Partnership

Question 1

Two Types of Partnerships

Answer 1

GENERAL–Personal L. A limited L pertnership is a general type of partnership.

LIMITED–Limited L

Question 2

General Partnership

Answer 2

LIMITED LIABILITY COMPANY and LIMITED LIABILITY PARTNERSHIP

NY permits the formation of an LLC, Professional LLC, and a Limited L Partnership (LLP). These business orgs are formed by filing a CERTIFICATE with the Dept of State.

Question 3

Limited Liability Company (LLC)

Answer 3

is an unincorporated org of one or more members, formed for any general business purpose. It is treated as a regular private corp in most areas, especially liability.

The member of an LLC are L for the company’s debts only to the extent of their initial investment, UNLESS the organizational agreement states otherwise. Treated as partnership for TAX PURPOSES.

Question 4

Professional Limited Liability Co (PLLC)

Answer 4

PLLC similar to a regular LLC except it may be used only by those offering professional services. Its L is similar to a Professional Corp.

Question 5

Limited Liability Partnership

Answer 5

an LLP may only be formed by partnerships operating as a general partnership. An LLP is treated the same as a regular partnership, except that the liability standard is similar to a PLLC

Question 6

Liability standard of PLLC and LLP

Answer 6

in the event of a K action, only the assets of the PLLC/LLP will be available to the creditors. For Malpractice, however, the members/partners will remain personally L for their own Neg and for the Neg under their direct supervision.

They will not, however, have any personal L for the Neg of another member/partner, unless the organizational agreement states otherwise.

Question 7

General Partners

Answer 7

1) all gen partners SHARE in mgmt
2) NEW gen partners must be approved by ALL gen partners–ASSIGNMENT does not cause dissolution of partnership and is generally permissible, but the assignee does not become a partner rather an assignee.
3) LIABILITY–Gen partners have unlimited L

4) WITHDRAWAL–withdrawing partner must give notice to persons who had prior dealings with the old partnership to avoid L on a NEW partnership debt.
- ACTUAL notice–must be given to creditors
- CONSTRUCTIVE notice–(eg in newspaper) is sufficient for creditors who knew of or dealtw the partnership but do not extend credit.

5) PRESUMPTION–all partnerships presumed to be “gen “ unless stated otherwise.

Question 8

Limited Partners–FORMATION

Answer 8

• an LP is formed by a WRITTEN AGREEMENT btw two or more persons having as members at least one gen partner and one limited partner.
• a CERTIFICATE of limited partnership must be filed with the Dept of State, setting forth the name of the LP, name and address of the Gen partners, the county the partnership is located, and various other requirements in PL 121-201.
• LPs controlled by either ULPA or RULPA which was revised effective July 1, 1991.

Question 9

Limited Partners–LIABILITY

Answer 9

limited partners are not L for torts, breaches of trust, debt, breach of K, etc. Their L is personally limited to the amount of their investment.

-Partnership Name–a limited partners surname cant appear in the partnership name UNLESS: (1) it is also the surname of a Gen partner OR (2) the business had previously been carried on w that surname prior to the time he became an LP.

RULE: a limited partner who lends his name is L to creditors who do not have actual knowledge he is NOT a gen partner

Question 10

Limited Partners–MGMT

Answer 10

Limited partners must not share in the mgmt to the extent that they control the partnership

ACTIVE PARTICIPATION–may participate in the affairs of the LP but cannot have an active vote in mgmt of LP. He may:

(1) be an employee, agent, contractor of LP
(2) be an adviser to the LP
(3) act as a surety
(4) participate in derivative actions involving the LP
(5) vote in areas of LP actions
(6) consult/advise or be an officer or fiduciary of the LP
(7) wind up the affairs of the LP

Question 11

Limited Partners–PARTNER APPEARANCE

Answer 11

a limited partner will lose their status and become personally L to 3rd parties who deal with the limited partner and believe she was a general partner

Question 12

Secret Partners

Answer 12

(1) are not know to be partners to the public
(2) may be active in conducting the business
(3) L same as gen partner, EXCEPT on withdrawal
(4) WITHDRAWAL - secret gen partners do not have to give notice of withdrawal to creditors/persons dealing w LP.

Question 13

Silent Partners

Answer 13

(1) Are known to the public but have no voice in mgmt or business
(2) L is the same as Gen partner

Question 14

Creation of Partnership–By K (oral or written)

Answer 14

no particular formalities are essential for a partnership K. Since the partnership is an agreement, it is governed by the general rules of K.

Question 15

Creation of Partnership–Implied from Party Acts

Answer 15

NY–law states that receipt by a person of a share of the profits is prima facie evid that the person is a partner. It creates an inference that the person receiving a share of the profits is a partner. inference is rebuttable.

(1) in payment of a debt by installments, or otherwise,
(2) as wages of an employee,
(3) as rent to a landlord,
(4) as an annuity to a widow or rep of a deceased partner,
(5) as interest on a loan, though the amt of payment may vary w the profits of the business
(6) As consideration for the sale of good will of a business or other property by installments or otherwise.

Question 16

Creation of Partnership–Partnership by Estoppel

Answer 16

The P asserting the claim must merely prove the following:

(1) a representation by one partner, action or stmts indicating the D was a partner,
(2) reliance by the P
(3) reasonableness of the reliance, AND
(detriment to P

Question 17

Partnership Property Rights

Answer 17

Partners have a personal property interest in the tenancy of the partnership. They DO NOT have rights in specific partnership property.

Question 18

Lawsuits and the Partnership

Answer 18

in K ACTIONS, partnership assets must be exhausted before an individual partner’s assets can be attached if partners are individually names in the summons and complaint.

in TORT or BREACH OF TRUST actions, the partnership is NOT a necessary party. The P can proceed under a respondeat superior theory against any partner.

Question 19

Partnership Profits and Losses

Answer 19

Unless partnership agreement provides otherwise, profits and losses are shared equally. Losses are shared in the same ratio as profits UNLESS the partnership agreement states otherwise.

Question 20

Indemnification

Answer 20

Unless partnership agreement provides otherwise, the partnership must indemnify every partner for payments made or personal liabilities incurred by him in the ordinary and proper conduct of partnership business or for the preservation of its property.

Question 21

Advance Payments

Answer 21

Unless partnership agreement provides otherwise, a partner who, in aid of the partnership, makes any payment or advance beyond beyond the amt of capital which he agreed to contribute, shall be paid interest from the date of the payment or advance.

Question 22

Interest on Capital Contributions

Answer 22

Unless partnership agreement provides otherwise, a partner shall receive interest on the capital contributed by him only from the date when REPAYMENT should be made.

Question 23

Mgmt of Partnership

Answer 23

Unless partnership agreement provides otherwise, mgmt is equal among all the partners and is not contingent on capital contribution or partner’s right to share in the profits.

Question 24

Remuneration

Answer 24

Unless partnership agreement provides otherwise, no partner is entitled to remuneration for acting in the partnership business, with the exception that a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs.

Question 25

Majority Vote

Answer 25

Regular and ordinary business decisions are governed by a maj vote

Question 26

Duty of Loyalty and Good Faith

Answer 26

Each partner owes to partnership a duty of loyalty, a duty to use due care and a duty to account. CANNOT BE ELIMINATED BY K.

• partner cant make a secret profit by engaging in partnerships business or by dealing with it. Partner L for losses suffered if he engages in such transactions.
• a partner may engage in outside activities provided they are not in competition/injure partnership business. A partner may not engage in outside activities which prevent other partners from doing their duties.

Question 27

Partnership Books

Answer 27

• Each partner has the right to inspect and copy the partnership books/records.
• Right to an ACCOUNTING–a partner is entitled to a formal accounting as to partnership affairs whenever circumstances render one reasonable.
• A demand for an accounting is normally joined with a demand for dissolution. However, one cannot have a dissolution w/o an accounting, b/c dissolution is followed by distribution which requires an accounting.

Question 28

Allocation of Powers

Answer 28

Partners may allocate responsibilities creating actual authority, however all partners have apparent auth and can bind the partnership. However, if 3rd parties have actual knowledge of the specific allocation of powers assigned to a particular partner, such person must deal with that partner.

Question 29

L to 3rd Parties Dealing w Partnership–PARTNER TORT L

Answer 29

Gen partners are L for torts committed during the course of the partnership

Question 30

L to 3rd Parties Dealing w Partnership–CRIM L OF PARTNERS

Answer 30

Partners not L for crimes committed by other partners unless they themselves participated, planned, aided, or acquiesced in their commission.

Question 31

L to 3rd Parties Dealing w Partnership–DECEASED PARTNER

Answer 31

deceased partner’s estate is L for firm debts incurred while he was a partner. Creditors must first satisfy claims from the partnership and living solvent partners before proceeding against the estate.

Question 32

L to 3rd Parties Dealing w Partnership–INCOMING PARTNER

Answer 32

L for the existing firm obligations ONLY to the extent of his capital contribution.

Question 33

L to 3rd Parties Dealing w Partnership–RETIRING PARTNER

Answer 33

L to creditors for existing debts of the partnership, but not for those incurred after retirement, so long as creditors had notice of the retirement before extending the credit.

RULE: a withdrawing partner is a surety by operation of partnership law of the debts existing at the time of their withdrawal.

NOTE: if the remaining partners and creditors modify the original obligation w/o the surety’s consent, the surety is released.

Question 34

L to 3rd Parties Dealing w Partnership–MEMBERSHIP

Answer 34

no person can become a member of a partnership w/o the consent of ALL of the partners UNLESS the partnership agreement provides otherwise.

Question 35

L to 3rd Parties Dealing w Partnership–LIABILITY

Answer 35

Partner’s L is personal; it extends to all his personal assets, not just investment in partnership

Question 36

L to 3rd Parties Dealing w Partnership–K ACTION

Answer 36

in K action, partnership assets must be exhausted before partner’s individual assets may be reached by creditors. However, in a TORT or BREACH OF TRUST action, creditors can proceed directly against individual partners.

Question 37

Involuntary Dissolution

Answer 37

Occurs:

(1) Death–upon death of a partner
(2) Bankrupcy–upon bankrupy of a partner or of the parnership
(3) Illegality–when partnership enterprise becomes illegal or participation by a partners becomes illegal.
(4) Withdrawal and Retirement–upon withdrawal or retirement of a partner.

(5) Judicial Decree–upon application by a partner, a judicial decree of dissolution must be granted when:
(a) a partner is show to be of unsound mind,
(b) A partner is shown to be permanently incapacitated, so that he cannot perform his duties,
(c) there is misconduct sufficiently serious so as to affect prejudicial the success of the business,
(d) the business is a failure (eg conducted at heavy lose so that future endeavors would be futile), OR
(e) there is any situation that would make it equitable to do so (eg lack of harmony jeopardizing the partnership).

Question 38

Effect of Dissolution

Answer 38

Winding Up–Partners are trustees for the purpose of winding up affairs of the firm and should:

• discharge the firm debts, AND
• distribute remaining assets, OR
• Ct may appoint a receiver when partners disagree as to the proper distribution.

Question 39

Distribution of Assets

Answer 39

Distribution of Assets of a Gen partnership in order of priority:

Class 1–debts to creditors (not partners)
Class 2– debts to partners for advances and loans
Class 3–return of partners’ capital investment subject to reduction if there are partnership losses
Class 4–Profits/losses are shared equally; sharing of losses is implied from an agreement to share profits.

NOTE: when there are insufficient firm assets, partners are personally L for firm debts.