulting in legal liability for someone else’s contractual actions and negligence. In a partnership, the individuals don’t own anything separately, instead partnership property is owned by the entity – the partnership. Moreover, in a partnership the individuals do not own any specific items of property, only the right to get the value of the property after third parties are paid.

One of the main concepts to understand about partnerships is the fact that partnership law is not particularly intuitive. The partnership is a separate legal entity with a "flow-through" aspect. For example, if a partnership is unable to meet its obligations, the partnership's liabilities are passed through to the individual partners, resulting in the partners becoming separately and jointly liable.

Another example of the "flow-through" nature of a partnership is illustrated by examining the income tax treatment of partnerships. For tax purposes, the partnership only files an informational tax return. Individual partners pay taxes on their share of the partnership profits.

The "flow-through" nature of a partnership can also be seen when examining how profits are handled by the partnership. Although a partnership collects proceeds from business activities, profits actually belong to the partners. The partnership agreement should therefore contain a profit-sharing agreement indicating how partners will divide partnership profits.

The creation of a partnership is a consensual relationship. No one can force a “partner” on anyone. No one may force an existing partner to remain a partner if he/she wishes to leave.

A partnership agreement governs the partnership relationship. If the partnership agreement does not address an issue, the Uniform Partnership Act applies. In addition, agency law (which was discussed in an earlier chapter) also applies to partnership relationships.

Another aspect of this area of the law is that the parties' intent to create a legal partnership is not conclusive in determining whether a partnership exists. The court evaluates whether there is an association of two or more persons carrying on as co-owners, sharing profits and losses in joint ownership with equal management rights. The intent to associate is a critical factor in determining whether a partnership exists.

In evaluating whether a partnership exists, a critical issue is usually whether the parties are co-owners of the business. Co-ownership means that each partner has a unilateral right to manage the business (even though they may relinquish that right, they must at least come to the table with it). When deciding whether a partnership exists, the court looks at the substance over the process. In other words, entering into what looks like a perfect partnership agreement does not necessarily result in a partnership.

Partnership Termination

Partnerships can disband based on (1) terms of the partnership agreement; (2) voluntary or involuntary withdrawal, the addition of new partners, death of a partner, bankruptcy of the partner or partnership, judicial degree. Dissolution requires express or implied notice to each partner. In addition, partnerships must provide actual notice to third party creditors of the partnership and actual or constructive notice to any other third party affected by the dissolution.  

For a dissolution to be formalized, either express or implied notice must be given to each partner and the partnership must give actual notice to any third party creditor of the partnership and actual or constructive notice to any other third party affected by the dissolution. Following the formal dissolution and notice to partners and affected third parties, partners are only authorized to complete pending transactions and wind up partnership affairs.

Once the partnership terminates, partnership assets are distributed in the following order. First, third party debts and partners’ loans or advances to the partnership are paid. Next, each partner’s capital contribution is paid. Finally, there is a distribution of profits to the partners in proportion to their pre-termination share of profits, unless otherwise agreed.

Limited Partnerships

A limited partnership is an entity composed of at least one general partner and at least one limited partner. A general partner manages the business and is personally liable for partnership obligations, while a limited partner contributes assets to the partnership but does not participate in the management of the partnership.

In regard to limited partnerships, it is critical to understand that the only way to be a limited partner is to file articles of limited partnership with the Secretary of State and list all of the limited partners in that document. The fact that a partner is a “silent partner” has no legal meaning if the formal document is not filed and his/her name is not on that document. The other important point is that once a person is a limited partner, if he/she begins to act like a general partner by managing or helping to manage the partnership business, the limited partner will then be treated as a general partner during the period of time that the limited partner assumes general partner duties and will therefore have unlimited personal liability for partnership debts. Again, substance over form!!

Consider the following scenario. Assume you are a partner and your partnership sells a defective product resulting in injury during the time that you were a partner. A lawsuit is filed after you retire from the partnership. Although you are no longer in the partnership at the time the lawsuit is filed, you will still have unlimited personal liability for the partnership debt. You CANNOT get rid of it in regard to the injured third party; even if you had the remaining partners sign a “hold harmless” agreement with you when you retired. What will happen is your personal assets will be available to the third party and you will have a legal right to sue the partners for their pro-rata contribution for what you lost. The only way to avoid such future liability is to die BEFORE such a lawsuit is filed. If you die after the lawsuit is filed, your estate will be tied up until the lawsuit is settled.

Facts:

Walid Elkhatib, an Arab American, bought a Dunkin- Donuts franchise in Illinois. Ten years later, Dunkin' Donuts began offering breakfast sandwiches with bacon, ham, or sausage through its franchises. Elkhatib refused to sell these items at his store on the ground that his religion forbade the handling of pork. Elkhatib then opened a second franchise, at which he also refused to sell pork products.

The next year, at both locations, Elkhatib began selling meatless sandwiches. He also opened a third franchise. When he proposed to relocate this franchise, Dunkin' Donuts refused to approve the new location. The company also informed him that it would not renew any of his franchise agreements because he did not carry the full sandwich line. Elkhatib filed a lawsuit against Dunkin' Donuts.

Questions

Assume that you represent Elkhatib. Present an argument demonstrating that Dunkin' Donuts wrongfully terminated Elkhatib's franchise. Use the chapter 36 concepts related to a franchise termination in arguing Elkhatib's case.

Assume that you represent Dunkin' Donuts. Use the chapter 36 concepts to argue that Dunkin' Donuts decision to terminate the franchise was justifiable. Use the chapter 36 concepts related to a franchise termination in defending Dunkin' Donuts decision to terminate the franchise.

In your opinion, did Dunkin Donuts act in good faith in its relationship with Elkhatib? Consider whether Dunkin' Donuts should be required to accommodate Elkhatib's religious beliefs and allow him to refuse to serve pork in these three franchise locations.

Should Elkhatib rethink his decision to operate the business as a franchise and consider alternate forms of business operation? Why or why not? Explain. What other forms of business operation should Elkhatib explore?

For Elkhatib, what are the advantages and disadvantages of operating a donut shop as a Dunkin' Donuts franchise?