Partnership Flashcards
Partnership
association of two or more persons to carry on as co-owners of a business for profit.
It’s formed as soon as that happens, regardless of whether the parties subjectively intend to form a partnership. So, if they intended to carry on as co-parties, there is a partnership even if they did not subjectively intend to be partners.
Elements to consider:
- sharing profits: creates a presumption
- sharing losses
- Right to participate in control (even if they never exercise it!)
- title to property held in joint or common tenancy
- parties designate rel. as partnership
- sharing of gross returns
- extensive activity
Formalities: no writing is required to form partnership, unless agreement to be partners for more than 1 year!
Partnership by Estoppel
Person held out AS partner: will be liable if consented to be held out by other as partner through the other’s words and conduct. Consent can’t be mere failure to deny partnership.
Person who holds ANOTHER out as partner: When a person holds another out as a partner, he thereby makes that person his agent to bind him to third parties. (If there is a partnership, only those partners who know of or consent to this holding out will be bound.)
Partnership agreement + formation
- Agreement can be written, oral, implied
- Contractual capacity required, p-ship purpose must be legal, no-one can become partner without express or implied consent of all partners, may file statement of partnership authority
Voting
Unless otherwise agreed all partners have equal voting rights
- decisions within ordinary course of p-ship = majority
- outside ordinary scope of p-ship = unanimous
Indemnification and Repayment
A partnership must indemnify every partner with regard to payments made and obligations reasonably incurred in carrying on the partnership business. If a partner makes a payment or advance on behalf of the partnership beyond the contribution the partner agreed to make, the payment or advance constitutes a loan that must be repaid with interest.
Distributions
Partners have whatever rights are granted in the partnership agreement as to distribution of profits. If the agreement is silent, partners share profits (and losses) equally.
Losses follow profits= if you have an explicit agreement to share profits in a certain way but silent on losses, then losses will be shared the same way as profits.
General Partnership Liability in Tort
With respect to the partnership’s liability in tort, a partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting in the ordinary course of business of the partnership or with authority of the partnership.
NB: but they always say a partner is liable for their own torts…
Statement of Partnership Authority
Real Property: grants/restrictions on partner authority to transfer partnership real property in the statement are BINDING on third parties if:
- the statement is recorded with secretary of state and county where property located. (TP benefitted by grants unless actual knowledge p lacked authority, and burdened by filed restrictions on authority).
Not Real Property:
- statement filed with secretary of state
- grants of partner authority in statement are binding on partnership unless a third party has actual knowledge that partner lacked authority (charged with constructive notice).
- restrictions on partner authority are not binding unless actual knowledge (not charged with constructive notice).
Apparent Authority
a partner is an agent of the partnership, and that a partner has apparent authority to bind the partnership to transactions within the ordinary course of the partnership’s business or business of the kind carried out by the partnership (unless the third party is aware that the partner lacks actual authority to act).
A third party must have subjective knowledge-what they should’ve known based on circumstances irrelevant. Notification is when it is delivered OR comes to TP’s attention.
Transfer of Partnership Interest
Partnership interest indicated: partnership can recover from initial transferee of unauthorized transfer, but not from a BFP
Partnership interest not indicated: if transferee gives value without notice of lack of authority, they take free of the partnership interest.
Liability of partners
(1) each partner is jointly and severally liable (so, one or more partners may be sued) for all obligations of the partnership, whether arising in tort or contract.
* each partner is individually liable for entire amount of p-ship obligations, but can require p-ship to indemnify, or require other partners to contribute to pro rata share if p-ship can’t indemnify
(2) But the plaintiff must first exhaust partnership resources before seeking to collect from an individual partner’s assets.
Liability of new partners
A newly admitted partner is not personally liable for partnership obligations that arose before their admission. They can only lose the amount of their investment in the partnership.
Liabilities of disassociating partners
Pre-Dissociation: An outgoing or dissociated partner remains liable for obligations arising while they were a partner unless there has been payment, release, or novation.
Post-Dissociation: An outgoing partner can also be liable for acts done after dissociation incurred within two years after dissociation IF
- when entering transaction the other party reasonably believed the dissociated partner was still a partner, AND
- did not have notice of the partner’s dissociation.
*partners can protect themselves by filing a dissociation statement to make other parties aware they are no longer with the p-ship.
Criminal Liability of Partners
Partners will not be criminally liable for the crimes of other partners committed within the scope of the partnership business, unless the other partners participated in the commission of the crime either as principals or accessories.
Fiduciary Duties of Partnership
- Duty of loyalty (can’t be waived)
- Duty of care (also apparently can’t be waived)
- Duty of obedience
- Duty of disclosure
Duty of loyalty
This duty requires each partner:
(1) to account to the partnership for any benefit derived by the partner in conducting the partnership business, using the partnership’s property, or appropriating a partnership opportunity;
(2) to refrain from dealing with the partnership in the conduct of its business as (or on behalf of) a party having an interest adverse to the partnership; and
(3) to refrain from competing with the partnership in the conduct of its business.
Duty of Care
The duty of care requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
Duty of Disclosure
A partner also has a duty to provide complete and accurate information concerning the partnership.
- without demand, all information concerning p-ship business and affairs reasonably required for proper exercise of p-ship rights/duties
- on demand, any other information concerning affairs
Duty of Obedience
The duty of obedience requires the partner to obey all reasonable directions of the partnership and not act outside the scope of his or her authority.
Partnership Property (RUPA)
Under the R.U.P.A., property is rebuttably presumed to be a partner’s property if (1) it’s held in the name of one or more partners, (2) the instrument transferring title gives no sign that they’re acting for a partnership, and (3) partnership funds were not used to acquire the property.
Under the R.U.P.A., property is rebuttably presumed to be partnership property if it was purchased with partnership funds, regardless of in whose name title is held. “Partnership funds” includes not only the partnership’s cash, but also the partnership’s credit.
If titled in p-ship name, then p-ship property
Untitled Property (common law)
Courts look to:
Acquisition of the property with partnership funds
Use of the property by the partnership in conducting the partnership’s business
Entry of the property in the partnership books as a partnership asset
A close relationship between the property and the business operations of the partnership
Improvement of the property with partnership funds
Maintenance of the property with partnership funds
Transfer of partnership rights
- Partner cannot transfer their management rights (unless unanimous vote to make new person partner)
- Partner can transfer financial rights (profit distributions)
Events of Dissociation
A partner becomes dissociated from the partnership by:
(1) oral or written notice of the partner’s express will to withdraw;
**creates automatic dissolution!
(2) happening of an agreed event;
(3) valid expulsion of the partner;
(4) the partner’s bankruptcy or the appointment of a receiver for a partner;
(5) the partner’s death or incapacity to perform partnership duties;
(6) the decision of a court that the partner is incapable of performing a partner’s duties; or
(7) termination of a business entity that is a partner.
Either of two events triggered upon dissociation
- P-ship dissolved and liquidated
- P-ship continues in existence w/ dissociated partner entitled to buyout of their p-ship interest
Dissolution
- In general, when a partner dissociates by express will in an at-will partnership, the partnership is dissolved and its business must be wound up.
- In a term partnership, if one partner dissociates wrongfully, or if a dissociation 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 dissociation, at least one-half of the remaining partners agree to wind up the partnership.
- Happening of agreed event
- happening of event makes it unlawful for partnership to continue
- issuance of judicial decree on application by partner
- issuance of judicial decree on application by a transferee of p-ship interest that it’s equitable to wind up
- passage of 90 consecutive days during which partnership does not have at least two partners
Apparent authority of dissociated partners
A partnership can be bound by an act of a dissociated partner undertaken within two years after dissociation (assuming that dissolution has not occurred) if:
(1) the act would have bound the partnership before dissociation, and
(2) the other party to the transaction (a) reasonably believed the dissociated partner was still a partner and (b) did not have notice of the dissociation
Order to payment during dissolution
- creditors
- partners capital contributions
- profits or losses, if any
Apparent authority of partners to bind after dissolution
- Partners retain apparent authority to bind the partnership to a third party on new business even after an event requiring winding up.
- A partnership can be bound after dissolution by any act of a partner appropriate for winding up the partnership’s business.
- The partnership will also be liable for other acts if the party with whom a partner dealt did not have notice of the dissolution.
Certificate of Limited Partnership
The information required in the certificate is minimal. It includes, among other items:
(1) the name of the partnership,
(2) the names and addresses of the agent for service of process, and
(3) the names and addresses of each general partner.
*if fail to file, just a gen p
General Partners (LP)
The LP is managed by the general partner(s). Each general partner has equal rights in the management and conduct of the LP’s activities. Generally, any matter relating to the limited partnership’s ordinary business activities may be exclusively decided by the general partner or, if there is more than one general partner, by a majority of the general partners.
Limited Partners (LP)
Limited partners usually have no management rights unless the partnership agreement grants them rights. Participation in management does not cause a limited partner to become personally liable for an obligation of the limited partnership (under older law, it did). That said, unless otherwise agreed, the vote of all partners (general and limited) is necessary for certain extraordinary activities,
Financial Rights in LPs
Unless otherwise agreed, distributions from an LP are made on the basis of the partners’ contributions (that is, in proportion to the value of each partners’ contribution) rather than the R.U.P.A’s default equal split for general partnerships.
Liability of Limited Partners in LP
A limited partner is not personally liable for an obligation of the LP solely by reason of being a limited partner. Limited partners have limited liability, meaning that they can only lose the value of their investments
A limited partner (as well as a general partner) is always liable for her own torts. The limited liability shield of any business organization does not protect a person from liability for her own torts.
FD of General Partners in LP
A general partner owes the LP and the other partners the same fiduciary duties of loyalty and care that general partners owe in a general partnership. However, a general partner does not automatically violate the duty of loyalty merely because the general partner’s conduct furthers his own interests.
FD Limited Partners in LP
Generally, a limited partner owes no fiduciary duty to the partnership or any other partner solely by reason of being a limited partner. Thus, they’re free to compete with the partnership and have interests adverse to those of the partnership, unless the partnership agreement provides otherwise.
Conversion and Merger
A limited partnership may convert to or merge with another form of business entity upon the consent of all partners and filing of a certificate (of conversion or merger) with the secretary of state.
Dissociation of LP
The events that will cause dissociation of a partner in a general partnership (see 4.1.1, supra) will also cause dissociation of a partner (general or limited) in a limited partnership.
**Note that a limited partner has no right to dissociate before termination of the limited partnership.
***A general partner’s right to dissociate is similar to the right of a partner to dissociate in a general partnership.
Ways for a LP to Dissolve
- judicially dissolution
- administrative dissolution
- The happening of an event specified in the partnership agreement.
- The consent of all general partners and limited partners holding a majority of the right to receive distributions (“majority in interest”)
- After dissociation of a general partner, upon consent of partners owning a majority in interest if another general partner remains; if no general partner remains, after 90 days unless the partners admit a new general partner
- Ninety days after dissociation of the last limited partner, unless a new limited partner is admitted within the 90 days
LLP
The R.U.P.A. allows the creation of limited liability partnerships (“LLPs”, sometimes called “RLLPs” (meaning, registered limited liability partnership)). This differs from a general partnership and a limited partnership in that in an LLP all of the partners have limited liability (that is, no partner is personally liable for a partnership obligation beyond their contribution to the partnership). So the major advantage of operating as an LLP is that partners are not personally liable for the LLP’s obligations
LLP formation requirements
To become an LLP, a partnership must file a statement of qualification with the secretary of state.
The statement must be executed by at least two partners. The required minimal information includes:
- (1) the name and address of the partnership;
- (2) a statement that the partnership elects to be an LLP; and
- (3) a deferred effective date, if any. The partnership becomes an LLP at the time of the filing of the statement or on the date specified in the statement, whichever is later.
Liability of LLP Partners
A partner in an LLP is not personally liable (directly, indirectly, or by way of contribution) for the obligations of the LLP, whether arising in tort, contract, or otherwise. As always, however, a partner remains personally liable for their own wrongful acts. If partnership assets are insufficient to indemnify them for an obligation they incurred on behalf of the LLP, they forfeit the right to receive contributions from other partners in exchange for being relieved of the obligation to contribute to their personal liability.
LLC Financial Rights
it does provide that if an LLC makes any distribution to its members, the distribution must be made to the members in equal shares unless the operating agreement provides otherwise. In most states, however, unless otherwise agreed, profits and losses and distributions are allocated on the basis of contributions.
LLC Liability
Members and managers generally are not personally liable for the LLC’s obligations. They have limited liability and can lose only the amount of their investments. (As always, though, members are liable for their own torts.) However, courts may pierce the LLC veil of limited liability to reach the members’ and managers’ personal assets to satisfy LLC obligations under circumstances similar to those under which courts would pierce the veil of a corporation. Failure to observe corporate-type formalities (for example, having meetings, recording minutes, etc.) will not be a ground for piercing the LLC veil.
A partner’s post-dissolution act (NOT disassociation)
- A partnership will be bound by a partner’s post-dissolution act if the act was appropriate for winding up the business (**entering a new contract= not appropriate)
- will be bound by a partner’s post dissolution act even if it was not appropriate for winding g up the business if the third party with whom the partner dealt did not have notice of the dissolution and the act would have bound the partnership before dissolution (through apparent or actual authority).
