Formation and Management of a Partnership

Question 1

Partnership - Definition

Answer 1

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

Question 2

Proof of Partnership Existence - Subjective Intent to Form a Partnership

Answer 2

• 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

Question 3

Factors for Deciding Whether Partnership Exists

Answer 3

• 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

Question 4

Profit-Sharing Partnership Presumption

Answer 4

• 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

Question 5

Evidence Indicative of a Partnership

Answer 5

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

Question 6

Writing

Answer 6

• 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

Question 7

Partnership by Estoppel

Answer 7

• 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

Question 8

Liability of Person Held Out as Partner

Answer 8

• 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)

Question 9

Liability of Person Who Holds Another Out as Partner

Answer 9

• 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

Question 10

Partnership Agreement

Answer 10

• 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

Question 11

Entity Status

Answer 11

• 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

Question 12

Additional Formation Considerations

Answer 12

• capacity
• legality of purpose
• consent
• statement of partnership authority

Question 13

Capacity

Answer 13

• 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

Question 14

Legality of Purpose

Answer 14

• partnership formed to achieve an illegal purpose is void
• courts will not compel an accounting or a settlement of a void partnership’s affairs

Question 15

Consent

Answer 15

• unless otherwise agreed, no one can become a partner without the express or implied consent of all partners

Question 16

Statement of Partnership Authority

Answer 16

• 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

Question 17

Voting

Answer 17

• 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

Question 18

Salary and Compensation

Answer 18

• 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

Question 19

Rights of Partners

Answer 19

• management
• distributions
• remuneration
• indemnification
• contribution
• inspection
• lawsuits

Question 20

Rights of Partners - Management

Answer 20

• all partners have an equal right to participate in the management of the partnership unless the partnership agreement provides otherwise

Question 20

Rights of Partners - Distributions

Answer 20

• partners have whatever rights are granted in the partnership agreement as to distribution of profits
  -> if agreement silent, partners share profits (and losses) equally

Question 20

Rights of Partners - Remuneration

Answer 20

• partners have NO right to remuneration for their services to the partnership except for winding up the partnership business

Question 21

Rights of Partners - Indemnification

Answer 21

• partner has a right to be indemnified by fellow partners for expenses incurred on behalf of the partnership

Question 22

Rights of Partners - Contribution

Answer 22

• partner has a right to contribution from fellow partners where the partner has paid more than his share of a partnership liability

Question 23

Rights of Partners - Inspection

Answer 23

• partner has a right to inspect and copy the partnership books

Question 24

Rights of Partners - Lawsuits

Answer 24

• partner may generally sue his partnership + the partnership may sue a partner in an action at law or in equity

Question 25

Partners’ Accounts

Answer 25

• 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

Question 26

Legal actions By and Against Partners

Answer 26

• 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