Personal Liability in a Partnership - Case Study Example

Case Scenario Student’s Name Institution City Date Due Question 1 The term partnership has for long been used to refer to an association of two or more people with an aim of making profit. Further, partnerships can be formed under two main types in accordance with law namely, general partnership and the limited liability. The general partnership is one in which all the partners are liable for all debts and obligation of the business while the limited partnership requires the presence of a general partner who is liable for all the debts and obligations of the partnership while the others are only liable to obligations up to the amount they have contributed into the business1. The formation of a partnership demands that persons coming together should do so willingly and have a primary objective of making profits. More so, the agreement between the partners should be done either through a written agreement or through the word of mouth ‘oral’. Consequently, when looking at the legal issues relating to partnership then there must be a clear perception that the partners come together with an aim of making profit. Hence a person who receives a portion of the profit as a payment to debts owed by the firm should not be confused as a partner. Such a transaction must be considered as being a protected relationship. In essence, the law acknowledges the legal relationship between partners but it does not acknowledge the partnership as a unit detached and distinct from the partners. The legal perspective of a partnership ignores the idea of recognizing a partnership as its own parson. It views it as the partners who formed it. Consequently, it is expected that the partners are entitled to sharing profits equally unless the agreement states otherwise. This goes further all partners are expected to participate equally in the management of the partnership. Likewise, for the obligations and liabilities the partners are equally liable2. In the case at hand, the partners (Tom and Adam) are in an orally agreed partnership whose agreement is to share profits and losses equally. The concerns of Adams are basically on the liability and obligation issues. As earlier stated in this essay, partners are expected to incur liabilities according to the partnerships agreement. Hence, in this case, the partnership is founded on a fifty-fifty agreement hence this is expected to be the base line even on the liabilities and obligations of this partnership3. However, this scenario also raises the issue of acquisition of new property in the partnership after it has already been established. Secondly in this partnership these business partners contributed property (Tom contributed land while Adams contributed Machinery). In a the case this partnership remained the same where there is no additional property it would be expected that the y would calculate the machine’s value due to depreciation and calculate the lands appreciation and divide the same amongst them. Thus the machine would be assumed to belong to Adams while the land would remain as being Tom’s property. However if new property is acquired through proceeds profits ploughed back by both partner then this new property should belong to the business. Therefore, before they purchase this land they should clearly know the source of the funds being used to purchase the land. Hence this will be the bases on which one will judge who incurs the liabilities and debts due to this transaction. In conclusion, there are various advantages for one engaging in a partnership business. Such examples include; this form of business is easy to start or establish, more than one owner reduces the burden of raising capital because their borrowing capacity is greater, ability to attract and retain since the business is capable of giving the incentive to become a partner, partnerships may benefit if the partners have complementing skills, the business is able to consult a widely due to the ability to access great networking, acquaintance, skills and contacts, partnerships can be easy to learn due to specialization of the partners in various departments in the firm, lastly the partners give moral support to one another. On the other hand these business formations have their disadvantages such as, presence of unlimited liability where all the partners are liable to debts of the firm even after bankruptcy where personal property can be used to settle such debt. Disagreement and personal disputes between the partners may cause the business to collapse. Partners are limited to the amount they can contribute; the business is limited in its growth due to a maximum of twenty members Question 2 In the second scenario the issue of legal obligation is very clear. The action of Adam goes against the legal obligations and limits that a partnership demands. In this support, Partnership act 1895-SECT 22 states that through admission by any partner about the firm while on official duty or business travel, any transaction the partner engages in is evidence against the firm although it is not applicable if the partner represents the firm on his own authority4. As discussed earlier, all business transactions as well as major decisions about the business should be done through consultation. The partners should engage in dealings that are beneficial to the business. Even though this was the intention that Adam had while pledging for those machines and casings. He should have consulted with his partner. For example, was he allowed to do what he deemed best for the business while on that trade fair? However, the reaction of Tom on realizing Adams action shows that this was not the case. Arguing both ways would bring about the questions, who would benefit from the equipment? Definitely the equipment and wine would benefit the firm and not Adam. The second question that will arise is, did Adam have the authority to undertake this transaction? The answer is No, as stated in the case,’………even though he did not have express authority to do so.’ The first answer is greatly diluted by the second answer. The legal implication on Adams action would be that he pays for the equipment with his own money and bring them in the partnership as private property. Moreover, it is expected that this being a partnership of two individuals, Adam must have been aware about the financial position of the firm. He should have made the best judgment that would not hurt the business at its current position. However he did not act wisely since the equipment and wine was not a necessity at that time. This makes him liable to this obligation and should as such be fully charged the full amount5. In every partnership business it is important for the patters to respect the position of both the business and the other partners. In a partnership like the one being evaluated in this case scenario (with two partners) it is very important that either partner distinguishes the thin line differentiating him and the business. Such a firm is easily confused with sole proprietorship. Moreover, the fact that this business was founded on an oral foundation might have diluted the seriousness that the partners would have regarded the business if it was formed on a written agreement. Oral agreements though valid lack seriousness and many assumptions are made. In fact most scholars have argued about the legal obligations of an oral agreement. Most of them have found it to be weak but they have not been able to prove it as being void. Therefore, in the case at hand Adam may have acted in good faith but in law assumption or negligence does not count. In addition, partnerships are founded on a base that requires deep consultation since what might be good for one partner might be the opposite of the other partner. Major decisions like investment of profits, acquisition of property, invitation of new partners among others need to be evaluated by al the partners since the affects the business even in the long run6. Going back to the first case scenario, this partnership having been founded on a weak agreement and having started with tangible assets as the main contributions by both partners may be the main cause of this misjudgment. There was no concrete agreement on many issues that affects a business. Consequently, the partners assume that they are on mutual agreement rather than in a contract and as such one partner can act on behalf of the business without consulting the other as long as he deems the actin as being fit7. Lastly, this second case scenario highlights the issue of private decisions within a partner and goes deeper to evaluate the best approach that should be followed while acquiring property by on partner on behalf of the partnership. Legal guidelines have emerged and they have greatly helped use to understand the best way to conduct transitions that affects the firm. Lastly, the case has exposed us to the effects of starting a business on an oral agreement. It has been demonstrated that oral agreements may result to negligence and assumptions that might affect the business negatively8. In conclusion partnerships are firms that are run by two to twenty people with the aim of making a profit. These partners are expected to enter into an agreement that details the roles of every partner, method of sharing profits and losses , define what is private and partnership property, define how transactions and partnership property should be acquired among other major issue. The main aim of this agreement is to reduce future unanticipated disputes that may hurt the business. Moreover, the partnerships agreements should be kept under a custodian who should not be a partner so that incase legal obligations arise they can act as guidelines to solve the tangle. References Emanuel, Steven L. Emanuel Law Outlines: Contracts. New York: Aspen Publishers Online, 2006. Emerson, Robert W. . Business Law, Barron's Business Review Books, 5th Ed. Hauppauge, New York: Barron's Educational Series, 2009. M Ller, Michael . Personal Liability in a Partnership: A Comparative Analysis of U.S. and German Law. Santa Cruz, CA: GRIN Verlag, 2011. Warner, Attorney Ralph , and Attorney Denis Clifford. Form a Partnership: The Complete Legal Guide. Berkeley, California: Nolo, 2012. Acts, Western Australian Consolidated. "PARTNERSHIP ACT 1895 PARTNERSHIP ACT 1895." Acts, Western Australian Consolidated. n.d. http://www.austlii.edu.au/au/legis/wa/consol_act/p84a1895135/ (accessed november 21, 2012). Morse, Geoffrey . Partnership Law. Oxford University Press: Oxford, 2010. Read More