Question

Joe entered into partnership with two others in the establishment of a real estate sales agency. The other two, Sam and Harry, had considerable experience in the real estate business but no money. Joe, on the other hand, had his own home and several significant assets, and although he didn't have any experience in the real estate business, his monetary contribution made him an equal partner with Sam and Harry. Unfortunately, Harry misused some trust funds that had come into his care as a result of business, investing it in the business of one of his sons rather than an interest-bearing account. The business of the son went sour and the money was lost. The client sued Harry, Sam, and Joe. a) Applying the relevant principles of law, identify and explain in details the type of partnership involved. Discuss the liabilities of Harry, Sam, and Joe based on the relevant legal principles.

Amanda and Florence decided to form a partnership for selling gourmet picnic baskets. To raise sufficient capital, they convinced their mothers to invest $5000 each as limited partners. Amanda's mother was an experienced restaurateur and watched the business with great interest. On several occasions, she advised them on the business and contacted old business associates to buy surplus stock. She even filled in taking orders in the office when needed. A customer who was made ill by contaminated food from a tin can supplied in one basket sued. b) Identify and explain in details the nature of the partnership as well as the liability, if any, of the mothers?

Answer 1

(a): In this case the type of partnership involved is a general partnership. All three partners are equal partners and as the partnership is a general partnership no liability protection will be offered to the partners. In case of a general partnership the partners are legally considered the same as the business and hence the personal assets can be considered as business assets. Also a partner will be responsible for the actions of the other partners.

In this case Harry, Sam and Joe will be liable for each other’s acts. They have unlimited liability for partnership debts and unlimited liability for the acts of their partners. As such Harry, Sam and Joe will all be liable towards the client who has sued. As Joe is the only partner with money he has the risk of losing his house as well as losing other assets and money that will be used to pay the debt owed to the client.

(b): In this case the mothers have entered into a limited partnership. Amanda and Florence clearly are general partners and their mothers have invested $5000 each as limited partners. Now in case of a limited partnership the limited partners are not involved in management. Here Amanda’s mother is clearly actively involved in the business and hence will not be considered a limited partner when a customer sues. On the other hand Florence’s mother will be regarded as a limited partner and her liability will be limited to $5,000 i.e. the amount invested by her.

In this case, the liability of Florence mother is limited to her financial stake in the business. However, Amanda's mother has unlimited liability.