Partnership

Question 1

What are the five partnership areas? (If partnership is on the bar 85% of the time it will be about general partnership formations)

Answer 1

1. General Partnership Formation
2. Liabilities of General Partners to Third Parties
3. Rights and Liabilities Between General Partners
4. General Partnership Dissolution
5. Alternative Unincorporated Business Organizations

Question 2

What is a general partnership formation?

Answer 2

1. Formalities: No formalities - truly unique among business forms in America - the problem is that you will be called by the law a general partnership even if you dont want to
2. Definition: A general partnership is an association of two or more persons who are carrying on as co-owners of a business for profit
3. Sharing profits is the key factor, therefore the contribution of money (ie capital) or services in return for a share of profits creates a presumption (use this word) that a general partnership exists (not salary or wage) but profit

Question 3

What are the Liabilities of General Partners to Third Parties?

Answer 3

1. Agency Principles Apply, partners are agents to the partnership for apparently carrying on usual partnership business therefore, the general partnership is liable for each partner’s torts in the scope of partnership business and for each partner’s authorized contracts

Question 4

Each General Partner is Personally Liable for All Debts of the Partnership and for?

Answer 4

For each co-partners torts; Make them liable (this is the cardinal rule)

Question 5

Is the partnership liable for incoming partner’s pre-existing debts?

Answer 5

Are generally not liable for prior debts, BUT any money paid in to the partnership by that incoming partner can be used to satisfy prior debts

Question 6

Dissociating (withdrawing) partner’s liability for subsequent debts

Answer 6

The answer: Dissociating partners retain liability on future debts until notice of their dissociation is given to creditors OR until 90 days after filing “notice of dissocation” with the state

Question 7

What is General Partnership Liability by Estoppel?

Answer 7

One who represents to a third party that a general partnership exists will be liable as if a general partnership exists (Was on a CO Bar)

Question 8

Hypo: Paula convinced her friend Peter to start a sailing school and agreed to lend Peter money to purchase a boat for that purpose. At a party, Paula told a wealthy friend: “My partner Peter and I are starting a sailing school and we need a boat.” The wealthy friend offered to sell Paula and Peter a boat and agreed to allow Peter to take it for a test ride the next day. Later that night, however, Peter and Paula fight and decide to drop the sailing school idea. The next day, Peter takes the boat for a ride and tortiously destroys the boat. May the wealthy friend sue Paula for the loss of the boat? (Bar examiners love this fact pattern)

Answer 8

3rd Party tort victim sue Paula (Partner?) for Peter’s (Co-Partner?) tortious activity? LIABILITY

As a rule the general partners are liable for all partnership obligations including, co-partners torts (was the partnership formed) IN THIS CASE, however Paula and Peter never formed a partnership because, their’s was a lending arrangement not based on sharing profits

Nonetheless under estoppel Paula will be liable to that 3rd party tort victim because she did represent to him that she is a partner of Peter's and therefore will be liable as if she were (which means oiable for his tort) 
The 3 areas of the fact pattern are met:
1. Formation 
2. Liability and; 
3. Estoppel

Question 9

What are the rights and liabilities between partners?

Answer 9

General Partners are Fiduciaries of Each Other and the Partnership Therefore, general partners owe to each other and the partnership loyalty which means that general partners may never engage in self dealing and may never usurp partnership opportunities; and may never make a secret profit at the partnership’s expense.

Question 10

If a partner breaches his duties to the partnership what are the remedies available?

Answer 10

Action for Accounting; May recover losses that are caused by the breach and also may disgorge profits made by the breaching partner as we

Question 11

What are the Partners’ Rights in Partnership Property and Liquidity?

Answer 11

1. Specific Assets - Land, leases or equipment which are owned only by the partnership itself, and therefore may not be transfered by individual partners without partnership authority -They are il-liquid; Liquidity (whether you can transfer)
2. Share of Profits - Is personal property owned by individual partners and therefore it may be transferred by individual partners to 3rd parties
3. Share in Management - General partners have the right to do so, asset owned only by the partnership itself, and therefore it may not be transferred by individual partners to 3rd parties, Cannot sell your right to vote, cannot leave control to a loved one
4. In order to determine whether the fact pattern involves property owned by the partnership or personal property owned by an individual partner, the test is: Who’s money was used to buy the property? -If partnership money used, than it becomes partnership property, if personal money, than it becomes personal property

Question 12

Hypo: John buys a car in John’s own name with John’s money which John uses in partnership business. John dies. Does John’s spouse Yoko get the car or is it a specific asset of the partnership?

Answer 12

Because John bought the car with John’s own money, it becomes John’s own car, and therefore he may leave that car to Yoko through inheritance

Question 13

What is the general rule for management of a partnership?

Answer 13

Absent an agreement, each partner is entitled to EQUAL control (vote)

Question 14

Hypo: A, B and C agree to contribute money and share profits 60-30-10. How do they vote?

Answer 14

This is a trap, WITHOUT AN AGREEMENT ON CONTROL, control is equal, which means one partner one vote and majority vote governs ordinary affairs but unanimous consent is required for fundamental matters
WITHOUT AN AGREEMENT, control is equal (this is the rule)

Question 15

What is the general rule for salary of a partnership?

Answer 15

Absent an agreement, partners get NO SALARY.

EXCEPTION: partners are entitled to compensation when winding up the partnership

Question 16

Hypo: A and B are partners. A works 96 hours a week. B sleeps all day. Does A get any salary?

Answer 16

No - WITHOUT AN AGREEMENT, no salary is our default rule

Question 17

What is the general rule for profits and losses of a partnership?

Answer 17

1. Absent an agreement, PROFITS SHARED EQUALLY

2. Absent an agreement, LOSSES SHARED LIKE PROFITS

Question 18

HYPO: If an agreement is silent on profits and losses?

Answer 18

WITHOUT AN AGREEMENT ON PROFITS, they are shared equally, secondly WITHOUT AN AGREEMENT ON LOSSES, they are shared just like profits, which would be equally as well

Question 19

HYPO: If an agreement states that “profits are shared 60/40” but is silent on losses. Losses shared?

Answer 19

As adults they may share profits, and WITHOUT AN AGREEMENT ON LOSSES, they are just like profits, which this time would be 60/40 as well
Conversely, if there is an agreement on losses that states they are shared 60/40 and there is no agreement about the sharing of profits, they are shared equally (don’t be fooled here)

Question 20

Hypo: Partner A puts up all of the money. Partner B does all of the work. Partner C gives the partnership its fine name. Partner D does nothing. How are profits shared?

Answer 20

WITHOUT AN AGREEMENT, Equally

Question 21

What is the definition of dissolution of the partnership?

Answer 21

IN THE ABSENCE OF AN AGREEMENT that sets forth events of dissolution, *a general partnership dissolved upon notice of the express will of any general partners to dissociate; The real end of the partnership is called termination

Question 22

When bringing the partnership to an end, what is the winding up stage?

Answer 22

The period between dissolution and termination in which the remaining partners liquidate the partnerships assets to satisfy the partnerships creditors

Question 23

Old business. The partnership and therefore its individual general partners retain liability on:

Answer 23

All transactions entered into to wind up old business by satisfying creditors who existed when winding up began

Question 24

New business. The partnership and therefore its individual general partners retain liability on brand new transactions during winding up until:

Answer 24

Notice of dissolution is given to creditors, or until 90 days after filing a statement of dissolution of the state

Question 25

Each level of priority must be fully satisfied before beginning the next level. What is the order of priority?

Answer 25

1. Creditors - Must pay all creditors first, creditors = all outside non-partner trade creditors + all partners who have loaned $ to the partnership and have become creditors thereby
2. All capital contributions paid into the partnership by partners - Money paid in for a share of profits, if any
   The partnership is liable to its own partners, the full repayment of their captial contribution
   i. - Rule: Each partner must be repaid his or her loans or capital contributions, plus that partner’s share of any profits, or minus that partner’s share of any losses.
3. Profits - Are shared equally in the absence of an agreement

Question 26

A and B dissolve the AyeBee Partnership. In winding up, they liquidate the partnership assets and have a total of $1 million to distribute. How should that amount be distributed if (1) the partnership owes $600,000 to trade creditors; (2) Partner A loaned the partnership $100,000; and (3) Partner B made capital contributions of $200,000?

Answer 26

• First, the partnership must repay all outside trade creditors their 600k plus partner A for the 100K Loan
• Second, the partnership still owes partner B the full repayment of its 200K capital amount
• Third, The remining 100K profit amount is than shared among partners A & B without an agreement and therefore each gets their equal share of $50K

Question 27

A and B dissolve the AyeBee Partnership. In winding up, they liquidate the partnership assets and have a total of $700,000 to distribute. How should that amount be distributed if (1) the partnership owes $600,000 to trade creditors; (2) Partner A loaned the partnership $100,000; and (3) Partner B made capital contributions of $200,000?

Answer 27

• First, the partnership msut repay all outside trade creditors and partner A together the same &700K
• Second, the partnership is still liable to partner B for the full repayment of its $200K
• Third, The remaining loss amount of $200K will be shared equally without an agreement between A & B and therefore each must pay in to the partnership $100K

Question 28

What is a limited partnership?

Answer 28

A partnership with at least 1 general partner and at least one limited partner; The state does want to know about you; File with the state, a limited partnership certificate
that includes the name of the all the general partners;

Question 29

1. Who has liability and control of a limited partnership?

2. What is the role of the limited partners?

Answer 29

1. General partners are liable for all limited partnership obligations, they have control;
2. Have limited liability and therefore are not liable for the limited partnerships obligations; Control - the law in most states is still that limited partners may not manage the business without forfeiting their limited liability status, but under the newly revised Uniform Limited Partnership Act, now may manage without giving up their limited liability status

Question 30

What is the definition of an LLC?

Answer 30

A hybrid, a mixture between a corporation and a partnership in which the owners who are called members have the same rights and limited liabilities as shareholders in a corporation, and also the benefits of partnership tax status (corporate tax (bad), partnership tax (good)
What is the best answer for business to use - This one
-limited liability, + limited liquidity, + limited life, + limited life

Question 31

What are the formation requirements of an LLC?

Answer 31

Must file the articles of orgnanization and you may adopt an operating agreement

Question 32

Who has control of an LLC?

Answer 32

Choice - The members may manage the business but also may delegate their control to a team of managers (like a board of directors)

Question 33

What is limited liquidity in an LLC?

Answer 33

A full membership interest may not be transferred without unanimous consent of the members or, as provided in the operating agreement

Question 34

What is limited life in an LLC?

Answer 34

The company will dissolve upon unanimous consent of the members or as provided in the operating agreement