Partnership Flashcards
Authority
Actual and apparent authority are tested heavily in partnership questions.
Partners in a general partnership generally have actual and apparent authority to bind the partnership in contracts entered into in the ordinary course of business.
The same applies to members in an LLC.
What is the typical answer to whether a partnership is formed on the MEE?
Formation of a general partnership does not require much. When an MEE question asks if a general partnership is formed, the answer is usually yes.
Opening rule statement
A partnership is the association of two or more persons to carry on as co-owners of a business for profit, whether or not the persons intended to form the partnership.
Profit sharing
Profit sharing creates a presumption that a person is a partner unless the profits were received in payment of a debt, rent to a landlord, wages, etc.
Other indicia of a partnership include capital contributions and mutual agency.
Neither a writing nor a certificate needs to be filed for a general partnership to be formed.
Note that a general partnership is the default form; sometimes a general partnership is formed because a limited partnership was improperly formed (e.g. the paperwork was not filed correctly).
Separate payment for services
A partner is not entitled to separate payment for services because a partner is compensated by the profits.
There are some exceptions, e.g., if agreed-upon or a partner may be reimbursed reasonable compensation if it assists in winding up the business of the partnership.
Partners are agents and comanagers of the partnership
Partners have equal rights to comanage ordinary affairs, e.g. signing a lease, even if profits are not shared equally.
A majority vote wins if there’s disagreement.
Extraordinary matters require a unanimous vote (e.g. admitting a new partner or selling land)
Partners are jointly and severally liable for partnership debts
An incoming partner is not personally liable for prior debts of the partnership, although his capital contributions can be used to satisfy such debts.
Outgoing partners are personally liable for debts incurred during their time at the partnership.
Partners have fiduciary duties
Partners are in a fiduciary relationship with one another and must act in good faith. They are charged with the duty of loyalty, (i.e. they may not usurp corporate opportunities for a personal advantage, engage in self-dealing, or compete with the partnership).
They also have the duty of care and the duty to account (they must account for any profits).
How does a partnership end
Step 1: dissolution,
Step 2: winding up
Step 3: termination
Dissolution
The dissolution of a partnership is the change in the relation of the partners.
Prior creditors are entitled to newspaper notice,
Note that a partner can withdraw from a partnership by giving notice at any time, this will trigger dissolution in an at will partnership.
Winding up
This is where the partnership assets are liquidated and creditors are paid.
Note that partners are still liable for any liabilities that occur during the winding up phase
Termination
This is the true end of the partnership
Creditor recourse
If a creditor has a claim against a partner, the creditor can obtain an interest in the partnership. This includes profits but not management or voting rights.
If a creditor has a claim against the partnership, the creditor can try to collect from the individual partners.
These principles are heavily tested.
Partner liability
Partners are jointly and severally liable for the obligations of the partnership.
Even if a partner enters into a contract without actual authority to do so, the partnership and the partners are bound (so long as the partner had apparent authority).
The creditor must obtain a judgment against the partners personally to go after each partners personal assets.
The creditor should attempt to collect from the partnership before seeking the partners’ personal assets
Filing
Partnerships other than genera partnerships must file a certificate with the state to be properly formed. Liability is limited.
