Partnership

Question 1

Partnership Definition (formation)

Answer 1

Voluntary association of two or more persons to carry on as co-owners of a business or profit.

Question 2

When is Partnership formed?

Answer 2

Presumed to exist if partners agree to share proporitonally in business profits or losses.

Question 3

General Partnership Characteristics

Answer 3

all partners participate fully in running business and share equally in profits and losses.

capital contributions may vary and are not required.

carry a lot of risk.

all partners are equal.

Question 4

Limited Partnership Definition

Answer 4

Partnership composed of:
* 1+ persons who control the business and are personally liable for partnership’s debts (GPs)
* 1+ persons who contribute capital and share profits but who cannot manage the business and are liable ONLY for the amount of their contribution (LPs)

Question 5

Partnership Agreement

Answer 5

Agreement, whether written, oral, or implied, among the partners concerning partnership, including amendments to agreement. (requires no governmental action/filing)

Question 6

What law are partnerships governed by?

Answer 6

Mostly State Law

UPA, RUPA, HUPA.

Question 7

Determining whether Partnership is formed:

Answer 7

 Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property.

 The sharing of gross returns does not by itself establish partnership, even if persons sharing them have joint or common right or interest in property from which returns are derived.

 A person who receives a share of the profits of business is presumed to be partner in the business, unless the profits were received in payment: (protected categories)
* Debt;
* Services as IC or wages or other compensation to employee;
* Rent;
* Annuity or other retirement or health benefit;
* Interest or other charge on loan;
* Sale of goodwill of business or other property by installments or otherwise.

Question 8

When does partner bind partnership?

Answer 8

Each partner is agent; Partner apparently acting in ordinary course of business binds partnership.

UNLESS:
Partner has no authority AND person whom partner was dealing with KNEW OR HAD RECEIVED NOTIFICATION that the partner lacked authority.

Partner has actual and apparent authority

Question 9

When is Partner Liable?

Answer 9

Partner liable for tort or penalty incurred when acting in ordinary course of business or with actual or apparent authority of partnership.

Question 10

What happens when partners disagree on how to manage partnership?

Answer 10

Difference as to matter in ordinary course of business: majority vote of partners

Difference as to matter outside ordinary course of business: amendment to partnership agreement only with affirmative vote or consent of all partners.

Question 11

What duties do partners owe to eachother?

Answer 11

Duty of Loyalty and Care, and Duties with Respect to Information

Question 12

What does Duty of Loyalty Include?

Answer 12

Account to partnership and hold as trustee any property profit or benefit derived by partner in conduct and winding up of partnership business.
o If you’re making profit, it is partnership profit.
o Cannot appropriate partnership opportunity

Refrain from dealing with partnership as or on behalf of party having an interest adverse to partnership.

Refrain from competing with partnership before dissolution of partnership.
o Can prepare to compete after; same as agency law.

Question 13

What does Duty of Care include?

Answer 13

Refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.
o Same as duty of performance in agency law.

Obligation of good faith and fair dealing.
o Cannot act within own interest of the partner – to further partners’ own interest.

Can be partner and also be lender/creditor. Does not affect person as a partner.

Question 14

What do Duties with Respect to Information Include?

Answer 14

• Books and Records: Require partnership to keep its books and records at its principal office.
• Access: partnership shall furnish to each partner any information concerning partnership business and other circumstances the partner knows or is material to proper exercise of the partner’s rights and duties.
• Furnishing Information: Upon Partner’s request, partnership must provide any other information, except to the extend the request is unreasonable or otherwise improper under the circumstances.

Question 15

Transferee (of partnership transferrable interest) Rights:

Answer 15

o Petition court to wind up partnership business;
o Receive distributions that transferor would be entitled to; and
o Receive upon dissolution/winding up the net amount distributable to transferor.

Question 16

What kind of liability does a partnership have to creditors?

Answer 16

Partners are jointly and severally liable.
- No limited liability.
- Personal assets at stake for debt of partnership.
- each partner responsible for their share.
- partner who pays all the debts is entitled to indemnification by other partners who did not pay.

Question 17

Default Rule for Profit Sharing

Answer 17

Profit sharing is done on equal basis and losses are allocated in same proportion as profits.
 Regardless of capital contribution or work put in by partners.
 Partnership agreement can establish otherwise.
* Loss-sharing agreement with partners do not affect their personal liability of each partner to third party for debts of partnership.

Question 18

Three Phases of Dissolution/Dissociation

Answer 18

1) Dissolution
2) Winding Up
3) Termination

Question 19

Modern Rule for Dissociation or Dissolution (RUPA)

Answer 19

Dissociation OR Dissolution; when partner leaves (voluntary or involuntary).
* Default rules providing that a dissociation leads to dissolution in some but not all circumstances

Question 20

Dissociation will occur in any of the following events:

Answer 20

At Will: Partner notice of express will to withdraw.
Term: event agreed to in partnership agreement
Partner’s expulsion pursuant to partnership agreement.
Partner’s expulsion by unanimous vote of other partners IF:
* (1) unlawful to carry on partnership business with that partner;
* (2) partner transferred its transferable interest;
* (3) corporate partner dissolving/ending;
* Partnership partner dissolving/ending.
Other partners get judicial determination
Partner bankruptcy
Individual partner death/incapacity

Question 21

What is the effect of dissociation?

Answer 21

Partner’s dissociation results in dissolution and winding up of partnership business.
 (1) right to participate in partnership management terminates;
 (2) duty of loyalty (not to compete) terminates; and
 (3) duty of loyalty and duty of care continue only for matters and events before the dissociation.

Question 22

Defining Characteristic of LLP

Answer 22

Only the LLP (the entity) is liable for business obligations (partners personally liable for own tortious conduct or of those they supervise).

Partner is not liable for negligent act committed by another partner or by an employee (associate!) not under the partner’s supervision.

Question 23

Defining Characteristic of LLLP

Answer 23

All partners have limited liability.