Business Organizations Flashcards
What are the elements necessary for formation of an agency?
A fiduciary relationship (obligation to act for another’s benefit) is created between the principal and the agent which requires:
- (1) mutual manifestation of assent between principal and agent;
- (2) the agent will act on the principal’s behalf; and
- (3) will be subject to the principal’s control.
In order to create an agency there must be an agreement, but not necessarily a contract between the parties.
- An agreement may result in the creation of an agency relationship although the parties did not call it an agency and did not intend the legal consequences of the relation to follow.
The existence of the agency may be proved by circumstantial evidence which shows a course of dealing between the two parties.
- When an agency relationship is to be proven by circumstantial evidence, the principal must be shown to have consented to the agency since one cannot be the agent of another except by consent of the principal.
Is an agency relationship subject to contract law?
No, an agency relationship is not itself a contract.
But an agent and a principal can enter into a contract that describes each other’s obligations.
- An agent has a duty to act in accordance with the express and implied terms of any contract between the agent and the principal.
Are undisclosed principals subject to liability for the acts of their agents?
Yes. An undisclosed principal who entrusts an agent with the management of his business is subject to liability to third persons with whom the agent enters into transactions usual in such businesses and on the principal’s account, although contrary to the directions of the principal.
This means that the agent may have certain powers to bind the principal despite any contract provision.
Who has the power to terminate an agency?
Both the principal and the agent have the power to end the agency at any time.
The power to terminate does not depend upon the existence of or conformity with an agreement between the agent and the principal. Exercising the power to terminate may constitute a breach of contract. The power to terminate stems from the character of actual authority, which assumes ongoing and manifest assent that is operative when an agent takes action.
How are the rules of Agency, as we have seen them, modified or expanded by discussion of the creditor-debtor relationship and when it turns into an agency?
A creditor who assumes control of his debtor’s business for the mutual benefit of himself and his debtor, may become a principal, with liability for the acts and transactions of the debtor in connection with the business.
- Mere exercise of veto power over purchase/sales over specified amount does not create agency.
- Taking over management and directing what contracts may or may not be made creates an agency.
- Creditor becomes principal when creditor assumes de facto control over debtor.
How are the rules of Agency, as we have seen them, modified or expanded by discussion of the buyer-supplier relationship and when it turns into an agency?
One who contracts to acquire property from a third person and convey it to another is the agent of the other only if it is agreed that he is to act primarily for the benefit of the other and not for himself. Factors indicating that the one who is to acquire the property and transfer it to the other is selling to, and not acting as agent for, the other are:
- (1) That he is to receive a fixed price for the property, irrespective of the price paid by him. This is the most important.
- (2) That he acts in his own name and receives the title to the property which he thereafter is to transfer.
- (3) That he has an independent business in buying and selling similar property.
What is the capacity required to create an agency?
An individual has capacity to act as principal in a relationship of agency as defined if, at the time the agent takes action, the individual would have capacity if acting in person.
- Minors do not have the capacity to be a principal but do have the capacity to be an agent because under the restatement, any person may ordinarily be empowered to act so as to affect the legal relations of another.
- Under the law relating to promoters, if a corporation does not exist, then it may not be bound until it exists and later ratifies the contract. Until then, the promoters are bound.
When does an agent act with actual authority?
Actual authority arises when at the time of taking action that has legal consequences for the principal, the agent:
- (1) reasonably believes,
- (2) in accordance with the principal’s manifestations to the agent
- (3) that the principal wishes the agent to so act.
Actual authority includes express and implied:
- Express authority is that specifically mentioned by the principal in setting out the extent of the agent’s duties.
- Implied authority of a corporate officer or agent includes all such incidental authority as is necessary, usual, and proper to effectuate the main authority expressly conferred.
When does an agent act with apparent authority?
Apparent authority arises when at the time of taking action that has legal consequences for the principal, a third party:
- (1) reasonably believes,
- (2) in accordance with the principal’s manifestations to the third party,
- (3) that the agent has authority to act on behalf of the principal.
What are the three ways to establish apparent authority?
(a) The principal expressly and directly tells a third person that a second person has authority to act on the principal’s behalf.
(b) If a principal allows an agent to occupy a position which, according to the ordinary habits of people in the locality, trade, or profession, carries a particular kind of authority, then anyone dealing with the agent is so justified in inferring that the agent has such authority.
(c) By allowing an agent to carry out prior similar transactions, a principal creates the appearance that the agent is authorized to carry out such acts subsequently.
What are the three kinds of principals (relative to the degree to which a third party knows their identity)?
A principal is disclosed if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal and has notice of the principal’s identity.
A principal is undisclosed if, when an agent and a third party interact, the third party has no notice that the agent is acting for a principal.
A principal is unidentified if, when an agent and a third party interact, the third party has notice that the agent is acting for a principal but does not have notice of the principal’s identity.
If an agent with actual/apparent authority makes a contract on behalf of a disclosed principal, who are the parties to the contract?
When an agent acting with actual or apparent authority makes a contract on behalf of a disclosed principal,
- (1) the principal and the third party are parties to the contract; and
- (2) the agent is not a party to the contract unless the agent and third party agree otherwise.
If an agent with actual authority makes a contract on behalf of an undisclosed principal, who are the parties to the contract?
When an agent acting with actual authority makes a contract on behalf of an undisclosed principal, unless excluded by the contract,
- (1) the principal is a party to the contract;
- (2) the agent and the third party are parties to the contract.
The third party does not know there is a principal, so there can’t be a manifestation from the principal to the third party that the agent is the principal’s agent.
If an agent with actual/apparent authority makes a contract on behalf of an unidentified principal, who are the parties to the contract?
When an agent acting with actual or apparent authority makes a contract on behalf of an unidentified principal,
- (1) the principal and the third party are parties to the contract; and
- (2) the agent is a party to the contract unless the agent and the third party agree otherwise.
Can an agent be a party to a contract if the principal does not exist or lacks capacity?
Yes, unless the third party agrees otherwise, a person who makes a contract with a third party “as an agent of a principal” becomes a party to the contract if the purported agent knows or has reason to know that the purported principal does not exist or lacks capacity to be a party to a contract.
If a person makes a contract with a third party on behalf of a principal, but lacks such authority, have they breached any warranty to the third party?
Yes. They breach an implied warranty of authority to the third party unless:
- (a) the principal or purported principal ratifies the act;
- (b) the person gives notice to the third party that no warranty of authority is given; or
- (c) the third party knows that the person acts without actual authority.
If a third party finds out that an undisclosed principal is the principal, may the third party avoid the contract?
Yes. When an agent, who makes a contract or conveyance on behalf of an undisclosed principal, falsely represents to the third party that the agent does not act on behalf of a principal, the third party may avoid the contract or conveyance if the principal or agent had notice that the third party would not have dealt with the principal.
Can principals be liable for acts of the agents under estoppel?
Yes. A principal who is not otherwise liable as a party to a transaction purportedly done by the agent on that principal’s account is subject to liability to a third party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on the principal’s account, if
- (a) the principal intentionally or carelessly caused such belief, or
- (b) having notice of such belief and that it might induce others to change their positions, the principal did not take reasonable steps to notify them of the facts.
Is an agent subject to liability to a third party harmed by the agent’s tortious conduct where the conduct was properly within the scope of employment?
Yes, an agent is subject to liability to a third party harmed by the agent’s tortious conduct. Unless an applicable statute provides otherwise, an actor remains subject to liability although the actor acts as an agent or an employee, with actual or apparent authority, or within the scope of employment.
If an agent harms a third party in the scope of the agency and in so doing breaches a duty of care owed (solely) to the principal, can the third party raise that breach as a basis for the agent’s liability to the third party?
No, an agent’s breach of a duty owed to the principal is not an independent basis for the agent’s tort liability to a third party. An agent is subject to tort liability to a third party harmed by the agent’s conduct only when the agent’s conduct breaches a duty that the agent owes to the third party.
When is a principal subject to direct liability to a third party harmed by an agent’s conduct?
When the agent acts with actual authority or the principal ratifies the agent’s conduct and:
- (a) the agent’s conduct is tortious;
- (b) the agent’s conduct, if that of the principal, would subject the principal to tort liability;
- (c) the principal is negligent in selecting, supervising, or otherwise controlling the agent; or
- (d) the principal delegates performance of a duty to use care to protect other persons or their property to an agent who fails to perform the duty.
When is a principal subject to vicarious liability to a third party harmed by an agent’s conduct?
When (a) the agent is an employee who commits a tort while acting within the scope of employment or (b) the agent commits a tort when acting with apparent authority in dealing with a third party on or purportedly on behalf of the principal.
An employee’s conduct was within the scope of employment if:
- (1) the conduct occurred substantially within the time and space limits authorized by the employment;
- (2) the employee was motivated, at least partially, by a purpose to serve the employer; and
- (3) the act was of a kind that the employee was hired to perform.
Are employers liable for tortious conduct committed by employees if the action was done on a detour from the employment?
An employee making a minor deviation from his employer’s business for his own purposes is still within the scope of his employment.
If the deviation in time or geographic area is substantial, the employer is not liable.
Intentional torts by employees are not generally within scope of employment. What are the exceptions?
(1) Force is authorized in employment (bouncer).
(2) Friction is generated by the employment (bill collector).
(3) The employee is furthering the business of the employer (removing rowdy customers).
Are principals liable for torts of independent contractors?
As a general rule, a principal is not liable for torts of independent contractors. There are exceptions:
- (1) The independent contractor is engaged in an inherently dangerous activity (blasting).
- (2) Duty is not delegable (duty to use care in building a fence around excavation site).
The difference between an independent contractor and employee is that with the independent contractor, the principal has no right to control the manner and method in which the job is performed, while with the employee, the principal has the right to such control.
What are the ways that actual authority may be terminated?
(a) Death of either party (or cessation of existence)
(b) Principal’s loss of capacity
(c) Agreement between agent and principal
(d) Occurrence of circumstances such that agent should reasonably conclude principal would no longer assent to agency
(e) Revocation by principal or renunciation by agent
(f) Statute
Does the death of a principal terminate the agent’s actual authority?
Yes. When a principal (natural person) dies, his/her agent’s actual authority terminates when the agent has notice of the principal’s death.
What is the effect of the loss of a principal’s capacity on actual authority? When is it effective?
It terminates the agent’s actual authority. The termination becomes effective when the agent has notice that the principal’s loss of capacity is permanent or that principal has been adjudicated to lack capacity.
Can an agent have effective actual authority if the principal has lost capacity?
Yes, a written instrument may make an agent’s actual authority effective upon a principal’s loss of capacity or confer it irrevocably regardless of such loss.
What is a durable power of attorney?
A written designation of an attorney-in-fact expressing the principal’s intention that the power shall not be affected by the principal’s subsequent loss of capacity, or that the power shall become effective upon the principal’s subsequent disability or incapacity.
The principal may revoke the power so long as the principal has capacity.
When is apparent authority terminated?
Apparent authority ends when it is no longer reasonable for the third party with whom an agent deals to believe that the agent continues to act with actual authority.
The termination of actual authority does not by itself end any apparent authority held by an agent.
What effects do indicia of authority have on the principal/agent relationship?
A principal may furnish an agent with a writing, such as a power of attorney, that states the extent and nature of the agent’s actual authority. Providing the agent with such a writing enables third parties to deal with the agent as to matters within the scope of the stated authority without confirming the agent’s authority directly with the principal.
When actual authority is terminated, the agent has a duty to return indicia of authority to the principal. If the agent does not return the indicia to the principal, the principal bears the risk that the agent will use them to deceive third parties who do not have notice that the agent’s actual authority has been terminated.
What is ratification? How does one ratify an act?
Ratification is the affirmance of a prior act done by another.
- Upon ratification, the prior act done by another is effective as if done by an agent acting with actual authority. Ratification retroactively creates the effects of actual authority, meaning it relates back in time to the act being ratified.
A person can ratify an act by:
- (a) manifesting assent that the act shall affect the person’s legal relations, or
- (b) conduct that justifies a reasonable assumption that the person so consents.
- This way, failure to object may constitute a manifestation of assent when the person has notice that others are likely to draw such an inference (that there is assent) from silence.
Are there times where ratification occurs, but will be found not to be effective?
Yes. Ratification is not effective:
- (a) in favor of a person who causes it by misrepresentation or other conduct that would make a contract voidable;
- (b) in favor of an agent against a principal when the principal ratifies to avoid a loss; or
- (c) to diminish the rights or other interests of persons, not parties to the transaction, that were acquired in the subject matter prior to the ratification.
Can a third party withdraw before ratification?
Yes. If an agent dupes a third party into believing the agent had authority, it is fair to permit the third party to withdraw.
Permitting the third party to withdraw prior to ratification by the principal creates an incentive for the principal to ratify sooner rather than later, rather than delaying to see whether the transaction itself turns out to be to the principal’s advantage.
This reduces the risk created by ratification, which is that the principal will use it to speculate at the expense of the third party.
Can ratification be used to deprive a person of a right fixed prior to the ratification, or to create a liability against a person past the time set to determine such a liability?
No. A ratification of a transaction is not effective unless it precedes the occurrence of circumstances that would cause the ratification to have adverse and inequitable effects on the rights of third parties. These circumstances include:
- (a) any manifestation of intention to withdraw from the transaction made by the third party;
- (b) any material change in circumstances that would make it inequitable to bind the third party, unless the third party chooses to be bound; and
- (c) a specific time that determines whether a third party is deprived of a right or subjected to a liability.
Can a principal ratify only part of an act?
No. A ratification is not effective unless it encompasses the entirety of an act, contract, or other single transaction.
Can someone ratify the act of someone who was not their agent?
Yes. A person can ratify the acts of another who purports to be their agent even though the person is not.
What are the elements of notification?
A notification is, (a) per agreement of the parties, (b) applicable law, or (c) when in a reasonable manner:
- (1) a manifestation
- (2) with the intent to affect the legal rights/duties of the notifier
- (3) relative to rights/duties of the notified.
Is a third party’s notification to an agent effective against the principal?
Yes. A notification given to an agent is effective as notice to the principal if the agent has actual or apparent authority to receive the notification, unless the person who gives the notification knows or has reason to know that the agent is acting adversely to the principal.
Is an agent’s notification to a third party effective against the principal?
Yes. A notification given by an agent is effective as notification given by the principal if the agent has actual or apparent authority to give the notification, unless the person who receives the notification knows or has reason to know that the agent is acting adversely to the principal.
When does notification take effect?
Depending on the parties’ intention and applicable law, a notification may be effective as soon as it is received.
Alternatively, the effect of a notification may be delayed when the notification requires that the person notified take further action.
In such cases, notification given to an agent is not effective as to the principal prior to the earlier of a reasonable time for taking action or a diligent attempt to take action.
When is knowledge of an agent imputed to the principal?
Notice of a fact that an agent knows or has reason to know is imputed to the principal if knowledge of the fact is material to the agent’s duties to the principal, unless the agent
- (a) acts adversely to the principal, or
- (b) is subject to a duty to another not to disclose the fact to the principal.
How do we determine if an agent is acting adversely to a principal?
It is not enough that the agent’s actions have harmed or damaged the principal. It is a subjective test: whether the agent acts intending to act solely for the agent’s own purposes or those of another person.
Assuming there is no contract governing the issue of payment for services rendered by an agent to a principal, does the principal have a duty to compensate the agent for the agent’s services?
Unless an agreement between a principal and an agent indicates otherwise, a principal has a duty to pay compensation to an agent for services that the agent provides.
An agreement that an agent will not have a right to compensation for services provided may be implied from the agent’s relationship to the principal or from the trivial nature of the services requested.
What does it mean to say that a principal has indemnified an agent? When does a principal have the duty to indemnify an agent?
It means that if the agent suffers any loss as a result of the agency, the principal will make the agent whole.
A principal has a duty to indemnify an agent in accordance with the terms of any contract between them, and unless otherwise agreed:
- (a) when the agent suffers a loss that fairly should be borne by the principal in light of their relationship; or
- (b) when the agent makes a payment:
- (i) within the scope of the agent’s actual authority; or
- (ii) that is beneficial to the principal, unless the agent acts officiously in making the payment.
What is the duty of good faith in an agency relationship?
A principal has a duty to deal with the agent fairly and in good faith, including a duty to provide the agent with information about risks of physical harm or pecuniary loss that the principal knows, has reason to know, or should know are present in the agent’s work but unknown to the agent.
What are the elements of a partnership?
A partnership is the association of two or more persons to carry on as co-owners a business for profit, whether or not the persons intend to form a partnership.
- The idea of an association is one of voluntarily coming together—to agree to combine property, money, skill, etc. to carry out a business enterprise.
- People who become co-owners other than by voluntary act (inheritance, divorce, foreclosure) are not automatically partners.
- It does not matter whether the two persons intended to form a partnership; instead, we look at the substance of the association: what it does, how it acts, etc.
What are some key factors that establish whether a person is a partner?
Partners:
- (i) Share equally net profits (prima facie evidence of partnership),
- (ii) Repay capital contribution once all liabilities are satisfied,
- (iii) Are indemnified by partnership,
- (iv) Have equal rights in management,
- (v) Have right to inspect and copy any partnership records, and
- (vi) Owe fiduciary duties to other partners.
In addition, becoming a partner requires consent of all of the partners.
Can a partnership simultaneously be a different kind of business organization?
No. Business associations organized under other statutes are not partnerships. General partnership is the residual form of for-profit business association, existing only if another form does not.
Can joint ownership of land establish a partnership on its own? What if the parties share profits made by use of the land?
No. In determining whether a partnership is formed, the following rules apply:
- Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not, by itself, establish a partnership, even if the co-owners share profits made by the use of the property.
- The sharing of gross returns does not, by itself, establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived.
What is the difference between gross receipts and profits? Which one, if shared by potential partners, is more of an indication of a partnership?
Gross receipts are the income before any costs/expenses are removed while profits are the income after all costs/expenses are removed.
Receiving a share of gross receipts indicates that each person will bear their own costs and risk of loss/profit. This indicates a decision not to carry on as partners (who share profits/losses).
Are persons who receive a share of profits of a business presumed to be a partner? Can the presumption be rebutted?
A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment:
- (a) of a debt by installments or otherwise;
- (b) for services as an independent contractor or of wages or other compensation to an employee;
- (c) of rent;
- (d) of an annuity or other retirement benefit to a beneficiary, representative, or designee of a deceased or retired partner;
- (e) of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or
- (f) for the sale of the goodwill of a business or other property by installments or otherwise.
When is a person liable as a “partner by estoppel” (also called a “purported partner”)?
When a person by words or conduct represents himself as a partner or consents to being represented by another as a partner, that person is liable to third parties who enter into a transaction relying upon the purported partnership.
What share of profits is each partner entitled to? What about losses?
Unless the agreement stipulates otherwise, the default is that the partners share equally in the profits and are equally chargeable with a share of the losses. To the extent the partnership agreement does not otherwise provide, RUPA governs relations among partners and between partners and a partnership.
- Use of the term “chargeable” “is intended to make clear that a partner is not obligated to contribute to partnership losses before his withdrawal or the liquidation of the partnership, unless the partners agree otherwise.
When do partners have the right to a salary?
Unless the agreement stipulates otherwise, the default is that the partners are not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership. So, if there is no agreement saying so, then there is no right to a salary.
If persons are partners in a business, when must profits be distributed to each partner?
Absent an agreement to the contrary, a partner is entitled to payment of profits when the partnership has dissolved and the winding up process is complete.
What is a “drawing account?”
A capital account keeps track of the capital contributed, profits, and losses accruing to each partner. Sometimes the partners agree that individual partners may remove value from those capital accounts. One mechanism of doing so is to create a “drawing account” that keeps track of the amount the partner has withdrawn from their capital account.
What is a “capital call”?
Sometimes a partnership needs additional resources to pay the obligations of the partnership. If that is the case, the partners may request additional funds from the partners. This “capital call” does not have a basis in RUPA, so if the partners want to allow for capital calls, they should include a provision for them in the partnership agreement.
What is a service only partner? What kinds of problems arise for service only partners during dissolution?
A service only partner is a partner whose “capital contribution” in money or property is zero, but who contributes by giving services to the partnership.
Because they share equally in a firm’s losses, they may have to pay other partners.
- Under the majority rule, in the absence of contrary agreement, a service only partner bears losses equally with all other partners.
- Under the minority rule, in the absence of contrary agreement, where one partner contributed capital and another only their services, in the event of a loss each loses his own capital (one money, the other labor).
What kind of authority do partners have? Can partners bind other partners?
Subject to the effect of a statement of partnership authority:
- (1) Each partner is an agent of the partnership for the purpose of its business. An act of a partner, including the execution of an instrument in the partnership name, for apparently carrying on in the ordinary course the partnership business binds the partnership, unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority.
- (2) An act of a partner which is not apparently for carrying on in the ordinary course the partnership business binds the partnership only if the act was authorized by the other partners or is authorized by terms of a written partnership agreement.
What is a partner’s right to manage the partnership? How are disagreements between partners resolved?
Each partner has equal rights in the management and conduct of the partnership business.
- A partnership shall keep its books and records, if any, at its chief executive office. A partnership shall provide partners and their agents and attorneys access to its books and records. Without access to information about the partnership, it is not possible for the partner to make informed decisions or to uncover problems.
A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all of the partners.
What is a “statement of partnership authority”?
A statement that is filed with the division of corporations (or secretary of state), that identifies the partnership with name and address of the partnership, name and address of the partners, and states the authority (or limits on the authority) of partners.
What are the three ways that partnership property may be transferred?
(1) If property is held in the name of partnership, then it may be transferred by instrument executed by a partner in the partnership name.
(2) If property is held in the name of one or more partners AND transferring instrument indicates existence of partnership, then it may be transferred by instrument executed in the partners’ names.
(3) If property is held in the name of one or more persons AND partnership is not noted on the instrument, then it may be transferred by instrument executed in those persons’ names.
How may a partnership recover partnership property from a transferee?
A partnership may recover partnership property from a transferee only if it proves that execution of the instrument of initial transfer did not bind the partnership and proves that the transferee knew or had received a notification that the person who executed the instrument of initial transfer lacked authority to bind the partnership.
- If the instrument indicated the existence of the partnership, the transferee must also have known that the property was partnership property.
Is knowledge imputed to other partners?
Yes. A partner’s knowledge, notice, or receipt of a notification of a fact relating to the partnership is effective immediately as knowledge by, notice to, or receipt of a notification by the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner.
What is the liability of members of a partnership? Do incoming partners share the same liability?
All partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.
A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person’s admission as a partner.
What is the liability of a dissociated partner?
(a) A partner’s dissociation does not of itself discharge the partner’s liability for a partnership obligation incurred before dissociation. A dissociated partner is not liable for a partnership obligation incurred after dissociation, except as otherwise provided in subsection (b).
(b) A partner who dissociates without resulting in a dissolution and winding up of the partnership business is liable as a partner to the other party in a transaction entered into by the partnership within two years after the partner’s dissociation, only if the partner is liable for the obligation and at the time of entering into the transaction, the other party:
- (1) reasonably believed that the dissociated partner was then a partner, and
- (2) did not have notice of the partner’s dissociation.
What is partnership tort liability?
A partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership.
What is the exhaustion rule?
Partnership creditors must first execute against partnership assets until those assets are fully exhausted before executing against a partner’s personal assets.
Under the default rules of RUPA, what right do individual partners have to transfer partnership property?
Property acquired by a partnership is property of the partnership and not of the partners individually. This means that among partners, in the absence of a contrary agreement:
- (a) No right to partition.
- (b) No right to withdraw property or to in-kind distribution.
- (c) No right to use for personal purposes.
How do we know if property is partnership property?
Ultimately, it is the intention of the partners that controls whether property belongs to the partnership or to one or more of the partners in their individual capacities, at least as among the partners themselves. Additionally, there are two presumptions under RUPA:
- (1) Property purchased with partnership funds is presumed to be partnership property, notwithstanding the name in which title is held.
- (2) Property acquired in the name of one or more of the partners, without an indication of their capacity as partners and without use of partnership funds or credit, is presumed to be the partners’ separate property, even if used for partnership purposes. In effect, it is presumed in that case that only the use of the property is contributed to the partnership.
What is the definition of “dissociation?” What events cause dissociation?
Dissociation is the change in the relationship caused by a partner’s ceasing to be associated in the carrying on of the business. The partnership cannot eliminate the power of a partner to dissociate by express will but can eliminate the right and thereby make the dissociation wrongful. A partner is dissociated from a partnership upon the occurrence of any of the following events:
- (a) notice of the partner’s express will to withdraw;
- (b) happening of an agreed event;
- (c) the valid expulsion of a partner;
- (d) the partner entering bankruptcy;
- (e) the partner’s death or incapacity to perform partnership duties;
- (f) for a partner that is a trust or estate, distribution of the trust’s or estate’s entire transferable interest in the partnership; and
- (g) termination of a business entity that is a partner.
When is dissociation wrongful? What liabilities does a wrongfully dissociated partner owe to the other partners?
A person’s dissociation as a partner is wrongful only if the dissociation is in breach of an express provision of the partnership agreement or occurs before the expiration of an agreed upon term.
A person that wrongfully dissociates as a partner is liable to the partnership and to the other partners for damages caused by the dissociation. The liability is in addition to any debt, obligation, or other liability of the partner to the partnership or the other partners.
When is a partner expelled?
When a partner is removed by the partners from the partnership and the partnership continues in existence, the removed partner has been expelled. Additionally, the expulsion must not violate the duty of loyalty.
If the partnership does not continue in existence, there has been a dissolution of the partnership and the partner was not expelled.
What is a partner’s duty of loyalty?
A partner’s duty of loyalty to the partnership and the other partners is limited to the following:
- (1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;
- (2) to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and
- (3) to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.
What is a partner’s duty of care?
A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
What happens to a partner’s rights in a partnership after the partner dissociates from the partnership, but the dissociation does not cause dissolution of the partnership?
(1) The partner’s right to participate in the management and conduct of the partnership business terminates (but can participate in winding up);
(2) The partner’s duty of loyalty to not compete with the partnership terminates; and
(3) The partner’s duty of loyalty (accounting/hold property as trustee and having adverse interest) and duty of care continue only with regard to matters arising and events occurring before the partner’s dissociation, unless the partner participates in winding up the partnership’s business.
What happens to a partner’s rights in a partnership after the partner dissociates from the partnership, and the dissociation causes dissolution of the partnership?
After dissolution, a partner who has not wrongfully dissociated may participate in winding up the partnership’s business, but on application of any partner, partner’s legal representative, or transferee, the court, for good cause shown, may order judicial supervision of the winding up.
What is the definition of “dissolution?” What can create the dissolution of a partnership?
“Dissolution” is merely the commencement of the winding up process. Each of the following can create the dissolution of a partnership:
- (1) In a partnership at will, notification by any partner of an express will to withdraw;
- (2) In a partnership for a definite term/particular undertaking:
- (a) Expiration of the term;
- (b) Completion of the undertaking;
- (c) Consent of all partners to dissolve;
- (d) Within 90 days of a partner’s death, bankruptcy, or wrongful dissociation, at least half of the remaining partners wish to dissolve.
- (3) The happening of an event that makes continuation of the partnership illegal;
- (4) The happening of an event listed in the partnership agreement that requires winding up the partnership;
- (5) Issuance of a judicial decree on application by a partner that
- (a) The economic purpose of the partnership is likely to be frustrated,
- (b) A partner has engaged in conduct making it not reasonably practicable to carry on the business, or
- (c) The business cannot practicably be carried on in conformity with the partnership agreement;
- (6) Issuance of a judicial decree on application by a transferee of a partner’s interest that it is equitable to wind up the partnership
- (a) After the term expires or the undertaking is completed in a partnership for a definite term or particular undertaking, or
- (b) At any time in a partnership at will.
What rights does a partner have to bind the partnership once the partnership has begun winding up?
Subject to a statement of dissolution, a partnership is bound by a partner’s act after dissolution that:
- (a) is appropriate for winding up the partnership business; or
- (b) would have bound the partnership before dissolution, if the other party to the transaction did not have notice of the dissolution.
What liability do partners owe to each other after dissolution?
A partner is liable to the other partners for the partner’s share of any partnership liability incurred winding up the partnership.
A partner who, with knowledge of the dissolution, incurs a partnership liability by an act that is not appropriate for winding up the partnership business is liable to the partnership for any damage caused to the partnership arising from the liability.
What is the definition of “winding up?” What causes it?
“Winding up” the partnership business entails selling its assets, paying its debts, and distributing the net balance, if any, to the partners in cash according to their interests.
The partnership entity continues, and the partners are associated in the winding up of the business until winding up is completed.
When the winding up is completed, the partnership entity terminates.
Anything that causes dissolution thereby causes winding up.
Can winding up be waived by the partners?
Yes. At any time after the dissolution of a partnership and before the winding up of its business is completed, all of the partners, including any dissociating partner other than a wrongfully dissociating partner, may waive the right to have the partnership’s business wound up and the partnership terminated. In that event:
- (1) the partnership resumes carrying on its business as if dissolution had never occurred, and any liability incurred by the partnership or a partner after the dissolution and before the waiver is determined as if dissolution had never occurred; and
- (2) the rights of a third party arising out of conduct in reliance on the dissolution before the third party knew or received a notification of the waiver may not be adversely affected.
What is the process of valuation?
In the following order:
- (1) Partnership assets are reduced to cash (liquidation).
- (2) Partnership creditors (including partners who are creditors) are paid.
- (3) Any surplus (or loss) is applied to a partner’s capital accounts.
- (4) Partners are paid out (or contribute) according to the amounts in the capital accounts.
- (5) If a partner does not pay for losses, the other partners must contribute per their share of profits/losses (the partners who contributed may seek the money from the partner who did not).
What are the two types of partners in a Limited Partnership and what (very roughly) are the differences?
Each general partner:
- Has the authority to bind the partnership in contract,
- Has equal rights to manage the partnership, and
- Is subject to joint and several liability for the partnership.
Each limited partner:
- Absent agreement, has no authority to bind the partnership in contract,
- Has no right to manage the partnership, and
- Has no liability for obligations of the partnership.
How do you form a limited partnership under ULPA? What information is required?
To form a limited partnership, a person must deliver a certificate of limited partnership to the Department of State for filing. The certificate must contain:
- (1) the name of the limited partnership,
- (2) the street and mailing address of the initial designated office of the limited partnership, and of the initial registered agent, and
- (3) the name and the business address of each general partner.
If the paperwork for a limited partnership is rejected, then the partnership will be considered a general partnership until paperwork is properly filed and accepted for a limited partnership.
Can general partners avoid liability with a good faith belief that they were a limited partner?
Yes, a partner who erroneously (but in good faith) believed he/she was a limited partner can avoid liability (other than for the initial investment) if, the person, on learning of the mistake:
- (a) Causes an appropriate certificate of limited partnership, amendment, or statement of correction to be signed and delivered to the Department of State for filing; or
- (b) Withdraws from future participation as an owner in the enterprise by signing and delivering to the Department of State for filing a statement of withdrawal under this section.
What liability does a limited partner owe when they become a general partner?
A person that becomes a general partner is not personally liable for a debt, obligation, or other liability of the limited partnership incurred before the person became a general partner.
What rights does a limited partner have?
A limited partner does not have the right or the power as a limited partner to act for or bind the limited partnership.
The limited partners have only those approval rights as are described in ULPA. The approval of all partners (general and limited) is required to:
- (a) Amend the partnership agreement or the certificate of limited partnership,
- (b) Admit or expel a limited or general partner,
- (c) Compromise a partner’s obligation to make contributions or return an improper distribution,
- (d) Redeem a transferable interest subject to a charging order,
- (e) Dissolve the limited partnership,
- (f) Approve a plan of conversion or a plan of merger,
- (g) Sell, lease, exchange, or otherwise dispose of all, or substantially all, of the limited partnership’s property, with or without good will, other than in the usual and regular course of the limited partnership’s activities.
How is a limited partnership dissolved?
A limited partnership is dissolved, and its activities must be wound up, only upon the occurrence of any of the following:
- (a) The happening of an event specified in the partnership agreement;
- (b) The consent of all general partners and of all limited partners;
- (c) After the dissociation of a person as a general partner:
- (1) If the limited partnership has at least one remaining general partner, the consent to dissolve the limited partnership by all partners at the time the consent is to be effective; or
- (2) If the limited partnership does not have a remaining general partner, the passage of 90 days after the dissociation, unless before the end of the period:
- (a) Consent to continue the activities of the limited partnership and admit at least one general partner is given by all partners at the time the consent is to be effective;
- (b) At least one person is admitted as a general partner in accordance with the consent;
- (d) The passage of 90 days after the dissociation of the limited partnership’s last limited partner, unless before the end of the period the limited partnership admits at least one limited partner; or
- (e) The signing and filing of a declaration of dissolution by the Department of State.
What duties do general partners owe to the limited partnership? What are those duties?
The only fiduciary duties that a general partner has to the limited partnership and the other partners are the duties of loyalty and care.
(1) Duty of loyalty:
- (a) To account to the limited partnership and hold as trustee for it any property, profit, or benefit derived by the general partner in the conduct and winding up of the limited partnership’s activities or derived from a use by the general partner of limited partnership property, including the appropriation of a limited partnership opportunity.
- (b) To refrain from dealing with the limited partnership in the conduct or winding up of the limited partnership’s activities as or on behalf of a party having an interest adverse to the limited partnership.
- (c) To refrain from competing with the limited partnership in the conduct of the limited partnership’s activities.
(2) A general partner’s duty of care to the limited partnership and the other partners in the conduct and winding up of the limited partnership’s activities is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
What is the corporate structure and what are shareholder roles? (Diagram)
