Partnership

Question 1

Overview

Answer 1

Partnership law is based on the law of contracts and agency. A partnership is an association of two or more persons (which may include trusts and business entities) to carry on as co- owners a business for profit. The large topics to think about in partnership law include: how
a partnership is formed; the duties and rights of partners and partnerships; liability between partners and third parties; how partners dissociate from a partnership; and how partnerships are dissolved. There are also limited partnerships and limited liability companies that are governed by different statutes than general partnerships.

Question 2

FORMATION - Requirements

Answer 2

1. No formal agreement or writing is required to form a partnership; the parties’ intent can be implied from their conduct
2. Anyone who is capable of entering a binding contract is capable of being a partner
3. The partnership may not have an illegal purpose
4. No one may become a partner without the consent of all the partners

Question 3

FORMATION - Factors to Imply a Partnership

Answer 3

1. Intent of the parties
2. Sharing of profits raises a presumption of partnership (exception—payments for: a
   debt, services rendered, rent, annuity or retirement benefits, interest on a loan, or
   sale of goodwill of a business)
3. Other factors do not raise a presumption but are evidence that a partnership has
   formed:
   a. Title to property is held in joint tenancy or tenancy in common
   b. Parties designate their relationship as a partnership
   c. The venture requires extensive activity
   d. Sharing of gross returns

Question 4

PARTNERSHIP PROPERTY - Factors to Determine Whether Property Belongs to the Partnership

Answer 4

1. For real and personal titled property, apply R.U.P.A.:
   a. Property belongs to partnership if it is titled in:
   1) The partnership name, or
   2) The name of the partnership and the instrument transferring title notes the
   titleholder’s capacity as partner or the existence of a partnership
   b. Property is presumed partnership property if purchased with partnership funds
   c. Property is presumed separate property of partner if:
   1) The property is held in name of partner(s)
   2) The instrument transferring title does not indicate the person’s capacity as
   a partner or mention the existence of a partnership
   3) Partnership funds were not used
2. For untitled property, apply common law factors:
   a. Used partnership funds
   b. Use of property by partnership
   c. Listed in partnership books as an asset
   d. Close relationship between property and the business
   e. Improvement with partnership funds
   f. Maintenance with partnership funds

Question 5

PARTNERSHIP PROPERTY - Partner’s Rights in Partnership Property

Answer 5

1. Partners are not co-owners of partnership property and have no transferable interest in partnership property
2. Partners have no right to use partnership property other than for the benefit of the partnership

Question 6

RIGHTS AND DUTIES OF PARTNERS - Rights

Answer 6

1. All partners have an equal right to participate in the management and control of the partnership absent a partnership agreement providing otherwise
2. All partners have an equal right to share in the profits and losses and receive
   distributions
3. Partners are not entitled to remuneration except for reasonable compensation for
   services rendered in winding up the partnership’s business
4. The partnership must indemnify partners for payments reasonably made and
   obligations reasonably incurred by a partner in carrying on the business of the
   partnership
5. If a partner must pay more than his fair share of the partnership’s debt, he is entitled
   to contribution from the other partners
6. All partners have the right to inspect the partnership books and records
7. The partnership may sue or be sued in the partnership name or in the names of the
   individual partners

Question 7

RIGHTS AND DUTIES OF PARTNERS - Duties

Answer 7

1. Duty of loyalty
   a. Partners must account for all profits or other benefits derived by the partner in
   connection with partnership business
   b. Partners may not deal with partnership as one with an adverse interest
   c. Partners may not compete with the partnership
2. Duty of care
   a. Partners must refrain from engaging in negligent, reckless, or unlawful conduct
   b. Partners must refrain from engaging in intentional misconduct
3. Duty of obedience
   a. Partners must obey all reasonable directions of the partnership
   b. Partners must refrain from acting outside the scope of the partner’s actual
   authority
4. Duty to provide complete and accurate information
   a. Partners must provide complete and accurate information concerning the partnership

Question 8

LIABILITY OF PARTNERS - Agency Principles Apply in Determining Liability

Answer 8

1. R.U.P.A. generally provides that each partner is an agent of the partnership
2. The act of any partner binds the partnership, unless the partner had no authority and the third party knew or had notice that the partner lacked authority

[The Revised Uniform Partnership Act (“R.U.P.A.”) provides a default set of rules for general partnerships]

Question 9

LIABILITY OF PARTNERS - Civil Liabilities

Answer 9

1. Contract liability—partners are liable on contracts made by a partner in the scope of the partnership business and on any other contracts expressly authorized by the partners
2. Tort liability—partners are liable for any torts committed by a partner or an employee of the partnership in the ordinary course of partnership business

Question 10

DISSOCIATION AND DISSOLUTION - Dissociation

Answer 10

1. A partner is dissociated from a partnership upon:
   a. Notice of the partner’s express will to withdraw
   b. The happening of an agreed upon event
   c. The valid expulsion of a partner
   d. The partner becoming bankrupt
   e. The death of an individual partner, or the termination of a partner that is a
   business entity, or
   f. A court decision that a partner is incapable of performing her duties

Question 11

DISSOCIATION AND DISSOLUTION - Dissolution

Answer 11

1. Generally, a partnership is dissolved and its business must be wound up:
   a. In a partnership at will, when a partner gives notice of her express will to
   withdraw
   b. In a partnership for a definite term or particular undertaking, when:
   1) Within 90 days after a partner’s death, bankruptcy, or wrongful dissociation, at least half the remaining partners express a will to wind up the business
   2) All the partners express a will to wind up the business, or
   3) The term expires or the undertaking is complete
   c. Upon the happening of an agreed upon event
   d. Upon the happening of an event that makes it unlawful for the partnership to
   continue, or
   e. Upon a judicial decree

Question 12

LIMITED PARTNERSHIP - Governing Law and Formation

Answer 12

1. Limited partnerships are governed by the Uniform Limited Partnership Act (“U.L.P.A.”)
2. Need one or more general partners plus at least one limited partner
3. Need to file a certificate of limited partnership with the secretary of state

Question 13

LIMITED PARTNERSHIP - Partner’s Contributions

Answer 13

1. Partner has no rights to distributions absent a contribution
2. Contributions may be in the form of any benefit to the partnership (e.g., money,
   property, services, and promises to make such contributions)

Question 14

LIMITED PARTNERSHIP - Liability of Limited and General Partners

Answer 14

1. Limited partner
   a. Limited partners have no personal liability for obligations of the partnership
2. General partner
   a. General partners are jointly and severally liable for all partnership obligations
   b. General partners may also be limited partners but they still have all of the liabilities and duties of a general partner

Question 15

LIMITED PARTNERSHIP - Duties of Partners

Answer 15

1. General partners owe the limited partnership fiduciary duties of care and loyalty
2. Limited partners owe no fiduciary duty to the partnership and are free to
   compete with the partnership, except as otherwise provided in the partnership agreement

Question 16

LIMITED PARTNERSHIP - Rights of Both General and Limited Partners

Answer 16

1. Both general and limited partners have the right to distributions, which can be transferred, in whole or in part
2. A partner may transact business with the limited partnership
3. Any partner may maintain a derivative action on behalf of the partnership if the
   partner first makes demand on the general partners or the demand would be futile
4. Any partner may apply for a decree of dissolution whenever it is not reasonably
   practicable to carry on the business in conformity with the partnership agreement

Question 17

LIMITED PARTNERSHIP - Rights of General Partners

Answer 17

1. Each general partner has equal rights in management
2. A general partner has a right to the partnership’s business information
3. A general partner is not entitled to remuneration for services performed for the
   partnership
4. A general partner is entitled to indemnification for liabilities incurred in the ordinary
   course of the partnership’s activities

Question 18

LIMITED PARTNERSHIP - Rights of Limited Partners

Answer 18

1. Limited partners have no right to participate in management, except as provided by the partnership agreement
2. Limited partners have the right to inspect and copy certain partnership records that are required to be kept in the records office

Question 19

LIMITED PARTNERSHIP - Dissociation and Dissolution

Answer 19

1. Events that cause dissociation of a partner in a general partnership will also cause dissociation in a limited partnership
2. A limited partner has no right to dissociate before termination of the limited partnership
3. A limited partnership may be judicially and administratively dissolved; otherwise, a
   limited partnership may be dissolved only by the occurrence of one of the following:
   a. The happening of an agreed upon event
   b. The consent of all the partners holding a majority of the right to receive
   distribution (“majority in interest”)
   c. After dissociation of a general partner and the consent of the majority in
   interest, if no general partner remains, after 90 days unless a new partner is
   admitted, or
   d. 90 days after dissociation of the last limited partner, unless a new limited
   partner is admitted
4. Assets are distributed first to creditors (including partners who are creditors) and
   then to the partners as a distribution

Question 20

LIMITED LIABILITY PARTNERSHIP - Formation

Answer 20

1. Formation of an L.L.P. must be approved by whatever vote is necessary to amend the partnership agreement
2. Requires statement of qualification (registration) filed with the secretary of state, containing:
   a. Name and address of partnership
   b. Statement of election to be an L.L.P.

Question 21

LIMITED LIABILITY PARTNERSHIP - Liability of Partners

Answer 21

1. A partner is not personally liable for the obligations of the partnership
2. However, a partner remains personally liable for her own wrongful acts

Question 22

LIMITED LIABILITY PARTNERSHIP - Rights and Obligations of Partners

Answer 22

1. Financial rights and obligations of partners, including profit/loss-sharing and indemnity, are identical to those of general partners in a general partnership
2. If partnership assets are insufficient to indemnify a partner for an L.L.P. obligation, each partner forfeits a right to receive contributions in exchange for being relieved of the obligation to contribute to the personal liability of other partners

Question 23

LIMITED LIABILITY COMPANIES - Governing Law and Formation

Answer 23

1. Most states follow the Revised Uniform Limited Liability Company Act of 2006 (“R.U.L.L.C.A.”), except where noted in your state’s outline
2. Limited Liability Companies (“LLCs”) are taxed like partnerships, but members enjoy limited liability, like shareholders in a corporation, and the LLC is treated as an entity distinct from its members
3. An LLC is formed by filing a certificate of organization with the secretary of state

Question 24

LIMITED LIABILITY COMPANIES - Management

Answer 24

1. All members participate in management except as otherwise specified in the operating agreement
2. Each member of a member-managed LLC has authority to bind the company to contracts, unless the member lacks actual authority to do so and the other party has notice of same

Question 25

LIMITED LIABILITY COMPANIES - Duties

Answer 25

1. Member-managed
   a. Members in member-managed LLCs owe duties of care and loyalty to each
   other and the LLC
   b. They must also discharge their duties consistently with the contractual obligation of good faith and fair dealing
2. Manager-managed
   a. In manager-managed LLCs, only the managers are subject to the duties of care
   and loyalty
   b. Only the members may authorize or ratify an act by a manager that would
   otherwise violate the duty of loyalty

Question 26

LIMITED LIABILITY COMPANIES - Piercing the LLC Veil

Answer 26

Courts may pierce the LLC veil to reach personal assets of members in circumstances similar to those justifying piercing in a corporation

Question 27

LIMITED LIABILITY COMPANIES - Distributions

Answer 27

The uniform act calls for distributions in equal shares unless the operating agreement provides otherwise, but most states do not follow that approach and allocate distributions on the basis of contributions unless the operating agreement provides otherwise

Question 28

LIMITED LIABILITY COMPANIES - Rights to Information

Answer 28

1. Member-Managed LLC
   a. In a member-managed LLC, a member has a right to inspect and copy any
   record concerning the LLC’s business that is material to the member’s rights
   and duties
2. Manager-Managed LLC
   a. In a manager-managed LLC, the managers have the same right to information and duty to furnish information as discussed above

Question 29

LIMITED LIABILITY COMPANIES - Dissociation

Answer 29

1. A member has the power to dissociate at any time
2. A wrongfully dissociating member may be liable to the LLC for damages
3. Generally, the events that cause dissociation of a partner also cause dissociation of
   an LLC member

Question 30

LIMITED LIABILITY COMPANIES - Dissolution

Answer 30

1. An LLC will dissolve when any of the following events occur:
   a. An agreed upon event of dissolution
   b. The consent of all the members
   c. The passage of 90 consecutive days during which the LLC has no members
   d. Judicial decree
   e. Administrative dissolution by the secretary of state