Partnership

Question 1

Nature of Partnerships

Answer 1

A partnership is an association of people who have agreed to co-own an ongoing business for profit.

2. A partnership is a distinct legal entity with a separate legal existence apart from the partners.
3. Partnerships can be “at will” or for a definite term or undertaking.
4. General partners are agents of the partnership, co-manage the partnership business, share in the profits and losses of the business, and are generally exposed to personal liability for partnership debts and obligations.
5. Limited partners, who only have a role in limited partnerships, are passive investors in the partnership business; as such, they are not agents of the partnership, do not participate in the management of the partnership business, and are not generally exposed to personal liability for the debts and obligations of the partnership.

Question 2

General Partnerships:

Answer 2

Consist only of two or more general partners.

Question 3

Limited Partnerships:

Answer 3

Consist of at least one general partner and one limited partner.

Question 4

Limited Liability Partnerships (“LLP”)

Answer 4

Any partnership other than a limited partnership is eligible to become a limited liability partnership.

In an LLP, general partners are not exposed to the personal liability risks that would ordinarily attach to their status as a partner in a business.

NOTE: For purposes of the MEE, the governing law for partnerships is the Uniform Partner-ship Act (1997) and the Uniform Limited Partnership Act (2001), each of which has been enact-ed in most American jurisdictions. Because the most recent version of each of these uniform acts revise earlier versions, UPA is sometimes referred to as the Revised Uniform Partnership Act (or RUPA) and ULPA is sometimes referred to as the Revised Uniform Limited Partnership Act (or RULPA). In an essay answer, the particular nomenclature you use is not important so long as you use it consistently.

EXAM TIP: Over the last decade or so, when the MEE has tested partnership law, partnership formation issues have been implicated a little less than half of the time.

EXAM TIP: If the essay indicates that a partnership has been properly or validly formed, the issue of “partnership formation” has been taken off the table and does not need to be addressed. Similarly, if an essay prompt explicitly says that there is a partnership or that particular parties are partners in a business, the issue of “partnership formation” is taken off the table as well.

EXAM TIP: If an essay prompt refers only to a business or describes multiple parties doing busi-ness without identifying them as partners, then whether this entity is a partnership is a threshold issue that must be addressed. And since there is no per se rule for the existence of a partnership, the analysis must grapple with the available facts.

Question 5

General partnership RULE:

Answer 5

A partnership is an associates of two or persons to carry on as co-owners of a business for profit. Ongoing business and co-owners. Personal can be individuals, corporations, etc. Must be business for profit.

Question 6

General partnership rule and intent:

Answer 6

The association of two or more persons to carry on as co-owners of a business for profit will form a partnership regardless of:

A general partnership is formed by:

This agreement can be made:

There are no other formal or statutory requirements to creating a general partnership.

Question 7

Sharing of profits

Answer 7

Under the Revised Uniform Partnership Act (RUPA), the sharing of profits is generally treated as: prima facia evidence of a partnership.

However, the following, even if paid “out of profits,” are not deemed to be a “sharing of profits:”

–receiving payment of a loan

–collecting rent

–earning a salary.

EXAM TIP: While a party sharing in the profits of an on-going business is presumed to be a partner, this presumption could be rebutted if, for example, there were evidence that losses are not also shared or that the management of the business is not shared.

Question 8

Formation of a Limited Partnership:

Answer 8

RULE:

The formation of a limited partnership requires compliance with statutory requirements, including: filing of a certificate of limited partnership with the secretary of states office.

Question 9

Signing of certificate of limited partnership

Answer 9

To be effective under the ULPA needs all partners to sign the certificate of limited partnership.

NOTE: According to statute, the name of a limited partnership must contain the phrase “limited partnership” or the abbreviation “L.P.” or “LP” at the end of its name. For other content require-ments for a certificate of limited partnership, consult your outline.

EXAM TIP: A failed attempt to form a limited partnership will in all likelihood mean that the parties have formed or continued as a general partnership. To validate this likelihood, do the required analysis: apply the rules concerning the formation of a general partnership to the facts available.

Question 10

Eligibility to Become a Limited Liability Partnership

Answer 10

General partnerships—but not limited partnerships—are eligible to become a limited liability partnership.

Question 11

General Partnerships Converting to a Limited Liability Partnership

Answer 11

Unless a different vote is required by the partnership agreement, a general partner-ship other than a limited partnership may convert to a limited liability partnership by: Yes, unless a different vote is required by the partnership agreement, a general partnership other than a limited partnership may convert to a limited liability partnership by the vote of partners holding majority interest in the partnership.

Question 12

Registering to be a LLP

Answer 12

To become a registered limited liability partnership, a partnership must comply with the statutory requirements, including: the filing, with the secretary of state’s office, of a completed registration executed by at least one partner as well as the payment of the required fees.

NOTE: According to statute, the name of a registered limited liability partnership must contain as the last words or letters of its name one of the following: “Registered Limited Liability Partnership,” “Limited Liability Partnership,” “R.L.L.P.,” “RLLP,” “L.L.P.,” or “LLP.” For other content requirements for a registration to become a registered limited liability partnership, consult your outline.

EXAM TIP: A failed attempt to form a limited liability partnership will in all likelihood mean that the parties have formed or continued as a general partnership. To validate this likelihood, do the required analysis: apply the rules concerning the formation of a general partnership to the facts available.

Question 13

Partnership Agreements: The General Rule

Answer 13

In general, relations among the partners and between the partners and the partner-ship are: governed by the partnership agreement or, when the partnership agreement does not otherwise provide, by the Uniform Partnership Act (UPA).

NOTE: The UPA is a series of default rules that apply when a partnership agreement is silent on a topic. For the most part, the partners can choose to opt out of these default rules by providing otherwise in their agreement.

Question 14

Partnership Agreements: Restrictions to books and records

Answer 14

RULE: No partnership agreement may unreasonably restrict a partner’s access to the books and records of the partnership.

NOTE: This makes sense in light of the unlimited personal liability each partner has on partnership debts.

EXAM TIP: Partners cannot opt out of the UPA entirely. A few of its provisions are non-waivable. Besides the UPA provision securing a partner’s right to have reasonable access to the partnership’s books and records, UPA provisions concerning such things as a partner’s duty of loyalty, duty of care, and right to dissociate are also non-waivable. While these rights and duties can be limited (e.g., the partnership agreement can require that the notice of a partner’s will to dissociate be provided in writing), they cannot be eliminated entirely.

Question 15

Rights of general partners

Answer 15

Absent a contrary provision in the partnership agreement, each general partner has: an equal right to manage and conduct the partnership’s business.

Each general partner is: an agent of the partnership in the conduct of its business

If taken outside the ordinary course of the partnership business, a partner’s ac-tion constitutes partnership business conducted on the partnership’s behalf ONLY IF: All general partners consent to the action.

NOTE: Yvette’s misrepresentation about the pony is problematic for the partnership; the partnership itself is now subject to a potential suit from Yvette’s buyer, and if the partnership can’t pay, then the partners are personally liable. One recourse the partnership will have is to bring an action against Yvette for fraud and for breach of the fiduciary duties she owes to the partnership.

EXAM TIP: One implication of each partner’s right to participate equally in the management of the general partnership’s business is that, when the partners are in disagreement about a course of action to be taken in the ordinary course of the partnership’s business, the matter is resolved by majority vote. Unanimity among the general partners would be required, however, if the proposed action was outside the ordinary course of the partnership’s business or in contravention of the partnership agreement.

EXAM TIP: General partners in a limited partnership and in a limited liability partnership have the same right to co-manage and bind the business as do general partners in a general partnership. Moreover, the right to co-manage the partnership’s business and to act on the partnership’s behalf is exclusively a right of general partners; these are not rights belonging to limited partners.

Question 16

Rights of limited partners

Answer 16

Limited partners do not have a right to: co-manage the partnership business along with the general partners.

Limited partners are not: authorized agents of the limited partnership, they do not have the right to act on its behalf and so do not have the power to bind the LP to contracts they might enter into.

Limited partners have the right to seek information for a purpose reasonably related to their interest as a limited partner, including the right to: inspect and copy the required partnership records and tax returns, and obtain true and full information as to the financial condition and state of the business of the partnership.

Question 17

Duties Within the Partnership: The Duty of Care

Answer 17

RULE:

Each partner owes to the partnership and the other partners a duty of care in the conduct (and winding up) of the partnership business.

Partners must not engage in: grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

Question 18

Duties Within the Partnership: The Duty of Loyalty

Answer 18

RULE:

Each partner owes to the partnership and the other partners a duty of loyalty.

Partners must not: compete with the partnership in the conduct of its business, or appropriate a partnership opportunity.

Partners must not engage in: dealings with the partnership IF their dealings are intended to serve an interest adverse to the partnership’s interest.

Partners must account for any benefit, and hold as trustee any profit derived from: any transaction connected with the partnership’s business or the use of partnership property.

Question 19

Duties Within the Partnership: The Duty to Disclose: Disclosures to general partners

Answer 19

○ Both partners and the partnership have a duty to furnish to a partner, without demand, any information that: is related to the partnership business and reasonably required for the proper exercise of a partner’s rights and duties under the partnership agreement.

Both partners and the partnership have a duty to furnish to a partner, on demand, any information that: concerns the partnership business so long as the demand is not unreasonable or improper in the circumstances.

Question 20

Duties Within the Partnership: The Duty to Disclose: Disclosures to limited partners

Answer 20

○ This duty to disclose also requires certain disclosures to limited partners.

Given a limited partner’s right to inspect, general partners and the partnership have a duty to provide limited partners with the opportunity to inspect the company’s financial and tax records and any other information reasonably related to the finances of the business and their interests therein.

NOTE: Partners who violate a fiduciary duty owed to the partnership and the other partners be-come liable to the partnership and the other partners for any loss incurred as a consequence of that breach of duty.

EXAM TIP: General partners in a limited partnership and in a limited liability partnership have the same fiduciary duties as do general partners in a general partnership. Moreover, the duty of loyalty and the duty of care are duties of general partners but not duties of limited partners. For limited partners, their duty is the less burdensome obligation of good faith and fair dealing.

Question 21

Profits of the business and sharing

Answer 21

Absent an agreement to the contrary: each partner is entitled to share equally in the profits generated by the partnership business

NOTE: In the hypothetical above, the applicable rule is another example of an UPA default rule. The partners could certainly opt out of this and provide for whatever profit split they want. But if they don’t provide otherwise, the UPA default rule is deemed to govern.

Question 22

Sharing of Loss

Answer 22

In the absence of a contrary agreement: the partners share loses in proportion to how they share profits. Again the UPA applies again.

NOTE: If Penelope or Paul were to have paid out more than their 10% share to cover the com-pany’s losses, or for that matter if Patrick had paid out more than his 80% share, each would have the right to seek contribution from any partner who had not paid their share of the outstanding debt.

Question 23

Personal Property v. Partnership Property

Answer 23

A partner’s personal property includes his partnership interest, which consists of: (a) his financial interest in his share of the partnership’s profits and losses; and (b) his right to receive distributions from the partnership.

Unless otherwise provided in the partnership agreement, a partner may: transfer to another party his partnership interest (i.e. his financial interest in the partnership and right top receive distributions.

While a transferee of a partner’s transferable partnership interest is entitled to those disbursements or distributions that the transferring partner would other-wise have been entitled, a transferee of a partner’s partnership interest acquires: No right to participate int he management and control of the business and no right to require access to partnership information, books, or records.

NOTE: One obvious implication of these rules concerning the transfer of partner’s interest is that the transfer of a partner’s interest does not automatically dissolve the partnership.

EXAM TIP: A partner’s personal property does not include partnership property (property acquired on behalf of or given to the partnership). A partner’s rightful use of partnership property is limited to uses on behalf of the partnership.

Question 24

Liability to Third Parties: General Partners

Answer 24

EXAM TIP: The liability rules for general partners are the most frequently tested set of partner-ship rules; they are the starting point for your liability analysis.

EXAM TIP: Remember, the liability rules for general partners are the same for general partner-ships and general partners in limited partnerships. Only in a limited liability partnership is a general partner’s exposure to personal liability limited.

A partnership is liable for torts committed by a partner when: the partners tortious act is committed in the ordinary course of business or with authority of the partnership.

All general partners are: liable jointly and severally for all obligations of the partnership, whether arising under tort, contract, or otherwise.

NOTE: General partners have unlimited liability. However, whenever partners are required to pay more than their share of the partnership debts, they may compel other partners to pay their pro rata share by suing them for contribution.

Question 25

Incoming partner liability

Answer 25

An incoming partner is: Not personally liable for partnership obligations arising from activity that occurred before his admission as a partner.

EXAM TIP: A creditor of a partner in the partner’s individual capacity cannot seek satisfaction from the partnership or the partnership’s other partners. Such a creditor is limited to seeking satisfaction from this individual partner’s personal property, which does however include this partner’s share of the partnership’s profits and this partner’s right to receive distributions.

Question 26

Limited Partners: Liability

Answer 26

RULE:

In general, a limited partner is: Not personally liable for the obligations of the partnership; his liability will be limited to his capital contribution.

NOTE: In contrast to general partners, limited partners are passive investors. While statute grants limited partners the right to inspect and copy partnership records related to its activities and financial condition, limited partners have neither a right to manage and conduct partnership business nor the power to bind the partnership. The limited partner’s limited exposure to liability follows from the limited partner’s limited role in conducting partnership business.

Question 27

Limited partners - losing limited status

Answer 27

RULE: Solely by reason of being a limited partner, a limited partner with NOT be personally liable for the obligations of a partnership beyond that limited partner’s capital contribution, EVEN IF the limited partner participates in the management and control of the partnership.

NOTE: Possibly an estoppel argument can be made by Reeznable, who unlike Snowbetter, reasonably believed Shemple was a general partner and acted in reliance of that belief.

Question 28

Partner Dissociation

Answer 28

EXAM TIP: Rules for dissociation of a general partner in a general partnership are the same as the rules for dissociation of a general partner in a limited liability partnership. Remember, once formed, a limited liability partnership (LLP) is a general partnership for all purposes except for liability.

Partner’s Power to Dissociate

a. Partnership is a voluntary relationship.
b. Thus, a partner’s power to dissociate—or withdraw—from a partnership is: excercisable at any time; it is non-waivable right of every partner (general or limited).
c. For a partner to exercise this power, the partnership must: have notice of the partner’s express will to wtihdraw from the partnership.
d. But while a partner always has the power to withdraw, a partner may not have the right to do so and may be liable for damages caused by wrongful dissociation.

Question 29

Wrongful Disassociation

Answer 29

RULES:

(1) A partner who dissociates in violation of an express provisionof partnership agreement does so wrongfully.
(2) A partner who wrongfully dissociates is: liable to the partnership and to the other partners for damages caused by the dissociation.

EXAM TIP: Even in the absence of an express provision, when a partner withdraws by express will from a partnership that is for a definite term or undertaking, this is generally going to be considered a wrongful dissociation if it occurs before the completion of the term or undertaking.

Question 30

Events Causing a Partner’s Dissociation

Answer 30

a. partner’s death
b. partner’s bankruptcy
c. the appointment of a guardian for a partner
d. a judicial determination that a partner is incapable of performing the duties of a partner
e. the occurrence of an event specified in the partnership as triggering a partner’s dissociation

EXAM TIP: If the partnership is for a definite term or undertaking, dissociation by bankruptcy is deemed wrongful and a partner who becomes bankrupt is liable for damages caused by his subsequent dissociation.

NOTE: Dissociation can also occur upon a partner’s expulsion from the partnership. A partner may be expelled from a partnership pursuant to: (1) a provision in a partnership agreement, (2) a unanimous vote of the other partners, or (3) a judicial determination made upon application by another partner. For details about the circumstances and limitations of this power to dissociate another partner through expulsion, consult your outline materials.

Question 31

Dissociation of a Partner in a Limited Partnership

Answer 31

EXAM TIP: Rules for dissociation of a general partner in a limited partnership are similar to the rules for dissociation of a general partner in a general partnership.

RULES:

(1) When a general partner withdraws from a limited partnership by express will, the partner: dissociates wrongfully if it occurs before the termination of the limited partnership.
(2) A limited partner has: no right to dissociate before the termination of the limited partnership.

NOTE: General partners of a limited partnership do not have the same right to dissociate as general partners of a general partnership. In a general partnership, general partners can disso-ciate by express will prior to the termination of the general partnership. Specifically, they have a right to dissociate by express will when the general partnership is at will.

Question 32

Consequences of Dissociation

Answer 32

Consequences of Dissociation

a. In general, dissociation terminates:
a partner’s right to co-manage and conduct partnership business.

b. Except with respect to events or matters occurring before dissociation, dissociation also terminates: a partner’s duty of loyalty and duty of care.
c. A partner who has dissociated is permitted to: compete with the partnership business.

d. A partner who dissociates does not:
thereby discharge liability for partnership obligations incurred before the dissociation.

e. In certain circumstances, a partner’s dissociation will: cause the dissolution of the partnership.

Question 33

Causes of a Partnership’s Dissolution: Causes applicable to partnerships generally

Answer 33

EXAM TIP: Rules for dissolution of a general partnership are basically the same as the rules for dissolution of a limited liability partnership. Remember, once formed, a limited liability partner-ship is a general partnership for all purposes except for liability.

RULES:

(1) An individual partner may file an application with a court to have a partnership dissolved.
(2) An application to dissolve a partnership will be granted if a court determines that:

• the economic purpose of the partnership is: likely to be unreasonably frustrated;
• the carrying on of the business in conformity with the partnership agreement would: not be reasonably practicable; or

• the carrying on of the business in partnership with a particular partner is:
no longer reasonably practicable in light of that partner’s conduct relating to the partnership’s business.

Question 34

Causes of a Partnership’s Dissolution: Transfer of partnership interest

Answer 34

RULE:

(1) Even though a transferee of a partner’s transferable interest in a partnership does not thereby become a partner, such a
transferee—not unlike a partner—can file an application with a court to have the partnership dissolved.

(a) If the partnership is at will, the transferee can: file the application at any time.
(b) However, if the partnership is for a definite term or undertaking, the transferee can: only file the application AFTER the completion of the term or undertaking.

NOTE: If a court hears an application to dissolve presented by a transferee of a partnership in-terest, the court’s determination to dissolve the partnership must be on the ground that it is equi-table to wind up the partnership business.

NOTE: In addition to a partnership dissolving upon judicial determination, a partnership also dissolves if it becomes unlawful to carry on the partnership’s business or upon the occurrence of an event agreed upon and specified in the partnership agreement.

Question 35

Causes of dissolution applicable only to partnerships at will

Answer 35

RULES:

(1) Generally, partnerships dissolve if a judicial determination is made upon application by a partner, if it becomes unlawful to carry on the partnership’s business, or upon the occurrence of
an event specified in the partnership agreement.

(2) In a partnership at will, dissolution will also occur when: the partnership has notice of a partner’s express will to
WITHDRAW (dissociate) from the partnership.`

Question 36

Causes of dissolution applicable only to partnerships for a definite term or for a particular undertaking

Answer 36

RULE:

In a partnership for a definite term or particular undertaking, the partnership will dissolve 90 days after the wrongful dissociation of one of its partners UNLESS: before that time A MAJORITY of the partners agree to continue the
partnership.

NOTE: In a partnership for a definite term or undertaking, if a partner dissociates by death or by bankruptcy, the analysis above would be unchanged. The partnership would dissolve after 90 days unless a majority of the remaining partners agree to continue the business.

NOTE: A partnership for a definite term or undertaking also dissolves upon the expiration of the term or the completion of the undertaking or upon the unanimous consent of all the partners.

Question 37

Dissolution of a Limited Partnership general partner withdraws

Answer 37

RULE:

Upon the withdrawal of its lone general partner, a limited partnership dissolves unless: before 90 days passes a majority of the limited partners consent to continue the business and admit one or more general partners to replace the dissociating general partner.

NOTE: If one of multiple general partners dissociates, the limited partnership will dissolve if, within 90 days of the dissociation, a majority of the remaining partners (general and limited) consent to its dissolution.

Question 38

Dissolution of a Limited Partnership with withdrawal of limited partner

Answer 38

A limited partnership dissolves upon the withdrawal of its sole limited partner unless: A limited partnership dissolves upon the withdrawal of its sole
limited partner unless: another limited partner is admitted within 90 days.

NOTE: Limited partnerships can also be dissolved upon: (1) the happening of an event specified in the partnership agreement, (2) the consent from all general partners and a majority of limited partners, or (3) court order granting the application of a partner that it is not reasonably practicable to carry on the business in conformity with the partnership agreement.

Question 39

Consequences of a Partnership’s Dissolution

Answer 39

a. Once dissolved, a partnership continues its existence for the purpose only of winding up its business, that is, for the purpose of discharging its debts and distributing its assets; this may include preserving the partnership’s business and property as a going concern for a reasonable time.
b. Upon dissolution, a partnership is bound by any transaction entered into by a partner that is appropriate for the winding up process.
c. Upon dissolution, transactions of a partner that would have bound a partnership if entered into before dissolution are still binding upon the partnership if the other party to the transaction did not have notice of the dissolution.
d. When the winding up of its business is complete, the partnership terminates.

Question 40

Winding up

Answer 40

RULE:

In the winding up process, the partnership’s assets will be used to: (1) discharge the partnership’s obligations to creditors, including, to the extent permitted by law, partners who are creditors; (2) reimburse partners for their capital contributions; and (3) allocate the balance, if any, to partners in accordance with profits. (Note: please ignore any contradictory information; this is the new rule under RUPA.)

EXAM TIP: In the winding up process, there is a hierarchy for allocation of partnership assets. Distribute assets in this order: (1) to creditors, including, to the extent permitted by law, partners who are creditors, (2) to partners for their capital contributions, and then (3) the balance, if any, to the partners in accordance with their respective shares of the profits.

Question 41

What happens to the money in the winding up

Answer 41

In the winding up process, to the extent further contributions are required from the partners in order for the partnership to meet all its obligations, each partner will be: jointly and severally liable for the entire amount of the outstanding debt.

To the extent partners pay more than their share of the outstanding debt, they may seek contribution from those partners who have not paid their share of the debt.

Unless provided otherwise in the partnership agreement, in winding up a part-nership, partners share: equally in the surplus, if any, or otherwise share in the outstanding debt in the same portion as they would share in the surplus.

Question 42

Order of priority

Answer 42

RULE:
In the winding up process, the partnership’s assets will be used to: first discharge the partnership’s obligations to creditors, including partners who are creditors, and then to reimburse partners for their capital contributions, if any, in cash.

(1) Outside creditors
(2) Inside creditors
(3) Capital contributions to partners
(4) Allocate balance in accordance with profits