Partnership Flashcards
Nature of a partnership
Agreement b/t 2+ persons who have agreed to co-own an ongoing business for profit. Distinct legal entity apart from partners. Can be at-will or for definite term or duration of “undertaking”
Two types of partners:
- General partners are agents of the partnership, co-manage, share in profits and loss, and are generally
exposed to personal liability for partnership debts and obligations
- Limited partners (only exist in limited partnerships) are passive investors - NOT agents, do NOT
participate in management, and are generally NOT exposed to liability
Types of partnerships (3)
General partnerships (GP) have only gens
Limited partnerships (LP) have gens and lims
Limited Liability partnerships (LLP):
- any partnership OTHER THAN an LP can become an LLP
- in an LLP, gens are not exposed to the same personal liability risks that would normally attach
Forming a general partnership
(If exam says a partnership “properly” or “validly” formed, or explicitly says there is a “partnership” or parties are “partners”, don’t bother addressing this)
GP is formed by an objective agreement b/t 2+ persons to co-own an ongoing business for profit. Can be EXPRESS (written or oral) or IMPLIED (from conduct). No other formal statutory requirements.
Proof of association: SHARING OF PROFITS is prima facie evidence of a partnership.
None of these, even if paid out of profits, are profit sharing: payment of a loan, collecting rent, salary pay
Forming a limited partnership
(Exam tip: can be indirectly indicated by partner seeking limitation of liability)
Certificates of limited partnership must be filed with Secretary of State’s office
Must be signed by ALL general partners. Name of partnership MUST contain LP
Failure to form an LP means you are by default a GP
Forming a limited liability partnership
Only GPs are eligible to become LLPs. Vote of majority partners is sufficient unless partnership agreement requires otherwise
After vote, must file a registration executed by AT LEAST ONE partner and a fee.
Partnership remains the same entity it was before - this just changes type, no new partnership created
Partnership agreements
General rule:
- relations among partners and b/t partners and partnership are governed by the partnership agreement,
or when the agreement is silent, by the Uniform Partnership Act (UPA)
- some UPA provisions non-waivable: duties of loyalty/care, right to dissociate. can be LIMITED by
agreement, but not totally waived
Exception: no agreement can unreasonably restrict a partner’s access to books/records
Rights of general partners
Absent a contrary provision in the PA, each general partner has equal right to manage/conduct business. (Equal right means disputes resolved via majority vote - must be unanimous if contravenes PA)
Each general partner is an agent in the conduct of the partnership’s business - agents’ acts are binding if they have proper authority
OUTSIDE of conduct of business, biding only if all general partners consent to it
General partners have the same rights no matter what type of partnership it is
Rights of limited partners
Limited partners have NO right to co-manage business and are NOT agents
Have the right to seek info for a purpose reasonably related to limited partnership interest, inc:
- inspect/copy partnership records and tax returns
- obtain true+full info about financial condition and state of business
Duties within the partnership
Duty of care: no gross negligence/recklessness, int’l misconduct, or knowing violation of law
Duty of loyalty: no competition or usurpation, no self-dealing, no embezzlement (same as agent)
Duty to disclose:
To general partners:
- partners and partnership have duty to disclose WITHOUT DEMAND any related info to a partner reasonably required for exercise of their rights/duties
- must furnish WITH DEMANDS any info that concerns business so long as not unreasonable/improper
To limited partners:
- opportunity to inspect business/finances
Profits, losses, contributions
Absent agreement to contrary:
- each partner entitled to share equally in profits generated by business;
- partners share losses in proportion to their share of the profits
NOTE: these are not the same rule! If you change the default profit allocation but say nothing about losses, losses match profit allocation - losses “follow” profits unless specially allocated
Accounting action: equitable action to determine each partner’s investment, profits/losses, share
The partnership interest and transferability
Partner’s personal property includes PARTNERSHIP INTEREST, which consists of:
- financial interest in share of profits and losses; and
- right to receive distributions of such
Unless otherwise provided in the PA, partnership interests ARE TRANSFERABLE to third parties. However, transferee does NOT receive a right to management or control, or to access! Just financial interest
Management/control/access rights are consensual relationship. Those can only be transferred by conset of the other partners
Liability to third parties
This is the most tested topic
General partners (in GPs and LPs, but not LLPs):
- partnership is liable for torts committed by a partner when partner’s tortious act was in ordinary course
of business or with partnership authority
- all general partners are jointly and severally liable for all obligations (including contract!). Each general partner has unlimited
liability, but can sue for pro rata contribution by other partners
- incoming partner NOT personally liable for obligations arising from activity before their admission
Limited partners (in LPs):
- NOT personally liable; liability limited to their capital contribution to the partnership
- this does NOT change even if the limited partner actually participates in management/control
Limited liability partnerships:
- when partnership is qualified as an LLP, obligations incurred are the sole obligation of the LLP itself
- does NOT absolve partners from liabilities already incurred before conversion, or own wrongful acts
- some statutes may extend liability to partners for negligence/wrongful acts of persons under their direct
supervision and control
Dissociation
When a partner leaves the partnership
Partnerships are voluntary. Partners have non-waivable power to dissociate at any time. However, RIGHT to dissociate can be limited by PA - can still do it, but may be liable to others for wrongful dissociation (for damages caused). If partnership for definite term or undertaking, voluntary dissociation is generally wrongful if before completion
Must give notice of express will to withdraw to the partnership
Events causing dissociation:
- death
- bankruptcy (if partnership is for a definite term/undertaking, bankruptcy is WRONGFUL)
- appointment of a guardian
- judicial determination that partner is incapable of performing duties
- occurrence of some event specified in the PA
- expulsion: unanimous vote of other partners, or as specified in PA
Dissociation in limited partnerships
- General partners can still dissociate from limited partnerships, but if it’s express, it’s wrongful if before termination of the LP
- limited partners have no right to dissociate at all
Consequences of dissociation
- In general: terminates right to co-manage and conduct business
- also terminates duties of loyalty and care, EXCEPT w/r/t events before dissociation
- dissociated partner is permitted to compete
- does NOT discharge liabilities incurred before dissociation
- partnership must BUYOUT the dissociated partner’s interest
- buyout price must be equal to the greater of either the liquidation value or the value of the
partnership’s assets based on a sale of the entire business as a going concern (plus interest). if no
agreement reached w/in 120 days after written demand, must pay estimate
In some circumstances, a dissociation will cause dissolution of the partnership
