Agency and Partnership

Question 1

Surviving spouse’s interest in the partnership after the death of a partner

Answer 1

On the death of a partner, if the partnership interest of the deceased partner is subject to redemption, the partner’s surviving spouse is a creditor of the partnership until the redemption price is paid. If the partnership interest of the deceased partner is not subject to redemption, the partner’s surviving spouse is a transferee of the partnership interest. A transfer of a partnership interest does not, in the absence of an agreement, entitle the transferee to anything more than the right to receive distributions of partnership profits to which the transferor would have been entitled.

Question 2

Transferee of a partnership interest

Answer 2

A transferee is entitled to reasonable information or an accounting of partnership transactions and inspection of the partnership books for proper purposes. A transferee is not entitled to interfere in the management or administration of the partnership in the absence of an agreement that states otherwise.

Question 3

Partner’s Duties

Answer 3

A partner owes the duties of loyalty and care to the partnership. A partner must discharge the partner’s duties to the partnership in good faith and in a manner the partner reasonably believes to be in the best interest of the partnership. A partner is presumed to have met the standard of care if he acted on an informed basis, in good faith, and in a manner reasonably believed to be in the best interests of the partnership.

Question 4

Partner’s duty of loyalty

Answer 4

A partner’s duty of loyalty includes (1) accounting to and holding for the partnership any property, profit, or benefit received by the partner in conjunction with the conduct or winding up of the partnership business or from the use of partnership property; (2) refraining from dealing with the partnership on behalf of a third party whose interests are adverse to the partnership; and (3) refraining from competing or dealing with the partnership in any manner that is adverse to the partnership.

Question 5

Liability of individual partners

Answer 5

A partner is an agent of the partnership for the purpose of its business, and the partnership itself is the principal. A partnership is bound on a contract entered into by a partner on the partnership’s behalf if the partner has actual authority to enter into the contract. Actual authority can be either express or implied. The key question is whether the partner reasonably believes that he has authority based on manifestations from the partnership. If the partner has such a belief, then that partner has actual authority. Additionally, partners are subject to personal liability for partnership obligations, including contracts that the partnership enters into in the course of partnership business. They are vicariously liable on such contracts by virtue of their status as partners. All partners are liable jointly and severally for all obligations of the partnership, regardless of whether the obligation arises in contract or in tort. This means that a partnership creditor may bring an action against any one or more partners, or against the partnership, in the same or in separate actions.

Question 6

By virtue of being a partner, a partner has…

Answer 6

implied actual authority to do things in the ordinary course of the partnership’s business, including creating partnership obligations for which the partnership is liable.

Question 7

Respondeat superior

Answer 7

Under the doctrine of respondeat superior, an employer is subject to vicarious liability for a tort committed by an employee acting within the scope of his employment. The employer is liable despite the absence of tortious conduct by the employer.

Question 8

A partner’s act that is not authorized by the partnership may nevertheless bind the partnership under the principles of…

Answer 8

apparent authority. An agent has apparent authority when a manifestation of the partnership causes a third party reasonably to believe that the partner has authority. The Texas Business Organizations Code (“TBOC”) recognizes apparent authority in the partnership context by stating that the act of any partner that appears to be for the purpose of carrying on, in the ordinary course, the partnership business or business of the kind carried on by the partnership binds the partnership, unless: (1) no authority existed for the partner to act for the partnership in the particular matter; and (2) the third party with whom the partner was dealing knew that the partner had no authority.

Question 9

Compensation for services rendered to the partnership by the partners

Answer 9

The general rule is that partners are not entitled to any compensation for services rendered to the partnership, unless the partnership agreement states otherwise. It is irrelevant that one partner may be forced to assume more work than anticipated, while other partners do nothing to further the business of the partnership. It is possible to imply an agreement to compensate a partner for extraordinary services when all partners do not have equal interests, are not equally liable, and are not equally responsible for the conduct of the partnership business.

Question 10

Partners’ shares of profit and loss

Answer 10

In the absence of an agreement to the contrary, partners share profits and losses equally.

Question 11

When partnership agreement sets definite time for termination of partnership.

Answer 11

Normally, a partnership is required to wind up its affairs when the partnership agreement provides for a period of duration. However, the partners may avoid winding up and dissolving the partnership if all partners agree to continue the partnership. In the alternative, if the partnership business is continued for 90 days following the date provided for dissolution and no settlement or liquidation is made, this is prima facie evidence of an agreement to continue the partnership.

Question 12

Steps to winding up a partnership

Answer 12

The first step in the process of winding up is to cease to carry on business of any kind except any business that is required for the process of winding up. Then, the partners must collect and sell the property of the partnership. Next, the partners must use the proceeds and any remaining funds of the partnership to discharge obligations to creditors, including partners who are creditors. Finally, any remaining funds are distributed to the partners after all creditors have been paid. Any partner who has not withdrawn may wind up the partnership.

Question 13

Distribution of partnership assets upon winding up.

Answer 13

The TBOC requires that the partnership’s assets first be applied to discharge obligations to creditors, including partners who are creditors. Any surplus remaining after creditors have been paid is distributed to the partners. To determine the rights and obligations of the partners toward creditors and each other in the disposition of assets and satisfaction of partnership liabilities, it first must be determined what each partner’s capital account is. Then, the amount of assets available for distribution should be taken into consideration. From the assets available for distribution, creditors are paid first. After the amount owed to creditors is deducted, any remaining amount should be distributed to partners. The balance of the partner’s capital account determines the amount each partner receives. If all of the obligations of the partnership cannot be satisfied from the sale of the assets and there is a negative balance, then each partner must contribute to pay off the partnership debt.

Question 14

Creation of a partnership

Answer 14

A partnership is created by the association of two or more persons to carry on as co-owners of a business for profit, regardless of whether: (i) the persons intend to create a partnership, or (ii) the association is called a “partnership,” “joint venture,” or other name. No formalities are required in order to form a partnership. As soon as two or more people associate to carry on, as co-owners, a business for profit, a partnership comes into existence.

Question 15

Limited Partnership

Answer 15

A limited partnership is a partnership that has one or more general partners and one or more limited partners. A limited partnership is distinguished from a general partnership in that it is created under specific statutory authority. In order to form a limited partnership, a certificate of formation must be filed with the Secretary of State.

Question 16

Limited Liability Partnership

Answer 16

A limited liability partnership (LLP) is a partnership in which a partner’s personal liability for obligations of the partnership is limited or eliminated. In order to enjoy LLP status, a statement must be filed with the state and include the name of the LLP, address of its principal office, federal tax ID number, number of partners, and brief statement of the business of the LLP. In other respects, an LLP is governed by the same rules as a partnership. However, individual partners are not liable for the negligent acts of other partners or partnership employees or contractual obligations of the LLP.

Question 17

Partnership Agreement; Limitations

Answer 17

Although not required, partners may agree to rules for the governance of their partnership through a partnership agreement. Generally, the partnership agreement can modify or waive the default rules provided by the TBOC. However, the TBOC does place limitations on the partners’ ability to override the statute in certain matters.
May not: limit access to records and books, limit liability to creditors, eliminate fiduciary duties, choose law of jurisdiction with no connection to partnership.

Question 18

Partnership agreement; access to records and books

Answer 18

A partnership agreement may not unreasonably restrict any partner’s access to the partnership’s books, records, and other partnership information. Unless there is an agreement to the contrary, all partnership books must be kept at the partnership’s chief executive office. Every partner has the right to inspect and copy those books. Given these broad inspection rights that cannot be waived by a partnership agreement, if the courts find that conditions for inspection are too restrictive or burdensome, this provision may be unenforceable.

Question 19

Partner Liability

Answer 19

The personal liability of partners for partnership obligations is the most negative consequence of the choice of a partnership as a business entity form. All partners are jointly and severally liable for all obligations of the partnership, whether in contract or tort. This means that a partnership creditor may bring an action against any one or more partners, or against the partnership, in the same or in separate actions. Because partners are severally, as well as jointly, liable for partnership obligations, every partner is personally and individually liable for the entire amount of all partnership obligations. However, a partner who is compelled to pay the entire partnership obligation is entitled to indemnification from the partnership. She may also require that the other partners contribute their pro rata shares of the payment in the event the partnership is unable to completely indemnify her. However, these remedies do not permit her to limit her liability to partnership creditors to her own contributions, and this liability cannot be lifted by the partnership agreement.

Question 20

Partnership agreement; fiduciary duties

Answer 20

A partnership agreement can never eliminate the partners’ duties of loyalty, care, or good faith. The partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty if they are not manifestly unreasonable, and the partnership agreement may determine the standards by which the performance of these obligations is to be measured, provided that the standards are not manifestly unreasonable. However, a broad statement that only willful or intentional misconduct will violate these duties would likely be unenforceable.

Question 21

Transfer of Interest

Answer 21

If the partnership agreement does not restrict the partner’s right to do so, a partner may voluntarily transfer all or part of his partnership interest to a third party at any time. However, a partnership may restrict this right.

Question 22

Choice of Law

Answer 22

The formation and internal affairs of a partnership are governed by the law of its jurisdiction of formation. A partnership’s jurisdiction of formation is the jurisdiction chosen in the partnership agreement, provided that the jurisdiction bears a reasonable relation to the partners or to the partnership’s business. However, they may not choose a governing law from a state that bears no reasonable relationship to the partners or the partnership’s business.

Question 23

Partnership property

Answer 23

Property is deemed to be partnership property if it is acquired in the partnership’s name or the name one or more of the partners with an indication that the partner is acting in his capacity as a partner or that a partnership exists.
Property is presumed Pship property if it is acquired with cash, credit, or other property of the Pship.

Question 24

Partner’s separate property

Answer 24

If a partner acquired property and (i) the transferring instrument does not indicate the person’s capacity as a partner or the existence of the partnership, and (ii) partnership property is not used to purchase the property, then the acquired property is presumed to be the partner’s separate property even if it is used in the partnership.

Question 25

Express actual authority

Answer 25

arises from any specific manifestation of authority from the partnership to the partner.

Question 26

Express implied authority

Answer 26

Arises from any manifestation by the partnership that causes the partner reasonably to believe that he has authority to act on the partnership’s behalf.

Question 27

Apparent authority

Answer 27

An agent has apparent authority when the manifestation of a principal causes a third party to reasonably believe that the agent has authority. The TBOC states that the act of any partner that appears to be for the purpose of carrying on, in the ordinary course, the partnership business bind the partnership unless the third party knew that no authority existed.

Question 28

Estoppel and ratification

Answer 28

A partnership, as the principal, is bound to contracts entered into by its partners or other agents when the partnership is estopped from denying their authority or when the partnership ratifies the contract.

Question 29

An agency relationship is created when:

Answer 29

a principal manifests assent to an agent, the agent acts on the principal’s behalf, the agent acts subject to the principal’s control, and the agent manifests assent or otherwise consents so to act.

Question 30

Main duties of agent to principal

Answer 30

(1) Duty of care to perform with reasonable diligence and skill in performing the work; (2) duty to provide information to the principal regarding all matters relating to the agency relationship; (3) duty of loyalty to the principal and work only for his benefit; (4) duty of obedience to the principal; and (5) Duties not to usurp business opportunities from the principal, not to take financial gain from the principal and to provide an accounting, and not to commingle the property of third party.

Question 31

PLLC

Answer 31

A professional limited liability company (PLLC) is a limited liability company (LLC) that is created by certain professionals, such as lawyers or doctors. Generally, a PLLC may not offer more than one kind of professional service. The name of the PLLC must contain the phrase “limited liability company,” “limited company,” or an abbreviation of one of those phrases.

Question 32

Manager Managed LLC – who is an agent?

Answer 32

In a manager-managed LLC, only the manager is an agent of the company.

Question 33

Agent’s liability - professional corporation

Answer 33

An agent is subject to liability to a third party harmed by the agent’s tortious conduct. The agent is not protected from liability by her status as an agent. An agent’s individual tort liability extends to negligent acts or other tortious conduct. Further, a professional corporation does not shield an employee from liability arising from her own malpractice. Additionally, the professional corporation usually gives protection against vicarious liability arising from malpractice by other professionals in the corporation.

Question 34

Formation of a Limited Partnership

Answer 34

A certificate of formation must be filed indicating that a limited partnership is being formed and include: the partnership name, the name and address of the agent for service of process, the name and address of each general partner, and the address of the principal office where records are to be kept.