Modifications of the Partnership Form

Question 1

GENERAL PARTNERSHIP

Answer 1

• all p/ns share in decision making authority

* all p/ns bear unlimited liability

Question 2

LIMITED PARTNERSHIP

Answer 2

• At least 1 General p/n (exercises control – has pwr to shift assets of Co., has unlimited liability – personally liable for debts)
• Limited p/ns with:
o No decision-making authority
o Limited Liability: not personally liable for p-ship
§ NOTE: RUPA – if he exercises control, personal liability to 3P who reasonably thought he was general p/n

Question 3

Section 303 of the 1976 RULPA

Answer 3

qualifies the control test by adding that a limited partner who participates in the control of the business is liable “only to persons who transact business with the limited partnership reasonably believing, based on the limited partner’s conduct, that the limited partner is a general partner.”

Question 4

SECTION 303 of the 2001 RULPA

Answer 4

states that a limited partner cannot be personally liable for partnership liabilities “even if the limited partner participates in the management and control of the enterprise.” The Comment to §303 of the 2001 Uniform Act states: “This section provides a full, status-based liability shield for each limited partner. . . .  In a world with LLPs, LLCs, and, most importantly, LLLPs, the control rule has become an anachronism. This Act therefore takes the next logical step in the evolution of the limited partner’s liability shield and renders the control rule extinct.”

Question 5

Importantly, since 1987, any enterprise with publicly traded equity — whether limited partnership, limited liability company, or corporation

Answer 5

— faces the same two-tier tax treatment as a corporation under subchapter C of the Internal Revenue Code (IRC). See IRC §7704(a); Treas. Reg. §301.7701-2(b)(7).

Question 6

LIMITED LIABILITY PARTNERSHIP (LLP)

Answer 6

• General p-ship where all p/ns have limited liability & can all exercise control
• Limited Liability for p/ns re:
o Bad Acts by other p/ns and As o P-ship debts (in K & Tort)
§ Min jxd: In some states, K and liability limited to signor/tortfeasor
o Personal liability only for your own negligence, malpractice, wrongful act/omission, other misconduct
• Some states require certain level of insurance or minimum capitalization to cover liabilities
• Dissolution is the same as a general p-ship

a few LLP statutes, including those of New York, Delaware and Minnesota, extend liability protection to partnership contract debts as well as tort liabilities.

some LLP statutes establish minimum capitalization or insurance requirements. For example, Delaware requires at least $1 million in insurance coverage or segregated assets available for creditors to substitute for the unlimited liability of partners for business torts.

Question 7

LIMITED LIABILITY COMPANY (LLC) [e.g., mostly real estate investment groups]

Answer 7

Can divide up ownership (members) & mgmt: Member managed or manager managed (unlike LLP)
o Members are the investors. Can have silent members or managers (controlling members or outside hires) o Limited Liability for all members (whether or not they exercise control)
§ Managers personally liable for their own negligence & recklessness
§ Silent members will not be personally liable
• LLC can have Continuity of life
• Members can sell shares w.o consent of other members (transferability of ownership)
• Dissolution is dictated by LLC agmt
o You can put almost any term in LLC agmt & will be enforced (freedom to K)

Question 8

Pappas et al. v. Tzolis (NY Ct. App. 2012)

Answer 8

Facts: Pappas & Ifantopoulous & Tzolis in LLC, long term lease. Each contribute. 1 yr later, Tzolis buys their shares for $1M (20 times original price) & they sign certificate saying they did their dd, price is right, consulted counsel, not owed a fiduciary duty. Tzolis resells building for $17M. Then they sue claiming breached fiduciary duty.
Issue: Can LLC members waive fiduciary duties?
Hold: Yes. They were sophisticated parties, should have been suspicious at the price.
Rule: Members of LLC can waive fiduciary duty of loyalty. Look to status and relationship.
Reasoning: Relationship at time of buyout was not one of trust, so unreasonable to say they relied on Tzolis’ representations. Efficient? If someone says invest in this biz & waive your fiduciary duty, you will give less bc of risk associated w waiving it.
Note: If Tzolis had LIED about obtaining the waiver, it would have been fraud, and thus, no Bueno. This is basically the opposite of Cardozo in Meinhard v. Salmon (and he is probably rolling over in his grave…)