Internal Affairs of a Partnership Flashcards
What duties does a partner owe?
The duty of care and the duty of loyalty.
What is the duty of care?
Partners must not engage in
- grossly negligent or reckless conduct,
- intentional misconduct, OR
- knowing violation of the law.
What is the duty of loyalty?
Partners must not
- compete with the partnership business,
- advance interests adverse to the partnership, OR
- usurp partnership opportunities.
Can a partnership agreement eliminate the duties of care or loyalty?
No.
Duty of care cannot be unreasonably reduced.
Duty of loyalty cannot be eliminated, but can be limited by describing it differently as long as the change is not manifestly unreasonable.
What is the safe harbor rule?
If an act might violate the duty of loyalty, then the partner can avoid doing so by:
- making full disclosure of all material facts AND
- a certain percentage of the other owners vote to authorize or ratify the transaction.
When do the duties of loyalty and care apply?
Only when you’re an actual partner, not when you are a prospective or former partner.
How are the profits and losses divided?
By agreement, and if none, then evenly.
How will distribution be determined?
In advance according to the partnership agreement.
Partners cannot demand distribution.
Can you transfer your partnership interests?
Yes, freely, unless the partnership agreement puts limitations on transfer.
What rights will a tranferee acquire?
The right to receive profits and distribution, but NOT the right to participate in the management or conducting of the business, unless otherwise agreed upon.
How are management rights divided?
By default: even split. But can be done by agreement too.
What vote is required for a partnership to engage in certain transactions/decisions?
Ordinary business: majority of the partners.
- Declaring a distribution
Extraordinary business: unanimous vote
- Amending partnership agreement
Who has access to records?
Partners and their agents, unlimitedly.
