Formation and Management of Partnership

Question 1

General Partnership

Answer 1

Association of two or more persons to carry on as co-owners a business for profit. It’s formed as soon as it happens regardless of whether the parties subjectively intend to form a partnership.

Remember that there must be at least two persons involved. “Persons” may be an individual, trust, corporation, partnership, or other entity.

Question 2

Proof of Partnership Existence

Answer 2

Intent of parties (parties subjective intent is irrelevant; courts look at whether parties intended to carry on a business for profit)
- if intent is UNCERTAIN, courts considering the sharing of profits , which creates a PRESUMPTION of a partnership

Question 3

How can the presumption of partnership by sharing profits be rebutted?

Answer 3

If share was received as payment of a debt, as wages/compensation for services, rent payment, an annuity/retirement benefit, interest on a loan, or for the sale of goodwill of a business.

Can also be rebutted if party brings evidence suggesting lack of a co-ownership relationship like no right of control or no sharing of losses.

Question 4

Other Factors for Determining Partnership Existence

Answer 4

1. right to participate in control
2. joint title to property (joint tenancy or tenancy in common)
3. ventures requires extensive activity by parties
4. sharing of gross returns
5. Writing (not required; but if pship over 1 year, then required under SoF)
6. Agreement (not required; can be written, oral, or implied)
7. Entity status

Question 5

Partnership by Estoppel

Answer 5

If no partnership was formed in fact, parties may still be liable as partners to protect reasonable reliance by third parties.

• Liability of person holding themselves out as partner: liable to third parties who extend credit in reliance on representation
  - liability of person who holds out another as partner: the other person will be an agent, which will bind “princinpal” to third parties.
• only those partners who know of or consent to this holding out will be bound - mere failure to deny does not give rise to liability

Question 6

Additional Formation Considerations

Answer 6

1. Capacity - anyone w/ contractual capacity may be a partner; a would-be partner who lacks capacity is liable only to extent of his capital contribution but partnership won’t be void.
2. legality of purpose - pship formed to achieve an illegal goal is void
3. consent - all partners need to consent (express or implied) for new partner
4. statement of pship authority - a partnership may choose to file a statement of partnership authority with the SoS, which gives constructive knowledge of partners’ authority

Question 7

Partnership: Governing Law

Answer 7

RUPA (Revised Uniform Partnership Act): provides a default set of rules. Howevers, partners are free to abide by different rules as set out in their partnership agreement. RUPA will govern only the issues not provided for.

Note: some duties cannot be waived however under RUPA (like duty of loyalty, the right of a court to expel a partner, etc.)

Question 8

Partnership Voting

Answer 8

Unless otherwise agreed, all partners have EQUAL rights in the management of the business + equal votes.

Decisions re. ordinary matters: majority
Decisions re. extraordinary (outside scope of ordinary business) matters: unanimous

Question 9

Right to Receive Salary/Compensation

Answer 9

Unless stated otherwise, partners DO NOT have a right to receive compesation for services rendered (exception for winding up business).

On the other hand, if a partner has promised to devote time to the business and fails, they may be charged in an accounting for damages caused to partnership.

Question 10

Partners’ Accounts

Answer 10

each partners has an account that is credited with an amount equal to theri contribution + share of profits - share of losses.

if partners personally profits at the expense of the partnership = needs to account to partnership for those profits.

upon dissolution = partners are entitleed to settlement of their accounts

Question 11

Indemnification and other repayment

Answer 11

Partnership MUST indemnify every partner with regard to payments made and obligations reasonably incurred in carrying on the business.

if a partner makes a payment or advance beyond what he promised to make, that payment is a loan that is to be repaid with interest.

Question 12

Books and Information

Answer 12

must be kept at partnership’s chief executive office. every partner can inspect and copy the books. upon demand, each partner must render true and full information of all things affecting partnership.

Question 13

legal actions by and against partners

Answer 13

partnership can be sued in its own name; however, to reach a partner’s personal assets, there has to be a judgment against that individual partner.

a partnership may sue a partner for breach of agreement or of a duty owed.

a partner may sue the partnership or other partners to enforce rights created under partnership act or agreement, or a right belonging to them.

Question 14

List all rights of partners

Answer 14

1. Management - all partners have an equal right to participate in the management of the partnership (unless otherwise provided)
2. Distributions - partners have whatever rights are granted in the partnership agreement as to distribution of profits. if agreement is silent, partners share profits/losses equally.
3. Renumeration - partners have no right to renumeration for their services to the partnership except for winding up the business
4. Indemnification - a partner has a right to be indemnified by fellow partners for expenses incurred on behalf of the partnership
5. Contribution - a partner has a right to contribution from fellow partners where the partner has paid more than his share of partnership liability
6. Inspection - a partner has a right to inspect and copy partnership books
7. Lawsuits - generally, a partner may sue his partnership and the parnership may sue a partner in an action at law or equity.