GENERAL PARTNERSHIP Flashcards
What is generally required to form a General Partnership?
1) 2 or more persons/entities
- Capacity
- Consent
2) Co-ownership
- Objective
- Parties’ intent
3) For profit
- NOT debt/services/rent/retirement
- NOT joint tenancy/tenancy in common
- NOT extensive activity
- NOT returns
Is a written agreement required to form a general partnership?
No - does not require an express agreement or a formal filing
Can a general partnership be made even if the formalities are not met?
Governing law
- Agreement
- Revised Uniform Partnership Act (RUPA)
Legal purpose
Limited Liability Partnership
A business entity created under a state’s general partnership laws, which grants all individual partners protection from vicarious liability for claims against the entity.
Purported Partner
A person who is not a partner, but by word or action represents to being a partner or consents to being represented as such.
Limited Partnership
A statutorily created business entity that must have, at a minimum, one general partner and one limited partner.
General Partner
A partner in a limited partnership who has the right to participate in the management and conduct of the limited partnership’s activities, and who is jointly and severally liable for the partnership’s obligations.
Limited Partner
A partner in a limited partnership who generally has no right to participate in the management or control of the limited partnership, and who enjoys limited liability protection.
Limited Liability Limited Partnership
A type of limited partnership in which the general partners and limited partners receive limited liability protection under state law.
How many votes do partners have?
Equal votes
How many votes are required to pass decisions in the ordinary course of business?
Majority vote
How many votes are required to pass decisions outside the ordinary course of business?
Unanimous vote
How much profits are partners entitled to?
Equal profits
According to agreement
How much losses are partners liable for?
Proportionate to profits
According to agreement
What is partner’s duty of care?
Not act with malice/negligence
Act in good faith
Act as reasonably prudent person in similar position
What is partner’s duty of loyalty?
Account for profits
Not act adversely
Not act in competing ventures
Not usurp corporate opportunities
What is partner’s duty of obedience?
Obey partnership’s reasonable directions
Act within scope of partnership
What remedies are available to a partnership for a partner’s breach of duties?
Assert existing judgment
What is required for Partner’s actual authority?
Express
- Statement of authority filed with Secretary of State
- Partnership agreement
- Majority vote (ordinary course of business)
- Unanimous vote (NOT ordinary course of business)
Implied
- Communication with Partner
- Partner’s reasonable belief
What is required for Partner’s apparent authority?
RUPA
1) Partner’s authority held out
2) Ordinary course of business/Of the kind
What are the exceptions to Partner’s apparent authority?
NO authority
TP knowledge/notice
- Actual knowledge (NOT negligent)
- Delivered notice/TP’s attention
What type of partners are liable?
Joint and severally liable partners
- Pre-existing liability
- Personal liability
Are newly joined partners liable?
No
- But they can lose investment share in partnership to satisfy debt obligations
Liability for partner’s acts
A partnership is liable for the loss or injury caused by a partner acting in the ordinary course of business, including contract (authority), tort (outside scope), or criminal acts (principal/associate).
What may partners be liable for?
Entire partnership obligations
- Obtain contribution from co-partnersfor paying more than fair share
- Obtain indemnification from co-partners for paying whole obligation
Dissociation
The act of a partner leaving a partnership
What is required for dissociation?
At-will partnership
- Notice (express will to withdraw)
- Agreed event
- Valid expulsion
- Partner’s death/incapacity
- Court judgment
- Termination of partnership
Term partnership (wrongful dissociation)
- Before term expiration
- Before completion of specific purpose
- Partner’s bankruptcy
What is the difference between at-will partnership and term partnership?
At-will partnership
- Mutual termination
Term partnership
- Termination after end of term
When is a dissociating partner entitled to buyout?
Rightful dissociation
- At time of dissociation
Wrongful dissociation
- After term expiration
- After completion of specific purpose
- Offset vs damages due to partner’s dissociation
What is buyout?
Partner can dissociate by selling his shares to the partnership in return for profits (equal/by agreement)
What is required for the dissociating partner/partnership’s liability to third parties for dissociating partner’s act?
1) Act would have been bound before dissociation
2) TP reasonably believed dissociating partner was still in partnership + TP had NO knowledge of dissociation
How long is the dissociating partner/partnership liable to third parties?
2 years after dissociation
What is required for the dissociating partner/partnership removing liability to third parties?
Notice re dissociation to TP
Notice re dissociation to Secretary of State
- Deemed to have notice within 90 days
Dissolution
The process of ending the partnership as an entity, shifting its purpose from conducting business to ending the business.
What is required for dissolution?
Unanimous vote
Rightful dissociation
Wrongful dissociation + majority vote
Partner’s death
Agreed event
Illegal conduct
Judicial decree issuance
What is required for waiving dissolution?
Unanimous vote to continue partnership
- Within 90 days of dissolution announcement
- Non-dissociating partners
Are partners entitled to buyout after dissolution?
No
Winding Up
The post-dissolution process in which the partners complete any remaining partnership business, collect on debts, pay creditors, and distribute any remaining assets to the partners.
What are (dissociated/non-dissociated) partners/partnership liable for to TPs?
Liabilities incurred during winding-up
- Joint and several liability
What is the dissociating partner liable to partnership for?
Breach of fiduciary duties until winding-up
Who may engage in winding-up?
Living partners
Rightfully dissociated partners
- NOT wrongfully
How may partnership’s assets be distributed?
Convert assets into cash
Distribute to:
1) Creditors
2) Partners (profits/losses)
What is required for the partners/partnership removing liability to third parties?
Notice re dissociation to TP
Notice re dissociation to Secretary of State
- Deemed to have notice within 90 days
X and Y are separate companies. They both agreed to create a new partnership for the next two years without any filing of documents with the Secretary of State or a written agreement. Although they never formally agreed to own the partnership together, they continued to promote their business in the partnership’s names and earn profit equally as well as paying debts and rental liabilities. Has a partnership been formed?
NOT limited partnership
- NO certificate of limited partnership filed
NOT limited liability partnership
- NO statement of qualification filed
General partnership
- 2 entities (X + Y)
- Co-ownership (partners’ intent from objective standpoint, partners’ subjective intent NOT relevant)
- For profit (debts + rents NOT relevant)
- N written agreement required (only land sale transactions - SOF)
Partnership ABC consisted of 15 partners. ABC specialised in manufacturing automobiles. One day, Partner Z wanted to produce separate phone chargers in cars. 7 of the 15 partners voted in favour, including Z. Z argues he is entitled to more votes than the others because he is the head partner. Can Z start producing the phone chargers?
No
- General partnership
- 1 partner = 1 vote
- Ordinary course of business (car chargers, car manufacturing) => Majority vote required (+50% partners’ votes)
- 7/15 votes is less than 50% => NO partners’ consent
Partnership ABC consisted of 15 partners. ABC specialised in manufacturing automobiles. Partners X and Y believed they dissociated without giving any notice at all. One day, Partner Z wanted to produce mobile phones as well as cars. All the partners voted in favour, including Z. Can Z start producing the mobile phones?
No
- General partnership
- 1 partner = 1 vote
- Not ordinary course of business (phone manufacturing vs car manufacturing) => Unanimous vote required (ALL partners’ votes)
- At-will partnership (NO term) => Notice of dissociation required (X + Y did NOT give notice) => X + Y did NOT dissociate
- 13/15 votes is NOT unanimous (X + Y’s votes required) => NO partners’ consent
Partnership ABC consisted of 15 partners. ABC specialised in manufacturing automobiles. After their first financial year, ABC suffered a $300,000 loss. After their second financial year, ABC enjoyed a $75,000 profit. How much is each partner entitled to and liable for?
$5,000 profit
- Profit entitlement is equal
- $75,000 / 15 partners = $5,000
$20,000 loss
- Profit entitlement is equal
- Loss liability is same as profit entitlement (equal)
- $300,000 / 15 partners = $20,000
Partnership ABC consisted of 15 partners. ABC specialised in manufacturing automobiles. The partners agreed that they would be entitled to $3,000, but their loss liability will be limited to $10,000. After their first financial year, ABC suffered a $300,000 loss. After their second financial year, ABC enjoyed a $75,000 profit. How much is each partner entitled to and liable for?
$3,000 profit
- Profit entitlement is $3,000 (as agreed)
$10,000 loss
- Loss liability is $10,000 (as agreed)
X is a partner of ABC, a car manufacturer. X entered a deal with a retailer. X knew that the retailer had a low P/L the last financial year, but decided to enter the deal anyway. ABC discovered X’s deal and was not happy. ABC wanted to assert an existing judgment against X. Can ABC sue X?
Breach of fiduciary duty of care
- X acted negligently (failed to consider Retailer’s low P/L)
- X did NOT act in good faith
- X did NOT act as reasonably prudent person would in like position (would have walked away from deal)
- ABC had outstanding judgment vs X
X is a partner of ABC, a car manufacturer. X’s cousin from a retailer rang X to ask him about entering a deal. X entered the deal in return for $1m. ABC discovered X’s deal and was not happy. ABC wanted to assert an existing judgment against X. Can ABC sue X?
Breach of fiduciary duty of loyalty
- X entered deal with related person (Cousin) => Conflict of interest
- X had knowledge Cousin was at Retailer
- X had knowledge Cousin would influence his judgment
- ABC had outstanding judgment vs X
X is a partner of ABC, a car manufacturer. X also ran another car manufacturing company, Speed. X received an offer from a retailer about a lucrative deal that would benefit both companies. X knew the deal would help Speed, which was in financial decline at the time. Therefore, X entered the deal with Speed. ABC discovered X’s deal and was not happy. ABC had no existing judgment against X. Can ABC sue X?
NO breach of fiduciary duty of loyalty
- X failed to give ABC time to act upon deal, which was within its line of business => Usurp corporate opportunity
- X received benefit from ownership in Speed
- BUT ABC had NO outstanding judgment vs X
X is a partner of ABC, a car manufacturer. X entered a deal with a retailer without consent from the other partners. X simply followed their partnership agreement that allowed him to enter such deals. ABC’s factory went bust, causing losses for retailer. Can Retailer sue ABC?
Yes
- X had actual authority (express - agreement)
- ABC is liable to Retailer for X’s actions (as principal of agent - RUPA)
X is a partner of ABC, a car manufacturer. X entered a deal with a retailer with consent from three of the five partners. ABC’s factory went bust, causing losses for retailer. Can Retailer sue ABC?
Yes
- X had actual authority (express - majority vote in ordinary course of business)
- ABC is liable to Retailer for X’s actions (as principal of agent - RUPA)
X is a partner of ABC, a car manufacturer. X entered a deal with a record label to advertise cars with music videos, with consent from everyone in the partnership. ABC’s factory went bust, causing losses for retailer. Can Retailer sue ABC?
Yes
- X had actual authority (express - unanimous vote outside ordinary course of business)
- ABC is liable to Retailer for X’s actions (as principal of agent - RUPA)
X is a partner of ABC, a car manufacturer. X was approached by a retailer about a lucrative deal. X spoke with the partners and they told him to find whatever good deal there is. X then entered a deal with Retailer. ABC’s factory went bust, causing losses for retailer. Can Retailer sue ABC?
Yes
- X had actual authority (implied - X’s reasonable belief that he had power to enter lucrative deal + X’s communication with partners)
- ABC is liable to Retailer for X’s actions (as principal of agent - RUPA)
X is a partner of ABC, a car manufacturer. ABC held a marketing forum at a trade show promoting their cars and interest in entering deals with retailers. A few weeks after the show, X received an email from a record label about shooting music videos with ABC’s cars. X then entered the deal. ABC’s factory went bust, causing losses for retailer. Can Retailer sue ABC?
No (RUPA)
- X had NO apparent authority (X’s authority was held out in forum BUT deal was NOT in ordinary course of business)
- ABC is NOT liable to Retailer for X’s actions
X is a partner of ABC, a car manufacturer. X received an email from a retailer about a lucrative deal. X responded saying he is not in charge of making decisions like this. Although Retailer did not read his response, Retailer asked again whether X is interested or not. X then entered the deal. ABC’s factory went bust, causing losses for retailer. Can Retailer sue ABC?
No (RUPA)
- X had NO apparent authority (Retailer had notice of X’s lack of authority, despite not reading it)
- ABC is NOT liable to Retailer for X’s actions
X, Y and Z are partners of ABC, a car manufacturer. Each owns $100,000 in the partnership. X received an email from a record label about shooting music videos with ABC’s cars. X then entered the deal. Shortly after, new partners B and C joined each owning $100,000 as well. ABC’s factory went bust, causing $200,000 loss for retailer. ABC is now worth $100,000. Who can Retailer sue?
NOT ABC
- ABC’s assets NOT sufficient ($100,000 vs $200,000)
NOT B/C
- Newly joined partners after deal
- BUT they can be liable for ABC’s obligations during dissolution
X/Y/Z
- Jointly + severally liable before deal
- Liable in contract (beyond scope of X’s authority) or tort (NO actual/apparent authority)
- One of the partners can pay $200,000 to Retailer + claim $50,000 each from other two partners (indemnification)
- One of the partners can pay more than their ownership amount ($100,000) to Retailer + claim 50% of difference (between paid amount and $100,000) from other two partners (contribution)
X, Y and Z decided to form a partnership named XYZ for an indefinite term. Each owned $1m in XYZ and they agreed that in the event the partnership’s losses reach $1m, the partnership should terminate. One day, X was killed in a car accident. At that point, XYZ made $6m profit and were liable for $3m debt. X’s son was entitled to X’s shares intestate, but X’s son does not want to be involved with XYZ. What can X’s son do?
Rightful dissociation
- At-will partnership (NO term)
- X’s death => Dissociation
Buyout ($2m)
- X’s shares ($1m) => X’s son
- X’s profit ($6m / 3 partners = $2m) (profits equally shared) => X’s son
- X’s loss ($3m / 3 partners = $1m) (losses shared according to profits shared) => X’s son
- $1m + $2m - $1m = $2m
X, Y and Z decided to form a partnership named XYZ for five years. Each owned $1m in XYZ. After two years, X sent a notice to the other partners saying “I’m out of here and never coming back. Just give me my share of the value of the practice.” At that point, XYZ made $6m profit and were liable for $3m debt. X’s departure would cause XYZ a further $100,000 loss. How much can X take from XYZ?
Wrongful dissociation
- Term partnership (5 years)
- X dissociated before term expired (2/5 years)
Buyout ($1m before end of term) ($1.9m after end of term)
- X’s shares ($1m) => X (after 3 years when term expires)
- X’s profit ($6m / 3 partners = $2m) (profits equally shared) => X
- X’s loss ($3m / 3 partners = $1m) (losses shared according to profits shared) => X
- X’s damages ($100,000) => X
- $2m - $1m = $1m (before end of term)
- $1m + $1m - $100,000 = $1.9m (after end of term)
X, Y and Z decided to form a partnership named XYZ for five years specialising in car manufacturing. X entered a deal on behalf of XYZ with a record label that wanted to use its cars for music videos without the others’ consent. After two years, X sent a notice to the other partners saying “I’m out of here and never coming back. Just give me my share of the value of the practice.” Three years after X left, Record Label was unhappy with XYZ’s progress. Believing that X was still at the partnership, Record Label wanted to sue XYZ. Can Record sue XYZ and/or X?
No
- More than 2 years post-dissociation => NO liability
- X’s deal would NOT have bound XYZ (outside ordinary course of business - music videos vs car manufacturing) => NO liability
X, Y and Z decided to form a partnership named XYZ for five years specialising in car manufacturing. X entered a deal on behalf of XYZ with a retailer. After two years, X sent a notice to the other partners saying “I’m out of here and never coming back. Just give me my share of the value of the practice.” A year after X left, Retailer was unhappy with XYZ’s progress particularly as it realised X left. Can Retailer sue XYZ and/or X?
No
- Within 2 years post-dissociation
- X’s deal would have bound XYZ (within ordinary course of business - retail + car manufacturing)
- Retailer had notice of X’s dissociation => NO liability
X, Y and Z decided to form a partnership named XYZ for five years specialising in car manufacturing. X entered a deal on behalf of XYZ with a retailer. After two years, X sent a notice to the other partners saying “I’m out of here and never coming back. Just give me my share of the value of the practice.” The partners notified Secretary of State about X’s dissociation. A year after X left, Retailer was unhappy with XYZ’s progress and wanted to sue both XYZ and X. Both argue that X’s dissociation was made public through Secretary of State, who claim they did not have notice one month after it was sent. Can Retailer still sue XYZ and/or X?
No
- Within 2 years post-dissociation
- X’s deal would have bound XYZ (within ordinary course of business - retail + car manufacturing)
- Secretary of State was deemed to have notice re dissociation within 90 days after it was sent => NO liability
X, Y and Z decided to form a partnership named XYZ for an indefinite term. One day, X sent a notice to the other partners saying “I’m out of here and never coming back. Just give me my share of the value of the practice.” Y then decided the partnership should terminate, but Z refused. Can Z stop the termination?
No
- Rightful dissociation (at-will partnership) => NO partners’ consent required
- Automatic dissolution
X, Y and Z decided to form a partnership named XYZ for an indefinite term. One day, X sent a notice to the other partners saying “I’m sick and tired of being here. I need some space.” Y then decided the partnership should terminate, but Z refused. Can Z stop the termination?
Yes
- NO unequivocal dissociation => Unanimous vote required
- X + Z did NOT vote in favour => NO dissolution
A, B, C, D and E decided to form a partnership named XYZ for five years. After two years, A sent a notice to the other partners saying ““I’m out of here and never coming back. Just give me my share of the value of the practice.” B then decided the partnership should terminate, to which C and D agreed, but E refused. Can E stop the termination?
No
- Wrongful dissociation (term partnership) => Majority vote required (NOT unanimous)
- B + C + D voted in favour (3/4 votes) => Dissolution
X, Y and Z decided to form a partnership named XYZ for an indefinite term. One day, X sent a notice to the other partners saying “I’m out of here and never coming back. Just give me my share of the value of the practice.” Y then decided the partnership should terminate and Z agreed. However, four months later, X and Z refused to terminate. Can Z stop the termination?
No
- Rightful dissociation (at-will partnership) => NO partners’ consent required
- Automatic dissolution
- NO unanimous vote for waiver (Y did NOT vote, X’s vote NOT relevant) + NOT within 90 days (after 4 months) => NO waiver
X, Y and Z decided to form a partnership named XYZ for an indefinite term. One day, X sent a notice to the other partners saying “I’m out of here and never coming back. Just give me my share of the value of the practice.” Y then decided the partnership should terminate and Z agreed. Y filed a notice of their dissolution to the Secretary of State. During the winding-up process, XYZ suffered losses that affected its clients who want to sue XYZ. X and Y continued to transact XYZ with companies that they own individually. Are there any liabilities involved?
NO liability to Client during winding-up
- XYZ + X, Y, Z (NO joint and several liability)
- Notice of dissolution to SoS
Liability to XYZ during winding-up
- X (dissociated partner) + Y (non-dissociated partner)
- Breach of fiduciary duty of loyalty (competing ventures)
X, Y and Z decided to form a partnership named XYZ for an indefinite term. One day, X wanted to leave the partnership and requested the partnership to buy out his shares. Y also wants his shares bought out by XYZ without leaving the partnership because he wants to continue making more profit until it should be terminated. Is this possible?
No
- Dissociation => Buyout
- Dissolution => NO buyout
X, Y and Z decided to form a partnership named XYZ for five years in selling cars to reach $50m profit. After two years, X wanted to leave the partnership and requested the partnership to buy out his shares. XYZ eventually reached its profit target and Y chose to leave as well. Eventually, Z realised there was no point running the partnership anymore and decided to close it down. Z realises he has to start distributing its assets. Who may take part in the distribution?
NOT X
- Wrongfully dissociated (before term expiration/specific purpose fulfilment)
Y
- Rightfully dissociated (after specific purpose fulfilment)
Z
- Living partner
X, Y and Z decided to form a partnership named XYZ for five years in selling cars to reach $1m profit. X, Y and Z each contributed $100,000. After two years, X wanted to leave the partnership and requested the partnership to buy out his shares. Eventually, Z realised there was no point running the partnership anymore and decided to close it down with Y’s consent. XYZ was last valued at $1 million and made $60,000 profit. XYZ’s bank notified that they are owed $730,000. How should XYZ’s assets be distributed?
1) Convert assets into cash
2) Pay creditor
- $730k => Bank
- XYZ has $270k left ($1m - $730k)
3) Pay capital to X + Y + Z
- $300,000 / 3 partners = $100k
- Each partner takes $100k
- XYZ has -$30k left ($270k - $300k)
4) Pay losses to XYZ
- Losses presumed to be distributed proportionately according to profit distribution (equal)
- -$30k / 3 partners = -$10k
- Each partner pays $10k to XYZ
- Each partner takes $90k ($100k - $10k)
5) Pay profit to X + Y + Z
- Profits presumed to be distributed equally
- $60k / 3 partners = $20k
- Each partner takes $20k
- Each partner takes $110k ($90k + $20k)
