FORMATION OF A GENERAL PARTNERSHIP & MANAGEMENT AND OPERATION OF A GENERAL PARTNERSHIP: & FINANCIAL RIGHTS AND OBLIGATIONS

Question 1

DEFINITION of a General Partnership

Answer 1

A partnership is formed as soon as two or more persons associate to carry on as co-owners a business for profit, regardless of whether the parties subjectively intend to form a partnership.

No state filing or other formalities are required.

Question 2

FACTORS for formation of a general partnership:

Answer 2

The most important factor in deciding whether an association rises to the level of a partnership is the sharing of profits.

Another important factor in the partnership inquiry is the person’s right to participate in the control of the business (even if control is never actually exercised). To state that partners are co-owners of a business is to state that they each have the power to control the
business.

If there is profit-sharing, and therefore a presumption of partner status, one can try to rebut that presumption with evidence suggesting the lack of a co-ownership relationship, such as no right to control or no sharing of losses(something that owners would typically share).

Question 3

A person who receives a share of the profits is presumed to be a partner unless the profits were received in payment:

Answer 3

1. of a debt;
2. as wages or other compensation;
3. as rent; or
4. as interest on a loan.

Question 4

What if Sam was getting 10% of the gross returns of the business (as opposed to the profits)?

Answer 4

Sharing of gross returns does not establish a presumption of partnership - a sharing profits does.

Question 5

How do you get profits?

Answer 5

Revenue - expenses = profit

Question 6

WRITING:

Answer 6

Partnership law does not require one, but the statute of frauds may.

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.

Question 8

PARTNERSHIP AGREEMENT:

Answer 8

No agreement is required to form a partnership. Nevertheless, you should be on the lookout for the existence of a partnership agreement because partnership law allows the partners to contract around almost all of the statutory provisions. Look for an agreement first, and then fall back on the statutory default rules in the absence of an agreement.

Note: A partnership agreement may be written, oral, or implied (e.g., by conduct).

Question 9

ENTITY STATUS:

Answer 9

Once formed, a partnership is considered to be a legal entity distinct from its partners.

Question 10

VOTING:

Answer 10

Unless otherwise agreed, all partners have equal rights in the management of the business and equal votes (i.e., one partner, one vote). Decisions regarding matters within the ordinary course of the partnership business
require a majority vote of the partners. Matters outside of the ordinary course of business require the consent of all partners.

Question 11

RIGHT TO SALARY OR OTHER COMPENSATION:

Answer 11

Unless otherwise agreed, partners get no compensation (with the exception of a right to reasonable compensation for services rendered in winding up the partnership
business).

Question 12

SHARING PROFITS AND LOSSES:

Answer 12

Unless otherwise agreed, profits are shared equally among the partners (by number).

Unless otherwise agreed, losses are shared in the same manner as profits.

Question 13

Assume that they agreed to split losses 60-30-10, but they have no agreement as to profits.

How will losses be shared?

How will profits be shared?

Answer 13

How will losses be shared?

• 60-30-10 pursuit to agreement

How will profits be shared?

• Equally, 1/3 each - losses follow profits, but profits do not follow losses

Question 14

LIABILITY OF THE PARTNERSHIP to 3rd party in Tort

Answer 14

With respect to the partnership’s liability in tort, a partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting in the orinary course of business of the
partnership or with authority of the partnership.

Question 15

LIABILITY OF THE PARTNERSHIP to 3rd party in K

Answer 15

With respect to the partnership’s liability in contract, a partnership is liable for contracts entered into on its behalf by partners with actual or apparent authority.

Question 16

ACTUAL AUTHORITY:

Answer 16

Actual authority can be created by the partnership agreement or by the requisite vote of the partners (e.g., majority vote for ordinary business matters).

Actual authority can also be created by the partnership’s
filing of a “statement of partnership authority” with the
Secretary of State. The effect of the statement differs depending upon whether the transaction involves a transfer of real property.

Question 17

Actual Authority - Grants of and restrictions on partner authority to transfer partnership real property in the statement

Answer 17

Grants of and restrictions on partner authority to transfer partnership real property in the statement are binding on third parties if the statement is also recorded in the county where the property is located. In other
words, third parties are deemed to have constructive
knowledge of the statement if secretary of state and county filings are made. Third parties are benefitted by filed grants of authority (unless they have actual knowledge that the partner lacked authority), and burdened by filed restrictions on authority.

Question 18

Actual Authority - With respect to all other transactions of the partnership other than real property transfers, grants of partner authority in the statement

Answer 18

With respect to all other transactions of the partnership
other than real property transfers, grants of partner
authority in the statement are binding on the partnership (unless the third party has actual knowledge that the partner lacked authority). Restrictions on partner authority in the statement, however, are not binding on third parties. In other words, third parties are only deemed to have constructive knowledge of filed grants of authority— not filed restrictions. Third parties are benefitted by filed grants (unless they have actual knowledge that the partner lacked authority), and are not burdened by filed restrictions (only actual knowledge of restrictions burdens them).

Question 19

APPARENT AUTHORITY:

Answer 19

The partnership statute states that a partner is an agent of the partnership, and that a partner has apparent authority to bind the partnership to transactions within the ordinary course of the partnership’s business (unless the third party is aware that the partner lacks actual authority).

Question 20

LIABILITY OF THE PARTNERS:

Answer 20

A defining characteristic of the general partnership is that each partner is jointly and severally liable for all of the obligations of the partnership (whether arising in tort or
contract).

BUT: the plaintiff must first exhaust partnership resources before seeking to collect from an individual partner’s assets (so the partners are essentially guarantors).

Question 21

You pass the bar exam and form a law firm as a general partnership. One of your partners commits malpractice representing a client. Can the client recover from you alone?

Answer 21

Yes. The malpractice by your partner created a partnership obligation. As a partner, you are jointly and severally liable for all partnership obligations. But the plaintiff must first exhaust partnership resources (i.e., the plaintiff must first try to recover from the partnership’s assets before seeking to recover from your personal assets).

Note: Where one partner pays a partnership obligation, he is entitled to indemnification from the partnership. He may also require the other partners to contribute their pro rata shares of the payment if the partnership is unable to indemnify

Question 22

LIABILITY OF THE PARTNERS - LIMITING LIABILITY TO THIRD PARTIES

A forms a partnership with B and C. They all agree that C will not be responsible for any partnership losses. Is C shielded from liability to a third party?

Answer 22

No. Partners cannot limit a third party’s rights without the 3rd party’s consent. The agreement is effective, however, among the partners themselves.

You pay then can enforce among your partners to pay
you back

Question 23

LIABILITIES OF ADMITTED PARTNERS: If the partnership
admits a new partner (unless otherwise agreed, this requires a unanimous partner vote), is that partner liable for debts incurred by the partnership before his admission?

Answer 23

A newly admitted partner is not personally liable for partnership obligations that arose before his admission. He can only lose the amount of his investment in the partnership.