25 - Business Structures 1

Question 1

What are the key elements of a valid Partnership?

Answer 1

Must have two or more partners. Must intend to engage in business for profit. Life of partnership is of limited duration in most cases. Agency/fiduciary relationship is created. Partnership interest is always considered personal property.

Question 2

Can corporations and other partnerships become partners in a partnership?

Answer 2

Yes; corporations and other partnerships can become partners of a partnership

Question 3

Name the Basics of Partnership Formation - Form of agreement and intent

Answer 3

Agreement can be very informal - either ORAL; IMPLIED or WRITTEN

Intent is to make a profit

Question 4

When must a partnership agreement be in writing?

Answer 4

Must be WRITTEN if partnership activity falls within Statute of Frauds:

A. Can’t be completed in 1 year

B. Even if partners reside in different states; not necessary unless within Statute of Frauds

C. Neither dollar amount of transactions nor purchasing of real estate has bearing on whether partnership agreement must be in writing

Question 5

How are profits shared in a partnership?

Answer 5

Profit sharing is equal by default

A. Unless partnership agreement says otherwise

B. Unless specified; sharing of losses follows same pattern as sharing of profits

Question 6

What is the Liability of General Partners in a partnership?

Answer 6

Joint Liability - Partners are collectively liable for debts/torts

Several Liability - Partners are individually liable for debts/torts

Question 7

Which assets may creditors of a partnership go after; and in which order?

Answer 7

Creditors must go after partnership assets first before suing partners individually

Question 8

What are the rights of a General Partner in a partnership?

Answer 8

General Partners have joint control over the management of the partnership and its affairs

Unanimous vote needed to change the structure of the partnership

Each partner has full right to inspect partnership accounting and business

Partner has the authority to assign their interest to another partner

Question 9

What does and does NOT happen when a General Partner assigns their partnership interest to someone else?

Answer 9

1. Other party gets that partner’s share of the profits and/or capital contribution.
2. Does NOT give assignee authority to vote on partnership business
3. Assignee does NOT have right to inspect partnership books
4. Assignor still maintains liability
5. Partner does NOT have the right to assign their interest in partnership property or allow partner’s creditors to attach a lien.

Question 10

What is the actual authority of a partner in a partnership?

Answer 10

Has authority to bind the partners to a contract.

Question 11

What is the APPARENT authority of a partner in a partnership?

Answer 11

A third party reasonably believes partner has authority to bind partnership to contract

Cannot use apparent authority to add a new partner

Cannot use apparent authority to sell or bind partnership assets

Question 12

With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership?

Answer 12

Partner not liable assuming notice given.

Notice must be given to nullify apparent authority

People who had knowledge of their role must be personally notified

Public must be notified

Question 13

With respect to PRECEDING debts; what is the liability of a partner in a partnership?

Answer 13

Old partners: Jointly and severally liable unless creditors grant novation

New partners: Only capital account at risk on preceding debts. For subsequent debts; they are joint and severally liable.

Question 14

What happens upon the death of a partner in a partnership?

Answer 14

Partner’s estate gets share of partnership profits and capital account

Estate does NOT get any partnership assets

Remainder of partners own partnership assets

Heirs of decedent are not added as partners unless remaining partners unanimously agree

Question 15

What happens during the winding up of a partnership and in what order?

Answer 15

1. Creditors get paid; Partners can also be creditors
2. Distributions in arrears get paid
3. Partners get return of Capital accounts
4. Any remaining distributions

Note: NO documents need to be filed with state to dissolve general partnership.

Question 16

What are the requirements to form a Limited Partnership?

Answer 16

Governed by state L.P. laws

Must file L.P. certificate with Sec. of State

Only General Partners must be listed

Future additions or subtractions of G.P. require certificate to be updated with state

Question 17

How are profits and losses split in a Limited Partnership?

Answer 17

Unlike G.P.; L.P. profits/losses are split according to capital contributions by default

Question 18

True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at
the same time.

Answer 18

True.

A Limited Partner; however; cannot also be a General Partner and maintain limited liability.

Question 19

Do limited partners have a fiduciary responsibility to a Limited Partnership?

Answer 19

No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership

Question 20

What authority does a limited partner have under a Limited Partnership?

Answer 20

1. Right to inspect records of the business.
2. Can still vote on partnership business without losing limited liability
3. Can consult and advise partnership without losing limited liability (assuming they don’t actually make the decisions)

Question 21

What limitations does a limited partner have in a Limited Partnership?

Answer 21

1. They have no authority as an agent to bind the partnership
2. They can’t participate in management decisions and maintain limited liability.

Question 22

What is the liability of a limited partner in a Limited Partnership?

Answer 22

Limited partners are liable to the extent of their capital contributions only

Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions

Becomes liable to third parties IF they knew of their involvement

Question 23

When does the dissolution of a Limited Partnership occur?

Answer 23

Automatically happens

1. Once final General Partner leaves
2. Time specified in certificate lapses
3. Event specified in certificate happens
4. Unanimous consent by partners
5. Illegal activity

Question 24

What is required to form a Limited Liability Partnership (LLP)?

Answer 24

1. Majority vote required to form LLP
2. Articles of LLP filed with Secretary of State
3. Governed by laws of that State
4. Limited Liability Partnership must be in name
5. No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner’s supervision

Question 25

What are the key aspects of a Limited Liability Company (LLC)?

Answer 25

Members can participate in management and retain limited liability

Members don’t own any interest in LLC property

Members can assign interest; but not transfer it

Members divide profits equally unless otherwise stated