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.
