Determining Partnership And Dissolution: A Case Study Essay.

1. Does a partnership between Todd and Zac exist? In the “A- Analysis/Application” part of your answer, make arguments both for and against the existence of a partnership. For questions B-F, you should assume that a partnerships does exist.

2. Is Zac entitled to the money from the beer he had been selling?

3. Who is liable to pay the outstanding rent?

4. If Denton successfully sues1 Zac and Todd, who is liable to pay the compensation?

5. Can Zac leave the partnership in the way he did?

6. Is the brewing equipment, Todd’s laptop, and recipe and formula partnership property?
 

Determining Partnership Based on Partnership Act Section 2

According to the Partnership Act 1891 Section 1, a partnership entails a subsisting relation between people who participate in a business venture together with the aim of getting profits. In this scenario, Todd and Zac are best friends who also have a common interest in liking beer. It is this interest that drove Zac into setting up a brewing facility. He uses his own money to buy equipment while Todd chips in by providing space in his father’s shed. It is upon these facts that one has to establish whether a partnership exists between Zac and Todd. In this attempt, the 1891 Partnership Act Section 2 provides rules which help in the determination of whether a partnership exists. Further, it is essential to use the IRAC (Issue, Rule, Application, and Conclusion) method in dissecting the scenario at hand

Issue

As stated above, the issue here is whether a partnership exists between Todd and Zac. For this to be answered, “Rule” has to be looked into so that acts are determined and the favorable laws and statutes are used to determine the issue at hand. 

Rule

A close look at section 2 1 (a) of the 1891 Partnership Act states that a partnership exists in a situation where there is a joint tenancy, the existence of a common property, (b) sharing of profits and losses equally or gross returns. When it comes to liability, this is presented in Section 9. Partners are liable for all debts that accrue in the business as well as any kind of obligation.

Application

From the Partnership Act, one can discern that there is no partnership between Todd and Zac. First, there is no joint ownership of equipment used in brewing beer. Zac used his own money to purchase the brewing equipment. Similarly, there are no guidelines for the sharing of profits and losses. There is also no consultation between Todd and Zac when a new business venture between Klaus and Todd is being arranged. Partners should have similar interests. Despite this requirement, Zac is not interested in making money or profits compared to Todd. From these facts, there is no partnership.

On the other hand, it is seemingly impossible to evade the fact that there seems to be a partnership. Being a friend, they love the fact that they can brew beer. Todd and Zac also become active in setting up the facility, with Todd providing space and clients for a start. However, the absence of clear guidelines regarding the sharing of profit and losses makes the two friends to become enemies in the end.

Conclusion

In a nutshell, there was no partnership between Zac and Todd owing to the fact that they did not have common goals, did not have joint property/assets and there were no clear rules in how the business could be run. This conclusion is mainly pegged on the fact that there is the absence of a common goal for making a profit, as stipulated by section 1 of the Partnership Act, 1891 

Being a partnership, al profits and losses got from the business must be shared equally. As such, Zac is not the only one entitled to the money he got from selling the beer alone. This is a guideline provided by section 9 of the 1989 Partnership Act which stipulates that partners in a firm are jointly liable for all obligations and debts as well as gains that are incurred when the membership still exists. It is essential for partners to exercise a duty of good faith. In this instance, Zac should be compelled to share equally what he got from the sales of beer with his partner Todd. One is also legally bound to inform the other partner about business activities that he or she takes part in. By agreeing to set up a business venture together, the two friends needed to follow the guiding principles of partnerships. It is unfair to hide earnings or profits from a colleague and by doing so, a partnership ceases to exist. In a nutshell, Zac is not entitled to the money he got after selling beer, without notifying Todd. 

The main issue to be looked into here is a liability in terms of payment for the outstanding rent. Being a partnership, the two have a joint tenancy stipulated under Section 2 (1) (a).  Joint tenancy is a determinant of whether a partnership exists. As such, both Todd and Zac should share the outstanding rent equally. In support of the company, Todd decided to borrow $10,000 from his dad so that he could expand the business. From the onset, it is evident that both parties were involved in expanding the business. It is thus essential to note that in a partnership, all duties and responsibilities are shared equally. In that regard, Todd and Zac should be enlightened on the need for equal participation especially when the company is making profits, losses, is indebted or is being sued.

The burden of compensation, after being sued solely lies on Zac and Todd. A partnership between the two makes them liable and should pay the damages being sought after by Denton. Section 10 of the Partnership Act 1989 states that any omission or a wrongful act was done by any partner in the course of its business will be strictly be handled by the firm. In this case, Todd and Zac have to be held responsible for the supply of defective beer supplied by Todd. It is the business that bears the burden of meeting the losses and the tainted image it is faced with. It is wrong for Zac to leave the partnership because of the losses being faced and the impending lawsuit before them. 

Liability in Partnership

Methods of leaving a partnership are the issue to look into in this section. Zac decided to leave because of the problems faced in the partnership such as the lawsuit, rent arrears and an unsuccessful business deal that would boost the profits of the firm. It is at this point that Zac decides to quit by notifying Todd about his plan. For starters, he does the right thing by notifying Todd. However, he packs all the equipment and his laptop that contained the recipes. According to Section 37, a partner has the right to notify about dissolution. In this case, Zac and Todd should have reached a consensus of dissolving the partnership or looking for alternative ways of handling the issues at hand. As such, Zac needed to formally notify Todd about his actions. Secondly, property and assets acquired during the partnership have to be shared equally between the two. A clear stipulation on sharing assets is presented by Division 3 Section 19, 20 and 21 of the Partnership Act. Here, all assets, property, money, and interests brought into the partnership are referred to as partnership Property. As such, no one in the partnership should have any form of ulterior interests over the assets. Also, any property bought by proceeds from the partnership is deemed to belong to the partnership. Basing on these laws, Todd and Zac should equally share all the property, assets, losses and profits. However, Zac left with all the equipment and recipes leaving Todd helpless. As such, Zac does not have any right to leave Todd the way he did, unless stated otherwise in their agreement.  

Section 20 of the partnership Act clearly states that all rights and interests vested in the property that was brought by Todd and Zac into the partnership for the main purpose for establishing a business, so that they could get profits belongs to the partnership. As such, this is called partnership property and should be equally shared by all partners in an event of a dissolution. It is thus clear that the brewing equipment, recipe, and laptop that was used by Zac and Todd belongs to the business. In addition, all assets used by the two should be expressly implied to belong to them too. It is at times noted that many partners enter into agreements without taking into consideration how assets will be shared in the end. In this case, one may side with Zac because he used his equipment in the partnership. Todd equally contributed by leasing a premise and looking for a potential market for the product. By having equal participation in the business, it is without a doubt that all equipment and resources that were used should have been shared equally between the two. By deciding to pack all the equipment and leaving Todd empty-handed, Zac used a wrong approach of leaving the partnership. 

Compensation in Partnership

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