LA BAR EXAM NON-CODE TOPIC 1 BUSINESS ENTITIES (PARTNERSHIPS) Flashcards
I. General Principles of Ordinary Partnerships - Definition, Formal Reqs., Name, Participation of Partners, Contributions, Decisions Affecting the Partnership, Ownership of Immovables
A partnership is a juridical person, distinct from its partners, created by written or oral contract between two or more “legal persons” to combine efforts and/ or resources in agreed-upon proportions, and to collaborate at mutual risk for common profit or commercial benefit. The parties to a partnership must only intend to create the relationship. A partnership may be inferred even if the parties did not consciously consider or intend it to be a partnership.
Remember that there must be at least two legal persons involved in forming a partnership. A partnership may not exist with only one partner. But also remember that a “legal person” may be an individual, partnership, corpo-
ration, or other association. Thus, Partnership A and Corporation B can agree to form Partnership C.
Essentially, a joint venture is a partnership created for a specific project. The essential elements of a joint venture and a partnership are the same and to the extent possible, joint ventures are governed by partnership law.
Since a partnership may be inadvertent, there are generally no formal requirements for formation. A partnership agreement can be oral or written. If written, the partners may choose to file the agreement with the secretary of state. Louisiana maintains a central registry for written partnership agreements with the secretary of state’s office in Baton Rouge. Filed partnership agreements must contain: (i) the name of the partnership; (1) the partnership’s address; and (ill) each partner’s name and address.
A partnership may adopt a name with or without the names of any of the partners. If no name is expressly adopted, the business must be conducted in the name of all of the partners.
Partners share equally in profits, losses, and distribution of assets unless otherwise agreed. If the partnership agreement states the extent of each partner’s participation in only one category of profits, losses, or asset distribution, then the same rule applies to the other categories unless the agreement expressly provides otherwise.
Each partner must make a contribution that has economic value. There are no restrictions on the type of property or services that may be contributed. If a partner fails to make the contribution, a third-party creditor of the partnership may sue to enforce the obligation to contribute.
Unless otherwise agreed, unanimity is required:
а.
To amend the partnership agreement;
b.
To admit new partners; and
C.
To terminate the partnership.
Unless otherwise agreed (e.g., by naming a managing general partner), decisions affecting the management of the partnership (i.e., policy decisions) are made by a majority of the partnership votes.
This means that in a two-person equal partnership, unanimity is required to make policy decisions.
For the partnership to own immovable property, the partnership agreement must be in writing at the time of acquisition. Otherwise, the property is owned in indivision (i.e., jointly) by the partners.
The partnership does not own immovables with respect to the rights of third parties unless the partnership agreement is filed with the secretary of state. If the agreement is not filed, third parties can treat partnership immovables as the partners’ individual property.
II. Obligations of Partners Toward Each Other - Generally, Sharing of Partnership Interest with Third Person, Can Inform Self of Business and Consult Records, Partner can be Creditor of Partnership
A partner owes a fiduciary duty to the partnership and to the other partners. This means that a partner may not appropriate any partnership asset, including a prospective business opportunity, for his own personal profit or act as a partner in
a manner contrary to what he perceives to be in the best interests of the partnership. If a partner violates his fiduciary duty, the partnership may recover damages for the harm suffered. If a breaching partner profits from the breach of fiduciary duty, then the partnership may recover the profits that accrued to the partner.
A partner may share her interest in the partnership with a third person, but the third person does not become a member of the partnership. The partner sharing her interest with the third person is liable for any damages the third person causes the partnership.
A partner has the right to inform herself of the partnership business and consult any records. A contrary agreement among the partners is null.
A partner who acts in good faith for the partnership may be a creditor of the partnership for sums she disburses, obligations she incurs, and losses she sustains thereby.
III. Partnership and Third Persons - Partner is a Mandatory of Partnership, Provision Stating Partner Doesn’t Share in Losses, A Partnership is Primarily Liable for Its Debts, Partner Sued in Capacity as Partner
Each partner is a mandatary, or agent, of the partnership for all matters in the ordinary course of partnership business other than alienation, lease, or encumbrance of the partnership’s immovables.
A provision in the partnership agreement or a resolution by a majority of the partnership to the effect that a partner is not a mandatary does not affect the rights of third persons who in good faith (without knowledge of the limitation) transact business with the partner (i.e., the partnership is still liable to them).
In such cases where a partner transacts business with a third party in excess of his actual authority to do so, the partnership may recover any damages suffered from the obligating partner who exceeded his authority.
A provision that a partner does not share in the partnership’s losses does not affect third persons. Such an agreement is binding, however, as between the partners.
Each partner is secondarily liable for her virile share of the partnership’s debts but may plead “discussion” of the partnership’s assets if sued individually-which means the partner can required the creditor to seize specifically identified partnership assets to satisfy the debt before seizing the partner’s personal assets.
The partners’ liability is joint, not solidary, unless the partners have contracted with the creditor for solidary liability.
If a new partner joins the partnership after a debt has been incurred, either from a tortious act or a contract, it is not absolutely clear from the Civil Code articles or Louisiana case law whether the new partner is personall liable for those partnership debts incurred before he ioined the partnership. However, it is the rule in all of the other 49 states under Uniform Partnership Act §17 and Revised Uniform Partnership Act
§306(b) that a new partner is not personally liable for such pre-existing debts, so it is quite likely that the Louisiana courts would also rule that new partners are not personally liable for pre-existing debts.
A partner who is sued in her capacity as a partner is not entitled to any indemnification or reimbursement of litigation expenses, whether successful in the defenses of the claims or not. However, indemnification might be required by mandate law if the costs of defending the suit could be characterized as a loss suffered by the partner, without his own fault, as mandatary of the partnership.
IV. Cessation of Membership - Generally, Effect on Partnership Status, Seizure of Partnership Interest, Expulsion, Withdrawal, Effects of Cessation
A partner ceases to be a member of the partnership upon death, interdiction, bankruptcy, seizure of his interest, expulsion, withdrawal, or in accordance with the partnership agreement.
The partnership does not terminate when a partner ceases his membership, unless only one partner is left. If all but one of the partners have withdrawn, the partnership ceases and automatically becomes a sole proprietorship. This rule applies to all partnerships, including registered
Limited Liability Partnerships. (See VIII., infra.)
A seizure of a partner’s interest causes cessation of membership if the seizure is effected under a writ of execution and is not released within 30 days. The cessation is retroactive to the date of seizure.
A partner may be expelled for just cause. Unless otherwise agreed, a majority of the partners must agree on an expulsion.
The exercise of the right of withdrawal hinges on whether the partnership is constituted for a term.
a. With Term
If the partnership is constituted for a term, a partner may withdraw during the term with the unanimous consent of the other partners.
He may withdraw without the consent of his partners only if another partner has failed to perform a material obligation.
b.
Without Term
A partner may withdraw from a partnership without a term at any time provided that he gives notice in good faith at a time that is not unfavorable to the partnership.
The statute is silent as to the effect of a wrongful withdrawal, implying that there is no such thing and an attempt to withdraw improperly is simply not effective. Thus, a member attempting a withdrawal wrongfully would effectively remain a partner- he would remain liable as a partner, would still be entitled to receive his share of the profits, and would suffer any diminution of his partnership interest, unless and until the partnership decided to consent to the withdrawal and paid him the fair market value of his partnership interest. He would also be liable to the partnership for any damages caused by the attempted wrongful withdrawal.
Upon properly ceasing to be a member of the partnership, the former partner, his successor, or the seizing creditor is entitled to be paid the value of his interest in the partnership. Unless otherwise agreed, the amount must be paid in money if the partnership continues to exist.
V. Termination of Partnership - Generally, When Continued, Effect
A partnership terminates by
unanimous consent,
a judgment of termination,
bankruptcy of the partnership,
reduction of membership to one per-son,
on expiration of its term,
the attaining of or the impossibility of attaining the object of the partnership,
or in accordance with the provisions of the partnership agreement.
A partnership may be expressly or tacitly continued after the term expires, its object attained, or the parties agree to terminate it. If the object becomes impossible, the partnership may be continued for a different object.
Upon termination, the authority of the partners to act as mandataries ceases except as to acts necessary for liquidation.
A partner who has no knowledge of the termination can still bind the partnership.
Termination does not affect the rights of third persons who in good faith (without knowledge of the termination) transact business with the partnership.
VI. Dissolution and Liquidation - Partnership Creditors over Creditors of Individual Partners, Creditors’ Order of Preference
The creditors of the partnership must be paid in preference to the creditors of the individual partners.
Upon liquidation, the creditors of the partnership are paid in the following order of priority:
1. Secured creditors (both partners and nonpartners);
- Unsecured creditors who are not partners;
- Unsecured creditors who are partners;
- Capital contributions of each partner are restored; and finally
- The surplus, if any, is divided proportionately.
VII. Commendam or Limited Partnership - General Definition, Applicability of General Partnership Rules, Liability Hinges on Contribution, Form Requirements, When Commendam Partner Can Be Liable As General Partner
A partnership in commendam is a partnership with one or more commendam (or limited) partners who have limited powers, rights, and liability (they are not personally liable for the debts of the partnership) and one or more general partners.
General partnership rules apply to the extent they are consistent.
A commendam partner must agree to make a contribution, but it can be cash, any type of property, or performance of non-managerial services.
The commendam partner is thereafter only liable for partnership debts up to the extent of
A contract for a partnership in commendam must be in writing and filed with the secretary of state. The partnership name must clearly reflect that it is a limited or commendam partnership, and it must not suggest that any commendam partner is a general partner. In addition, the partnership contract must describe the contribution of each commendam partner and its value or how it is to be valued. The contract should also state the time or circumstance upon which the contribution is to be made or the services are to be performed; if it fails to do so, the contribution is due on demand. If any of the foregoing requirements is not met, commendam partners are liable to third persons in the same manner as general partners.
It is important to remember that a commendam partnership can exist only on compliance with the above requirements. Watch out for exam questions that set up facts where one partner wants limited liability and the other partner tells him that he can be a commendam partner, but there is no filing with the secretary of state. A commendam partnership was not created and all partners are subject to full liability.
A commendam partner becomes liable as a general partner if she (i) permits her name to be used in the business dealings of the partnership; (ji) participates in the management or administration of the partnership; or (iii) conducts business with third parties on behalf of the partnership.
However, such liability will be only to persons who transact business with the partnership reasonably believing, based on the partner in commen-dam’s conduct, that the partner in commendam is a general partner.
It is important to remember that a commendam partner can lose her limited liability by participating in the management of the partnership or by conducting business on behalf of the partnership.
Several activities are permitted that will not result in liability as a general partner: consulting with and advising partners on business matters of the partnership, acting as surety, approving or disapproving amendments to the agreement, and voting on important matters such as alienation or encumbrance of substantial assets, changing the nature of the business of the partnership, admitting or expelling partners, and so on.
If a limited partner has the same name as a general partner, he does not come within the “use of name” prohibition.
A person can serve as an officer or director of a corporate general partner without becoming liable as a general partner.
A partner in commendam does not have the authority of a general partner to bind the partnership in dealings with third parties.
VIII. The Registered Limited Liability Partnership - Generally, Effect of Entity, Name Requirements, Conversion From Previous Partnership Form, Professional LLPs
A registered Limited Liability Partnership (“LLP”) combines many of the beneficial attributes of partnerships and corporations.
An LLP insulates its partners from personal liability for the “debts and obligations of the partnership arising from errors, omissions, negligence, incompetence, or malfeasance committed in the course of the partnership business by another partner or a representative of the partnership.”
Thus a partner in an LLP is not the proper party in any such legal proceeding by or against the LLP.
An LLP does not protect the partnership’s assets from any kind of partnership liability.
An LLP does not protect an individual partner from personal liability for:
a.
Her virile share of other partnership debts and obligations (e.g., contract obligations); or
b.
Partnership debts resulting from the partner’s own actions of any type, including negligence.
If on an exam you have to determine the liability of a partner in an LLP for a tort committed by a co-partner, recall that a partner’s liability is usually limited; i.e., she will not be personally liable for the co-partner’s tort. But be sure
to check to see if the partner engaged in the tort; if she did, she will not be shielded from liability.
An LLP’s name must contain the words “registered limited liability partnership” or the abbreviation “L.L.P.” as the last words or letters.
An LLP can only be formed by conversion of a previously existing Louisiana partnership.
- Application
The partnership must file an application with the secretary of state stating: (i) the name of the partnership, (i) the address of its principal office, (iii) the number of partners (but names are not required), and (iv) a brief statement of the business in which the partnership engages. - Signed by Majority in Interest
The application must be signed by a majority in interest of the partners (not necessarily a majority of the partners).
Louisiana allows the practice of professions (e.g., doctors, lawyers, accountants) by LLPs (and limited liability companies (“LLCs”)). The statutes incorporate the key provisions appearing in all of the various professional corporation statutes and in that way obviate the need for a separate statute for each different profession.
Using an LLP (or LLC) to conduct a professional practice is permitted only to the extent the practice of that profession in this form is permitted by other laws and the appropriate regulatory agency (e.g., the Louisiana Supreme Court for lawyers).
