One is not a partnership

Larry Ribstein —  6 September 2011

Bob Hillman and Don Weidner have a nice little paper in the form of a dialog about what you have when a partner withdraws leaving only one “partner”: Partners Without Partners: The Legal Status of Single Person Partnerships.  Here’s part of the abstract:

Although we have differing views on whether a single person partnership is possible under RUPA, we conclude on common ground that the buyout is appropriate. We also unite in a call for statutory clarification.

Gary Rosin, commenting on the paper, states his position more succinctly, quoting Springsteen: “When you’re alone you’re alone.  When you’re alone you ain’t nothing but alone.”

The basic problem is that the partnership statutes define a partnership as two or more persons, but don’t specify whether withdrawal of the penultimate partner triggers dissolution of the entity or, instead, a buyout plus continuation by the sole remaining partner.

In my view the answer is clear.

In a two-member partnership, the firm necessarily dissolves and is not continued on dissociation of one of the members because the remaining firm would not have the requisite two members to be a partnership.

Bromberg & Ribstein, §7.03(c), n. 13a. Although you can’t get that from the statute, it is a necessary implication of the definition of partnership.

If you insist that the fact that the statute doesn’t define this as a dissolution event, or that the partnership “entity” still exists notwithstanding withdrawal, then here’s some policy for you.  The function of the partnership statute is to serve as a standard form for a particular type of relationship — i.e, among two or more members.  As I point out in my Rise of the Uncorporation (p. 158, fn omitted),

The idea of multiple owners is inherent in the partnership standard form and coherent with partnership’s other provisions. Among other things, partnerships are based on contracts, which seemingly require two or more people: they are associations involving sharing of financial and management rights among the members, and the important partnership concepts of dissociation   and dissolution necessarily imply a relationship from which to dissociate. Moreover, multiple owners distinguish partnership from another standard form—that of agency, which is based on a single party (the principal) getting all of the benefit (i.e., profit) and having all of the control.

I go on to discuss whether people should be permitted to contract for one-member partnerships, which I view as a more complex issue.  But the cases discussed by Hillman and Weidner don’t involve contracts.

H & W are concerned about whether this approach would frustrate buyout rights that would otherwise exist.  Maybe, but this is just a default rule.  The parties can contract for any kind of buyout they want, as long as they don’t end up with a sole proprietorship.  If they don’t contract, they can’t back into a buyout by trying to define a partnership as something it isn’t.

Anyway, the uncertainty costs of the H & W approach exceed the benefits.  Allowing a buyout and survival of the partnership leads to a host of problems, some of which they discuss.  For example, what if the partnership is an LLP — would the liability protection continue for events after the penultimate partner’s dissociation even if it’s a one-member entity and therefore not a partnership (and so technically ineligible to be an LLP)?

This issue and the H & W article raise two broader concerns. First, the problem here is a symptom of uniform lawmaking, which I’ve discussed elsewhere (e.g.). H & W point out (p. 8) that problems with partnership dissolution persist despite “more than a century” of partnership law drafting dominated by the uniform lawmaking process.  This is no wonder given the perversity of the process discussed in my article with Kobayashi linked immediately above.  Weidner’s recollections as RUPA reporter (see p. 9) only confirm the twists and turns of the process and the ad hoc way decisions are sometimes made.  Moreover, even a perfect process necessarily will have glitches or develop problems over time.  Yet uniform lawmaking is designed to lock in a single solution and to eschew the interstate competition that has helped develop LLC and corporate law.

Second, do we really need all of this complexity?  As noted above and in Gary Rosin’s post, part of the problem is the continuing pall cast by the vague and uncertain “entity” concept.  Simply viewing a partnership as a contract subject to a various rules, some of which are default rules provided for in the standard form, provides simpler and more direct answers.  The “entity” concept turns the contract into a mess of a legal construct.  Since the parties can’t be sure how a court will analyze the situation, they may not even be able to settle the issue by contract. The two-member partnership becomes another victim of lawyer-driven over-complexity.

Anyway, all we need to know for now is in Bromberg & Ribstein:  when a partner withdraws from a two member partnership he leaves one owner.  One owner is not a partnership, and can’t become one via a buyout. Hence the partnership dissolves.  If you don’t like that solution, contract around it.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

6 responses to One is not a partnership

  1. 

    A California Court of Appeal has addressed this question in Corrales v. Corrales. I write about the case in this blog posting:

    http://calcorporatelaw.com/2011/08/one-may-be-the-loneliest-number-but-its-not-a-partnership/

  2. 

    Fascinating topic, so I’ll comment yet again. The paper should also discuss why you can’t have a partnership with ZERO partners— that is, why death of both partners must end the partnership. This would be enormously helpful sometimes. I think the answer is that someone has have ultimate authority in the company, and that has to be a partner, not an heir (also relevant: delegated authority woudl end with death of the delegator). Also, there shouldn’t be a rule for giving an heir or executor partnership status because it IS of the essence in partnerships that the other partners get to veto a new partner if they distrust him.

  3. 

    The article looks interesting, too. I haven’t read through it, but a couple of thoughts (from someone who doesnt’ know partnership law) are:

    1. Why does it matter whether the entity is called a partnership or a sole proprietorship? PRof. Ribstein gives one answer: limited liability if it is an LLC. Anything else? Could we continue to apply all the law of partnership— it just mostly being vacuous since there aren’t any authority problems?

    2. Since we allow a corporation with just 1 owner (even iniitally one person can have 100% of the stock), why not a partnership? (going back to 1, tho, why would anyone want to do that?)

    3. Even under the common law, couldn’t the remaining partner, after one withdraws, keep running the business and just pay money to the exiting partner, even if the exiter wants to kill the business? The amount woudl have to be fair, of course, and coudl be challenged in court. (Maybe land owned by the partnership would cause a problem,tho.)

    • 

      1. Most of the law of partnership would simply be irrelevant, since it’s designed for two or more. That’s not an insurmountable obstacle to an agreement in a one-member “partnership” as I discuss in my Rise of the Uncorporation. But if the parties agreed to be subjected to the default rules, the firm should dissolve when these rules no longer apply.
      2. Corporate law has long contemplated one-member firms. Also, partnership is inherently based on an agreement between the owners. Corporate law isn’t — which provides a conceptual basis for applying rules that don’t arise from such an agreement.
      3. Yes. But the buyout would be in connection with a dissolution and the business would be continued as a sole proprietorship.

  4. 

    The paper cited in the post contains a dialog. Great! Our Indiana law-and-econ lunch has published a couple papers using that format, and I hope more people use it. It’s especially appropriate in law, and it solves the problem of co-authors who disagree diametrically.

    “Lifting the Veil of Ignorance: Personalizing the Marriage Contract,” (with Jeffrey Stake) Indiana Law Journal (Spring 1998) 73: 454-502. Modern state laws only allow marriages in which each party can unilaterally divorce the other. We argue that the law should clearly permit parties to contract for more restrictive forms of marriage. In Ascii tex , or pdf ( http://rasmusen.org/published/Rasmusen_98.ILJ.marriage.pdf).

    Review Discussion: Game Theory and the Law (with Kenneth Dau- Schmidt, Michael Alexeev, Jeff Stake, and Bob Heidt), Law and Society Review . Our dialogue- form review of the 1994 book by Douglas Baird, Robert Gertner \& Randall Picker. Law and Society Review, 31: 613-629 (1997). In Ascii txt- HTML or pdf ( http://rasmusen.org/published/Rasmusen_97.LSR.baird.pdf).

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  1. Small business, partnership law and software « Truth on the Market - September 25, 2011

    [...] One wonders how this could be anything other than a continuation in which plaintiff acquiesced when it went on for more than a decade.  In fact, the court failed to consider an easier way to resolve the question:  the partnership must dissolve when there’s only one “partner” left. [...]