Partnership

Question 1

Partnership

Answer 1

A partnership is an association of two or more persons to carry on as co-owners of a business for profit.

ExamTip: Parties’ subjective intent is NOT relevant with regard to “intent to form a partnership”. Parties MUST intend to be co-owners of a business for profit.

Question 2

Factors for Finding a Partnership

Answer 2

1. Most importantly, sharing of PROFITS raises a presumption of partnership.
2. Sharing of losses
3. Right to participate in control of the business. (Even if no control is ever exercised)

ExamTip: Presumption of a partnership is rebuttable with proper evidence that there is no sharing of losses, or control over the business.

Question 3

Partnership by Estoppel

Answer 3

When a person by words or conduct represents himself as a partner or consents to being represented by another as a partner, he will be liable to third parties who extend credit to the actual or apparent partnership in reliance on the representation.

Question 4

Law Governing Partnerships

Answer 4

Generally, partnerships are permitted to contract around default rules. However, if a partnership agreement fails to address an issue, the Revised Uniform Partnership Act (“RUPA”) default rules will apply.

Question 5

Voting by Partners

Answer 5

“One partner, one vote” unless otherwise is agreed upon. All partners have EQUAL RIGHTS in the management of the business.

Majority vote is required for matters within the ordinary course of the partnership business.

Unanimous vote is required for matters outside of the ordinary course of business.

Question 6

Partners’ Right to Compensation

Answer 6

Partners have no right to a salary or other compensation based on the understanding that they will receive a share of the profits.

However, partners must be indemnified with regard to payments made and obligations reasonably incurred in carrying on the partnership business.

Question 7

Sharing Profits and Losses

Answer 7

Unless otherwise agreed, profits are shared EQUALLY among all partners. Losses are shared in the same manner as profits unless specified otherwise.

ExamTip: Losses follow profits. Profits do NOT follow losses.

Question 8

Tort Liability of the Partnership

Answer 8

A partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner acting in the ordinary course of the partnership’s business or with authority of the partnership.

Question 9

Contracts Liability of the Partnership

Answer 9

A partnership is liable for all contracts entered into by a partner in the scope of partnership business or with actual or apparent authority of the partnership.

Question 10

Actual & Apparent Authority of Partners

Answer 10

Actual Authority is the authority a partner reasonably believes they have based on the communications between the partnership and the partner.

A partner is an agent of the partnership and 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.

ExamTip: If the third-party knows the partner lacks actual authority, there is no apparent authority either.

Question 11

Statement of Partnership Authority

Answer 11

Partnerships can create actual authority by filing a statement of partnership authority with the secretary of state. A statement of this kind grants or limits a partner’s authority to enter into transactions on the Partnership’s behalf.

ExamTip: If a statement is filed with SoS and County Recorder, third-parties are deemed to have notice w/r/t transactions involving partnership’s real property.

Question 12

Liability of the Partners

Answer 12

Each partner is jointly and severally liable for ALL obligations of the partnership.

Plaintiffs MUST first exhaust partnership resources, then seek to collect from individual partners’ assets.

ExamTip: An individual partner may require that the partnership indemnify his payments to Plaintiff or ask for a pro rata contribution from other partners.

Question 13

Liability of Newly Admitted Partners

Answer 13

A newly admitted partner is NOT personally liable for partnership obligations that arose before their admission.

Question 14

Liability of Dissociating Partners

Answer 14

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, a partner can be liable for liabilities incurred within two-years IF (1) the other party reasonably believed the dissociated partner was still a partner; and (2) did not have notice of dissociation.

ExamTip: Partner must either give one-by-one notice or file as notice of dissociation, which becomes effective in 90-days.

Question 15

Four Fiduciary Duties of Partners

Answer 15

Partners owe the following 4 duties to each other and the partnership:

1. Duty of Loyalty
2. Duty of Care
3. Duty of Disclosure
4. Duty of Obedience

Question 16

Duty of Loyalty

Answer 16

Duty of loyalty requires that each partner
(1) account to the P 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 as an adversary.

(3) to refrain from competing with the partnership in the conduct of its business.

Question 17

Duty of Care

Answer 17

Under the RUPA, a partner is only in breach of the duty of care when he engages in: (a) grossly negligent or reckless conduct; (b) intentional misconduct; OR (c) a knowing violation

ExamTip: Ordinary Negligence is excused

Question 18

Duty of Disclosure

Answer 18

NOT a fiduciary duty.

A partner has a duty to provide complete and accurate information concerning the partnership. Each partner must furnish (1) without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties; AND (2) on demand, any other information concerning the partnership’s business and affairs.

ExamTip: The duty of disclosure MAY be eliminated. Only duty that can be K’ed away.

Question 19

Duty of Obedience

Answer 19

The duty of obedience requires the partner to obey all reasonable directions by the partnership and not act outside of the scope of his authority.

Question 20

Partnership Property

Answer 20

1. Titled property is partnership property if acquired in the partnership’s name or in a partner’s name but there are indications that the partner is acting for a partnership.
2. Property purchased with partnership funds is rebuttably presumed to be partnership property.

ExamTip: A partner is NOT a co-owner of partnership property and has no interest in partnership property that can be transferred.

ExamTip 2: A partner may only use partnership property for benefit of partnership.

Question 21

Partners’ Separate Property

Answer 21

Property
(1) held in the name of one or more partners;
(2) the instrument transferring title gives no sign that they are acting for a partnership; AND
(3) partnership funds were not used to acquire the property.

Question 22

Partnership Interest

Answer 22

A partner’s ownership interest in a partnership is called the “partnership interest”. This interest consists of (1) management rights and (2) financial rights.

1. Management rights can NOT be transferred unilaterally. Only an admitted partner (approved by unanimous vote) will become “partner” with managerial rights.
2. Financial rights are personal property and CAN be transferred unilaterally. Upon transfer, the transferee’s only right is to receive profit distributions.

Question 23

Dissociation

Answer 23

Dissociation occurs when any partner ceases to be associated with the partnership in carrying on its business.

A partner becomes dissociated from the partnership by
(1) Oral or written notice of partner’s EXPRESS WILL to withdraw
(2) Happening of an agreed event
(3) Valid expulsion of the partner
(4) Partner’s bankruptcy or the appointment of a receiver for a partner
(5) Partner’s death or incapacity to perform partnership duties
(6) Decision by a court that the partner is incapable
(7) Termination of a business entity that is a partner

Question 24

Wrongful Dissociation

Answer 24

A partner will be deemed to have wrongfully dissociated if the dissociation is in breach of an express term in the partnership agreement.

Withdrawal from a term partnership; Expulsion; or Bankruptcy are also wrongful dissociations.

Wrongfuly dissociated partner is liable for any damages to the partnership.

Question 25

Term & “At Will” Partnerships

Answer 25

An at-will partnership is one where the partners have not agreed to remain partners until the [1] expiration of a definite term or the [2] completion of a particular undertaking.

Question 26

Dissolution

Answer 26

1. When a partner dissociates by express will in an at-will partnership, the partnership is dissolved and its business must be wound up.
2. In a term partnership, a wrongful dissociation does not result in dissolution unless one-half of the remaining partners vote, within 90 days, to wind up the partnership.

Question 27

Limited Partnership (“LP”)

Answer 27

A limited partnership is a partnership with at least one general partner and at least one limited partner.

ExamTip: An LP can be created only by filing a certificate of formation with the state. Failure to file creates a general partnership.

Question 28

Certificate of Limited Partnership

Answer 28

A certificate of LP must be filed with the secretary of state. The filing must include: (1) name of the partnership; (2) names and addresses of the agent for service of process; and (3) the names and addresses of each general partner.

Question 29

Rights of Limited Partners in LP

Answer 29

Limited partners have no management rights unless the partnership agreement expressly grants them rights.

However, limited partners (along with general partners) must vote for extraordinary events.

Financial rights include the right to profit distributions, apportioned on the basis of each partner’s contribution (NOT EQUAL !).

Question 30

Liability for IMPROPER Distributions

Answer 30

A general partner who consents to an improper distribution is personally liable to the limited partnership for the amount that the distribution exceeds what could have properly been distributed.

Question 31

Liability of General Partners

Answer 31

General partners are jointly and severally liable for all obligations of the LP.

Question 32

Liability of Limited Partners

Answer 32

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 and can only lose the value of their investments.

ExamTip: A limited partner is ALWAYS liable for their own torts.

Question 33

Limited Liability Partnership

Answer 33

A partner in an LLP is NOT personally liable for the obligations of the LLP, whether arising in tort, contract, or otherwise.

This means that an LLP partner will not be held liable for torts of a co-partner, unless they personally participated.

Question 34

Limited Liability Companies

Answer 34

A distinct organizational structure. Those who own shares are called “members”.

Management can either be “member-managed” or “manager-managed”

Question 35

Fiduciary Duties in an LLC

Answer 35

Fiduciary duties of care and loyalty are owed to members and the LLC.

1. Duty of Care: Members (or managers if manager-managed) must act with the care that a person in a like position would exercise under similar circumstances, in a manner that is in the best interests of the LLC.
2. Duty of Loyalty: Refrain from self-dealing