Final exam - partnerships

Question 1

What is a partnership?

Answer 1

An association of two or more persons to carry on as co-owners a business for profit - shared profits and control
- made by agreement, no formal creation requirements

Question 2

Partnership Capital Accounts

Answer 2

Allocation of profits increases capital account, losses decrease account, as does taking a draw (money taken from partnership into individual partner’s bank account)

Question 3

Partnership Profits and Losses

Answer 3

Divided equally (pro rata) by default under UPA and RUPA, but can be overridden.
Losses follow profits unless otherwise agreed.
No entitlement for renumeration other than profits (not salary)

Question 4

Liability of partners in a partnership?

Answer 4

All partners are jointly and severally liable for everything chargeable to the partnership under 13 and 14 (torts and breaches of fiduciary duties) and jointly for all other debts and obligations of the partnership (contracts). Unless entered after the obligation occurred.

Question 5

Indemnification

Answer 5

partnership liable as a result of a partner acting within the ordinary course of business

Question 6

Order of compensation when remaining assets

Answer 6

Creditors not partners (employees, third parties)
owed to partners not for capital or profits (e.g. salary)
partners for capital
partners for profits

Question 7

What is partnership by estoppel?

Answer 7

Representation to third party that a partnership exists, and reliance on that representation
[“A person who represents himself, or permits another to represent him, to anyone as a partner in an existing partnership or with others not actual partners, is liable to any such person to whom such a representation is made who has, on the faith of the representation, given credit to the actual or apparent partnership.]

Question 8

Fiduciary duties of partners

Answer 8

Duty of loyalty: hold as trustee property, profit, or benefit derived; don’t help party having adverse interest; don’t compete before dissolution.
- duty to inform of business opportunities
Duty of care: refraining from engaging in grossly negligent or reckless conduct, intentional misconduct or a knowing violation of the law.

Question 9

Rights of a partner

Answer 9

Profits, control/management, co-owner/tenant in specific partnership property - equal right to possess property for partnership purposes (NO RIGHT IN SPECIFIC PROPERTY)

Question 10

Raising additional capital through dilution:

Answer 10

pro rata: make more shares and sell at same price as before
penalty: make more shares and sell at a discount

Question 11

Partnership mechanics - partners

Answer 11

Each has right, only become partner with unanimous consent. No specific partnership property can be assigned without consent of all partners.

Question 12

Who can decide disagreement as to matter in the ordinary course of business? Outside of ordinary course of business? Amendment to partnership?

Answer 12

Ordinary matters may be decided by majority of partners.
But if in contravention of agreement, requires unanimous consent

Question 13

Partner’s authority

Answer 13

Act of one when apparently carrying on in the usual way the business of the partnership BINDS THE PARTNERSHIP [RUPA includes “business of the kind”] – agent with actual authority. Unless no authority and third party knows that.

Question 14

Ways a partnership may be dissolved:

Answer 14

Dissolution is change in relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business.
Act of one or more partners:
Rightful: termination of partnership’s term or particular undertaking when for term, or if no end (at will partnership) at will of any partner.
Wrongful: in contravention of agreement, even if term not met
By operation of law (death, bankruptcy, etc.)
By court order

Question 15

Consequences of dissolution under UPA? RUPA?

Answer 15

UNDER UPA: Dissolution limits partners’ authority to act for partnership and prompts the “winding up” of the partnership – disposing of assets, business and dividing the remaining assets or liability among the partners. In some cases remaining partners can carry on as new partnership - wrongful, expelled, unanimous consent.
UNDER RUPA: Triggering event is disassociation, which can lead either to dissolution or continuation of the business.

Question 16

Texas shoot out

Answer 16

One values and the other pays that value, or to receive that amount.

Question 17

Continuation per agreement vs. following wrongful dissolution

Answer 17

Per agreement:
- new partnership but creditors transfer.
- Departing partner entitled to accounting - fair value plus interest if delay - and remains liable on firm obligations unless released by creditors
- New partner is liable to old debt, but only out of partnership assets (no personal liability)
Following wrongful dissolution:
- Dissolver’s participation in winding up is limited, dissolver entitled to fair value of interest in partnership (maybe not including good will), minus damages for breach

Question 18

What is a limited partnership?

Answer 18

At least one general partner, at least one limited partner. [one general and multiple limited – limited partners do not exercise control]
Formed by filing certain documents, must say LP.
Limited partners have restricted voting rights and limited control.
General partner liable to creditors, liability of limited partners is limited - under RUPA, only liable to extent of contributions unless also general partners or was exercising/had right to exercise control - liable to those who believed general partner [Limited partners can be liable only to those who “reasonably believe, based upon the limited partner’s conduct, that the limited partner is a general partner.” – RULPA §303(b)]

Question 19

LLPs and LLLPs

Answer 19

Everyone has limited liability.
LLP is like a general partnership but with limited liability - easy to convert GP to LLLPs is like LP but general partner gets limited liability as well.