(2) Partnerships: Formation, Authority, Liability, Transfers, Fiduciary Duties, Dissolution

Question 1

General Partnership

Formation

Answer 1

A general partnership is created when (1) two or more persons (2)as co-owners (3) carry on a business for profit. No written agreement or formalities are required, the desire to create the for profit business can be implied through actions. The intent of the parties to create a partnership is irrelevant as long as they have the intent to create a for-profit business together.

Question 2

How can a general partnership be presumed?

Formation - General Partnership

Answer 2

A partnership is presumed if there is an agreement to share profits equally.

Question 3

If the agreement is silent what contract provisions are implied?

Formation - General Partnership

Answer 3

Absent an agreement to the contract each partner has an equal vote and profits are shared equally and losses are shared in the same ratio as the profits are shared. (i.e., if the agreement says profits are split 70/30 but is silent to how losses are split then losses are split 70/30 as well).

Question 4

Definition of Limited Partnership

Formation - Limited Partnership

Answer 4

A limited Partnership is a partnership composed of general and limited partners, with at least one general partner.

Question 5

Definition of General Partner

Formation - Limited Partnership

Answer 5

A general partner has control of the day-to-day business activities but has unlimited liability.

Question 6

Definition of Limited Partner

Formation - Limited Partnership

Answer 6

A limited partner has no control of the day-to-day business activities and has limited liability.

Question 7

Formation of Limited Partnership

Formation - Limited Partnership

Answer 7

A Limited Partnership is formed upon the filing of a certificate of limited partnership with the secretary of state that includes (1) the name of the limited partnership; (2) the address of the partnerships principal office; (3) name and address of the partnerships registered agent – must be within the state; (4) name and address of each general partner; (5) whether the partner is a limited liability limited partnership; AND (6) it must be signed by all general partners.

Question 8

Name Requirement for Limited Partnership

Formation - Limited Partnership

Answer 8

if a limited partnership the name must contain “limited partnership”, “LP” or “L.P.” if a limited liability limited partnership the name must contain “limited liability limited partnership”, “LLLP” or “L.L.L.P.”

Question 9

If the requirements are met for a Limited Partnership, then what happens?

Formation - Limited Partnership

Answer 9

If the requirements aren’t met then a general partnership is created.

Question 10

Definition:

Limited Liability Partnership

Formation - Limited Liability Partnership

Answer 10

A limited liability partnership (LLP) is one in which all partners have limited personal liability.

Question 11

Rule:

Limited Liability Partnership

Formation - Limited Liability Partnership

Answer 11

Any partnership may become an LLP upon (1) approval by the same vote that is necessary to amend the partnership agreement AND (2) by filing a statement of qualification with the secretary of state. Unless otherwise agreed an unanimous vote is required to amend a partnership agreement.

Question 12

A Statement of Qualification

Formation - Limited Liability Partnership

Answer 12

must include (a) the name and address of the partnership; (b) a statement that the partnership elects to become an LLP; AND (c) a deferred effective date, if applicable.

Question 13

Does filing a statement of qualification create a new partnership?

Formation - Limited Liability Partnership

Answer 13

NO, the filing of a statement of qualification doesn’t create a new partnership, instead the LLP continues to be the same partnership entity that existed prior to the filing and the LLP remains liable for any unfulfilled obligations of the partnership entity before it became an LLP.

Question 14

Partnership vs. Separate Business

Formation

Answer 14

To determine whether two businesses or people running businesses are separate entities are operating as a general partnership the court will consider whether the business (1) operates under a separate name; (2) keeps the files of the business in a separate room; (3) uses the same office staff; (4) has contributed any money to the other person or entity; (5) intends to share profits with the other person or entity; and (6) pays rent for a separate office.

Question 15

Ordinary Course of Business

Authority to Bind the Partners

Answer 15

An act is within the ordinary course of business if it is normal and necessary for managing the business – a person would reasonably conclude the act is directly and necessarily embraced within the partnership.

Question 16

Express Actual Authority

Answer 16

A partner has express actual authority to bind the partnership upon receiving said authority from the partners. Acts within the ordinary course of business need only be approved by a majority of the partners whereas acts outside the ordinary course of business need to be approved unanimously.

Question 17

What happens if Partnership Agreement is silent on partners authority scope?

Authority to Bind the Partners

Answer 17

If a partnership agreement is silent on the scope of the partners authority to bind the partnership, the partner has the authority to bind the partnership to usual and customary matters unless the partner knows that (a) other partners might disagree OR (b) for some other reason consultation with fellow partners is appropriate.

Question 18

Is hiring an employee within the ordinary course of business?

Authority to Bind the Partners

Answer 18

YES, hiring an employee is usually within the ordinary course of partnership business unless the partnership agreement states otherwise.

Question 19

Implied Actual Authority

Authority to Bind the Partners

Answer 19

A partner has implied actual authority to take actions that are reasonable incidental or necessary to achieve the partners authorized duties.

Question 20

Apparent Authority

Authority to Bind the Partners

Answer 20

A partner has apparent authority to bind the partnership for all acts apparently conducted within the ordinary course of the partnership business or the kind carried on by the partnership. However a partners act will not bind the partnership if (1) the partner lacked authority; AND (2) the 3rd party knew or had notice that the partner lacked authority.

Question 21

Can acts outside the scope of the ordinary course of business bind to the partnership through apparent authority?

Authority to Bind the Partners

Answer 21

For acts outside the scope of the business there must be a manifestation by the partnership that the partner had authority in order to bind the partnership.

Question 22

Personal Liability

Personal Liability of General Partners

Answer 22

General partners are personally liable for all obligations of the partnership unless otherwise agreed or provided by law. General partners are jointly and severally liable for the partnership obligations which means that a claimant can collect the full amount of the debt from any one of the partners.

Question 23

Incoming Partners Personal Liability

Personal Liability of General Partners

Answer 23

Incoming partners admitted into an existing partnership are not liable for obligations incurred prior to their admission even if the incoming partner has notice of the claim. The incoming partner is still at risk of losing any capital contributions made to the partnership.

Question 24

Outgoing Partners Personal Liability

Personal Liability of General Partners

Answer 24

An outgoing partner remains liable for debts of the partnership while they were a partner unless there was a novation, release or payment.

Question 25

Judgement Enforcement

Personal Liability of General Partners

Answer 25

A judgement creditor can’t levy execution of the judgement against a partners personal assets for a partnership debt unless (1) a judgement has been rendered against the partner; AND (2) the partnership assets have been exhausted or are insufficient.

Question 26

Rule & Exceptions:

Personal Liability of Limited Liability Partners

Answer 26

Rule: A partner in an LLP is not liable for the partnerships obligations it is solely the obligation of the LLP.

Exceptions: (1) Partners are always liable for their own misconduct or when they sign a personal guarantee for the obligation; (2) A partner is at risk for losing any capital contributions made to the partnerships to pay for the partnerships debts; (3) obligations incurred before a partnership becomes an LLP are treated as obligations of the prior partnership entity.

Question 27

Transfer of Ownership Interests

Answer 27

A partner can only transfer (1) their own interest in the share of the profits and losses and (2) their right to receive distributions. All other rights (i.e., the right to access partnership property, participate in management, inspect books) belongs to the partnership and cannot be transferred.

Question 28

Can a transferee of partnership interest become a partner in the business?

Transfer of Ownership Interests

Answer 28

Unless a written agreement states otherwise all partners must consent for a transferee of a partnership interest to become a partner in the business. If the transferee becomes a partner the assignee may be liable for partnership obligations arising after their admittance depending on the type of partnership entity.

Question 29

Fiduciary Duties of Partners

Answer 29

Partners owe the duty of care and the duty of loyalty to the partnership and other partners.

Question 30

Duty of Care

Fiduciary Duties of Partners

Answer 30

A partner is only in breach of the duty of care when they engage in (a) grossly negligent or reckless conduct; (b) intentional misconduct; or (c) a knowing violation of law.

Question 31

Duty of Loyalty

Fiduciary Duties of Partners

Answer 31

A partner cannot (a) engage in self dealing; (b) usurp business opportunities or (c) compete against the partnership. When a partner breaches the duty of loyalty, profits may be disgorged and any contracts may be revoked or rescinded.

Question 32

Good Faith and Fair Dealing

Fiduciary Duties of Partners

Answer 32

A partner has the obligation of good faith and fair dealing when exercising their rights and observing their other fiduciary duties as a partner. A partnership agreement cannot eliminate this obligation but can implement standards to measure performance of this obligation.

Question 33

Dissociation

Answer 33

A partner may cease to be associated with the carrying on of the partnership business through the process of dissociation. A partners dissociation may be voluntary or involuntary. A partner can dissociate from the partnership at any time even if the dissociation is wrongful. A partner dissociation does not cause the partnership to dissolve or wind up.

Question 34

Defintion:

Winding Up/Dissolution

Answer 34

Winding up is the process of settling partnership affairs after dissolution. During the winding up process, partnership assets are converted to cash and distributed in the following order (1) outside creditors; (2) inside credits – partners who made loans; (3) partners capital contributions; and (4) profits to be distributed among the partners.

Each category must be fulfilled before moving to the next. If partnership assets are insufficient to pay the liabilities of the partnership the loss may be divided by the partner.

Question 35

Rule:

Dissolution/Winding Up

Answer 35

A partnership is not terminated upon dissolution. A partnership is terminated after the winding up process is completed. The winding up process maybe conducted by any partner who has not dissociated or the legal rep of the last surviving partner