Agency & Partnerships

Question 1

What is agency?

Answer 1

Agency is a fiduciary relation that
* results from the manifestation of consent, by one person (principal) to another (agent)
* that the other shall act on his behalf and subject to his control
* and consent by the other to so act.

Question 2

Control in Agency

Answer 2

• The agent must act subject to the principal’s control, but the degree of control exercised by the principal doesn’t have to be significant or extensive.
• Sufficient if principal specifies tasks agent should perform.

Question 3

Capacity in agency

Answer 3

• Principal must have contractal capcity.
• Agent doesn’t need contractual capacity (can be minor, but must have some mental capacity)

Question 4

Writing Requirement for Agency

Answer 4

• Appointment of an agent doesn’t require writing unless the agency is for more than one year.
• However, statute of frauds may be required for a specific task becuase of the equal dignities rule.

Question 5

Is consideration needed to create an agency relationship?

Answer 5

No.

Question 6

Agency creation by Estoppel

Answer 6

An agency may be created through estoppel - requires third-party reliance on the principal’s communication.

Question 7

fiduiciary duty

Answer 7

The higest duty that the law can impose.
Think principally about the interest of the principal. Consists of:
* duty of care
* duty of loyalty
* duty of obedience.
* express contractual duties

Question 8

fiduciary duty of care

Answer 8

• Reasonable care under the circumstances
• Sliding scale depending on special skills of agent

Question 9

fiduciary duty of loyalty

Answer 9

• Basically a duty of fairness toward principal.
• Agent cannot put their interests or the interests of third parties above the interests of the principal.

Question 10

fiduciary duty of obedience

Answer 10

• Agent must obey all reasonable directions of their principal.
• If the agent disobeys a reasonable direction, the agent will be liable to the principal for any loss that the principal suffers.
• Could be considered an aspect of duty of loyalty.

Question 11

Principal’s remedies against agent

Answer 11

• Contract remedies (if agent compensated) (damages/disgourgement)
• Tort remedies
• Constructive trust
• Action for secret profits
• Withhold compensation
• Terminate agency

Question 12

subagent and coagent

Answer 12

subagent - a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent’s principal. An agent has absolute liability to the principal for breaches by a subagent. If the principal authorized the agent to appoint the subagent, the subagent owes the principal the same duties as the agent owes the principal.

coagent - another agent of the principal. Employees of a single organization are presumed to be coagents, not subagents

Question 13

principals duty to agent

Answer 13

Principal’s Duties
* Not fiduciary in nature.
* Compensation
* Cooperation
* Indemnity/reimbursement
* Express contractual duties

Agent’s Remedies
* A compensated agent has the usual contract remedies against the principal (but has a duty to mitigate damages).
* possessory lien

Question 14

Actual authority

Answer 14

Express: Authority that’s conveyed by the principal in words (oral or written). Mistake is no defense for the principal.

Implied: Authority that the agent reasonably believes they possess based on the principal’s words/actions. Inlcudes authority:
* Incidental to express authority
* Arising out of custom known to the agent
* Resulting from prior acquiescence by the principal
* To take emergency measures
* To delegate authority in cases of ministerial acts, where circumstances require, where performance is impossible without delegation, or where delegation is customary
* To pay for and accept delivery of goods where there is authority to purchase
* To give general warranties as to fitness and quality and grant customary covenants in land sales, collect payment,and deliver where there is authority to sell AND
* To manage investments in accordance with the “prudent investor” standard
* to conduct actions pursuant to the title or
position given to them by the principal.

Question 14

Termination of Actual Authority

Answer 14

Termination of actual authority may occur by
* occurance of a contractually defined event
* lapse of reasonable time
* change in circumstances such as insolvency/change of law/destruction of subject matter
* agent’s breach
* unilateral termination by either party
* operation of law (such as death) with notice

Question 15

Irrevocable agencies

Answer 15

an agency cannot be terminated by principal nor operation of law if the agency was given to protect the agent’s (or a third party’s) rights and it is supported by consideration.

Question 16

Apparent authority

Answer 16

1) the third party dealing with the agent has a reasonable belief in the agent’s authority
2) the belief was generated by some act or omission by the principal, “holding out” the agent as possessing the authoirty.

In an apparent authority situation, you need to discuss what transpired between the principal and the third party.

Question 17

Apparent authority through agent exceeding actual authority

Answer 17

There are situations where the agent exceeds their authority, yet the principal is still bound. These inlcude:
* Prior Acts: Where the principal previously permitted the agent to exceed their express or implied authority and knows that the third party is aware of this.
* Position of Power: The power is implied by the position or title that the princial has bestowed upon the agent, if such title/position customarily confers the power in question.

Question 18

Apparent authority through Principals omissions

Answer 18

Generally, a principal will not be bound if they did not hold the agent out as having authority. Two exceptions
* Imposters: negligently permitted by principal will create agency by estoppel for any victim 3rd party.
* Lingering Apparent Authority: Agent used to have authority no longer does but principal has not actually or constructively notified third parties who have previosuly dealt with former agent, or has not recovered written evidence of authority.

• Death of Prinicpal: The majority view is that death or incompetency of the principal does not automatically terminate the agent’s apparent authority.

Question 19

Inherent Authority

Answer 19

Inherent authority is derived solely from the agency relationship and results in the principal being bound even though the agent had no actual or apparent authority to perform the particular act.
Imposed by courts.
Inlcudes:
* Respondeat Superior
* Conduct similar to that authorized

Question 20

Authority by ratification

Answer 20

Agent did not have authoirty to do something but the principal subsequently validates the act either:
* expressly: through oral or written affirmation, or
* Impliedly by affirming or accepting the benefit, or by silience if there was a duty to disaffirm.

• requires that the prinicipal knew the material facts, had capacity, and accepted the entire transaction (cannot impliedly ratify a part only)

Question 21

Limits on principal’s ability to ratify

Answer 21

• Generally, a “principal” may ratify anything unless: (1) performance was illegal at the time of ratification, (2) the third party has withdrawn, or (3) there has been a material change in circumstances
• The majority rule is that a principal may not ratify if they were not disclosed by the agent (the third party either did not know there was a principal, or did not know their identity).

Question 22

When is the Principal liable on the contract?

Answer 22

Principal is bound where valid authority existed (actual authority, apparent authority, or ratification)

Question 23

When is the third party liable on the contract?

Answer 23

Third party is bound to principal if valid authority existed and principal enforces.

Third party is bound to agent if principal was unidentified or undisclosed and agent enforces contract, but principal is still entitled to contract benefits.

Question 24

When is the Agent liable on the contract?

Answer 24

If principle is undisclosed or partially disclosed, the principal is still liable, but so is the agent.

Agent is only not liable if the principal was fully disclosed.

Question 25

Prinicipal direct Tort liability

Answer 25

In addition to vicarious liability, a principal may be directly liable for their own negligence in hiring, retaining, or supervising the agent. A principal may also be directly liable for an agent’s tort if they gave the agent actual authority to commit the tort or ratified the tort, or in other circumstances involving independent contractors

Question 26

Principal’s vicaious Tort liability Respondeat Superior

Answer 26

1) is the agent an employee of the principal? Principals usually not liable for independent contractors. Employee if principal holds the right to control the manner in which the agent performs their work.
2)** was the tort committed within the scope of employment?** If no, Principal not liable.

Question 27

Principal’s vicaious Tort liability to independent contractors

Answer 27

Principal may still be liable if:
1) the activity involved inherently dangerous, 2) the duty nondelegable, or
3) the principal knowingly selected an incompetent independent contractor.

Question 28

The Right to Control and the employee/employer relationship

Answer 28

A party will be considered an employee of the principal rather than a contractor if the principal holds the right to control the manner in which the agent performs their work.

Factors for right to control:
* The degree of skill required on the job
* Whose tools and facilities are used
* The period of employment
* The basis of compensation (time/job)
* The relationship of work to the business purpose
* Whether the person has a distinct business
* The characterization and understanding of the parties.
* The customs of the locality regarding supervision of work

Question 29

Meaning of the scope of employment

Answer 29

Was the conduct “of the kind” that the agent was hired to perform?
* similar or incidental to that which was authorized

Did the tort occur “on the job” (that is, within the time and space limits of the employment)?
* Detour – minor departure from scope of employment – Employer Liable.
* Frolic – major departure from scope of employment – Employee Liable.

Was the conduct motivated at least in part to serve the principal?
* The employee’s invitation to passengers, unless expressly authorized by the employer, is generally held to be outside the scope of the employment relationship.
* The employer is not liable for torts caused by the use of substantially different (more dangrous) instrumentalities from those authorized
* If the employee makes a trip with two purposes, it will be within the scope of employment if any substantial purpose of the employer is being served.

**Principal can validly ratify agent’s tortuous actions only if they have all material facts. **

Question 30

Principal’s vicaious liability for intentional torts.

Answer 30

The general rule is that the employer is not liable for the intentional torts of an employee unless:
* Employee is acting to further the employer’s purposes(overzealous)
* Force is authorized in the employment (bouncer)
* Friction is generated by the employment (bill collector)

Question 31

Liability for “borrowed” employes

Answer 31

The key issue is who has the primary right of
control over the employee. That principal is liable.

Question 32

Employer-Employee by Estoppel

Answer 32

Where a principal creates the appearance of an employer-employee relationship upon which a third party relies, that principal will be estopped from denying the relationship and will be liable under the doctrine of respondeat superior

Question 33

Vicarious Tort liability through Apparent authority

Answer 33

A principal is vicariously liable where an agent appears to deal or communicate on behalf of the principal and the agent’s apparent authority enables the agent to (1) commit a tort or (2) conceal its commission.

Question 34

Stages to consider for principal contract liability

Answer 34

Is a principal liable to a third party on a contract entered into by an agent?
* Did the agent have actual or apparent authority at the time of the contract, or did the principal ratify the contract later?
* If so, the principal is liable on the contract (but usually, the agent is not).

Question 35

Stages to consider for principal Tort liability

Answer 35

Is an employer liable for a tort committed by an employee?
* Was the tort committed by an employee in the scope of employment?
* If so, the employer (master) and employee (servant) are jointly and severally liable to the third party.

Question 36

What is a Partnership?

Answer 36

• A partnership is an association of two or more persons to carry on as co-owners a business for profit.
• Doesn’t matter if they didnt intend to form a partnership.
• Profit Sharing = rebuttable presumption of partnership.
• simply loaning money does not create a partnership
• A “person” may be an individual, trust, corporation, partnership, or other entity.
• Co-ownership = control
• Other idicators inlcude capital contributions, mutual agency, property held in joint tenancy or in common, parties designation as partnership, the venture undertaken is extensive, sharing of gross returns.
• can rebut with no right to control or no requirement to join in losses.
• No writing requirement under partnership law, but equal dignity rule applies
• General partnership is the default form.

Other requirements:
* Contracting capacity
* Legality of purpose
* Express or implied consent of all partners.

Question 37

Partnership by estoppel

Answer 37

• When a person by words or conduct represents himself as a partner or consents to being represented by another as a partner, he will be liable to third parties.
• If someone else holds you out as a partner without your consent, you are not liable for failing to deny. Only the one doing the misrepresentation will be liable.

Question 38

Partnership agreements

Answer 38

• Not necessary to form a partnership, but will allow partners to contract around statutory provisions.
• Check for a partnership agreement first before seeing if a partnership statutorily exists. usually on the bar there is no agreement so you must learn the default rules.
• A partnership agreement may be written, oral, or implied (for example, by conduct).

Question 39

Partnership entity status

Answer 39

• A partnership is a legal entity distinct from its partners. Title to land may be in the partnership name.
• A partnership may sue or be sued in the partnership name. legally distinct from partners
• A partnership may sue a partner for breach of the partnership agreement or of a duty owed to the partnership.
• A partner may sue the partnership or other partners to enforce a right created by partnership act or agreement, or a right otherwise belonging to the partner.

Question 40

Default partnership voting rules

Answer 40

• All partners have equal rights in the management of the business and equal votes regardless of share held.
• matters within the ordinary course of the partnership business = majority vote (number not share).
• Matters outside of the ordinary course of business = unanimous consent

Question 41

Default partnership compensation rule

Answer 41

Partners have no salary, they share in profits.

Question 42

Default partnership indemnification rule

Answer 42

A partner has a right to be indemnified by fellow partners for expenses incurred on behalf of the partnership.

Question 43

Default partnership contribution rule

Answer 43

A partner has a right to contribution from fellow partners where the partner has paid more than his share of a partnership liability

Question 44

Default partnership profits/losses rule

Answer 44

• Profits are shared equally by number.
• Losses follow profits.

Question 45

Default partnership tort liability to third party rule

Answer 45

A partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting in the ordinary course of business of the partnership or with authority of the partnership.

Question 46

Default partnership contract liability to third party rule

Answer 46

a partnership is liable for all contracts entered into by a partner in the scope of
partnership business or with actual or apparent authority of the partnership.

Question 47

Actual authority in partnership

Answer 47

1) Express Actual authority can can come from the partnership agreement or a vote of the partners. A majority vote of the partners is required to authorizeordinary business; a unanimous vote of the partners is required to
authorize extraordinary acts.

2) Express Actual authority can also be created by the partnership filling a statement of partnership authority with the secretary of state. The effect differs depending on whether the transaction involves a transfer of real property:

• Real estate transactions: Third parties are deemed to have constructive knowledge of both the grants and restrictions of authority of partners only if filings are made with the secretary of state and the county.
• Non-real estate transactions: Third parties are only deemed to have constructive notice of filed grants of authority, never filed restrictions. (cannot cut off apparent authority).

3) implied actual authority is authority that is necessary to carry out an express power, or is supported by custom or acquiescence.

Question 48

Apparant authority in partnership

Answer 48

• By statute, a partner is an agent of the partnership and has apparant authority to bind the partnership to transactions within the ordinary course of the partnership’s business unless the third party is aware that the partner lacks actual authority to act.
• Partnership default rules that affect the rights of third parties cannot be changed by agreement.

Question 49

Default partnership rule on notice

Answer 49

A partner’s notice of a fact relating to the partnership is imputed to the partnership immediately unless the partner having notice is participating in a fraud against the partnership.

Question 50

Sharing of liability rule in partnership

Answer 50

* A defining characteristic of the general partnership is that each partner is jointly and severally liable (so, one or more partners may be sued) for all obligations of the partnership, whether arising in tort or contract.
* The plaintiff must first exhaust partnership resources before seeking to collect from an individual partner’s assets (partners essentially guarantors)
* Each partner is personally and individually liable for the entire amount of partnership obligations (joint and several)
* Where one partner pays the whole obligation of a partnership, they’re entitled to indemnification from the partnership. They may also require the other partners to contribute their pro rata shares of the payment if the partnership is unable to indemnify.
* Partners cannot limit a third party’s rights without the third party’s consent. The agreement is effective, however, among the partners themselves.

A partner who make an agreement on behalf of the partnership without apparant or actual authority will be solely personally liable.

Question 50

Liability of newly admitted partes

Answer 50

A newly admitted partner (requires a unanimous vote) is not personally liable for partnership obligations that arose before their admission. They can only lose the amount of their investment in the partnership.

Question 51

Liability of dissociated partners

Answer 51

• An outgoing or dissociated partner remains liable for obligations arising while they were a partner unless there has been payment, release, or novation.
• An outgoing partner can also be liable for acts done after dissociation.

Question 52

Partnership fiduciary duty

Answer 52

• Each partner owes four fiduciary duties to the partnership: they owe duties of loyalty and care to each other and to the partnership.
• They also owe a statutory duty of disclosure as well as a duty of obedience

Question 52

Partnership duty of loyalty

Answer 52

• Basically a duty of fairness toward partnership
• partner cannot put their interests or the interests of third parties above the interests of the partnership
• Cannot be limited by agreement.

Requires each partner to
(1) to account to the partnership for any benefit derived by the partner in onducting the partnership business, using the partnership’s property, or appropriating a partnership opportunity;
(2) to refrain from putting their own or a third party’s interests above those of thepartnerships; and
(3) to refrain from competing with the partnership in the conduct of its business.

Question 53

partnership duty of care

Answer 53

• The duty of care requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
• partner not liable for ordinary negligence.
• cannot be limited by agreement.

Question 53

partnership statutory duty to disclose

Answer 53

Each partner and the partnership shall furnish
* (1) without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties; and
* (2) on demand, any other information concerning the partnership’s business and affairs (except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances).
* CAN be limited by agreement.

Question 54

When does property belong to partnership?

Answer 54

partnership property if
* aquired by a partnership
* aquired by a partner with reference to the partnership
* Presumer if partnership funds are used

Presumed partner property if:
* Held in name of partner, not purchased with partnership money, with no sign they were acting for the partnership.

Untitled property
* look at circumstances and intent to determine ownership.

Question 55

Rights in Partnership property

Answer 55

Partnership: unrestricted rights to property

Partner: Not a co-owner. No interest in property. Can only use for partnership purposes.

Question 56

Partner’s partnership interest

Answer 56

The partnership interest is the personal property of the partner. Inlcudes:
* financial rights
* management rights (everything else)

Transfer of rights:
* Default no right to unilateral transfer. The
default rule for the admission of a new partner is that it requires a
unanimous vote of the existing partners.
* Unless otherwise agreed, a partner can unilaterally transfer his financial rights, but the transferee does not become a partner, and the partner retains all management rights.

Question 57

Dissociation of Partnership

Answer 57

Withdrawal from partnership.
Dissociation can occur via:
* notice of express will to withdraw
* occurance of a contractuall specified event
* valid explusion of partner
* partner’s bankruptcy
* death of incapacity of partner
* court order
* termination of partner business entity

Unlike the other events of dissociation, notice of a partner’s express will to withdraw from a partnership at will automatically triggers dissolution of the partnership. On an essay with this fact you should discuss both dissociation and dissolution.

Question 58

Wrongful Dissociation

Answer 58

• When a partner breaches an express term in the partnership agreement.
• Includes when a partner in a term partnership dissociates before the agreed term.
• A partner who wrongfully dissociates is liable to the partnership for any damages caused by the dissociation.

Question 59

At-Will Partnership

Answer 59

Partners have not agreed to a timeframe for the partnership. Default.

Question 60

Term Partnership

Answer 60

partners have agreed, explicitly or implicitly, to remain partners for a definite term or until the completion of a particular undertaking.

Question 61

Consequences of Dissociation for Partnership

Answer 61

Two statutory approaches depending on the circumstance:
1) the partnership is dissolved, its business must be wound up, and the business will be liquidated.
2) the partnership continues in existence. The dissociated partner is entitled to a buyout of their partnership interest.

Question 62

Consequences of Dissociation for Partner

Answer 62

• Partner’s right to participate in management ceases.
• Partnership buys out interest though either liquidation or going-concern value.
• Partnership indemnifies partner against known pre-dissociation liabilities and post-dissociation liabilities not incurred by the dissociating partner’s acts.

Note: a partner who wrongfully dissociates a term partnership early is not entitled to payment of the buyout price until the term expires or the undertaking is completed, but interest must be paid on buyout price from date of dissociation.

Question 63

Dissolution of Partnership

Answer 63

Dissolution and winding up are required only in limited circumstances.

Two circumstances are of particular importance:
1. When a partner dissociates by express will in an at-will partnership, the partnership is dissolved and its business must be wound up.
2. In a term partnership, if one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up of the partnership are required only if, within 90 days after the dissociation, at least one-half of the remaining partners agree to wind up the partnership.

Question 64

Dissolution v. Dissociation

Answer 64

A Partner dissociates
A Partnership disolves.

Question 65

Liability of Dissociated Partner

Answer 65

Pre-Dissociation Liability
* A dissociated partner remains liable for pre-dissociation partnership obligations

Post-Dissociation Liability
* A dissociated partner can be liable for post-dissociation partnership liabilities incurred within two years after the dissociation if (1) when entering the transaction the other party reasonably believed the dissociated partner was still a partner, and (2) did not have notice of the partner’s dissociation.
* Note that a dissociated partner can protect themselves by notifying creditors directly of their dissociation (effective immediately) or by filing a public notice of dissociation (becomes effective 90 days after filing).

Question 66

Dissociated Partner’s Power to Bind Partnership (Apparent Authority of Dissociated Partner)

Answer 66

• A partnership can be bound by an act of a dissociated partner undertaken within two years after dissociation if: (1) the act would have bound the partnership before dissociation, and (2) the other party to the transaction (a) reasonably believed the dissociated partner was still a partner, and (b) did not have notice of the dissociation.
• The partnership can protect itself by notifying creditors directly of the dissociation (effective immediately) or by filing a public statement of dissociation (becomes effective 90 days after filing).

Question 67

in what order is the money dispersed in dissolution of a partnership?

Answer 67

1) Outside creditors
2) Inside creditors.
3) Reimburse partners for capital contributions.
4) Excess assets are distributed to the partners in cash in accordance with their profit shares OR individual partners must contribute in accordance with their loss shares, inlcuding reimbursing other partners capital consitubutions

Question 68

What events may trigger the Dissolution of an at will

Answer 68

• notice of an at-will partner’s express will to withdraw
• occurance of a contractually specified event.
• consent of all of the partners to dissolve
• within 90 days after a partner’s death, bankruptcy, or wrongful dissociation, at least half of the remaining partners wish to dissolve;
• Partnership becomes unlawful
• The passage of 90 consecutive days during which the partnership does not have at least two partners.
• court order

Question 69

Apparent Authority—Partner’s Power to Bind
Partnership After Dissolution

Answer 69

Partners retain apparent authority to bind the partnership to a third party on new business even after an event requiring winding up.

The partnership can protect itself by
* notifying creditors directly of the dissolution.
* Filing a statement of dissolution which gives all persons constructive notice after 90 days.

Partnership will have rights against a partner that binds it in this way if that partner knew about the dissolution when she entered into the contract.

Question 70

Partners’ waiver of Dissolution

Answer 70

Any time before the winding up of the partnership business is complete, the partners may decide to waive the dissolution and continue the partnership by unanimous vote of the partners who have not wrongfully dissociated.

Question 71

Can a partner Dissociate?

Answer 71

Yes, at any time. Even if it is a term partnership, you have the power but you might not have the right. You may be liable for damages and will be bought out.

Question 72

General Partner v. Limited Partner

Answer 72

The general partner is personally liable for partnership obligations, while the limited partner generally does not have any liability beyond the liability to make agreed-upon contributions.

Question 73

Limited Partnership

Answer 73

• A partnership with at least one general partner and at least one limited partner. General partnership principles typically apply unless displaced by LP-specific provisions.
• Requires filing a certificate of formation with the state.
• A limited partnership is an entity distinct from its partners.
• has a perpetual duration unless otherwise provided.
• Limited Partnership agreement can be written, oral, or implied.
• As in a general partnership, the agreement can displace almost all of the statutory provisions.
• Name must inlcude the phrase “limited partnership” or the abbreviation “L.P.”
• default allocation of profits/losses - no provision
• default allocation of distributions - in proportion to contributions

Question 74

How to create a limited partnership

Answer 74

A certificate of limited partnership must be
* be filed with the secretary of state
* be signed by all general partners.
* include (1) the name of the partnership, (2) the names and addresses of the agent for service of process, and (3) the names and addresses of each general partner.
* inlcude whether the limited partnership is a limited liability limited partnership.

If you don’t have these you’ll be a GP!
look out for fact patterns where a LP is incorrectly created.

Question 75

Management of LP

Answer 75

Role of General Partners
* The LP is managed by the general partner(s).
* Each general partner has equal rights.
* Decisions require a majority of GPs.

Role of Limited Partners
* Generally, limited partners usually have no management rights (can changed by agreement).
* Participation in management does not cause a limited partner to become personally liable.

All Partners
The vote of ALL partners is necessary for certain extraordinary activities, including to:
(1) amend the partnership agreement;
(2) convert the partnership to a limited liability limited partnership;
(3) dispose of all or substantially all of the limited partnership’s property outside the usual and regular course of the partnership’s activities;
(4) admit a new partner; or
(5) compromise a partner’s obligation to make a contribution or to return an improper distribution.

Question 76

Financial Rights in LP

Answer 76

• Generally, distributions from an LP are made on the proportion of the partners’ contributions.
• No contribution=no distribution
• An LP may not distribute if it would be unable to pay its debts as they become due or its total assets would be less than the sum of its total liabilities.

Question 77

Liability of GPs in an LP

Answer 77

• General partners are jointly and severally liable for all obligations of the LP.
• New GPs are not liable for LP obligations incurred before their arrival

Question 78

Liability of LPs in an LP

Answer 78

• A limited partner is not personally liable for an obligation of the LP solely by reason of being a limited partner.
• LPs can only lose the value of their investment.
• The limited liability shield of any business organization does not protect a person from liability for her own torts.

Question 79

Fiduciary Duty in LPs

Answer 79

GP - same is an a general partnership
LP - None unless contracted otherwise

Question 80

What is an LLP

Answer 80

• An LLP is a essentailly a GP in which all of the partners have limited liability (no partner is personally liable for a partnership obligation beyond their contribution to the partnership).
• In general, you apply the default general partnership rules to LLPs, with some exceptions
• default allocation of profits/losses - Equally if LLP/ no provision if LLLP
• default allocation of distributions - No provision if LLP/ in proportion to contribution if LLLP

Question 81

Formation requirements for LLPs

Answer 81

To become an LLP, a partnership must file a statement of qualification with the secretary of state. The statement must be executed by
at least two partners.
The required minimal information includes:
(1) the name and address of the partnership;
(2) a statement that the partnership elects to be an LLP; and
(3) The filing of the statement and a deferred effective date, if any.

Name must reference LLP

Question 82

What is an LLC?

Answer 82

A limited liability company (“LLC”) is a hybrid business organization between a corporation and a partnership that
(1) is taxed like a partnership (except for a single-member LLC),
(2) offers its owners (called members) the limited liability of shareholders of a corporation, and
(3) can be run like either a corporation or a partnership.

• Most common form of new business organization.
• Requires filing a certificate of organization with the state.
• An LLC is treated as a separate legal entity distinct from its owners
• default allocation of profits/losses - proportional to contribution in most states
• default allocation of distributions - proportional to contribution in most states.

Question 83

Formation/Filing for an LLC

Answer 83

An LLC is formed by filing a certificate of organization with the secretary of state.
Certificate must inlcude:
1. The name of the LLC
2. The address of the LLC’s registered office AND
3. The name and address of its registered agent

Name must denote LLC

Must have at least one member

Question 84

Management of LLC

Answer 84

• Presumed to be managed by all members.
• Majority for ordinary business decisions
• Unanimity for extraordinary decision
• Can also have a manager managed LLC where a group of managers who may or may not be members control the management.

Question 85

Financial rights in LLC

Answer 85

In most states, unless otherwise agreed, profits and losses and distributions are allocated on the basis of contributions.

Question 86

Liability under LLC

Answer 86

Members and managers generally are not personally liable for the LLC’s obligations. They have limited liability and can lose only the amount of their investments.
Members are personally liable only if the court decides to pierce the LLC veil or if proper procedures for dissolution and winding up have not been followed.
creditors may enforce claims agaisnt LLC members, but the members’ total liability may not exceed the total value of assets distrubted to the member in dissolution.

Question 87

Fiduciary duty in LLC

Answer 87

Those engaged in management owe to the the LLC and to its other members the fiduciary duties of care and loyalty

Duty of Care: Members (or managers) must act with the carethat a person in a like position would exercise under similar circumstances, in a manner reasonably believed to be in the best interests of the LLC
Business judgment rule protection: Members (or managers) cannot be held liable for negligent decisions

Duty of Loyalty: Members (or managers) must:
(1) account to and hold for the LLC any benefitthey derive from the LLC’s activities or from the appropriation of an LLC opportunity;
(2) refrain from dealing with the LLC as, or on behalf of, a person who has an adverse interest to the LLC (unless the transaction is fair to the LLC); and
(3) refrain from competing with the LLC’s business.

Question 88

Partnerships and LLC taxation

Answer 88

• Partnerships and LLCs have pass through taxation.
• The member might not actually get the money!

Question 89

Creditors claims against partners

Answer 89

If a creditor has a claim against an individual partner, the creditor can obtain an interest in the partnership. This includes profits but not management or voting rights.

Question 90

Dissociation in an LLC

Answer 90

if a member leaves, then it leads to a dissociation of that member, but it does not lead to winding up or dissolution unless the other members unanimously agree to dissolve the LLC.