Formation and Management of a Partnership Flashcards
Partnership - Definition
Elements:
1- an association of two or more persons (corporations count as persons)
2- to carry on as co-owners
3- a business for profit
- formed regardless of whether the parties subjectively intended to form a partnership
Proof of Partnership Existence - Subjective Intent to Form a Partnership
- IRRELEVANT
- BUT courts look at whether or not the partners intended to carry on as co-owners a business for profit -> if yes, there’s a partnership even if they didn’t intend to be partners
Factors for Deciding Whether Partnership Exists
- sharing of profits raises rebuttable presumption of partnership
- right to participate in control (if yes, more likely co-owners -> partnership)
-> applies even if control never actually exercised - additional evidence indicative of partnership
Profit-Sharing Partnership Presumption
- book refers to this as the most important factor
- can be rebutted w/ ev suggesting lack of co-ownership relationship
Doesn’t apply if share received as:
- payment of a debt,
- wages or comp for services rendered,
- rent payment,
- an annuity or other retirement benefit,
- interest on a loan,
- for the sale of goodwill of a business
Evidence Indicative of a Partnership
Following are factors that support partnership formation but DON’T raise rebuttable presumption:
- title to property is held in joint tenancy or in common
- parties designate their relationship as a partnership
- venture undertaken by the parties requires extensive activity
-> ex: A and B each contribute $100,000 to buy building of rental apartments that must be managed -> more likely partners than if each contributed $100,000 to buy shares in company that manages real estate
- sharing of gross returns
Writing
- no writing is required to form partnership
- BUT Statute of Frauds -> if partners wish to have an enforceable agreement to remain partners for more than one year, they generally must execute a writing reflecting their agreement
Partnership by Estoppel
- if no partnership was formed in fact, parties may still be liable as if they were partners to protect reasonable reliance by third parties
Includes:
- liability of person held out as partner
- liability of person who holds another out as partner
Liability of Person Held Out as Partner
- when person by words or conduct represents himself as a partner or consents to being represented by another as a partner, he will be liable to third parties who extend credit to the actual or apparent partnership in reliance on the representation
- no duty to deny partnership though -> person who is held out by someone else as a partner is NOT liable as a partner unless they actually consent to the holding out (mere failure to deny doesn’t give rise to liability)
Liability of Person Who Holds Another Out as Partner
- when person holds another out as partner, he thereby makes that person his agent to bind him to third parties
- if there’s a partnership, only those partners who know of or consent to this holding out will be bound
Partnership Agreement
- NONE required to form a partnership
- BUT if you have one, you can contract around almost all statutory provisions
- may be written, oral, or implied
Entity Status
- except wrt partners’ personal liability for partnership obligations, partnership is a legal entity distinct from its partners
- title to land may be in the partnership name
- partnership may sue or be sued in the partnership name
Additional Formation Considerations
- capacity
- legality of purpose
- consent
- statement of partnership authority
Capacity
- anyone capable of entering into a binding contract may be a partner
- a would-be partner who lacks capacity is liable only to the extent of his capital contribution, BUT the partnership w/ such person is not void -> will continue to exist until steps taken to dissolve it
Legality of Purpose
- partnership formed to achieve an illegal purpose is void
- courts will not compel an accounting or a settlement of a void partnership’s affairs
Consent
- unless otherwise agreed, no one can become a partner without the express or implied consent of all partners
Statement of Partnership Authority
- partnership may choose to file a statement of partnership authority w/ secretary of state -> can give constructive knowledge of the extent of the partners’ authority w/ regard to the partnership
Voting
- unless otherwise agreed, all partners have equal rights in the management of the business + equal votes
- one partner, one vote
- decisions re matters w/in ordinary course of business -> need MAJORITY vote of the partners
- matters outside ordinary course of business -> need UNANIMOUS consent of all partners
Salary and Compensation
- unless otherwise agreed, partner has no right to compensation for services rendered to the partnership (w/ exception of right to reasonable compensation for services rendered in winding up the partnership business)
- if partner has impliedly or expressly promised to devote time to partnership business + fails to do so, they may be charged in accounting for damages caused to the partnership
Rights of Partners
- management
- distributions
- remuneration
- indemnification
- contribution
- inspection
- lawsuits
Rights of Partners - Management
- all partners have an equal right to participate in the management of the partnership unless the partnership agreement provides otherwise
Rights of Partners - Distributions
- partners have whatever rights are granted in the partnership agreement as to distribution of profits
-> if agreement silent, partners share profits (and losses) equally
Rights of Partners - Remuneration
- partners have NO right to remuneration for their services to the partnership except for winding up the partnership business
Rights of Partners - Indemnification
- partner has a right to be indemnified by fellow partners for expenses incurred on behalf of the partnership
Rights of Partners - Contribution
- partner has a right to contribution from fellow partners where the partner has paid more than his share of a partnership liability
Rights of Partners - Inspection
- partner has a right to inspect and copy the partnership books
Rights of Partners - Lawsuits
- partner may generally sue his partnership + the partnership may sue a partner in an action at law or in equity
Partners’ Accounts
- each partner is deemed to have an account credited w/ an amount equal to partner’s contribution plus his share of any profits + debited w/ share of any losses + liabilities
- where a partner personally profits at expense of partnership, partner must account to the partnership for those profits
- upon dissolution, partner is entitled to settlement of their account
Legal actions By and Against Partners
- a partnership may sue or be sued in its own name
- but to reach partner’s individual assets, need judgment against the indiv partner
- partnership may sue a partner for breach of partnership agreement or duty
- partner may sue the partnership or other partners to enforce a right created by partnership act or agreement, or a right otherwise belonging to the partner
