General Partnerships Flashcards
General Partnerships
Taxation
Income and Losses are allocated and passed through to partners either equally (Default Rules) or according to the partnership agreement
General Partnerships
Allocation of Profits & Losses
Profits and Losses are allocated either:
1. Equally (under Default Rules), or
2. In accordance with the Partnership Agreement
General Partnerships
Governing Law
Both internal affairs of a partnership and liability of a partner for debt, obligation, or other liability of the partnership are governed:
- According to the jurisdiction in which the partnership has its principal officer or
- As specified in the partnership agreement
General Partnerships
Partnership Agreement:
When Default Rules Apply
State partnership statutes contain default rules that apply when:
- The partnership agreement is silent
- The partners fail to agree on departures from default rules, or
- The matter at issue involves a limited list of non-waivable or non-modifiable rules
General Partnerships
Partnership Agreement:
Prohibited Modifications
-
Vary:
a. Rights and duties for filing with the state
b. The power to dissociate (except to require notice)
c. The right of the court to expel a partner
d. The wind up requirement
e. The law applicable to LLPs -
Eliminate:
a. The Duty of Loyalty, except
…..i. Identifying specific allowed categories of activities
…..ii. Where sufficient partners authorize a specific act
b. The obligation of Good Faith and Fair Dealing - Unreasonably Reduce: The Duty of Care
-
Restrict:
a. The rights of Third Parties
b. Unreasonably, partners’ right of access to books and records
General Partnerships
Duty of Loyalty:
Acceptable Modifications
- Identifying specific exempted categories of activities in the partnership agreement
- Where sufficient partners have authorized a specific act as exempt
General Partnerships
Formation
General Partnerships may be formed expressly or inadvertently where:
-
Two or more persons associate and carry on as co-owners of a for-profit business
AND
-
Two or more persons associate and carry on as co-owners of a for-profit business
- The founders do not file paperwork necessary to form a different type of business entity
General Partnerships
Formation:
Inadvertent General Partnerships
Factors to Consider
- Equal Rights to Manage and Control
- Profit Sharing
- Loss Sharing
- Joint Liability to Creditors
- Capital Contributions to the Enterprise
- Extensions of Loans
Early People Like Jogging Crazy Lengths
General Partnerships
Types of Partnerships
- Partnership at Will
- Partnership for a Definite Term
- Partnership for a Particular Undertaking
General Partnerships
Adding a New Partner
Either:
1. Unanimous Consent of existing partners
2. Alternative Methods, per the partnership agreement
General Partnerships
“Pick Your Partner” Principle
Default Rule: The consent or all partners is required to become a partner, or to exercise information or management rights, in an existing partnershipa partner
Management rights are nontransferable.
General Partnerships
Partners’ Interest Rights
- Partnership Status Rights (Management & Voting)
- Financial Rights
- Other Rights
General Partnerships
Partners’ Rights:
Management Rights
Partners have equal rights to participate in management of the partnership, usually exercised through voting
General Partnerships
Partners’ Rights:
Voting
Default Rule: Voting is equal/per capital, regardless of unequal contributions
Voting rules may be modified in the partnership agreement
General Partnerships
Voting Rules:
Decisions Requiring Majority Vote
Default Rule: Differences concerning matters within the Ordinary Course of Business
General Partnerships
Voting Rules:
Decisions Requiring Unanimous Approval
Default Rule:
1. Differences concerning matters outside the Ordinary Course of Business
2. Partnership Agreement Amendments
General Partnerships
Partnership Property v. Separate Property
Property acquired with partnership assets is presumed to be partnership property
When it is unclear –> courts rely on the intention of the parties.
General Partnerships
Partnership Capital
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)
General Partnerships
Capital Account
(+) Initial Capital Contributions
(+) Subsequent Capital Contributions
(-) Distributions
= Capital Account
General Partnerships
Partner as Agent
Partners are agents of the partnership for the purpose of partnership business
They have the power to bind the partnership when acting within their authority
To determine authority –> Consider the *facts *and circumstances
General Partnerships
Partner Acting Without Authority:
Response Options
If the partnership is aware of a partner acting without authority, they can send written notice stating the partner does not have the authority to bind the partnership
General Partnerships
Partners’ Fiduciary Duties
- Duty of Loyalty
- Duty of Care
- Obligations of Good Faith and Fair Dealing
General Partnerships
Partners’ Fiduciary Duties:
Duty of Loyalty
- No Usurpation of partnership opportunity
- No Competing with the partnership
- No Conflicting Interest transactions
Cannot be eliminated, but may be reasonably limited
UCI
General Partnerships
Partners’ Fiduciary Duties:
Duty of Care
- No grossly negligent or reckless conduct
- No intentional misconduct
- No knowing violations of the law
Cannot be eliminated or unreasonably reduced
General Partnerships
Partnership Liability
The partnership is liable for:
1. Actionable conduct of a partner
2. Acting:
a. In the ordinary course of business
OR
b. with the authority of the partnership
A partnership may sue and be sued in the name of the partnership
General Partnerships
Partner Liability
All partners are jointly-and-severally liable for all obligations of the partnership that occured while they were partners.
Any or all partners may be sued, BUT a partner must recieve a judgment against themselves to be held liable for the partnership.
General Partnerships
Partner Liability:
Reaching a Partner’s Assets
- Judgment against the partnership
- Judgment against the partner, and
- At least one of the following:
a. A writ of execution stating partnership assets insufficient
b. The partnership is in bankruptcy
c. The partner agrees
d. The court grants permission when there has been a reasonable showing that the partnership cannot repay
e. The partner is also liable under tort law, independent of the partnership
General Partnerships
Partners’ Rights:
Financial Rights
Default Rule: Each partner is entitled to an equal share of profits and losses (allocation)
Partners do not have a right to recieve distributions unless stated in the partnership agreement
Financial rights are transferrable, and their transfer does not automatically cause dissociation/dissolution
General Partnerships
Transferred Financial Rights:
Partner & Transferee’s Rights
Transferee: Distribution Rights of the Partner
Partner: Management & Control Rights + **Personal Liability **for Partnership Obligations
General Partnerships
Partners’ Rights:
Information & Accounting
Partners have a right of access to the partnership’s books and records.
General Partnerships
End Game Timeline
Dissociation –> Dissolution –> Winding Up –> Termination –> Partnership No Longer Exists
OR
Dissociation –> No Dissolution –> Partnership Continues
General Partnerships
Events Resulting in Partner Dissociation
- Partnership has notice of a partner’s express will to withdraw
- The occurrence of and agreed upon event
- The partner’s expulsion
a. Under the partnership agreement
b. By unanimous vote
c. By judicial determination - 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 - 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 - Termination of a partner who is not an individual, partnership, corporation, trust, or estate
General Partnerships
Dissolution
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.
General Partnerships
Events Causing Dissolution:
Generally
- Occurence of event that dictates winding up in the partnership agreement
- Subject to cure, an event causing illegality of the partnership business
- Certain judicial determinations
General Partnerships
Events Causing Dissolution:
Partnership At Will
Upon notice to the partnership of a partner’s express will to withdraw (dissociate)
RUPA 801(1)
General Partnerships
Partner Dissociation Events:
Partnership for a Definite Term/Undertaking
- Completion of the term/undertaking
- Unanimous decision to wind up
- 50% of remaining partners seek to wind up within 90 days of certain dissociation events
General Partnerships
Where Partner Dissociation Does Not Cause Dissolution:
Effect on Rights, Liabilities, & Authority of Partners
Dissociated Partner
1. Ended Rights & Duties
a. Partnership Status Rights
b. Fiduciary Duties
2. Lingering Rights & Duties (2 years)
a. Authority (Apparent)
b. Liability (For apparent authority)
3. May have a right to buyout
Remaining Partners
1. Have a right to buyout the dissociating partner
2. May file a statement of dissociation
General Partnerships
Winding Up
A partnership winds up when it:
1. Completes its work,
2. Sells its assets,
3. Pays its obligations (including Partner Accounts), and
4. Settles internal financial matters.
General Partnerships
Partner Accounts
Upon dissolution, Partner Accounts become partnership liabilty
After liquidation, all profits/losses must be allocated to each Partner Account
Partner Accounts must be addressed in the partnership agreeemnt
A partnership account includes the sum of:
(+) Partner’s Contributions (Money & value of Property)
(+) Share of the partnership’s profits
(-) Money Received (distributions & Profits)
(-) Value of Property Received
(-) Share of the partnership’s losses
General Partnerships
Winding Up:
Remaining Debts
If the partnership has more obligations than assets in 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.
