14.2 - General Partnership Flashcards
Define a general partnership
- Entity distinct from its ownership
- Two or more persons carrying on as co-owners of a business for profit
Define the main 3 responsibilities of each partner in a partnership
- Each is a fiduciary
- Each is an agent
- Not a party to partnership litigation
Identify the 3 main aspects of a partnership
- Lacks continuity of existence
- Duration limited to will of partners
- Each partner must be admitted by all other partners
True or False >>>
Partnership debts are personal debts of the partners
True
True or False >>>
Partnerships are subject to regular federal income tax
False - partnership is not subject to federal income tax
What is RUPA and what does it cover?
- Revised Uniform Partnership Act
- a series of default rules that govern matters not addressed by the partnership agreement
What is the purpose of the partnership agreement?
to establish relationships between the partners
True or False >>>
The law recognizes the supremacy of the partnership agreement in most situations
True
Identify 8 (restrictions) or things the partnership agreement cannot do
- Unreasonably restrict access to books / records
- Eliminate duty of loyalty / good faith obligation
- Unreasonably reduce duty of care
- Vary power to dissociate
- Waive right to seek court expulsion
- Vary law applying to LLP
- Vary right to dissolution
- Restrict 3rd party rights
What is the formation for partnership agreements?
- No formalities necessary
Are partnership agreements required to be in writing?
- Partnership agreement may be written or oral
- If partnership exists for a definite period > 1 year, must be written
What are the requirements to form a partnership?
- Intention to form and make a profit
- Partnership by estoppel may be recognized
- Example: no actual partnership exists, but I mention in a business conversation that Trina is my business partner. The other party relies on that information and incur damages; I am therefore liable
How does capitalization impact the partnership and the selling of shares?
- General partnership has advantage of multiple capital contribution sources
- General partnership cannot raise equity by selling shares
How are profits, losses and distributions treated in a partnership?
- RUPA says to share profits and losses equally unless otherwise stated in the partnership contract
- Must contribute in proportion to share of profits towards any losses of partnership unless otherwise stated in the partnership contract
Identify partner liability in the case of losses and debts of the business
- Each partner has unlimited personal liability for all losses and debts of business
Define a partnership distribution
- Transfer of partnership property from the partnership to a partner
What forms might a partnership distribution take?
- May take various forms:
- Share of profits
- Compensation for services
- Reimbursements
- Indemnification of liability
True or False >>>
- Unless otherwise agreed, the right to compensation for services is generally a right to receive a share of the profits, not to be paid for services
True
What does a partnership interest consist of?
- Consists of:
- Partner’s share of profits and losses
- Right to receive distributions
Are partners allowed to transfer / assign their interests without loss of rights or dissolution of partnership?
Yes
What are assignees entitled to under “Assignee Rights”?
- Entitled only to the profits assignor would normally receive
Does an assignee automatically become a partner or receive rights to participate in management?
No
Is a partner allowed to transfer ownership to a family member during his or her life or through inheritance?
No - the ability to transfer financial interest but not ownership is a disadvantage of the partnership
How does the death of a partner affect the partnership?
- Partner’s interest become personal property
- Heirs become assignees, not partners
- Death does not dissolve the partnership if the other partners choose to continue
What form must partnerships file for tax purposes and how often?
- Must file form 1065 annually
How do taxes impact a partnership?
- Partnership is not a taxable entity
- Profits and losses pass through to partners
Identify the (5) rights of partners
- Equal participation in management
- Right to access partnership records
- Copy and inspect books
- Unanimous vote required to amend partnership, admit a new partner, determine other non-routine matters
- Right to possess / use partnership property
- Right to choose associates
Identify the powers of partners and how are they governed?
- Governed by law and specific terms of agreement
- Each partner consents to be both a principal and agent of the partnership
Define actual / apparent authority
- Right to act as an agent in any legal transaction
Is the partnership bound by actual / apparent authority?
- Partnership is bound even if partner had no actual authority if 3rd party did not know or receive notification of lack of authority
How can partnerships avoid apparent authority issues?
file a notice of limitations to avoid apparent authority issues
What are the duties of partners?
- Fiduciary duty of loyalty and care
What is the duty of loyalty limited to?
- Not competing with partnership
- Not dealing with adverse interest to partnership
- Not exploiting partnership opportunities for personal gain
What does it mean for a partner or partnership to exercise duty of care?
- Not engaging in:
- Knowing violations of law
- Intentional wrongdoing
- Gross negligence
- Reckless behavior
What character traits or actions must a partner possess in exercising good faith?
- Must be honest in fact & meet reasonable standards of fair dealing
Is good faith violated because partners choose to act in own interest?
No
Subsequent admission of a partner into the partnership means that the new partner will assume responsibility for???
- Results in liability for partnership obligations
- Preadmission obligations
- Withdrawing partner’s liability
- Termination of partnership
How can a partnership terminate?
- Partners may limit duration to definite term or completion of particular act
- partnership may also be at will
What provisions does RUPA (revised uniform protection act) provide in the case of terminating a partnership?
- RUPA provisions
- Dissociation
- Dissolution
- Winding up AKA liquidation
- Termination
Define dissociation in the case of a partnership
- Legal effect of a partner’s ceasing to be associated in carrying o the business of the partnership
When can a partner dissociate and how does dissociation effect them?
- Partner has power to dissociate at any time
- Partner’s management rights terminate
What happens to the business if a partner chooses to dissociate?
- Business either continues or dissolves
Identify 8 acts that could result in possible dissociation
- Notice to partnership of partner’s will to withdraw
- Event specified in agreement
- Expulsion of partner under terms of agreement
- Expulsion by unanimous partner vote
- Court order
- Incapacity
- Death
- Insolvency
Who is required to file the dissociation statement in a partnership?
- May be filed by partnership or dissociated partner
How does a statement of dissociation liabilities and apparent authority?
Partner’s apparent authority is terminated and his / her liability for the partnership’s post-dissociation obligations
How long does apparent authority extend if filed dissociation notice is not provided to partners within 90 days after filing?
2 years
What does a partnership do if a partner dissociates and the business is not wound up?
- partnership must purchase dissociated interest
Identify the 3 actions that will result in dissolution
- Results from:
- Notice of will to withdraw
- Operation of law
- Court order
How is authority effected in a dissolution?
- Actual terminates on dissolution
- Apparent may continue unless notice is given
- Fiduciary duties remain in effect
- Except duty not to compete
What actions may be taken by person winding up partnership?
- Continue the business as a going concern for a reasonable time
- Take judicial actions
- Settle and close the business
- Dispose of and transfer property
- Discharge liabilities
- Distribute assets
- Settle disputes by mediation / arbitration
- Perform other necessary acts
Define winding up
- Administrative process of settling partnership affairs
Can the partnership continue after dissolution? If so, explain
- All parties may waive right to winding up
- Continues business as if dissolution did not occur
How does negative capital impact partners?
- Partner liable to contribute balance
- Other partners must pay the difference in same proportion as losses
- Partner making excess contributions may recover from other partners
How are joint ventures formed and treated for financial purposes?
- Easily formed
- Common in international commerce
- Formed to accomplish specific purpose
- Treated as a partnership in most cases
Identify 2 disadvantages of joint ventures
- Lack of continuity of existence
- Interests not readily transferable
