Share
Explore BrainMass

Forming Partnerships

Can you help me understand the questions below. They each made a $10,000 profit so far, but since they've invested some back in to another house depending on the sale of that property the funds could decrease. I'm also not sure what other legal issues are present.

Jamie, Louis, and Lisa form a partnership, under a written agreement each signs, to buy, renovate, and resell old houses in an area near a major university. The neighborhood in which they plan to focus their activities is quite rundown, but they and others believe it will rapidly improve once a few properties in the area are renovated. The partnership agreement says that they plan to be in this venture "at least five years, or until they can recover their original investment plus a good profit." Each of the three partners puts up $50,000 in cash. One strategy of the partnership is to avoid bank financing and its associated fees, thus the partners plan to use the proceeds of sale on the first house to invest in a second, and so forth. They spend $90,000 to purchase their first property, on which they spend an additional $40,000 in renovation, and then sell for $160,000. They purchase the second property for $100,000 and have begun renovation that is expected to cost $35,000 when Ann suddenly attempts to withdraw from the partnership. Can Lisa withdraw from the partnership? What other legal issues are present in this situation? It has been a year and a half since the partnership was formed.

Solution Preview

Hi,

Interesting scenario! Let's take a closer look!

1. They purchase the second property for $100,000 and have begun renovation that is expected to cost $35,000 when Ann suddenly attempts to withdraw from the partnership. Can Lisa withdraw from the partnership? What other legal issues are present in this situation? It has been a year and a half since the partnership was formed.

Partners can withdraw from the partnership under certain conditions as written into the contract agreement. If the proper legal steps are taken, which may vary across country and state, then the partner (e.g., Ann) would not be in violation of the terms of the partnership agreement. However, if the withdrawal violates the partnership agreement in any way, which it might in this scenario, then Ann would be subject to the laws of her state or province for violating the partnership agreement, which would be written into the partnership contract (see examples below).

What we know from this scenario: that the partnership agreement says that they plan to be in this venture "at least five years, or until they can recover their original investment plus a good profit." We know it is not 5 years, but what constitutes a "good profit?" Thus, the last part of the clause is somewhat ambiguous, as a 'good' profit ($26,666.67 ???) might mean different things to different people. So, although it seems reasonable to conclude that neither condition have been met, it would also depend on whether the present profit of $26,666.67 each (without subtracting the expected renovations: #35,000) qualified as a "good" profit. Another factor to consider is what is actually written into the contract, as most partnership agreements have specific instructions of if/how to legally 'withdraw from the partnership', such as in the following example:

EXAMPLE 1: Withdrawal from Partnership.

(a) Partial or complete withdrawal. Each ...

Solution Summary

Can Lisa withdraw from the partnership? What legal issues are present in this situation?

$2.19