Agency and Partnership

Question 1

General Partnership

Answer 1

A partnership is an association of two or more persons to carry on as co-owners of a business for profit. When there is no express agreement, factors indicating a partnership include: common ownership of property, sharing of profits and losses, and degree of activity in the enterprise.

• Intent
• Formalities
• Share of profits
• Share of losses
• Extent of activity in the enterprise

Question 2

Limited Liability Partnership

Answer 2

To become an LLP, a partnership must file a statement of qualification with the secretary of state.

• Time of formation
• Liability advantages of LLP

Question 3

Liability in a general partnership

Answer 3

In a general partnership, all partners are jointly and severally liable for all obligations, to the partnership, whether the obligations arise in contract or in tort.

• When individual assets can be reached
• Vicarious liabilty

Question 4

Transfer of partnership interests

Answer 4

A partner has a transferrable interest in the profits and losses of the partnership and in the right to receive distributions and it may be transferred at any time.

• Rights to distribution in transferee
• Lack of partnership status absent agreement

Question 5

Use of partnership property

Answer 5

Property is deemed to be partnership property if it is titled in the partnership’s name.

• Partners not co-owners
• Use for partnership purpose only

Question 6

Agency relationship

Answer 6

An agency relationship is created when one person manifests an intent that another person act on his behalf and both parties consent to the agreement. Agency requires capacity, consent, and control.

Agents must have minimal mental capacity and principles must have contracting capacity.
The greater the principles right to control the more likely there is an agency relationship.

• Principal is bound if agent acted with actual or apparent authority
• Actual authority
• Apparent authority

Question 7

Authority of a partner

Answer 7

Every partner is an agent of the partnership and the acts of a partner will bind the partnership if the partner has acted with authority.

• Actual authority
• Agreement, consent of partners, scope of partnership business
• Apparent authority

Question 8

Limited partnerships

Answer 8

A limited partnership is comprised of one or more general partners and one or more limited partners.

• General partners liability
• Limited partners liability
• Filing of certificate of limited partnership

Question 9

Dissolution of a partnership

Answer 9

When a partnership is dissolved and its assets are reduced to cash, the cash must be used to pay the partnership’s liabilities in the following order: creditors, noncreditor partners, and then partners in settlement of their accounts.

• Losses
• Distribution of losses

Question 10

Independent contractor v. employee

Answer 10

The primary issue in determining whether a person acted as an employee or an independent contract is whether the principal has the right to control the individuals manner and method of work. Several factors are looked at in making this determination.

• Status of professional
• Use of facilities and supplies
• Review of work

Question 11

Actual authority

Answer 11

Actual authority includes express and implied authority. Express authority means that the agent expressly has the authority from the principle to act. Implied authority means that the nature of the agent’s position implies authority to act on a particular matter, either from custom and usage, by acquiescence, or because of necessity.

Question 12

Apparent authority

Answer 12

There is apparent authority when the principle communicates by some statement or act to a third party the apparent authority of the agent to act on behalf of the principal with respect to that third party, and for ratification, the principal agrees to be bound by the unauthorized acts of the agent.
For ratification, the principle agrees to be bound by the unauthorized acts of the agent.

Question 13

Agent’s duties to principle

Answer 13

Agents owe a duty of undivided loyalty to the principle, strict obedience to the instructions of the principle, and reasonable care. Where there is a breach of these duties, the principle’s damages consist of: damages, accounting for secret profits, and withholding of compensation.

Question 14

Principal’s duties to agents

Answer 14

The principle owes a duty to reasonably compensate the agent, and to reimburse him for all expenses and losses reasonably incurred in discharging any authorized duties.
An agent’s remedies include: damages for breach of contract, and an agent’s lien on any property the agent holds.

Question 15

Termination of an agency relationship

Answer 15

Agency relationships can terminate by: lapse of time, happening of an event, change in circumstances, breach of fiduciary duty, unilateral act, or operation of law like death.

Actual authority terminates when the agent knows or should have known of a termination. There will not be a termination of apparent authority where a third party reasonably relies on evidence of agency relationship.

Agency relationship cannot be unilaterally terminated when the agency is coupled with an interest or when power is given as security.

Question 16

Agency liability to third parties

Answer 16

The agent is not liable to a third party on a contract entered into by an authorized agent on behalf of a fully disclosed principle. A disclosed principle will be liable on contracts even when the agents act for an improper purpose, unless the third party is aware the agent is not acting for the principle.

Both the agent and principle are liable on a contract entered into by an authorized agent on behalf of a partially disclosed principle.

An agent is always liable to a third party on a contract entered into by an authorized agent on behalf of an undisclosed principal. An undisclosed principal is not liable on the contract when his agent acts for an improper purpose.

Question 17

Agency liability in a partnership

Answer 17

A partnership is liable for the acts and omission of any partner acting in the ordinary course of the partnership business or with the authority of the other partners, to the same extent that the acting party is liable.

Question 18

Agency liability in a corporation

Answer 18

A corporate officer has implied authority intrinsic to his position to bind the corporation to minor day-to-day operations.

Question 19

Partnership management and operation

Answer 19

Subject to an agreement between the partners, all partners have equal rights in the management and conduct of the partnership. Disagreements may be decided by a majority of the partners.
All partners contribute to a partnership and absent a contrary agreement, profits are shared equally. Losses are shared in the same proportion as profits.

Question 20

Fiduciary duties in a partnership

Answer 20

Partners are in a fiduciary relationship to each other and to the partnership as a whole, and thus they owe a duty of loyalty. The duty of loyalty requires a partner to act in good faith and to act fairly towards one another. A partner’s duty of loyalty is threefold: to refrain from dealing with the partnership as or on behalf of a party who is adverse to the partnership, to refrain from competing with the partnership, and to account for profits, property, opportunities, or other benefits derived by the partner in conjunction with the partnership business.

Question 21

Dissociation

Answer 21

Dissociation is the change in a relationship among the partners caused by any partner ceasing to be associated in the carrying on of the business. Dissociation can occur voluntarily, as when a partner withdraws, or involuntarily, such as on death or incompetence or expulsion. Upon dissociation, a dissociating partner is paid their capital account and share of profits. A partner who wrongfully dissociates is liable to the partnership for damages caused by the dissociation. Dissociation may, but not always, cause dissolution of the partnership.

Question 22

Dissolution.

Answer 22

Dissolution occurs upon agreement by the partners or by dissociation of partners. Dissolution can sometimes be voided if the partnership continues and buys out the dissociated partner’s interests. If a partnership does not have a definite term, it is an at will partnership and may be dissolved by any partner at their express will.

Question 23

LLC

Answer 23

An LLC is a business association that is taxed like a partnership but its members enjoy limited liability like shareholders and directors of a corporation. LLC’s are primarily governed by operating agreements that control most aspects of management. LLC’s are formed by filing Articles of Organization with the secretary of state, which include a statement that the entity is an LLC, the name which must include the designation as an LLC, and the street address and registered agent for service of process, and the names of all members.
Management by the members is presumed and profits and losses are allocated based on contribution.
When an LLC is defectively formed, the result is most likely a general partnership.

Question 24

Assignment of partnership interestst

Answer 24

The assignment of partnership interests transfers only the right to profits and losses, it does not transfer management rights. Membership transfer requires unanimous consent of the members.