Chapter 37 Flashcards
Partnership
“an association of 2 or more persons to carry on as co-owners a business for profit”.
1. “Person” includes corporations
2. Intent to association is the key element and so to join a partnership, all partners must consent.
Agency and Partnership
each partner is deemed to be the agent of the other partners and an agent of the partnership itself. “If you and I were in a partnership, we would be agents to each other, and we would also be agents to the partnership”
What are the differences between agency law and partnership law?
Partnerships:
- Partners agree to carry on a business for profit
- They commit funds, skills, time, etc. to the venture
- They agree to share profits and losses
- Each partner has an ownership interest in the business
Traditional Agency Relationships:
- No ownership interests in the business is given to an agent
- Agents don’t usually share in losses
In the absence of a written formal partnership agreement, the courts look at the following:
- a sharing of profits and losses just because two people share profits and losses doesn’t mean that two people are in a partnership (ex: creditor/debtor relationships)
- a joint ownership of the business
- an equal right to be involved in management
There are things shared profits can be used to pay for which are NOT an indication that a partnership exists. What are some examples?
- Creditor/debtor relationships
- Landlord rent relationships
- Wages for independent contractor
Joint ownership of property does NOT always mean a partnership exists. What are some examples?
Real property (joint tenant scenario) – two parties own a property
Family property in a family limited partnership (this would be a partnership)
Uniform Partnership Act (UPA)
the partnership is viewed as an entity for purposes of filing a lawsuit, being sued, owning property, collecting judgments and accounts (most states follow)
Is the partnership as an entity a shield for liability?
No, as a partner, my personal assets are at risk
Is the partnership a taxpaying entity?
No, it is viewed as a pass-through entity. Income passes through to the partners as though the entity doesn’t exist. Partners pay a pro rata share for their personal income taxes.
For federal income tax purposes, the partnership is a pass-through entity and not a taxpaying entity.
a. entity itself doesn’t pay federal income taxes
b. each partner pays federal income taxes at personal rates based on their share of income (distributed or not) from the partnership whether distributed or not. (you pay tax on income reinvested in the partnership for growth.)
c. partnership files an information return with the IRS.
Partnership Agreement
A written or oral agreement that sets forth each partner’s rights and obligations with respect to the partnership.
When does a partnership agreement have to be in writing?
If the partnership is transferring interest in real property (equal dignity rule)
Do banks require the partnership agreement to be in writing?
Sometimes
What is included in the partnership agreement?
Basic Structure, Capital Contributions, Sharing of Profits and Losses, Management and Control, Dissociation and Dissolution
Duration of the Partnership - Set Term
Set exact time limit
Duration of the Partnership - At Will
Can be dissolved at any point
Partnership by Estoppel
Partnership acts like partners who aren’t actually in the partnership, are
Rights of Management in a Partnership
Generally each partner has one vote in management matters regardless of their ownership interest! (Free to change the rules, but you have to put it in writing)
- Need majority vote on matters which are in the ordinary course of business
- Need unanimous vote on outside ordinary course of business matters.
What is an example of an activity that would require a unanimous vote from management of a partnership to pass?
Admitting new partners, amending the partnership agreement, or entering into a new line of business
Interest in the Partnership
unless stated other- wise profits are shared equally and losses are shared in the same ratio as profits. (This is without regard to the % of capital contributions from each partner.) From the Uniform Partnership Act
So if there are 4 partners, they share profits 25%.
What if 2 partners each contribute 10% of the capital (10 and 10) and the other 2 partners contribute the remaining 80% (40 and 40)?
Do they still share profits equally?
If the partnership agreement is silent on how profits and losses are shared then, yes they share equally regardless of their capital contributions.
Are partners generally paid for service to the partnership?
No, but the agreement can state otherwise.
Partners are paid from the distribution of profits.
What is an example of when a partner would be paid for service to the partnership?
Managing partner of a law firm - receives a salary in addition to share of the profits for performing special administrative/managerial activities
Inspection of the Books
Partners have the right to receive full and complete information concerning the conduct of all aspects of the partnership business. Partners have a duty to provide information, preserve it, and keep accurate records.
What determines the value of each partner’s share in the partnership?
An accounting of partnership assets or profits. It can be performed voluntarily or compelled by a court order
Partnership Property Rights
all property bought by the partnership is owned by the partnership and not by the partners individually.
Is a partner a co-owner of property with the partnership?
No
Can partnership property be used to satisfy personal debts of individual partners?
No
Can individual partner’s personal assets be used to satisfy partnership debts?
Yes
Charging Orders
an individual partner’s personal creditor seeks this charging order (petitioning the court for an order that gives them, the creditor, rights in the individual partner’s partnership assets). The charging order can give the creditor the partner’s interest share of the partnership.
What are the two Fiduciary Duties owed?
Duty of Care and Duty of Loyalty
Duty of Care
avoid intentional wrongdoing (violation of the law), avoid grossly negligent actions (simple negligence is not a violation of duty of care)
Duty of Loyalty
don’t engage in self-interests that directly competes with the partnership (talk to partners and tell them what you’re doing to avoid this)
Can you waive the Duty of Care or the Duty of Loyalty in the partnership agreement?
No
Liability of Partners - Personal Liability
big disadvantage of a general partnership is the personal liability for the debts of the partnership. It is unlimited in most states. Usually, partnership assets must be exhausted before personal assets may be reached.
Liability of Partners - Joint Liability
a 3rd party must sue all the partners as a group, but each partner can be held liable for the full amount. Failure to sue all partners means partnership assets will not be used to satisfy the judgment. (states are either joint liability or joint and several)
Liability of Partners - Joint and Several Liability
a 3rd party has the option of suing all the partners together (jointly) or one or more of the partners separately (severally).
(Most states are joint and several!) you are liable together, but you are also individually liable
All partners can be liable even if…
A particular partner did not participate in or know about the illegal conduct
Does judgement against one partner severally extinguish the liability of the others?
No
Indemnification
with joint and several liability, a partner who commits a tort that leads to the partnership being sued can be required to pay back (reimburse/indemnify) the partnership for the damages the partnership must pay, unless the tort was in the ordinary course of business
Dissociation
when a partner ceases to be associated with the carrying of the business of the partnership. A partner wants out
Can a partnership continue after dissociation?
Yes, or it can terminate
Dissociation/Termination Events
- Partner voluntarily gives notice of intent to withdraw
- An event stated in the partnership agreement that causes termination or dissolution may occur (like death or incompetency, sometimes even divorce)
- Unanimous vote of other partners
- Court order
- Partner declares bankruptcy
A partner has the power to dissociate, but…
he may not have the right to dissociate. Even though you have the power to leave, leaving might violate the partnership agreement, and if it does - then you do not have the RIGHT to leave
Effects of Dissociation
- Partnership must purchase the dissociated partner’s interest
- They buyout price for the partner’s interest at dissociation is based on the amount that would have been distributed to that partner if the partnership had wound up on the dissociation date.
- Dissociated partner no longer has the right to participate in management or conduct business for the partnership.
- Liability to 3rd parties continues for 2 years after a partner has dissociated.
How can you reduce the statutes of limitations on dissociation?
File a notice of dissociation, it cuts the statutes of limitations down to 90 days instead of 2 years.
Termination
Dissolution (same events as dissociation)
Winding up: collecting, liquidating, and distributing partnership assets
Buy-Sell Agreements
a great way to agree in advance on how to value partnership assets in the event of dissolution or termination
Limited Liability Partnerships
A hybrid form of business designed mostly for professionals who normally do business as partners in a partnership
Who typically uses LLPs?
Professional services firms like law firms and accounting firms use this entity. Professional LLCs are kind of taking the place of some of these LLPs.
What is an advantage of an LLP?
pass-through taxation and limited personal liability Originally designed to protect the professionals from each other malpractice
Formation of Limited Liability Partnerships
forms must be filed with the secretary of state’s office and the business name must include the words “Limited Liability Partnership” or “LLP.”
Must file an annual report with the state to remain qualified.
Liability for LLPs
allows professionals, such as attorneys and accountants, to avoid personal liability for the malpractice of other partners
Each partner is liable for his or her own malpractice
What is an exception to the liability of LLPs?
Another partner may be liable if he/she supervised the wrongdoer. (junior partner is being supervised by a senior partner – the senior partner may be liable do to their supervision role)
UPA and many states LLP statutes say Partners in an LLP are…
exempt from personal liability for ANY Partnership obligation in contract, tort or otherwise
5 accountants operate an accounting firm as an LLP. One of the accountants, Ann Smith, is sued for malpractice and loses. The firm’s malpractice insurance is insufficient to pay the judgement. If the entity is an LLP, who pays the judgement?
Ann pays
5 accountants operate an accounting firm as an LLP. One of the accountants, Ann Smith, is sued for malpractice and loses. John Black supervises Ann. The firm’s malpractice insurance is insufficient to pay the judgement. If the entity is an LLP, who pays the judgement?
John could also be liable as well as Ann.
5 accountants operate an accounting firm as a traditional partnership. One of the accountants, Ann Smith, is sued for malpractice and loses. The firm’s malpractice insurance is insufficient to pay the judgement. If the entity is an LLP, who pays the judgement?
All partners are liable - their personal assets could be used to satisfy the obligation
Limited Partnerships
Consist of 1 or more general partners and 1 or more limited partners. (have created limited liability for certain people in the partnership)
Limited Partnerships - General Partners
assume management and full debt responsibility. Even their personal assets can be used to satisfy the limited partnership debts. (personal liability)
Limited Partnerships - Limited Partners
contribute cash or other property and owns an interest in the firm but is not involved in management. “silent partners”, usually wealthy investors who are just looking for something to do with their money – they can lose what they have in the business (what they have invested), but they can never lose their personal assets
A young, unestablished entrepreneur, Joe Bob has an idea to develop 500 acres into a subdivision. He has no money and goes into search of wealthy individuals to invest in his venture. He will want to set up a Limited Partnership. He’s the general partner with all the liability and responsibility for management decisions. His wealthy investors are the limited partners who are only liable to the extent of their investment. How can Joe Bob alleviate the liability of being a general partner?
An entity (like an LLC or corporation) in SOME states can be the general partner. (In Texas this is allowed)
2 entities involved:
- Valley View Enterprises, Inc. – a corporation
- Valley View Properties, Ltd. – a limited partnership
The corporation built golf club and estates
LP cut the roadways and the sewer
Joseph Ferrara is the owner and president of the corporation; and the sole general partner of the LP
Corporation failed to among other things… get the property permits and complete work timely, etc.
DeWine is the Ohio State Attorney General suing over the multiple permit violations committed in the development of the Pine Lakes Golf Club and Estates in Trumbull County, Ohio and for violating Ohio State environmental laws.
Who is liable?
Joseph Ferrara is personally liable for the permit violations. He argues that he shouldn’t be personally liable because he is the president of VVE. Which would be true, but he’s the general partner of the LP, so he is personally liable.
2 entities involved:
- Valley View Enterprises, Inc. – a corporation
- Valley View Properties, Ltd. – a limited partnership
The corporation built golf club and estates
LP cut the roadways and the sewer
Joseph Ferrara is the owner and president of the corporation; and the sole general partner of the LP
Corporation failed to among other things… get the property permits and complete work timely, etc.
DeWine is the Ohio State Attorney General suing over the multiple permit violations committed in the development of the Pine Lakes Golf Club and Estates in Trumbull County, Ohio and for violating Ohio State environmental laws.
How could Joseph avoid liability?
If this was in Texas, the general partner could have been a corporation or LLC. We should have probably set up everything as an LLC.
Formation of Limited Partnerships
Public and formal proceedings required.
Certificate of Limited Partnership is filed by the general partner and each limited partner with the secretary of state’s office. This requires very specific info and it’s usually open for public inspection. HAS TO BE FILED BY EVERY LIMITED PARTNER
Disadvantage of an LP:
General partners are jointly and severally liable for the partnership’s obligations, although limited partners are protected from liability (unless the limited partner executes guaranties, etc.)
Limited Liability Limited Partnerships (LLLPs)
General partner’s liability is limited.
26 states allow for LLLPs or recognize LLLPs formed in other states. Creating an LLC or corporation to be general partner (GP) in the LP is no longer necessary in theses states to eliminate risk for the GP.
