Intro Through General Partnerships Flashcards
1
Q
Chief Concerns of Entrepreneurs:
A
- Raising Operating funds
- Limiting personal liability for the business debts
- Minimizing tax burden for earnings generated by business
2
Q
3 ways to obtain money for business to operate
A
- Borrow- creating debt liability
- Generating profits
- Equity investors- give cash with the right to future profits. (Incl. sole proprietors). Have rights to “residual” after creditors paid
3
Q
What is double taxation?
A
shareholders paying personal taxes on dividends after the business has paid taxes already on earnings.
4
Q
What business types get “pass through taxation” by default?
A
Sole proprietors, partnerships, and LLCs are subject to “pass through” taxes and only get taxed once.
5
Q
What are Agency Costs?
A
costs lost by actions that do not serve the shareholder’s aims through negligence, incompetence, sloth, etc.
6
Q
Under UPA 6, what are the elements of a partnership?
A
- 2 or more “persons”
- to carry on
- as co-owners
- a business for profit
7
Q
What are the main factors in determining if a person is a Co-Owner under the UPA?
A
Main factors of ownership are the RIGHT to control the business and whether or not someone shares in profits.
Sharing profit is prima facie evidence of a partner under UPA.
Right to control can be dispositive of being a partner, even if the control is never exercised.
8
Q
T/F: All partners have equal rights in management and conduct of a general partnership.
A
False! They can have an agreement otherwise. If the question was “by default under the UPA”, then it would be true.
In order to be true, the exam answer must ALWAYS be true.
9
Q
UNDER UPA, how is each piece of evidence usually weighed in determining if a partnership or partner exists?
- Statement that partnership is intended
- Proof of shared profits
- The exchange of securities
Martin v. Peyton N.Y. 1927
A
- Statement that partnership is intended is not conclusive.
- Proof of shared profits is not decisive proof of partnership, must be viewed on the whole.
- The exchange of securities can qualify toward repayment of a loan, which would rebut the evidence of profit sharing.
Martin v. Peyton N.Y. 1927
10
Q
In Martin v. Peyton N.Y. 1927, Martin wanted Peyton to be liable for the partnership’s losses. Why was Peyton not liable despite the jointly handled securities transaction, profit splitting, the option to join the agreement, splitting interest upon retirement, and ability to control via veto power?
A
Peyton’s returns/ splitting and veto power were considered a safeguard/ collateral against the loan he provided. It was an ordinary precaution and did not imply an association in the business. He acted as a reasonable creditor, not a partner. He never exercised the partnership option that existed in their contract.
11
Q
Lupien v. Malsbenden- When $85k was loaned, and even though they said their relationship was as creditor and borrower, why did a partnership exist?
A
Investor was a partner because he gave the loan with no interest and had right of control over the business. Defendant was involved in the business on a day to day basis. Does not look in any way like a mere creditor relationship.
12
Q
Who can be partners in a partnership?
A
Partners need not be individuals, they may be corporations, partnerships, or other associations. UPA SS 2, 6. RUPA 101(6), 102(10-14)
13
Q
T/F: the UPA/RUPA default statutes govern partnership agreements.
A
False: The statutes are only the defaults, the partnership agreement may state alternative rules.(with the exception of some unwaivable conditions) RUPA S103
14
Q
T/F: Under UPA partnership agreement may be in writing, oral, or implied.
A
False: Under RUPA partnership agreement may be in writing, oral, or implied. UPA has no such provision.
15
Q
How does the statute of frauds apply to partnership agreements that aren’t in writing?
A
Statue of frauds may harm partnerships not in writing. SoF requires real estate transaction be in writing so if real estate if offered in a partnership, it must be written down.
16
Q
Why should a partnership agreement be written down?
A
Writing down partnership agreement helps client look forward, helps specify whether property is being loaned or contributed to the partnership as a capital contribution, helps map out the “end game” when somebody wants out.
17
Q
T/F: UPA takes an aggregate view rather than an entity view of partnerships?
A
True: UPA takes an aggregate view. Ex: UPA S29: if one partner leaves the entire partnership dissolves. If the partnership was an entity, one departure would not dissolve it.
18
Q
How was dissolution of partnership relevant in Fairway Development co. v. Title Insurance Co. of Minnesota?
A
Title company guaranteed a policy but then refused to pay on the grounds that the partnership that originally took out the policy had dissolved after the partnership was bought out by one of the partners. Therefore Title Co. was not in privity with the new Fairway development co.
19
Q
What provisions of the UPA imply a new partnership is made as partners join and leave?
A
UPA S 29 and S 41(1) imply a new partnership is made when partners come and go.
§ 29. Dissolution Defined-
The dissolution of a partnership is the change in the relation of
the partners caused by any partner ceasing to be associated in the
carrying on as distinguished from the winding up of the business. THIS IS NOT TERMINATION
20
Q
Can you sue a partnership and get access to all of the partners?
A
Bet your ass you can
UPA § 15. Nature of Partner’s Liability
All partners are liable
(a) Jointly and severally for everything chargeable to the partnership
under sections 13 and 14.
(b) Jointly for all other debts and obligations of the partnership; but
any partner may enter into a separate obligation to perform a partnership
contract.
21
Q
Does RUPA use the aggregate or entity view of partnerships?
A
RUPA explicitly adopts an entity view of partnerships.
(a) A partnership is an entity distinct from its partners.
(b) A limited liability partnership continues to be the same entity that
existed before the filing of a statement of qualification under Section 1001
22
Q
What was evidence there was no partnerhsip in Smith V. Kelley?
A
Smith bore no losses from the firm and no partnership was intended by the firm.
23
Q
why did Smith want the court to find that he was a partner in Smith V. Kelley?
A
Smith wanted to be considered a partner so he could get a larger and continuing share of the partnership’s profits. He only got 20% and would stand to get 33% as a partner under UPA S18(a)- (a) “Each partner shall be repaid his contributions, whether by way of
capital or advances to the partnership property and SHARE EQUALLY
in the profits and surplus remaining after all liabilities,
including those to partners, are satisfied; and
must contribute towards the losses, whether of capital or otherwise, sustained by the partnership
according to his share in the profits.
24
Q
Is intent dispositive in determining if a partnership exists?
A
No. The court looks at all of the fact to determine if there may be an “inadvertent partnership.” absence of intent won’t be dispositive, particularly where there’s a 3rd party plaintiff
25
Who can enforce a partnership by estoppel?
Only: 3rd parties and
only those 3rd parties in contract with the partnership.
Reliance on a representation to cause estoppel is only statutorily required in a K setting, but Sokolow argues that similar reliance should be extended to tort liability.
26
What is Estoppel?
It is an equitable doctrine, not available as a way of formation. It is intended to protect 3rd party reliance on the doctrine. In Smith v. Kelley, 3rd parties who thought Smith was a partner could use estoppel to make the partnership liable. Both parties have to consent in some way to representation as partners to a 3rd party.
Estoppel is more of a fallback position.
27
What has SCOTX ruled on Estoppel?
Freedom of contract makes it so a partnership is not formed by estoppel if parties went to great lengths to set precedent conditions to the partnership forming. Ex: requiring consent of a certain % of the board of directors
28
How are individual partners taxed and what disclosures must they make?
Partners are generally considered self employed for income tax purposes.
Partners are required in TX to disclose fellow partner’s substance abuse problems affecting their work.
29
Under the UPA, is the partnership liable for a partner's wrongful act?
UPA S13- Partnership is vicariously liable for a partner’s wrongful act. Inquiry does not include master/ servant analysis.
Only ask if the tort was committed:
1. By a partner
2. In the ordinary course of business.
30
Under the UPA, are partners liable for another partner's tort?
If the partnership is liable in the tort, then the individual partners are liable as well.
Partner commits tort, → partnership is vicariously liable → individual partners are vicariously liable via the partnership.
31
What are the Facts of Summers v. Dooley?
2 Partners here: By agreement, if either was unable to work then that partner was responsible for paying a third party to work on his behalf. Plaintiff was unable to perform his duties and suggested that the business hire an employee. Defendant objected but plaintiff hired another person anyway, personally costing plaintiff $11,000. Plaintiff wanted to be reimbursed for half of the costs.
32
Do a majority of partners need to assent to a change within the ordinary course of business?
NO. Changes in the ordinary course of business can be made without requiring all partners to assent, but not when one 50% votes no explicitly.
Exclusive control by one partner of business activities may exist implicitly, giving that partner actual authority to perform.
33
In Smith v. Kelley, Was Smith liable as a partner despite not having an interest in the partnership?
UNDER UPA S16, Smith is potentially liable as a partner if sued by a 3rd party because the firm represented him to the public as a partner. Probably not liable under RUPA S308(e)
34
Why did the "no" vote win in Summers v. Dooley despite them having 50/50 voting power in the partnership?
Under UPA S18(h) A decision to change the status quo would also require a majority approval, and THE 1920s TREATISE SAYS THAT IF A PARTNERSHIP IS SPLIT 50/50, THOSE WHO VOTE TO FORBID A CHANGE SHALL HAVE THEIR WAY.
RUPA 401j requires a majority vote to settle differences ARISING OUTSIDE THE COURSE OF ORDINARY BUSINESS.
One of the 2 partners voted no to the hiring so the status quo prevailed.
35
Why did the 50% "no" voting partner lose in National Biscuit Co. (Nabisco) v. Stroud?
1. State used RUPA. so "activities within the scope of ordinary business of the partnership could not be LIMITED except by majority vote, and that half of the members were not a majority.
2. the conflict involved an innocent 3rd party rather than just partners.
36
What is a statement of partnership authority?
under RUPA 303, something you may file with the secreatary of state. Filing gives the partnership some deniability of each partner’s authority. If the SPA is recorded with the county, you have constructive notice about who has partnership authority. works similar to property recording.
37
In a 50/50 voting split in a partneship, who wins the dispute?
Under the UPA, Likely he who is preserving the status quo of the business.
38
if A contributes 60%, B contributes 20%, and C contributes 20% of capital, does A have managing power over B and C unde the default rule?
Not under the default rule. Each has 33.3%. They should agree to alter managing power if desired.
39
if A contributes 60%, B contributes 20%, and C contributes 20% of capital, what will each get back upon dissolution of the partnership?
Each will get 33% profit under the default rule, and also each will get their capital contributions back upon dissolution.
40
What are common examples of Agents in BA?
employees are agents of their employers and officers are agents of corporations
Artificial persons like companies or trusts can be agents or principals
41
3 general elements of agency:
1. Consent by the principal and the agent- consent by both to act on behalf of the principal… can be written, oral, or implied by conduct
2. Action by the agent on behalf of the principal- must have been acting PRIMARILY for the benefit of the principal e.g. not for personal pay.
3. Control by the principal of the details of performance - the principal need not control minutia or physically control, but must have control over the result or ultimate objectives of the agency relationship, even including prescribing duty/s obligations after the agent has acted.
42
Is intent to form required to form an agency relationship?
Creating an agency relationship does not require intent.
43
In a tort setting:
For vicarious liability of employer to a 3rd party
Employee must be:
1. A servant
| 2. Acting within the scope of employment
44
How do you determine if an employee was a servant (implicating respondeat superior)?
Servant- Main Factor: If an employer controls the means of a result, WHETHER THE EMPLOYER EXERCISED THE CONTROL OR NOT, they are a master to a servant agent
Secondary Factors: was the action part of the employers regular business
Were the tools or or location provided by the employer
Was the worker paid in intervals or a lump sum?
Was the employment long term?
45
How do you determine if the employee was acting within the scope of employment?
Was it part of the employees regular tasks?
Was it part of the employment action?
If outside, employee may have been on a detour or frolic
Detour- minor deviation from employee’s expected task. Ex: smoke break. Employer still liable because only minor detour from usual tasks.
Frolic- Major deviation from employee’s regular task. Ex: amazon driver on his lunch hour going across town off their route
46
When is an agent an independent contractor?
if a principal has control over a result only, the agent is an independent contractor.
47
Why are masters liable for torts committed by his servant within the scope of his employment through respondeat superior? (policy reason)
employer is in best position to bear the cost of harm and benefits most from doing the business
48
Why is a principal generally not liable for the torts of an independent contractor?
employer does not have the know-how to best perform or keep safe the actions of independent contractors. (does not control their methods)
49
Are employers liable for an employee attacking someone while working?
No.
| Respondeat superior applies to Negligence; Employers generally not liable for employee’s intentional torts
50
Can employer protect themself from paying for employee's negligent torts?
Employer can indemnify themselves (get paid back) by the employee/ agent., but if they have no assets, the employer is left holding the bag.
51
Can Agents hire a sub-agent with the principal’s explicit or implicit consent?
Yes.
52
What are the 3 types of agency authority in Contracts?
A principal will be liable on a contract b/w an agent and a third party when the agent acts with
1. actual authority,
2. apparent authority, or
3. inherent authority of the principal.
Even if the agent lacks this authority, the principal may be liable through estoppel.
53
What is actual authority?
Express authority from P so that Agent would reasonably believe they have the power to deal with others as a representative of the Principal.
54
Can actual authority be implied?
Yes!
Can be express or implied from reasonable inference based on the CONDUCT of the principal.
Implied actual authority is common with Incidental authority, where actual authority exists to do things necessary that are incidental to the principal’s goal. Ex: hiring someone if it is required by statute to accomplish the principal's goal/ An RA buys books and charges them to a professor twice, and the professor pays without saying anything.
55
What is apparent authority?
When the Principal tells a 3RD PARTY explicity or implicity that the agent has authority.
P is selling his car for $100 through his agent A to buyer Z. P tells Z that A is his agent. A has actual authority to sell at the $100 price P requested. A has apparent authority to sell at whatever price P has represented to Z who is informed that A is his agent. IF P represents the same price to A and Z then the actual and apparent authority of A are equivalent. This is based on what the PRINCIPAL did to create the appearance of authority to the reasonable impression of a 3rd party. This is an equitable doctrine based around fairness for the 3rd parties.
If the agent sells for less that $100, the agent is liable to the Principal for the remainder.
56
What can create apparent authority?
Apparent authority can be created by a principal’s
- Words to a 3rd party
- Actions toward a 3rd party
- a title given to an agent by the principal
- Prior action involving the 3rd party
57
How do partnerships limit the powers of actual authority?
Statutory actual authority can be limited by the partnership agreement.
Partners usually appoint a “managing partner” to limit their own authority
58
How does estoppel apply in the context of actual/ apparent authority?
Even when the principal has not made any manifestations of authority to the third person at all, the principal is held responsible
1. If it contributed to the third party's belief or failed to dispel it. Usually a failure to correct the 3rd party’s misunderstanding or failure to use reasonable care.
2. If the 3rd party acts to its own detriment as a result,
then the principal is liable through estoppel.
59
Is ratification of an agent's actions retroactive?
Yes. Principal can expressly ratify the agent’s actions even if the agent originally had no authority when taking the action.
60
Can ratification occur if P is not aware of the material facts of the original transaction?
No. ratification only occurs if the principal is aware of the material facts in the original transaction.
61
Can a Principal ratify an agent's act through implication?
Yes!
Implied ratification- if the principal treats the agent’s act as authorized- usually by accepting benefit of the transaction.
62
Does the Principal have to communicate to the Agent or 3rd party to ratify the agent's actions?
No. Only requires the P to know the material facts and accept the benefits of the Agent's actions without correction.
63
Are 3rd parties bound by a ratified action of an agent?
Not if they already pulled out or or the circumstances changed in a way that is unfair to them.
64
What happens if a Principal and an agent both make a deal to sell a property to different 3rd parties?
If P made the deal first, P can;t ratify A's deal. P is liable to sell the property to their 3rd party and is prob still liable to the other 3rd party even though the first 3rd party has the right to the property.
65
Are 3rd parties liable to the P if the P is disclosed in the contract?
3rd parties are liable to them if agent acted with authority, so long as the principal is not excluded as a party to the form or terms of the contract.
66
Are 3rd parties liable to the P if the P is undisclosed in the contract?
3rd parties are liable to them if agent acted with authority, so long as the principal is not excluded as a party to the form or terms of the contract, the existence of P is not fraudulently concealed, and there is no set off or similar defense against the agent.
Undisclosed P’s contract with 3rd party is also voidable if P’s involvement substantially changes the 3rd partied rights or obligations.
67
What is fraudulent concealment?
Fraudulent concealment- agent falsely represents they are not contracting on behalf of a principal. 3rd parties can avoid the contract in this case if P or A had notice the 3rd party would not have dealt with P otherwise.
68
are Agents liable to 3rd parties if the P is disclosed in the contract?
Agents are not liable to 3rd parties for the contracts entered on behalf of P.
69
are Agents liable to 3rd parties if the P is undisclosed or partially disclosed in the contract?
Yes. In this case, Agents are a party to the contract and liable to the 3rd party regardless of the P’s liability to the 3rd party.
70
What are a principal's duties to an agent?
- not fiduciary in nature.
- fiduciary responsibilities only run from A to P, never P to A
- P must perform his contractual commitments to A
- must not unreasonably interfere with A’s work
- must act fairly and in good faith towards A
- if A incurs expenses of suffers other losses in carrying out P’s instructions, P has a duty to indemnify (pay back) the agent.
71
How do you terminate an agent's power when they have actual authority?
Relationship between P and A is consensual
- actual authority terminates when the objective is completed, or P or A dies, etc.
- revocation or renunciation by P or A terminates actual authority.
- if there is a contract, revocation or renunciation may breach the contract. Actual authority ceases at that time of revocation or renunciation, even if liability for the contract still exists.
72
How do you terminate an agent's power when they have apparent authority?
Inferences of apparent authority may exist after prior actual authority has ended. Termination of actual authority does not itself end apparent authority, so NOTICE to 3rd parties of termination may be required.
73
How do you calculate a partner's capital account?
Capital Account = Capital contribution + partners share of profits - partners share of the losses
74
How do you determine the value of an asset? (a plot of land with a building on it.)
Land Asset value = land purchase price
Building asset value = building purchase price - depreciation
depreciation= (purchase price- value as scrap) / Useful life of the asset
75
Who is laible for debts under the UPA?
All partners are joint and severally liable for debts under the UPA.
all partners are jointly liable for all other obligations of the PS. under UPA
76
Who is laible for debts under RUPA?
All partners are joint and severally liable for all PS obligations under RUPA.
77
Is there an exhaustion requirement under the UPA?
No. You can sue partners without suing the partnership first.
78
Is there an exhaustion requirement under RUPA?
Yes. You must exhaust the partnership resources before suing the partners personally. Partners are more like guarantors for the PS debt than debtors.
79
Can a partnership loss agreement indemnify partners from outside suits?
No. Loss agreement is only a sort of indemnification BETWEEN PARTNERS
80
Why are Joint Ventures different than General Partnerships in Texas?
In TX you have to write an express agreement about how you will share partnership losses in a joint venture. but there may be no practical difference since JVs are still treated like a GP.
81
Why could Kessler not recoup 50% of his capital contributions losses from Antinora when their Joint venture failed?
Even though there was no express statement of loss splitting, the partnership agreement was read as Kessler only being able to recoup his capital contribution out of the profit of the sale. Default rule would have let him recover otherwise. Even though Antinora only contributed labor, not capital, he would have been 50% liable for the capital Kesller lost under the default rule where partners have an even split of partnership losses.
Service partners should get in writing that they are not liable for capital contributions of another partner and that they are still eligible for compensation.
82
What is the main rule from Roach v. Mead regarding liability to 3rd parties?
A partner is responsible to third parties for the acts of another partner when the third party can reasonably assume those acts fall within the purpose of the partnership.
The court found as fact that Roach (P) had a reasonable expectation that Mead (D) was acting as his attorney when he borrowed the money. Since the partnership is a law partnership, and since Mead (D) acted like a lawyer, Berentson (D) is fully responsible for Mead’s (D) actions.
(Binds the partnership via apparent authority if act was within the scope of expected bsuiness)
83
Why would you form a GP?
You wouldn't. Only benfit is you don't have to pay to file with the secratary of state.
84
What does the Texas Broad Shield LLP statute do for vicarious liability for LLPs?
Makes LLPs and LLCs offer the same protection from vicarious liability.
85
What are the 3 main takeaways from what we learned about PS liability?
1. A partner is always liable for his or her own torts or malpractice
2. The firm itself is always liable under agency principles for an act within the scope of the firm's business
3. You can convert one type of business association into another or merge one type into another if the owners consent & documents are filed with the secretary of state.
86
What duty did Cardozo say partners owed to each other in Meinhart v. Salmon?
Cardozo says partnerships have the highest fiduciary duty: loyalty
87
How do you tell if a partner usurped a partnership opportunity under Meinhart v. Salmon?
Needed to show the “requisite nexus”- see whether there is a meaningful connection between the original partnership and the opportunity that developed to see if it is an opportunity that belongs to the partnership.
This includes:
- how the opportunity came to the defendant
- What is the scope of the initial partnership agreement / venture?
-
88
Does it matter if the partnership doesn't have the resources to take advantage of an opportunity when determining if a partner usurped an opportunity?
It could. Cardozo says no in Meinhart v. Salmon due to the duty of loyalty, but other courts may take this into account.
89
Did Mr. Salmon commit fraud in Meinhart v. Salmon?
Fraud isn’t required for usurpation of a partnership opportunity. The court assumed good faith dealing.
90
How does the court treat a Plaintiff who waits for a usurped opportunity to become profitable before coming after money for the opportunity?
favor Ps even if they wait for the other opportunity to become profitable to make a claim because partner’s breach of fiduciary duty usually outweighs any delay the partner took in making a claim.
91
What is the remedy for usurpation of partnership opportunity?
usually disgorgement of profit. Sometimes when this involves property, the court will make a “constructive trust” . the court treats the property as if it were in a trust for the benefit of the original partnership.
92
Why does Section 404 of RUPA (1997) dislike the Meinhart standard in UPA S21.
- S21 wasnt flexible based on no agreement wording
- Couched the duties partners owed to the partnership in terms of the duty of care and the duty of loyalty.
- Limiting language of 404 was not adopted by many legislatures because they wanted a broad duty of care. Under DE law, partners can eliminate the duty of care and the duty of loyalty.
93
Is it easier to reduce the duty of care or the duty of loyalty in a PS agreement? Where is there wiggle room in limiting the Duty of Loyalty?
Duty of Care. in RUPA 1997 partners only are liable for GROSS negligence or recklessness.
In TX, you can eliminate Duty of care but not duty of loyalty
BUT for Duty of loyalty, you can limit what you must disclose.
UPA S20 only requires rendering info to other partner ON DEMAND. RUPA S403(c) sometimes only required to disclose info on demand or when reasonably required by or related to the partnership agreement
94
How was Johnson v. Peckham relevant to our discussion of Meinhart v. Salmon?
TX decided whether or not the original partners had in mind the drilling of a particular oil well or had in mind the broader search and discovery of oil to know if future wells were usurpations under the PS agreement.
95
What can a partner do with partnership property?
Partners DO NOT own partnership porperty. They can only use partnership property for partnership purposes
UPA 8, 10, 25
96
What can a partner do with their interest in the partnership?
IF the interest is a finacnial stake in the PS it is treated like any other financial asset.
UPA 26-28
97
why does it matter if the partnership owns property vs has the property on loan to it?
important because loaned property is not available to creditors
98
If a property is in someone elses name, is it still partnership property?
Yes. PS property does not necessarily have to be in the name of the partnership to be PS property. Title to the property is not dispositive.
99
How did the Rappaports screw up when making their family partnership?
They only assigned their kids a 10% financial stake of the partnership. They meant to Unanimously add them as partners as UPA requires.
This only moved financial interest of the partnership, did not create new partners. No rights and obligations were transferred.
100
When does dissolution occur?
Dissolution occurs when a partner no longer associates with “carrying on” the partnership business. Easy to trigger and another downside of a GP.
101
What are the 2 main distinctions when examining partnership dissolution?
whether the partnership is “at will” or “term”
and
whether the act of dissolution is rightful or wrongful.
102
When is a partnership dissolution "rightful?"
dissolution is rightful if it doesn't violate the partnership agreement.
- Such acts include the following:
1 termination of the definite term or particular undertaking in a term partnership;
2 the express will of any partner in an at-will partnership;
3 the express will of all of the partners who have not assigned their interests or had them subject to a charging order; and
4 the expulsion of any partner from the business Bonafide in accordance with a power conferred by the partnership agreement.
103
what's en example of a wrongful dissolution of a term partnership?
a partner in a term partnership withdrawals before the end of the term.
104
What are 4 reasons for a partnership to dissolve outside the scope of a partnership agreement?
1. if there is an event that makes it unlawful for the partnership or Partners to carry on as a partnership
2. the death of any partner
3. the bankruptcy of any partner or the partnership
4. a decree of court order.
105
Under the UPA, What happens when a partner lleaves or joins?
there is an informal dissolution and a new partnership is made with the new members
106
Under the RUPA, What happens when a partner leaves ?
usually the partners just buy that partner out and continue business.
107
Under the UPA, Is winding up required upon dissolution?
Winding up is not required upon dissolution. Can simply leave and let the business run with remaining partners.
108
Is a partnership at will or Term by default?
At will. Term partnerships are for limited projects like making movies or 3 yr project, e.g., but term partnerhsip can still be made implicitly.
109
Who has the right to wind up partnership affairs?
Anyone who has not wrongfully dissolved the partnership. Partners and partnership are responsible for winding up old business under UPA 35
110
Can partners bind the partnership after the partnership dissolved?
Old partners can bind partnership to new business based on their apparent authority. Under agency principals, you would probably have to provide notice of the dissolution to prevent this.
111
What are the rights of creditors to the partnership after the partnership dissolves?
Creditors who are creditors prior to dissolution are entitled to personal notice. Newspaper notice can suffice if not possible. Creditors who didn't know about the partnership prior to dissolution cannot make claims on the partnership.
112
How do you distribute partnership assets upon dissolution?
RUPA does not have a formula for dissolution, just get the “fair market value” of interest in the partnership. S 701(a). Partnership as an entity is unaffected under RUPA by a partner leaving. In certain circumstances under RUPA, a partner is required to wind up their affairs. Partnership as an entity goes on by default. Only UPA triggers dissolution
113
What did Page v. Page determine about term partnerships?
Partners can implicitly agree to partner until a certain sum of money is earned, a debt is paid, or a property is favorably disposed of, etc.
Here there was just a “common hope” that partnership earnings would cover expenses.
114
What does Collins v. Lewis (30 year lease for cafeteria business) determine about dissolving a term partnership?
Partners always have the power to dissolve, even if they do not have the right to do so.
If partner dissolved he was in breach of contract. Contract was breached because the agreement was tied to a 30 year lease creating a term partnership.
This would have been a wrongful dissolution, and the dissolving partner would have owed lost profits for the remainder of the lease.
115
What does Dreifuerst v. Dreifuerst (Feed mills) say about dissolution and the right to wind up a partnership?
Partnerships at will have no definite term or particular purpose and thusly can be dissolved by the express will of any partner.
Lawful dissolution gives each partner
1. the right to wind up the partnership,
2. the right to have the business liquidated and his share of the surplus paid in cash.
The trial court thus erred in ordering an "in-kind" division of the assets of the partnership. Brother Dreifuerst’s (D) sale would be the best way of determining the true fair market value of the assets.
116
If you have a 60% share of partnership profits according to your agreement, and the agreement is silent as to your share of the losses, what is your share of the losses?
60%. partnership losses are split according to their share of the profits
117
How do you calculate average tax rate?
total avg rate per each dollar of income that is TAXABLE.
So if the marginal rate on $60k is 15% and the first $50k is not taxable, the marginal tax rate is 15% on the $10k that is taxable and the average rate is the average rate applied to TAXABLE income so it is also 15%.
118
What was the significance of the Tax reform act of 1986 (Reagan) for individuals?
- Significantly lowered the maximal marginal rates for individuals.
- Knocked the bottom out of tax shelters. Congress said if you were a “passive investor” in a business, you were only entitled to use a loss from a passive investment to cover taxes on a similar passive investment. Could not just apply passive losses to personal income.
119
What was the significance of the Tax Cuts and Jobs act 2017 (Trump) for corporations?
- designed to cut federal income tax rates- data shows the shareholders won out much more than employees or the general public.
- A corporation is no longer a tax penalty device! Lowered the top corporate tax rate to 21%
1. Adopted a flat rate for all corporations for federal income tax.
2. Congress didn't want to disadvantage pass through business owners though, so pass through owners are allowed to deduct 20% of their income.
120
How did the Tax reform act of 1986 (Reagan) impact whether you would incorporate if operating at a profit?
If the business was operating at a profit prior to 1986 you would incorporate because capital gains tax was 20ish percent compared to dealing with up to 90% income tax rate. could take advantage of accumulation and bailout strategy.
After 1986, you would NOT incorporate so that you could benefit from a lower personal income tax rate.
121
How did the Tax Cuts and Jobs act 2017 (Trump) impact whether you would incorporate?
Post 2017 it is fact based whether to incorporate. Not clear because corporations are now taxed at a flat 21% rate.
122
What is Accumulaiton and Bailout?
When owners just stored money instead of distributing dividends and waited until they inflated the value of the company by stockpiling, then sold their own interest after the price was inflated. When they sold their shares they were taxed at a 20ish% capital gains rate.
123
How was accumulation and bailout good for heirs of wealthy business owners?
If the wealthy owner died before bailing out all of the appreciation from the shareholder’s shares would escape federal income tax because the heirs would inherit at a stepped up basis a.k.a. They would receive at the fair market value at the day of death. So all the gains from accumulation prior were zeroed out as far as income is concerned.
124
How did the Tax reform act of 1986 (Reagan) impact whether you would incorporate if operating at a loss?
If the business was operating at a loss prior to 1986 you would not incorporate. After 1986, you would STILL not incorporate so that you could as owner use the loss as a tax deduction through pass through taxation.
125
Prior to 1986- A had $80k in taxable income and was 25% partner in a limited partnership with $40k in losses from the depreciating value of the partnership’s real estate.
How could A shelter her income?
A could deduct her share of this loss ($10k), leaving only $70k of taxable income . This could shelter $10k of her personal income.
126
Do Partners pay taxes if no income is distributed to them?
Yes. They still pay income tax on their share of the partnership income whether it is distributed to them that year or not.
127
Can a majority of partners act in contravention of the partnership agreement?
No. Must be unanimous to do anything in contravention to the partnership agreement.
128
What are the restrictions for having an S-Corp?
- 100 shareholder max
- one class of stock
- Taxed similar to a partnership
- SHs must be US persons
129
How did the tax Reform Act of 2021 (Trump) help pass through business owners to balance out how much it helped corporations?
Pass through business owners can now deduct 20% of net income
130
What tax does TX require if you have a limited liability type of business?
TX requires a margin tax if you are an entity that is has limited liability.
131
hiscorically, why would you not incorporate if operating at a loss?
You can benefit from deductions. Or you can elect to be an S corp and elect pass through.
132
In limited partnerships, what is the difference in liability for a limited partner and a general partner?
General partners are generally liable for the debts and obligations of the firm.
Limited partners have liability only up to the amount they invested in the partnership.
133
In a TX limited partnership, what liability do general partners have?
In TX, GPs are jointly and severally liable for contracts and torts disputes.
134
Can a limited partnership be naturally made?
No/ Must be formed under statute, not naturally made.
135
Do you have to file to shift your GP into an LP?
You don't have to file as a GP, all you would have to do is file as an LP and your GP becomes an LP.
136
In an LP, how does vicarious liability work for general and limited partners?
General partners get joint & several vicarious liability unles it is an LLLP
limited partners get no vicarious liability unless they participate in control of the partnership.
137
In TX, when does a limited partner have liability to a 3rd party?
when a 3rd party has “Reasonable belief based on limited partner’s conduct” that limited partner was a general partner
138
what is the modern control test for limited partners being treated as general partners?
The modern trend has done away with a control test because it ruins the point of having a limited partnership.
139
What better association should each be registered as to limit liability?
1. GP
2. LP
GP should be an LLP to limit the liability of owners.
| LP should Be an LLLP to limit liability of its general partners.
140
In TX, are LLCs run more like corporations or like partnerships?
In Texas, LLCs are run by managers, the managers operate like officers of a corporation, more like a corp.
141
If you are in a manager-managed LLC, can members bind the LLC?
No. 3rd parties have notice only managers can bind the LLC.
Could bind in a member-managed LLC.
142
What replaced the corporateness test to determine if LLCs were taxed as corporations?
"Check the Box” LLC regulation allows LLCs to check if they will be taxed pass through or like corporations.
Some foreign companies can still be treated as de facto corps under the corporateness test.
143
What case law do corporations traditionally use when resolving an issue with an LLC
Whatever business form's case law inspired that provision of the LLC statute. (less of an issue now with the case law available)
144
How do you form an LLC?
Register “articles of organization” with the secretary of state.
145
What governs how an LLC is run?
Details of governance are found in an LLC/ operating agreement.- not filed with a state official. Nonpublic like a corporation bylaws or partnership agreement.
146
What is a shelf LLC?
LLCs formed without any members yet. Must file upon formation and file when first member joins. The LLC is deemed formed when the first member joins Usually.
147
Does an LLC have to have an operating agreement?
No. LLC does not have to have an operating agreement.
148
Why are LLCs better than LLPs?
LLC > LLP because in narrow-shield states LLP owners are still vicariously liable for contracts of the company.
149
What is the main reason you wouldn't choose an LLC?
when goal is going public
150
What traits of corporations were borrowed by LLCs?
easily transferring ownership and not easily dissolving
151
What are the traits of Texas LLCs?
Manager-run by default
per capita voting
Can eliminate duty of Care but not Duty of Loyalty (same as all TX BAs)
152
what is the general order of repayment of liabilities for non-corporations?
1. 3rd party holders of fixed charges and creditors with proprietary interest in assets (first)
2. Equity partners
3. Non Equity partners
153
If you switch to limited liabilty BA, are the limited liability protections retroactive?
If you change business types, the limited liability protections only begin from the adoption, not retroactive.
154
What is the difference between how creditors are treated during distribution in RUPA vs. how creditors are treated under UPA 40(b)?
All of the PS creditors are treated on a par.
In UPA, 3rd party creditors are above partner creditors.
In RUPA, all creditors are treated on par.
