Formation and Management of a Partnership

Question 1

Partnership - Definition

Answer 1

An association of two or more persons to carry on as co-owners in a business for profit.

• A partnership is created regardless of whether the parties subjectively intend to form a partnership.
• No formal filing or other formalities are required.

Question 2

Proof of Partnership Existence

Answer 2

• Courts look at the intent of hte parties.
• If the parties intended to carry on a business as co-owners, there is a partnership even if the parties did not intend to be partners.

Question 3

Factors For Deciding Whether Partnership Exists

Answer 3

The following factors raise a rebuttable presumption of a partnership:
* Sharing of Profits – Raises the presumption of partnership; this is the most important factor in deciding whether an assocation is a partnership.
* A person who receives a share of the profits is presumed to be a partner UNLESS the share was received as a payment of debt, wages, compensation, rent, etc.

• Right to Participate in Control – The person’s right to participate in the control of the business makes it more likely that there is a partnership.
• A partner need not exercise the right to control to be considered a partner, just simply having the power is enough.
• **Loss Sharing **– The sharing of losses creates a rebuttable presumption that a person is a partner in the partnership because typically only owners share in losses.

Question 4

Evidence Indicative of a Partnership

Answer 4

The following factors are additional evidence that a partnership has been formed. These factors do not raise a presumption of partnership.
* Title to property is held in joint tenancy or in common.
* The parties designate their relationship as a partnership.
* Whether the venture undertaken by the parties requires extensive activity.
* Sharing of gross returns

Question 5

Partnerships & Writing Requirement

Answer 5

• No writing is required to form a partnership.
• To have an enforceable partnership for more than one year, the Statute of Frauds requires a writing.

Question 6

Partnership by Estoppel

Answer 6

• Partnership liability is imposed when a party is not a partner in fact.
• When a person, through words or conduct, represents himself as a partner he will be liable to third parties who extend credit to the actual or apparent partnership in reliance on the representation.
• Mere failure to deny a representation of partnership does not give rise to liability as a purported partner.

Question 7

Partnership Agreement

Answer 7

• No agreement is required to form a partnership.
• Often an agreement will exist.
• A partnership agreement can be oral, written, or implied through conduct.
• Partnership law allows the partners to contract around almost all of the statutory provisions in a partnership agreement.

Exam Tip: Look for an agreement first and then fall back on the statutory default rules when there is no written agreement.

Exam Tip: On the exam, there typically won’t be an agreement or a provision, so you still need to know the statutory default rules.

Question 8

Partnership Entity

Answer 8

• A partnership is legal entity distinct from its partners.
• Title to land may be in the partnership name.
• A partnership may sue and be sued in the partnership name.

Question 9

Partnership Formation – Capacity

Answer 9

• Anyone who is capable of entering into a binding contract may be a partner.
• A “partner” who lacks capacity is liable only to the extent of his capital contribution.
• A partnership with a person who lacks capacity is NOT void, it will continue to exist until it is dissolved.

Question 10

Partnership Purpose

Answer 10

• A partnership formed to achieve an illegal purpose is VOID.

Question 11

Partnership Consent

Answer 11

Unless otherwise agreed, no one can become a partner without the express or implied consent of ALL partners.

Question 12

Governing Law

Answer 12

• Partners are free to agree through a partnership agreement to abide by different rules governing the relationship among themselves.
• Revised Uniform Partnership Act is the default rules.
• Certain RUPA provisions cannot be waived.

Question 13

Voting

Answer 13

• One partner = one vote
• Unless otherwise agreed, all partners have equal rights in the management of the business and equal votes.
• Matters within the **ordinary course of business require a majority vote. **
• Matters outside the ordinary course of business require unanimous consent of all partners.

Question 14

Right to Salary or Compensation

Answer 14

• A partner has no right to compensation for services rendered to the partnership.
• If a partner has impliedly or expressly promised to devote time to the partnership business and fails to do so, the partner can be charged for damages caused to the partnership.

Question 15

Partners’ Accounts

Answer 15

Each partner is deemed to have an account that is credited with an amount that is equal to partner’s contribution + share of profits - share of any losses & partnership liabilities.

• A partner who personally profits at the expense of the partnership must account to the partnership.
• Upon dissolution, a partner is entitled to settlment of their account.

Question 16

Rights of Partners

Answer 16

• Management – All partners have an equal right to participate in the management of the partnership unless the partnership agreement provides otherwise.
• Distributions – Partners have whatever rights are granted in the partnership agreement as to distribution of profits. If the agreement is silent, partners share profits and losses equally.
• Remuneration – Partners have no right to remuneration for their services to the partnership except for winding up the partnership business.
• Indemnification – A partner has a right to be indemnified by fellow partners for expenses incurred on behalf of the partnership.
• Contribution – A partnership has a right to contribution from fellow partners where the partner has paid more than his share of a partnership liability.
• Inspection – A partner has a right to inspect and copy the partnership books.
• Lawsuits – A partner may sue his partnership and the partnership may sue a partner in an action at law or in equity.