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Business Associations > General Partnerships > Flashcards

General Partnerships Flashcards

1
Q

General Partnership

Taxation

A

Income and losses are allocated and passed through to partners

The entity does not pay taxes, but must still file information returns

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2
Q

General Partnership

Allocation

A

Both income and expenses are allocated in accordance to the Partnership Agreement

An allocation is not necessarily and automatically followed by a distribution

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3
Q

General Partnership

Governing Law

A

The governing law is generally specified in the partnership agreement

Unless state law provides otherwise, the law of the jurisdiction in which the partnership has its chief executive officer will govern:

  1. Relations among partners
  2. Relations between the partners and the partnership
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4
Q

General Partnership

Choice of Law

A

Both internal affairs of a partnership and liability of a partner for debt, obligation, or other liability of the partnership is governed according to the jurisdiction in which the partnership has its principal officer

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5
Q

General Partnership

Partnership Agreement

A

Partners have considerable freedom to set the management and governance rules and rules affecting economic relations between and amongst partners.

The partnership agreement generally takes precedence over the default rules

State partnership statutes contain default rules that apply when:

  1. The partnership agreement is silent
  2. The partners fail to agree on departures from default rules, or
  3. The matter at issue involves a limited list of non-waivable or non-modifiable rules
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6
Q

General Partnership

Prohibited Modifications to the Partnership Agreement

A

(1) Vary the rights and duties for filing with the state, except in eliminating the duty to provide copies to all partners
(2) Unreasonable restrict the right of access to books and records
(3) Eliminate the duty of loyalty, except for
(a) Identifying specific types or categories of activities that do not violate the duty of loyalty (if not manifestly unreasonable) or
(b) where all the partners or a specific percentage can authorize a specific act or transaction that otherwise would violate the duty of loyalty
(4) Unreasonably reduce the duty of care
(5) Eliminate the obligation of good faith and fair dealing, but may state reasonable standards of measurement
(6) Vary the power to dissociate as a partner, except to require notice
(7) Vary the right of the court to expel a partner
(8) Vary the windup requirement
(9) Vary the law applicable to LLPs
(10) Restrict the rights of third parties

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7
Q

General Partnership

Formation

A

General partnerships are formed whenever:

  1. Two or more persons associate and carry on as the co-owners of a for-profit business and
  2. The founders do not file the paperwork necessary to form or operate their business using some other form of business enterprise

General partnerships may be formed expressly or inadvertently

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8
Q

Inadvertent General Partnership

A

When there is no express oral or written partnership agreement, courts examine the partis’ objectively manifested intentions, as reflected in their words and conduct, to determine whether the parties’ association meets the definition of legal partnership.

Factors to Consider:

  1. Equal Rights to Manage and Control
  2. Profit Sharing
  3. Loss Sharing
  4. Joint liability to Creditors
  5. Contributions of Capital to the Enterprise
  6. Extensions of Loans
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9
Q

General Partnership

Administrative Formation-Stage Requirements

A
  1. Fictitious Name, if necessary
  2. Any Licensing Requirement the business may be subject to
  3. Out of State Operations Filing and Notice Requirements
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10
Q

General Partnership

Fictitious Name

A

Although a partnership may not need to file incorporation paperwork, if they are doing business under a fictitious name, they are still requires to file a fictitious business name statement

The general rule is that if all the partner’s surnames are included in the name, then it is not fictitious

“& Associates” is generally considered fictitious.

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11
Q

General Partnership

Failure to File Fictitious Name

A

Failure to file a fictitious business name statement will result in fines or inability to maintain an action in that jurisdiction until the defect is cured

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12
Q

General Partnership

Partnership Types

A
  1. Partnership at Will
  2. Partnership for a Definite Term
  3. Partnership for a Particular Undertaking
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13
Q

At-Will Partnership

A

Continues indefinitely

Can be dissolved by the express will of any partner

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14
Q

Partnership for a Definite Time

A

Partnership dissolves after a set amount of time or on a specific date

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15
Q

Partnership for a Particular Undertaking

A

Partnership dissolves after the purpose for which the partnership was formed has been completed/accomplished.

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16
Q

General Partnership

Becoming a Partner

A

A person becomes a partner only with the unanimous consent of all existing partners.

Partners may adopt alternative admission requirements in the Partnership Agreement.

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17
Q

General Partnerships

Pick Your Partner Principle

A

The default rule is that no one may become a partner in an existing partnership, or exercise information or governance rights, without the consent of all other partners.

Governance rights are nontransferable.

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18
Q

General Partnerships

Partner Operation Rights

A
  1. Management Rights
  2. Voting Rights
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19
Q

General Partnerships

Partner Management Rights

A

Partners have equal rights to participate in the management of partnership affairs and partnership business.

Partners usually exercise their management rights through voting.

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20
Q

General Partnerships

Partner Voting Rights

A

Partners generally exercise their management rights through voting.

Voting is typically per capita–regardless of unequal contributions

Partners may customize statutory default voting rules.

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21
Q

General Partnerships

Voting Requirements

A

Voting Requirements

Majority Vote

Unanimous Approval

Differences concerning matters within the Ordinary Course of Business

Under default rules. § 401(j)

Differences concerning matters outside the Ordinary Course of Business

Required. § 401(j)

Amendments to the Partnership Agreement

Required. § 401(j)

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22
Q

General Partnerships

Decisions Requiring Majority Vote

A

Under default rules, differences concerning matters within the Ordinary Course of Business.

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23
Q

General Partnerships

Decisions Requiring Unanimous Approval

A

Under default rules,

  • Differences concerning matters outside the Ordinary Course of Business
  • Amendments to the Partnership Agreement
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24
Q

General Partnerships

Customized Voting Rules

A

Partners are permitted to customize statutory default voting rules, such as by giving only Managing Partners or a Committee the right to vote on certain topics.

A partner who forfeits their right to vote on some or all matters foes not forfeit their right to participate in management.

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25
Q

General Partnerships

Partnership Property

A

Consists of both capital contributed and property subsequently acquired.

(1) Property acquired in the name of or transferred to:
(a) The partnership or
(b) One or more partners + indication acquired in partner’s capacity as partner
(2) Property purchased with partnership assets is presumed to be partnership property
(3) Capital contributions made by partners

26
Q

General Partnerships

Separate Property

A

Property of the Partner

Use of separate property in connection with the partnership does not mean that the property automatically becomes partnership property.

Property is assumed to be separate property when it is acquired/transferred in the name of one or more partners without:

  1. Indication acquired/transferred in partner’s capacity as partner
  2. Use of Partnership assets
27
Q

General Partnerships

Partnership Property v. Separate Property

A

Property acquired with partnership assets is presumed to be partnership property

When it is unclear whether property belongs to the partnership or an individual partner, courts rely on the intention of the parties.

28
Q

General Partnerships

Rights in Partnership Property

A

Property acquired by the partnership is owned by the partnership itself, rather than the individual partner.

Individual partners cannot assign or transfer partnership property

29
Q

General Partnerships

Partnership Capital

A

Property or money contributed by each of the partners for the purpose of establishing and carrying on the business of the partnership

Partners may contribute almost anything (cash, real property, office furniture, cars, trademarks, and services) to the partnership (capital contributions)

30
Q

General Partnerships

Capital Contributions

A

Capital contributed to the partnership by the partners

Once contributed, unless otherwise specified, the property becomes property of the partnership itself and the contributing partner forfeits their individual rights to the contributed property.

31
Q

General Partnerships

Capital Account

A

All capital contributions should be documented

The money or value of any property contributed by a partner forms the partner’s capital account.

A partner’s capital account is increased if the partner makes additional contributions.

A partner’s capital account is decreased as distributions are made to partners.

32
Q

General Partnerships

Partner as Agent

A

Each partner in a partnership is an agent of the partnership and generally has the power to bind the partnership.

Actual facts and circumstances must be taken into account to determine whether the partner was acting with authority

33
Q

General Partnerships

Partner’s Authority to Bind Partnership

A

The partner/partnership agency relations is a general agency, meaning each partner has authority to take action on the partnership’s behalf that will bind the partnership.

Partners have actual authority with respect to actions taken on behalf of the partnership that bind the partnership

Partners have statutory apparent authority with respect to partnership business

34
Q

General Partnerships

Partner Acting without Authority

A

If the partnership is aware that a partner is acting without authority, the partnership should send written notice to suppliers and creditors stating that the partner no longer has authority to bind the partnership.

Written Notice may include:

  • Statements of Authority
  • Statements of Denial
  • Statements of Dissociation
  • Statements of Dissolution
35
Q

General Partnerships

Partner Fiduciary Duties

A
  1. Duty of Loyalty (to Partnership & Other Partners)
  2. Duty of Care (to Partnership & Other Partners
  3. Obligations of Good Faith and Fair Dealing

A partner’s fiduciary duties may be altered by the Partnership Agreement within prescribed limits.

36
Q

General Partnerships

Partner’s Duty of Loyalty

A
  1. No usurpation of partnership opportunity
  2. No conflicting interest transactions
  3. No competing with the partnership

This duty may not be eliminated, but may be altered, if not manifestly unreasonable, by:

  1. Specifying specific categories and activities that do not violate the duty
  2. Specifying a method by which a specific act or transaction may be authorized or ratified
37
Q

General Partnerships

Partner’s Duty of Care

A
  1. No grossly negligent or reckless conduct
  2. No intentional misconduct
  3. No knowing violations of the law

This duty may not be eliminated or unreasonably reduced

38
Q

General Partnerships

Partner’s Obligation of Good Faith and Fair Dealing

A

A partner must discharge all duties to and exercise any rights of the partnership and other partners with the obligation of good faith and fair dealing

39
Q

General Partnerships

General Partnership Liability

A

A partnership is an entity distinct from its partners.

In general, the partnership is liable for actionable conduct of a partner acting in the ordinary course of the partnership business, or with authority of the partnership

A partnership may sue and be sued in the name of the partnership

40
Q

General Partnerships

Partner Liability

A

Partners are personally liable when they were a partner at the time the obligation was incurred, meaning partners cannot be held liable for partnership obligations incurred prior to their admission as a partner.

In general, all partners are liable jointly and severally for all obligations of the partnership.

Any or all of the partners may be sued, but a partner must receive a judgment against themselves to be held liable for the partnership.

41
Q

General Partnerships

Reaching a Partner’s Personal Assets

A

To reach a partner’s personal assets based on a claim against the partnership you must have:

(1) A judgment against the partner
(a) Based on a claim against the partnership
(b) For which the partner is personally liable
(2) And at least one of the following:
(a) The judgment creditor can show a writ of execution stating the partnership’s assets covered none or partial payment of the obligation
(b) The partnership is a debtor in bankruptcy
(c) The partner agrees to allow the judgement creditor to reach their personal assets
(d) The court grants the judgment creditor permission to reach the partner’s assets because there has been a reasonable showing that the partnership cannot repay the obligation
(e) The partner is liable under tort law independent of the partnership

42
Q

General Partnerships

Partners’ Interest in the Partnership

A

A partner in a partnership generally has an ownership or equity interest in the partnership.

A partner’s partnership interest gives them:

  1. Financial Rights
  2. Partnership Status Rights
  3. Other Rights
43
Q

General Partnerships

Partners’ Financial Rights

A

Under default rules, each partner is entitled to an equal share of the partnership profits (allocation) and chargeable for an equal share of the partnership losses.

No right to receive a distribution, unless such right is set forth in the Partnership Agreement.

Financial rights may be transferred

A transfer of financial rights does not automatically dissolve the partnership nor cause the dissociation of the partner

44
Q

General Partnerships

Partners’ Financial Rights:

Transferee’s Rights

A

A transferee of a partner’s financial rights in a partnership is entitled to receive whatever distributions the partner is entitled to.

The transferee does not gain any management or control rights or personal liability for partnership obligations.

45
Q

General Partnerships

Partners’ Financial Rights after Transfer

A

The transferor remains the partner, retaining all management and control rights, as well as personal liability for partnership obligations

46
Q

General Partnerships

Partners’ Partnership Status Rights

A

Each partner is entitled to an equal share of management and control rights, as well as informational rights, regardless of amount contributed unless otherwise provided for in the partnership agreement.

Partnership status rights may not be transferred

47
Q

General Partnerships

Partners’ Information Rights & Right to Accounting

A

Partners have a right of access to the partnership’s books and records.

48
Q

General Partnerships

Dissociation

A

A partner dissociates when they are no longer part of or withdraw from the partnership

The partner’s right to participate in the management of the business and their duty of loyalty terminate upon dissociation

Only certain partner dissociations trigger a dissolution of the partnership.

49
Q

General Partnerships

Events Resulting in Partner Dissociation

A

(1) Partnership has notice of a partner’s express will to withdraw
(2) The occurrence of and agreed upon event
(3) The partner’s expulsion
(a) Under the partnership agreement
(b) By unanimous vote
(c) By judicial determination
(4) The partner’s
(a) Becoming a debtor in bankruptcy
(b) Executing an assignment for creditors
(c) Appointment of a trustee, receiver, or liquidator of all or substantially all the partner’s property
(d) Failing to remove such trustee within 90 days of appointment
(5) When the partner is an individual
(a) Their death
(b) The appointment of a guardian or general conservator
(c) A judicial determination of partner’s incapability of performing
(6) Termination of a partner who is not an individual, partnership, corporation, trust, or estate

50
Q

General Partnerships

Impact of Partner Dissociation on Partnership

A

A Partner’s dissociation may either:

  1. Cause dissolution of the partnership
  2. Not cause dissolution of the partnership
51
Q

General Partnerships

Impact of Partner Dissociation

Continuing Partnership

A

If a partner’s dissociation does not cause the partnership to dissolve, the rights, liabilities, and authority of partners are changed as follows:

(1) The Dissociated Partner
(a) Ended Rights & Duties
(i) Partnership Status Rights
(ii) Fiduciary Duties
(b) Lingering Rights & Duties (2 years)
(i) Authority
(ii) Liability
(c) May have a Right to Buyout, depending on the circumstances
(2) The Remaining Partner(s)
(a) Have a right to buyout the dissociating partner
(b) May file a statement of dissociation

52
Q

General Partnerships

Impact of Partner Dissociation

Dissociated Partner’s

Lingering Rights & Duties

A

In a continuing partnership, the partnership remains bound for two years by any acts of the dissociating partner and the dissociating partner remains liable for such acts if the third party:

  1. Did not have notice of the partner’s dissociation, or
  2. Reasonably believed the dissociated partner was still a partner
53
Q

General Partnerships

Impact of Partner Dissociation

Causing Dissolution

A

If a dissociation causes dissolution, the partnership continues after dissolution only for the purpose of winding up its business, after which it is terminated.

54
Q

General Partnerships

Statement of Dissociation

A

A voluntary filing with the state agency identifying the dissociating partner to speed up the removal of any lingering authority.

Third parties are deemed to have notice of partner’s dissociation 90 days after the statement becomes effective.

55
Q

General Partnerships

Dissolution

A

A partnership dissolves in a sense that it no longer exists to generate profits as a business and now exists for the purposes of winding up the partnership business.

At any time after dissolution and before winding up, all of the partners, including any dissociating partners not wrongfully dissociated may waive the right to wind up and terminate after dissolution.

56
Q

General Partnerships

Events Causing Dissolution

A

(1) In a Partnership At Will, the partnership gets notice of a partner’s will to dissociate
(2) In a Partnership for a Definite Term or Particular Undertaking:
(a) Completion of the term or undertaking
(b) Unanimous decision to wind up
(c) 50% of remaining partners seek to wind up within 90 days of certain dissociation events
(3) Occurrence of event which, per the partnership agreement, dictates winding up
(4) Subject to cure, and event causing illegality of the partnership business
(5) Certain judicial determinations

57
Q

General Partnerships

Winding Up

A

A partnership winds up when it completes its work, sells its assets, pays its obligations, and settles internal financial matters.

58
Q

General Partnerships

Partner Accounts

A

On dissolution, the partnership accounts become partnership liability, meaning the partnership must pay each partner the amount it their partnership account.

After liquidation of assets and payment of debts, all profits/losses must be allocated equally to the partner’s account balance.

The Partnership Agreement must address partnership accounts with great specificity

A partnership account includes the sum of:

  1. + Partner’s Contributions (Money & value of Property)
  2. + Share of the partnership’s profits
  3. - Money Received (distributions & Profits)
  4. - Value of Property Received
  5. - Share of the partnership’s losses
59
Q

General Partnerships

Winding Up

Remaining Debts

A

If the partnership has more obligations than the partnership and partnership accounts, then the partners must contribute the difference, proportionately.

If one partner fails to pay, the other partners must proportionately pay his share and then they can recover their contribution from that partner.

60
Q

General Partnerships

Termination

A

At the conclusion of the winding up process, the partnership terminates and no longer exists

Business Associations (4 decks)

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