Formation Flashcards
What is a partnership?
An association of two or more legal persons who carry on a for-profit business as co-owners
Who can form a partnership?
Anyone or anything that has legal capacity to contract
Note: Includes legal entities
Who cannot form a partnership?
Humans
What intent is required for a partnership?
- To carry on as co-owners
- For profit
Note: No specific intent to form a partnership is required
When is there a presumption of a partnership relationship?
When two or more persons share profits
When does the presumption of a partnership relationship not apply?
- Payment of a debt
- Interest payments
- Rent
- Wages
- Goodwill
Can a partnership hold property?
Yes
Can a partnership sue and be sued in its own name?
Yes
Are partners personally liable for the partnership’s obligations?
Yes
Do partnerships have entity-level taxation?
No
Does there need to a written partnership agreement?
No
What law governs partnerships?
- The partnership agreement, if a written one exists
- Otherwise, state law
Exception: When state law is mandatory
Which state laws are mandatory in governing partnerships?
- Liability to third parties
- Right to access books and records
- Fiduciary duties
What duties do partners owe?
- Fiduciary duty
- Duty of loyalty
- Duty of care
Is every partner a fiduciary of the partnership?
Yes
What does the duty of loyalty entail?
Partners must not:
- Compete with the partnership business
- Advance an adverse interest
- Usurp a partnership opportunity
Can a partnership limit the duty of loyalty?
Yes, as long as it is not manifestly unreasonable
Can a partnership eliminate the duty of loyalty?
No
What is the safe harbor option for something that may be considered disloyal?
If a partner makes full disclosure of all material facts, then a certain percentage of the other partners may authorize or ratify the transaction
What does the duty of care entail?
Partners must not engage in:
- Grossly negligent or reckless conduct
- Intentional misconduct
- Knowing violations of the law
Can a partnership reduce the duty of care?
Yes, as long as it’s not unreasonable
Who does the duty of loyalty and duty of care apply to?
Current partners
Note: NOT former or prospective partners
How is the division of profits and losses generally determined?
By the partnership agreement
Do the division of profits and losses need to be the same?
No
Must financial/capital contributions affect the division of profits and losses?
No
When there is no partnership agreement on it, how are profits divided?
Evenly
When there is no partnership agreement on it, how are losses divided?
Losses follow profits
What is the default rule for distributions in a partnership?
Partners do not have the right to demand a distribution
What can partners do to allow for distributions?
Agree to allow distributions to be made according to the partnership agreement
What is the default rule for transferring partnership interests?
A partner does not have the right to transfer their partnership interest
Can partners change the default transfer rule?
Yes, by a majority vote of the partners
What is the default rule for new partners?
All existing partners must consent to the new partner
What is the default rule for division of management and control in a partnership?
Every partner has equal rights in the management and control of the partnership
Can parties agree to a different division of management and control in a partnership?
Yes
By default, ordinary business requires a vote of ____________ of partners
the majority
By default, extraordinary business requires a vote of _______ partners
all
What is the default rule for quorum for partnership voting?
No default rule
Who must be provided access to records?
Partners and their agents
