Conglomerate Blog: Business, Law, Economics & Society

Only absolutists (and Siths) speak in absolutes. Pragmatists operate on the belief that ideas are tools devised by people “to cope with the world in which they find themselves,” that ideas are produced by groups of individuals, that ideas are social constructs, and that the survival of ideas depends on their adaptability. (See Louis Menand, The Metaphysical Club (2001) – an excellent read). I am absolutely a pragmatist (or maybe a pragmatically disguised absolutist). At any rate, in my view law is like a coral reef, and should grow by accretion over time and be hospitable to living things.

So, what does this have to do with partnership law. I have heard some say things to the effect of “unincorporated business organizations are contractual by nature,” such that organizations (such as single member LLCs) that do not involve contract should not fit into the LLC/partnership box. I take a different approach, and would argue that LLCs/partnerships are contacts to the extent the we imbue them with contract features, and are not contracts to the extent that we do not. Thus, although I generally believe in contract primacy (at least at some level), I don’t think contract-speak ends the discussion. Call me a modified contractarian, or a “trimmer.” David Millon (W&L) wrote on similar themes in a very nice piece on corporate personhood, published a decade or so in Stanford Agora (“The Ambiguous Significance of Corporate Personhood” - http://ssrn.com/abstract=264141) (to which I commented re partnerships).

For example, partnership has, since the beginning of time for all I know, been defined as “an association of two or more persons to carry on as co-owners a business for profit.” Thus, pretty much by definition, historical partnerships are contractual critters. At least to some extent. But, the past does not need to always and in all ways be the future. Witness LLCs which originally began under the conception of at least two members and moved, based on demand and utility, to the single member LLC concept (no contract) within a decade. My wonderment is: why not the same possibility for partnerships. Start with two or more, but continue as an entity when only one.

In a recent article (available at http://ssrn.com/abstract=1911501), Bob Hillman (UC-Davis) and Don Weidner (Fla. St.) (who together with Allan Vestal (Drake) write a nice book on the Revised Uniform Partnership Act), discuss the legal status of single person partnerships. They pose the “rather straightforward question on which the contemporary law provides no clear answers: Is it possible to have a partnership consisting of one partner, a partner without a partner? The question will arise for any two person partnership when one of the partners leaves the partnership.” The answer matters, since for example non-partnership may require asset liquidation while partnership may permit business continuation without liquidation and with a buy-out of the dissociated former partner.

Hillman argues that the requirement of at least two partners is definitional (“a partnership means an association of two or more”), and that a one person organization cannot be a partnership. Weidner, on the other hand, argues that while two persons are required to “form” a partnership under the Revised UPA, but that once formed the question becomes “what are the rules that wind down or extinguish the existence of those entities,” and that the single-person term (or particular purpose) partnership continues until the buyout of the penultimate partner. Hillman counters that “You [Weidner] emphasize the importance of an uncompleted buyout in assessing the status of the partnership following the penultimate partner’s dissociation. I disagree. Whether the partnership continues for purposes of keeping the fiction of the partnership alive should not depend on whether the buyout has been completed.” Weidner continues to “answer the much more fundamental question: is there still a partnership after the buyout is complete: My answer is yes. The partnership entity continues the business.”

I loved reading this exchange, in part because I know both authors fairly well, highly respect them, and hear their voices in the conversation. Also, some of the discussion mirrors (on a more sophisticated level) conversations I had approximately 7 years ago with a Colorado friend who has been very active for many years in drafting Colorado business organization legislation. He took Weidner’s perspective; I took Hillman’s. Vestal and I also encouraged a student law review note on this topic – see Wortham, Revised Uniform Partnership Act: Anomalies of a Simplified, Modernized Partnership Law, 92 Ky. L. J. 1083 (2004).

Although I still side with Hillman in this debate, and think that the two or more persons language is definitional and that a “partnership with only one member is an oxymoron,” that is not really the point of this posting. I simply see no reason not to avoid the issue by statutory drafting. I think the stakes can be large, and issues may include:

1. Buy-out provisions as discussed by Hillman and Weidner.

2. Assume a limited liability partnership, what happens to limited liability protections when there is only one partner (and business is carried on, as a sole proprietorship)?

3. Assume a partnership holding real property, what happens on dissociation of the penultimate partner? RUPA §302 provides, “If a person holds all of the partners’ interests in the partnership, all the partnership property vests in that person.” But are due-on sale provisions triggered? How about lender consent requirements? How about restrictions on property transfer? Are rights of first refusal triggered? What is the effect on title insurance (and does the rarely cited Fairways decision rear its ugly head)?

Rather than mess with this stuff, I would encourage consideration of statutory language permitting continuation of the partnership entity if the penultimate partner dissociates and the remaining partner continues the business. I drafted language for this a few years ago and, although it has disappeared into some pile or into a recycling bin, my recollection is that it was not difficult. When faced with a difficult conceptual issue, which is posed by statutory language, one answer is to fix the statute. This is pragmatic; and it is not absolutist/contractarian. There is no “natural law” of partnerships. LLCs prove the value of flexibility. I obviously kind of like the pragmatic approach.

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Only absolutists (and Siths) speak in absolutes. Pragmatists operate on the belief that ideas are tools devised by people “to cope with the world in which they find themselves,” that ideas are produced by groups of individuals, that ideas are social constructs, and that the survival of ideas depends on their adaptability. (See Louis Menand, The Metaphysical Club (2001) – an excellent read). I am absolutely a pragmatist (or maybe a pragmatically disguised absolutist). At any rate, in my view law is like a coral reef, and should grow by accretion over time and be hospitable to living things.

So, what does this have to do with partnership law. I have heard some say things to the effect of “unincorporated business organizations are contractual by nature,” such that organizations (such as single member LLCs) that do not involve contract should not fit into the LLC/partnership box. I take a different approach, and would argue that LLCs/partnerships are contacts to the extent the we imbue them with contract features, and are not contracts to the extent that we do not. Thus, although I generally believe in contract primacy (at least at some level), I don’t think contract-speak ends the discussion. Call me a modified contractarian, or a “trimmer.” David Millon (W&L) wrote on similar themes in a very nice piece on corporate personhood, published a decade or so in Stanford Agora (“The Ambiguous Significance of Corporate Personhood” - http://ssrn.com/abstract=264141) (to which I commented re partnerships).

For example, partnership has, since the beginning of time for all I know, been defined as “an association of two or more persons to carry on as co-owners a business for profit.” Thus, pretty much by definition, historical partnerships are contractual critters. At least to some extent. But, the past does not need to always and in all ways be the future. Witness LLCs which originally began under the conception of at least two members and moved, based on demand and utility, to the single member LLC concept (no contract) within a decade. My wonderment is: why not the same possibility for partnerships. Start with two or more, but continue as an entity when only one.

In a recent article (available at http://ssrn.com/abstract=1911501), Bob Hillman (UC-Davis) and Don Weidner (Fla. St.) (who together with Allan Vestal (Drake) write a nice book on the Revised Uniform Partnership Act), discuss the legal status of single person partnerships. They pose the “rather straightforward question on which the contemporary law provides no clear answers: Is it possible to have a partnership consisting of one partner, a partner without a partner? The question will arise for any two person partnership when one of the partners leaves the partnership.” The answer matters, since for example non-partnership may require asset liquidation while partnership may permit business continuation without liquidation and with a buy-out of the dissociated former partner.

Hillman argues that the requirement of at least two partners is definitional (“a partnership means an association of two or more”), and that a one person organization cannot be a partnership. Weidner, on the other hand, argues that while two persons are required to “form” a partnership under the Revised UPA, but that once formed the question becomes “what are the rules that wind down or extinguish the existence of those entities,” and that the single-person term (or particular purpose) partnership continues until the buyout of the penultimate partner. Hillman counters that “You [Weidner] emphasize the importance of an uncompleted buyout in assessing the status of the partnership following the penultimate partner’s dissociation. I disagree. Whether the partnership continues for purposes of keeping the fiction of the partnership alive should not depend on whether the buyout has been completed.” Weidner continues to “answer the much more fundamental question: is there still a partnership after the buyout is complete: My answer is yes. The partnership entity continues the business.”

I loved reading this exchange, in part because I know both authors fairly well, highly respect them, and hear their voices in the conversation. Also, some of the discussion mirrors (on a more sophisticated level) conversations I had approximately 7 years ago with a Colorado friend who has been very active for many years in drafting Colorado business organization legislation. He took Weidner’s perspective; I took Hillman’s. Vestal and I also encouraged a student law review note on this topic – see Wortham, Revised Uniform Partnership Act: Anomalies of a Simplified, Modernized Partnership Law, 92 Ky. L. J. 1083 (2004).

Although I still side with Hillman in this debate, and think that the two or more persons language is definitional and that a “partnership with only one member is an oxymoron,” that is not really the point of this posting. I simply see no reason not to avoid the issue by statutory drafting. I think the stakes can be large, and issues may include:

1. Buy-out provisions as discussed by Hillman and Weidner.

2. Assume a limited liability partnership, what happens to limited liability protections when there is only one partner (and business is carried on, as a sole proprietorship)?

3. Assume a partnership holding real property, what happens on dissociation of the penultimate partner? RUPA §302 provides, “If a person holds all of the partners’ interests in the partnership, all the partnership property vests in that person.” But are due-on sale provisions triggered? How about lender consent requirements? How about restrictions on property transfer? Are rights of first refusal triggered? What is the effect on title insurance (and does the rarely cited Fairways decision rear its ugly head)?

Rather than mess with this stuff, I would encourage consideration of statutory language permitting continuation of the partnership entity if the penultimate partner dissociates and the remaining partner continues the business. I drafted language for this a few years ago and, although it has disappeared into some pile or into a recycling bin, my recollection is that it was not difficult. When faced with a difficult conceptual issue, which is posed by statutory language, one answer is to fix the statute. This is pragmatic; and it is not absolutist/contractarian. There is no “natural law” of partnerships. LLCs prove the value of flexibility. I obviously kind of like the pragmatic approach.

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