Partnership

Question 1

General Partnership

Answer 1

A partnership is an association of two or more persons who are carrying on as co-owners of a business for profit, whether or not the partners intend to form a partnership.

Question 2

Formalities of a General Partnership

Answer 2

No formalities are required to form a general partnership (based on contract/agency laws) so a partnership is found based on the intent of the parties to carry on a business as co-owners

Question 3

How can intent of parties be established?

Answer 3

1. Contribution in exchange for profit (presumption)
2. Common ownership of property jointly or tenants in common; hold themselves out as partners
3. Sharing of gross revenues does not necessarily indicate they are partners.

Question 4

Partnerships have fiduciary, agency-like relationships

Answer 4

Partners are bound by contracts entered into with authority by their co-partners, and are liable for torts committed by their co-partners within the scope of the partnership.

Question 5

Property purchased with partnership funds

Answer 5

Presumed to be a partnership asset. Regardless of how title is held, property is rebuttably presumed to be partnership property.

Question 6

Untitled partnership property

Answer 6

Property is partnership property based on the parties’ intent, courts look at the following, if:

1. Partnership funds were used to acquire, improve, or maintain the property.
2. There is a close relationship between the property and the partnership business operation.
3. The partnership lists it as an asset in its books.

Question 7

Partnership Rights

Answer 7

1. Ownership
2. Transferability except partner’s own share
3. Use of property for benefit of partnership
4. Control- equal control - no salary
5. Profits and Losses- shared equally and losses shared in same proportion as profits
6. Indemnity- all liabilities and expenses incurred on behalf of the partnership

Question 8

Fiduciary relationship

Answer 8

Partners are fiduciaries of each other and the partnership. Partners have the following duties:

1. Duty of care- BJR
2. Duty of loyalty to further the partnership interests over his own interests
3. Duty to disclose material facts regarding partnership business
4. Duty to account- Partners may bring actions against other partners for losses caused by breach and may disgorge a breaching partner of profits.

Question 9

Partnership liability for debts of partnership

Answer 9

General partners are liable for the debts of the partnership. Limited partners are not.

Question 10

Contracts and Partnerships

Answer 10

Contracts: Each partner is an agent of the partnership for the purpose of conducting business. The partner’s authority to bind the partnership when dealing with third parties follows agency law principles.

Question 11

Actual Authority (Partnership)

Answer 11

Where the partner reasonably believes that she has authority to act based on the partnership agreement or a vote of the partners, the partnership will be bound.

Question 12

Apparent Authority (Partnership)

Answer 12

Any partner may act to carry out ordinary partnership business and doing so will bind the partnership.
Except if the partner has no authority to act for the partnership in the manner the 3rd party actually knew or received proper notice that the partner lacked such authority.

Question 13

Estoppel (Partnership)

Answer 13

If a person represents to a 3rd party that a general partnership exists, she will be liable as if it does.

Question 14

Civil Liability-Contracts(Partnership)

Answer 14

The partners are liable for all contracts entered into by a partner that is within the scope of partnership business and/or is made with authority of the partnership

Question 15

Civil Liability- Joint and Severable(Partnership)

Answer 15

Partnership liability is joint and several for all obligations. Each partner is personally liable for the entire amount of partnership obligations. However, a partner paying more than his share may seek contribution or indemnity form the other parties.

Question 16

Liability of Incoming Partners

Answer 16

Incoming partners are not personally liable for debts incurred prior to joining the partnership, but any money paid into the partnership by an incoming partner can be used to satisfy prior debts.

Question 17

Liability for Disassociating Partners

Answer 17

1. A disassociating (outgoing) partner remains liable for partnership debts incurred prior to disassociation.
2. A partnership can be bound by an act of a disassociated partner (and the disassociated partner may be liable for acts) undertaken within two years after dissociation if:
   a. Act would have bound the partnership prior to disassociation.
   b. The other party reasonably believed the disassociated partner was still a partner, and
   c. The other party did not have notice of disassociation. (All parties deemed to have received it 90 days after filing)

Question 18

Dissociation

Answer 18

Occurs when a partner ceases to be a partner in the partnership.

1. Does not necessarily terminate the partnership (unless only 2 partners).
2. May be voluntary, involuntary where the other partners expel a partner
3. Partnership must purchase a disassociated partnership’s interest
4. Disassociated partner may still bind the partnership and may remain liable for it.

Question 19

Dissolution

Answer 19

Occurs when a partnership stops being active and the partnership business is wound up.

Question 20

Reasons a partnership may dissolve

Answer 20

1. Voluntary dissolution occurs when a partnership is formed for a specific purpose and the objective is achieved or the agreement specifies and end date, or when one party notifies the other.
2. Involuntary dissolution can occur when the partnership is engaged in unlawful activity, or by court decree at the request of the partner.

Question 21

Winding up

Answer 21

is the period between the dissolution and termination of a partnership in which the remaining partners liquidate the partnership’s assets to satisfy creditors, an accounting is made, and the remaining assets are distributed to the partners.

1. Partners receive Compensation.
2. Partnership and General Partners remain liable for all transactions entered into to wind up old business with existing creditors.
3. The partnership and general partners remain liable on new business transactions until notice of dissolution is given to creditors or until 90 days after filing a statement of dissolution with the state.

Question 22

Priority of Distribution in Partnership Dissolution

Answer 22

1. Creditors - including outside creditors and loans from non-partners
2. Partners who had loaned money.
3. Capital contributions of partners
4. Profits and Surplus, if any remain, are shared equally amongst the partners unless there is an agreement otherwise.

Question 23

Limited Partnership

Answer 23

A partnership that has at least one general partner and at least one limited partner, which creates a two-tiered partnership structure with differing rights, duties, and liabilities for general and limited partners. The main difference is that a limited partner is only liable for the obligations of the partnership to the extent of his capital contributions and is not entitled to management or control the partnership business.

Question 24

Formation of Limited Partnership

Answer 24

1. File a limited partnership agreement with the state.
2. Identify the name of the partnership, which includes the words “limited partnership”
3. Provide the name and address of the agent for services of process and of each general partner, and
4. Maintain records: In the state of organization the LP agreements, the partnership tax returns for the three most current years, etc. There must be record of the amount and descriptions of each partner’s contribution, any special distribution rights of each partner, etc.

Question 25

Rights and Duties of Limited Partners

Answer 25

Limited partners generally have no right to act on behalf of the partnership and owe no fiduciary duties to the partnership and are free to compete with the partnership and have interests adverse to those of the partnership unless an agreement provides otherwise. Limited partners have a right to a full accounting and to inspect the partnership books.

Question 26

Rights of both General and Limited Partners

Answer 26

1. Distribution: Based on partner's contribution 2. Consent: A partner's contribution obligation is only excused by the consent of all parties, and is not excused by death and disability. 3. Transferability: A partner's right to distributions is personal property that may be transferred. 4. Dissolve: Right to apply for dissolution of the limited partnership.

Question 27

Liability of Limited Partners of a Limited Partnership

Answer 27

Limited partners are not liable for the obligations of the partnership itself beyond their capital contributions and generally have no right to manage the business, though they may. However, a limited partner may be found liable as a general partner if a 3rd party has reason to believe the limited partner is actually a general partner.

Question 28

Dissolution of a Limited Partnership

Answer 28

A limited partnership will dissolve: 1. At the time specified in the limited partnership certificate. 2. Upon written consent of all partners 3. Upon dissolution of a general partner, unless the agreement provides otherwise, or the partners appoint a new general partner within 90 days. 4. Upon judicial decree of dissolution.

Question 29

Winding up Limited Partnership

Answer 29

The limited partnership will continue to exists for the purpose of winding up activities.

Question 30

Priority of distribution for Limited Partnerships

Answer 30

Assets are distributed in the following order: 1. Creditors, including outside creditors and partner loans. 2. Partners and former partners in satisfaction of distribution previously required under the limited partnership agreement 3. Capital Contributions by partners must be paid. 4. Partners for the amount due under the partnership agreement or if not specified then in proportion of their distribution share.

Question 31

Limited Liability Partnership (LLP)

Answer 31

a form of partnership where the partners are not personally liable for the obligations of the partnership

Question 32

Formation of a LLP

Answer 32

1. File a statement of qualification with the secretary of state executed by at least two partners. 2. Identify the name and address of the partnership, and 3. Have partnership name ending in LLP or RLLP.

Question 33

Liability of limited partners

Answer 33

All LLP partners have no personal liability for the partnership, whether contract, tort or otherwise. LL partner will still have personal liability for his own wrongful act.

Question 34

Fiduciary Obligations for LLP Partners

Answer 34

Partners owe LLP duties similar to those a director owes to a corporation, including duty of care and duty of loyalty.

Question 35

Limited Liability Corporation (LLC)

Answer 35

a business entity that has the limited liability of a corporation combined with the tax advantages of a partnership.

Question 36

Formation of a LLC

Answer 36

1. File an "articles of incorporation" with the state. 2. Identify the name of the LLC, and address of registered office and agent, and 3. Name of all members 4. The LLC may also adopt an operating agreement identifying how the LLC is to be managed. In absence of an agreement, the members will have an equal right to manage and control

Question 37

Rights and Duties of LLC members

Answer 37

1. Profits and Losses: sharing is based on contributions unless operating agreements provide otherwise. 2. Management and Control: Members typically control the LLC, but the articles may provide for another type of management 3. Transferability: Management interests are not freely transferable and members can only transfer their right to receive profits and losses, so an LLC has limited liability.

Question 38

LLC member fiduciary duties

Answer 38

Members owe the LLC and other LLC members a duty of care and duty of loyalty

Question 39

Liability for LLC members

Answer 39

LLC members are not personally liable for the obligations of the company itself beyond their own capital contributions.

Question 40

Dissolution of LLC

Answer 40

Traditional: Dissolution of any LLC member, such as by death, retirement, resignation, bankruptcy, etc. generally causes dissolution; or Modern Trend: Dissolution is only caused by one of the following: a. An event specified in the operating agreement b. Consent by all members c. Event that makes the enterprise unlawful. d. Judicial decree

Question 41

Dissolution in a term partnership required when:

Answer 41

if one partner dissociates wrongfully, or if a dissolution occurs because of a partner's death or bankruptcy, dissolution and winding up of the partnership are required only if, within 90 days after the dissolution, one half of the remaining partners agree to wind up the partnership.

Question 42

What is the best partnership arrangement for closely held businesses?

Answer 42

LLPs and LLCs. They protect all of the owners from liability for the obligations of the business; they allow the owners of the business to contract around almost all of the statutory provisions (so the business can run as the owners desire); they allow all of the owners to participate in the management of the business; and they provide pass through income tax treatment.