Partnership Flashcards
General Partnership
- Is created when:
- two or more persons;
- as co-owners;
- carry on a business for profit.
*Intent to form a partnership is NOT required.
- A joint venture or sharing in gross profits DOES NOT automatically create a partnership.
- Creditor vs. Partner – A person who receives a share of the profits is presumed to be a partner UNLESS the payment is received in payment:
- of a debt;
- for wages as an employee or independent contractor;
- of rent;
- of an annuity or retirement benefit;
- of interest/loan charges; OR
- for the sale of goodwill of a business.
Authority to Bind the Partnership
- A partner is an agent of the Pship, and generally has authority to bind the Pship for its business (including contracts).
- To bind the Pship, the partner MUST have authority.
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Express Actual Authority – A partner receives such authority from the partners.
- Differences among partners for Acts within the ordinary course of business→must be approved by a majority of the partners.
- Acts outside the ordinary course of business → must be approved unanimously.
- If Pship Agreement is silent → a partner has authority for usual & customary matters UNLESS he knows: (a) other partners might disagree, or (b) that consultation is appropriate.
- Implied Actual Authority (Incidental Authority) – A partner may take actions reasonably incidental or necessary to achieve the partner’s authorized duties.
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Apparent Authority – A partner has apparent authority for acts:
- conducted within the ordinary course of the Pship business; OR
- of the kind carried on by the Pship.
- BUT, a partner’s act will NOT bind the Pship when the:
- Partner lacked authority; AND
- Third-party knew (or received notice) of a lack of authority.
Ordinary Course of Business = normal and necessary for managing the business.
*For acts outside the scope of business→need a manifestation by Pship that partner had authority in order to be binding.
Liability of General Partners
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Personal Liability→General partners are personally liable for ALL obligations of the Pship UNLESS: (a) otherwise agreed by claimant; or (b) provided by law.
- UPA (1997) → partners are jointly and severally liable.
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Incoming Partners→Partners admitted into an existing partnership are NOT liable for obligations incurred prior to their admission.
- BUT, incoming partners risk losing their capital contributions to the Pship
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Judgment Enforcement Against a Partner’s Personal Assets – A judgment against the Pship is NOT a judgment against the individual partner(s).
- BUT, a judgment may be sought against the Pship and individual partners in the same action.
- Generally, a judgment creditor CANNOT levy execution of a judgment for a Pship debt against a partner unless:
- The partner is found personally liable;
- A judgment is rendered against the partner; AND
- Pship assets are exhausted/insufficient to satisfy the judgment.
Duty of Care (GIV)
- A partner owes the fiduciary duty of care to the Pship and other partners.
- Under RUPA, a partner only breaches the duty of care if he engages in (GIV):
- Grossly negligent or reckless conduct;
- Intentional misconduct; OR
- A knowing violation of law.
- If a partner breaches, he may be held personally liable to the Pship for any losses.
- A breach of the duty has been found in the following situations:
- Violating an agreement or policy of the Pship.
- Failing to thoroughly investigate facts before entering into contracts (if it’s gross negligence).
- Acting outside the scope of Pship business without consent of other partners.
Duty of Loyalty (ANN)
- A partner owes the fiduciary duty of loyalty to the Pship and other partners. This requires a partner to act in the best interests of the Pship.
- Under RUPA, a partner must (ANN):
- Account for any property, profit, or opportunity derived from Pship property or business (including refraining from appropriating Pship assets);
- Not have an interest adverse to the Pship (a conflict of interest); AND
- Not compete with the Pship (unless agreed otherwise).
- If a partner breaches, he may be held personally liable to the Pship for any losses.
- BUT, a partner is NOT liable if:
- He fully discloses information; AND
- Either:
- the Pship agreement is amended; OR
- all partners consent.
- If reasonable, the Pship agreement MAY eliminate or alter a duty of loyalty.
- Fiduciary duties apply during dissolution (except the duty not to compete).
- Partnership Opportunity→is one that:
- is closely related to the Pship’s existing or prospective line of business;
- would competitively advantage the Pship; AND
- the Pship has the financial ability, knowledge, and experience to pursue.
Dissociation (Withdrawal of a Partner)
- A partner may dissociate (withdraw) from the Pship at any time upon notice.
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Wrongful Dissociation – Dissociation is deemed wrongful if:
- It’s in breach of an express provision of the Pship agreement; OR
- Before the completion of an agreed upon term or undertaking.
- A wrongfully dissociated partner CANNOT participate in management or the winding up process.
- A partner may be liable to the Pship (and other partners) for damages caused by his wrongful dissociation.
Dissolution of a General Partnership
- Unless agreed otherwise, dissolution occurs upon:
- Notice of a partner’s express will to withdraw;
- Occurrence of an agreed upon event;
- The business becoming unlawful; OR
- Judicial dissolution.
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Dissolution of a Pship for a Definite Term (when it is not partnership at will) occurs:
- within 90-days after a partner’s dissociation by death or wrongful dissociation, if it’s the express will of at least half of the remaining partners to wind up (rightful dissociation constitutes the expression of the partner’s will to wind-up);
- upon the express will of all partners to wind up;
- upon the expiration of the term or completion of the Pship’s purpose.
- Does Dissociation Cause Dissolution?
- Under RUPA (2013):
- Dissolution may be rescinded by the affirmative vote or consent of ALL remaining partners to continue the business. (wrongfully dissociating partners may not vote)
- Buyout→In such instance, the dissociated partner is entitled to a buyout of their interest (value of interest = greater of liquidation or going concern value + interest).
- Under RUPA (2013):
Authority to Bind the Partnership After Dissolution
- A partner’s authority is limited after dissolution.
- Actual Authority → limited only to acts appropriate for winding up the business.
- Apparent Authority → a partner has apparent authority to bind the Pship if the:
- Partner’s acts would have normally bound the Pship; AND
- Third-party did not have notice of dissolution.
Liability of Limited Partners
- Limited partners are NOT personally liable for obligations of the LP.
- Exceptions:
- Liable for their own misconduct;
- At risk of losing their capital contribution to the Pship; OR
- May become personally liable if the partner participates in management (depends on the jurisdiction).
- Liability for Participating in Management:
- RULPA→personal liability created, BUT a partner is liable only to persons who transact business with the LP reasonably believing that the limited partner is a general partner.
- RULPA has a safe harbor provision excluding certain acts from liability.
- RULPA→personal liability created, BUT a partner is liable only to persons who transact business with the LP reasonably believing that the limited partner is a general partner.
Liability of Limited Liability Partners
- Under RUPA, a partner in an LLP is NOT liable for partnership obligations.
- But a partner in an LLP is liable:
- for their own misconduct;
- when the partner signs a personal guarantee for an obligation; OR
- for obligations incurred before the Pship became an LLP.
Right to Management and Control
- Unless otherwise agreed, each partner has equal rights in the management and control of the business.
- A disagreement for ordinary Pship business need only be approved by a majority of the partners.
- Acts outside the ordinary course of business MUST be approved unanimously.
Right to Pasrtnership Property
All property acquired by a Pship (or with Pship assets) is owned by the Pship, not the partners individually.
- Partners have an equal right to use property for Pship purposes.
- Personal use of Pship property requires the consent of the other partners.
- Property acquired in the name of the partner is presumed to be separate property as long as:
- no Pship assets are used to acquire it; AND
- title to the property does not reference the Pship.
- Judgment Solely Against a Partner → CANNOT be satisfied with Pship property because the partner has no ownership interest in Pship property.
- However, a creditor may seize the partner’s financial interest in the Pship.
Remuneration (Payment for Partner’s Service)
- A partner is NOT entitled to remuneration for services performed for the Pship UNLESS:
- There is an agreement to the contrary; OR
- It’s for reasonable compensation for services rendered in winding up the Pship business.
Advance of Funds & Reimbursement
- Pship MUST reimburse a partner for an advance or purchase made to or for the Pship beyond their capital contribution amount.
- For Reimbursement→(1) payment must be in proper course of Pship business, AND (2) partner must comply with duty of care & loyalty.
Management & Control in a LP
- General Partner→Has full management rights and control.
- Limited Partner→Has NO say or control as to how the LP is run, and DOES NOT have the right to manage or control day-to-day business.
- Generally, they are passive and have voting rights only in extraordinary situations (i.e. sale of Pship or all its assets, amending Pship agreement, or admitting a new partner).