Partnership

Question 1

What is a Partnership?

Answer 1

UPA § 202(a): “… the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.“
Written agreement not needed; imply from conduct
Written agreement not determinative; look at conduct
Courts focus on sharing of profits and control
Sharing of profits creates presumption of partnership, unless profits were received in payment of wages, interest on a loan, etc. UPA §202(c)(3)

Question 2

Partnership Agreements

Answer 2

UPA & Partnership Agreement:
Relations among the partners are governed by the partnership agreement. UPA §105(a)
If partnership agreement does not otherwise provide, UPA provides the default rules. UPA §105(b)
But some UPA rules cannot be modified by the partnership agreement. UPA §105(c)

Question 3

UPA §105(c) – Partnership Agreements May Not:

Answer 3

vary §307 (actions by and against partnership and partners);
unreasonably restrict partner’s right to access partnership’s books;
alter or eliminate duties of loyalty or care except as in §105(d);
eliminate good faith and fair dealing but may set standards;
unreasonably restrict partner’s right to sue partnership or partners;
relieve liability for bad faith, willful misconduct, knowing law violation;
vary power to dissociate as a partner by express will;
vary grounds for expulsion of a partner by judicial order;
vary causes of dissolution by judicial order under 801(4-5);
vary requirement to wind up partnership in 802(a), (b)(1), (d)

Question 4

Partnership by Estoppel

Answer 4

UPA § 308(e): “Except as otherwise provided in [(a) and (b)], persons who are not partners as to each other are not liable as partners to other persons.”
UPA § 308(a): “If a person, by words or conduct, purports to be a partner, or consents to being represented by another as a partner, in a partnership or with one or more persons not partners, the purported partner is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership.”

Question 5

Fiduciary Duties

Answer 5

Loyalty: Partners owe duty to – UPA §409(b)
Account for property, profit, or benefit derived by partner in conduct of partnership’s business, use of its property, or appropriation of its opportunity
Refrain from adverse dealings with partnership on own account or on behalf of third party, and
Refrain from competing with partnership
Care: Duty to refrain from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of law– UPA §409(c)
Good Faith: Partners must discharge duties in good faith and fair dealing – UPA §409(d)

Question 6

Bargaining Away the Duty of Loyalty

Answer 6

UPA §105(c)(5): “A partnership agreement may not: … alter or eliminate the duty of loyalty or the duty of care, except as otherwise provided in [(d)]”
UPA §105(d)(3): “If not manifestly unreasonable, the partnership agreement may:
alter or eliminate the aspects of the duty of loyalty stated in Section 409(b);
identify specific types or categories of activities that do not violate the duty of loyalty;
alter the duty of care, but may not authorize conduct involving bad faith, willful or intentional misconduct, or knowing violation of law; and
alter or eliminate any other fiduciary duty.”

Question 7

Bargaining Away the Duty of Loyalty (authorization/partnership agreement)

Answer 7

UPA §409(f): “All the partners may authorize or ratify, after full disclosure of all material facts, a specific act or transaction by a partner that otherwise would violate the duty of loyalty.”
UPA §105(d)(1): “The partnership agreement may: (A) specify the method by which a specific act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified by one or more disinterested and independent persons after full disclosure of all material facts;

Question 8

Partnership Property

Answer 8

“A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily.” UPA §501, see also §§ 203 & 401(i)
“A transferee has the right to: (1) receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled ….” UPA § 503(b)(1)
Transferee does not get right to participate in management or access records. UPA § 503(a)(3).
Person becomes a partner only as provided in the partnership agreement or with the consent of all of the partners. UPA §402(b)

Question 9

Profit/loss division

Answer 9

Unless the partners otherwise agree, profits are divided equally and losses follow profits
“Each partner is entitled to an equal share of the partnership distributions and … is chargeable with a share of the partnership losses in proportion to the partner’s share of the distributions.” UPA §401(a)
Capital account: running balance reflecting partner’s ownership equity (initial capital contribution plus allocations of profits, minus allocations of losses and distributions).

Question 10

Partner’s Mgmt Rights

Answer 10

UPA §401(h): “Each partner has equal rights in the management and conduct of the partnership’s business.”
UPA §401(k): “A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the affirmative vote or consent of all the partners.”
Agreement can modify these UPA defaults–§105 & Day

Question 11

Partner’s Authority

Answer 11

UPA §301(1):“Each partner is an agent of the partnership for the purpose of its business. An act of a partner … for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership,
unless the partner did not have authority to act for the partnership in the particular matter and the person with which the partner was dealing knew or had notice that the partner lacked authority.”
UPA §301(2): “An act of a partner which is not apparently for carrying on in the ordinary course the partnership’s business … binds the partnership only if the act was actually authorized by all the other partners.”

Question 12

Reconciling Deadlock
Partner v. Partner

Answer 12

UPA §401(h): Each partner has equal rights in management of the partnership’s business.

UPA §401(k): Disagreement as to a matter in the ordinary course of pship business is decided by majority of the partners

Question 13

Reconciling Deadlock
Third party v. Partner [or Pship] (Biscuit)

Answer 13

UPA §301(1): Each partner is an agent of pship, and can bind pship to third party for acts in ordinary course of pship business
unless partner had no authority to act for pship in that matter and third party knew or had notice that partner lacked authority
UPA §401(k): Disagreement on matter in ordinary course of pship business decided by majority of partners
No majority vote to change Freeman’s authority to buy bread for pship, so Freeman still had authority
Burden is on party wishing to change status quo

Question 14

Partner’s Torts & Indemnity for Liabilities

Answer 14

UPA §305(a): “A partnership is liable for loss or injury caused to a person … as a result of a wrongful act or omission … of a partner acting in the ordinary course of business of the partnership or with the actual or apparent authority of the partnership.”
UPA §305(b): also partnership liable if partner misapplies money or property of a third party (e.g., a client)
UPA §401(c): “A partnership shall indemnify … a person with respect to any claim … and any debt, obligation, or other liability incurred by the person by reason of the person’s … capacity as a partner, if [it] does not arise from the person’s breach of this section or Section 407 or 409.”
UPA §306(a): “all partners are liable jointly and severally for all debts, obligations, and other liabilities of the partnership

Question 15

Right to Dissociate – UPA (1997) §601

Answer 15

Partners always have the power to dissociate, but not always the right to do so. See UPA §602(a)
UPA §601: A partner is dissociated from pship upon:
partner’s express will to withdraw as a partner,
event stated in the partnership agreement,
partner’s expulsion pursuant to the partnership agreement,
partner’s expulsion by vote of all the other partners if there has been a transfer of all that partner’s transferable interest,
judicial order
partner’s bankruptcy
partner’s death or incapacity …

Question 16

Dissociation Effects– UPA (1997)

Answer 16

Continuation of partnership after dissociation
Dissociating partner’s rights in management and duty of loyalty end. UPA §603
Dissociating partner’s interest must be bought. §701
Price equal to greater of liquidation value, or value based on sale of entire business as a going concern. §701(b)
Deduct damages if wrongful dissociation. §§602(c), 701(c)
If dissociated before term expired or undertaking completed, buyout payment delayed until then. §701(h)
Dissociating partner is liable for pship debts incurred before dissociation, unless released by creditors. UPA §703
Note: A new partner is not personally liable for pship liabilities incurred before became a partner. UPA §306(b)

Question 17

Wrongful Dissociation – UPA (1997)

Answer 17

UPA §602(b): Dissociation is wrongful only if:
is in breach of express provision of pship agreement; or
in partnership for a definite term or particular undertaking, occurs before term’s end or undertaking’s completion and:
the person withdraws as a partner by express will …;
the person is expelled as partner by judicial order…; or
the person is dissociated [by bankruptcy] ….”
Partner who wrongfully dissociates is liable for damages caused by the dissociation. UPA §602(c)
Limits participation in winding up. §802(c)
Withdrawing partner paid fair value minus damages. §701

Question 18

Dissolution & Winding Up – UPA (1997)

Answer 18

UPA §801: Dissolution and winding up occurs upon:
In pship at will, notice of partner’s express will to withdraw,
In pship for definite term or undertaking,
vote of at least half of remaining partners within 90 days after person’s death, bankruptcy, or wrongful dissociation,
affirmative vote of all the partners, or
end of term or completion of undertaking
Event stated in partnership agreement
Court’s dissolution order upon application by partner that
conduct of pship’s business is unlawful
economic purpose of pship is unreasonably frustrated, or
partner’s conduct makes it not reas. practicable to carry on
otherwise not reasonably practicable to carry on partnership

Unanimous vote of partners may waive right to have business wound up, unless statement of termination effective or court has ordered dissolution. UPA §803
Then partnership continues as if no dissolution occurred
Otherwise pship is wound up. UPA§802(a)
Dissolution terminates authority of partners to act for partnership except in winding up & under §301 if other party does not know of dissolution. UPA §804(a)

After partnership’s creditors paid, any remaining surplus distributed to partners for unreturned contributions and then in proportion to rights in distributions. UPA §806(b)
If assets less than amount owed to creditors, partners must contribute (as they share losses) – UPA §806(c)

Question 19

Partnership entities with limited liability (LLP)

Answer 19

Limited Liability Partnership (LLP)
Governed by UPA
General partnership with limited liability for partners
UPA §306(c): “A debt, obligation, or other liability of a partnership incurred while the partnership is a [LLP] is solely the debt, obligation, or other liability of the [LLP]. A partner is not personally liable … for a debt, obligation, or other liability of the [LLP] solely by reason of being … a partner.”
Create by filing statement of qualification with Secretary of State under UPA §901

Question 20

Limited Partnership (LP)

Answer 20

Limited Partnership (LP)
Governed by ULPA or RULPA (not expected to know)
One or more GPs, and one or more LPs
Limited liability for LPs if do not take part in control
RULPA §303: “Only limited partners who participate in control can be held liable and they can be held liable only to those who reasonably believe, based upon limited partner’s conduct, that limited partner is a general partner.”
GPs have personal liability, but can avoid if LLLP

Question 21

Limited Liability Limited Partnership (LLLP)

Answer 21

Limited partnership with limited liability for GPs

Question 22

LLC Formation

Answer 22

File articles of organization with State – ULLCA §201
Name, must include “limited liability company,” “LLC” or similar phrases – see also ULLCA §112
Address of company’s principal office
Name and address of registered agent
Many states also require articles to state:
Whether term company (if so, specify the term)
Whether manager or member managed
States typically require annual reports
LLC may choose partnership tax of subchapter K

Question 23

LLC Operating Agreement

Answer 23

§105(a): Operating agreement (OA) governs relations among members and between members and LLC, rights and duties of managers, affairs of LLC, and means for amending the agreement.
§105(b): To the extent OA does not provide for a matter in (a), the Act governs
§105(c): List of things OA may not do, e.g.:
Vary law governing internal affairs and liability of members and managers for debt or liability of LLC
Eliminate duty of loyalty or care, but may limit
Eliminate duty of good faith, but may set standards
Relieve person of liability for bad faith conduct, willful or intentional misconduct, or knowing violation of law
Vary the causes of dissolution by judicial order

Question 24

LLC Member’s Management Rights

Answer 24

Member-managed LLC unless operating agreement expressly says for manager-managed – ULLCA §407
States typically require to be stated in articles of org.

If member-managed LLC – ULLCA §407(b)
Each member has equal rights in LLC’s management
Difference among members as to matter in ordinary course of company’s activities decided by majority.
Consent of all members required for extraordinary acts or to amend the operating agreement (same if manager-managed).

If manager-managed – ULLCA §404(c)
Activities of LLC decided by manager or majority if managers
Each manager has equal rights in management

Question 25

Limited Liability for LLC members

Answer 25

ULLCA §304:
“A debt, obligation, or other liability of a [LLC] is solely the debt, obligation, or other liability of the company. A member or manager is not personally liable … for a debt, obligation, or other liability of the company solely by reason of being or acting as a member or manager.”
“The failure of a [LLC] to observe formalities relating to the exercise of its powers or management of its activities and affairs is not a ground for imposing liability on a member or manager for a debt, obligation, or other liability of the company.”

Question 26

LLC Fiduciary Duties

Answer 26

Member-managed LLCs: ULLCA §409(a-d)
Members owe fiduciary duty of loyalty and care to company and other members (same as UPA).
Member must discharge duties and exercise rights consistent with good faith & fair dealing.

Manager-managed LLCs: ULLCA §409(h)
Managers owe a fiduciary duty of loyalty and care, not the members.

But may alter the duty of loyalty: ULLCA §105(d)
“If not manifestly unreasonable, the operating agreement may (A) alter or eliminate the aspects of the duty of loyalty stated in Section in 409(b) and (i); (B) identify specific types or categories of activities that do not violate the duty of loyalty ….”