Partnership

Question 1

What is a general partnership?

Answer 1

A general partnership is an association of 2 or more persons to carry on as co-owners of a business for profit.

Question 2

How is a partnership formed?

Answer 2

Rule:

A partnership is formed when the parties intent to enter into a partnership relationship.

A partnership is based on an agreement between the partners. The agreement may be written, oral, or inferred from the conduct of the parties; there are no particular formalities or statutory requirements.

Any person who has the capacity to enter into a K can enter into a partnership agreement. A corporation may be a partner so long as participation in a partnership is appropriate under the corporation’s articles and bylaws.

Question 3

What does the court consider when determining whether or not a partnership has been formed?

Answer 3

When determining whether a partnership has been formed, or whether particular parties are in fact partners, courts may consider such evidence as

1. the sharing of profits;
2. the management practices;
3. the amount and type of services rendered; and
4. the record title to any property.

NOTE:

A person’s receipt of a share of the profits is prima facie evidence that he is a partner in the business.

Question 4

What is the rule regarding Partnership by Estoppel?

Answer 4

When a person, by words or conduct, represents himself, or has consented to be represented, as a partner in a partnership, he is liable to anyone who has extended credit in good-faith reliance on the representation. Any members of the partnership consenting to such representation will be held jointly and severally liable for any liabilities arising therefrom.

Question 5

What governs the relationship among and between partners and partnerships?

Answer 5

Relations among the partners and between the partners and the partnership are governed by the partnership agreement. To the extent the partnership agreement does not otherwise provide, the provisions of the Uniform Partnership Act (UPA) govern.

Question 6

What power and authority does a partner have?

Answer 6

RULE:

Each partner is an agent of the partnership for the purpose of its business, and has authority to bind the partnership.

• A partner may have express authority to act by the terms of the partnership agreement or by consent of the other partner(s).
• A partner may have apparent authority based on the nature and course of business of the partnership, or on the custom of similar partnerships in the community.

EXCEPTIONS:

Unless authorized by ALL of the partners, a partner has no authority to

1. assign the partnership property in trust for creditors;
2. dispose of good will;
3. confess a judgment;
4. submit a partnership claim or liability to arbitration; or
5. do any other act which would make it impossible to carry on the ordinary business.

Question 7

Is notice imputed to all parties of the partnership?

Answer 7

Yes. Notice of any matter relating to partnership affairs to any partner constitutes notice to the partnership.

EXCEPT:

Notice is NOT imputed where a partner commits, or consents to, a fraud on the partnership.

Question 8

How does liability attach to a partnership?

Answer 8

All partners are jointly and severally liable for everything chargeable to the partnership.

An admission or representation made by any partner concerning partnership affairs within the scope of his authority is evidence against the partnership.

Question 9

What is the extent of a partner’s liabilty to the partnership?

Answer 9

A partner is entitled to indemnification by the partnership for any payments made on its behalf in excess of his pro rata share.

A partner is liable for any partnership obligations incurred before his admission to the partnership as though he had been a partner when such obligations were incurred. However, his liability for such obligations can be satisfied only out of partnership property. Thus, his liability is limited to his investment in the business.

Question 10

What is the extent of a partnership’s liabilty for the acts of its partners?

Answer 10

RULE:

The partnership is liable for loss or injury caused by the wrongful act or omission of any partner acting in the ordinary course of the business of the partnership, or with the authority of his co-partners.

If a partner acts in violation of a restriction on his authority, and the 3rd P has knowledge of the restriction, the partnership will NOT be bound.

Question 11

How are contributions, profits, and losses distributed among a partnership?

Answer 11

Each partner is entitled to be repaid his contributions to the partnership, whether in capital, advances to the partnership property, or surplus remaining after all liabilities are satisfied. Each partner must also contribute toward any losses.

Absent a contrary agreement, partners share profits and losses equally.

Question 12

In a partnership, who has the authority to conduct business and manage the company?

Answer 12

Unless the partnership agreement provides otherwise, each partner has equal rights to participate in the management of the business.

Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no act in contravention of any agreement between the partners may be done without the consent of all partners.

Question 13

What does a partner receive if he pays into the partnership beyond the amount of capital that he agreed to contribute?

Answer 13

A partner has a right to receive interest on any payments made on behalf of the partnership beyond the amount of capital that he agreed to contribute.

Question 14

Is a partner entitled to compensation for services performed for the partnership?

Answer 14

Partners are not entitled to compensation for services performed for the partnership unless the partnership agreement states otherwise.

Question 15

Who has access to the records and books of the partnership and where are these records/books stored?

Answer 15

Every partner has the right to access, inspect, and copy the partnership books, which must be kept at the partnership’s principal place of business.

Question 16

In what situations does a partner have a right to an accounting of the partnership?

Answer 16

A partner has the right to a formal account of partnership affairs in the following situations:

1. if he is wrongfully excluded from the partnership business or possession of its property by his co-partners;
2. if the right exists under the terms of any agreement;
3. if a partner has improperly received a benefit or obtained secret profits in violation of his fiduciary duties; and
4. whenever other circumstances render it just and reasonable.

In South Carolina, an accounting action in equity between partners is a condition precedent to actions at law between partners for matters arising out of the partnership.

Question 17

What are a partner’s duties in a partnership?

Answer 17

• As to partnership matters, partners stand in a fiduciary relation to one another. Thus, partners have a duty of loyalty and must act within the best interests of the other partners and the partnership. Partners must refrain from engaging in self-dealing.
• Partners should not compete with the partnership. Accordingly, a partner may not exploit a business opportunity of the partnership unless he has made full disclosure and received the approval of his other partners.
• A partner has a duty to disclose true and full information of all things affecting the partnership to all other partners.
• Every partner must account to the partnership for any benefit and hold as trustee for it any profut derived from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use of its property.

Question 18

A new partner may be admitted to a partnership, provided that ______________________.

Answer 18

All partners consent to admit the new partner.

Question 19

What property rights does a partner have in the partnership?

Answer 19

The property rights of a partner consist of:

1. his rights in specific partnership property;
2. his interest in the partnership; and
3. his right to participate in management.

Partners are co-owners and hold property as Tenants in Partnership – a type of joint tenancy created by statute to meet the needs of partnerships for continuity and predictability.

Question 20

What are the characteristics of a tenancy in partnership?

Answer 20

• Partners have equal rights to possess partnership property for partnership purposes, but no right to possess it for any other purpose without the consent of the other partners.
• a partner’s right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners in the same property.
• a partner’s right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership
• upon the death of a partner, his right in specific partnership property vests in the surviving partners.
• a partner’s right in specific partnership property is not subject to dower, curtesy, or allowance to widows, heirs, or next of kin.

Question 21

May a partner assign his interest in the partnership?

Answer 21

Except as provided in the partnership agreement, a partner’s interest in the partnership is assignable, and such conveyance does not serve to dissolve the partnership. However, the assignee receives ONLY the profits to which his assignor would have been due; he is NOT entitled to participate in the management of the business.

Question 22

How is partnership property acquired and conveyed?

Answer 22

Acquisition of Property:

All property brought into the business at its formation is partnership property, as is all property subsequently acquired with partnership funds.

Any estate in real property may be acquired in the partnership name.

Conveyance of Real Property:

If the title to real property is in the partnership name, any partner may convey title by a conveyance executed in the partnership name.

If the title to real property is in the name of one or more, but not all of the partners, and the record does not disclose the right of the partnership, the partners in whose name the title stands may convey title to the property.

If the title to real property is in the name of all partners, a conveyance executed by all the partners passes all their rights in the property.

Question 23

What are some causes for partnership dissolution?

Answer 23

Causes of Partnership Dissolution:

• termination of the definite terms or particular undertaking specified in the partnership agreement.
• the express will of any partner, either in accordance with or in violation of the terms of the partnership agreement.
• the express will of all of the partners.
• the expulsion of any partner, if the terms of the partnership agreement so provide.
• any event which makes it unlawful for the business of the partnership to be carried on.
• the death of any partner, unless a written agreement between the partners expressly provides otherwise.
• the bankruptcy of any partner or the partnership.
• a court decree.

Question 24

What is the effect of partnership dissolution on a partner’s liability?

Answer 24

RULE:

Except as is necessary to wind up partnership affairs or to complete transactions that have not yet been completed, dissolution terminates all authority of any partner to act for the partnership with respect to co-partners and 3rd parties, subject to some exceptions.

• When the dissolution is caused by the act, death, or bankruptcy of a partner, each partner is ordinarily liable to his co-partners for his share of any liability created by any partner acting for the partnership as if the partnership had not been dissolved.

Question 25

After dissolution, what is required in order for a partner to still bind the partnership in a transaction?

Answer 25

After dissolution, a partner can still bind the partnership by a transaction which would bind the partnership if dissolution has not taken place IF the other party to the transaction:

1. had extended credit to the partnership prior to dissolution and had no knowledge or notice of dissolution; OR
2. was not a creditor, but knew of the partnership prior to dissolution and had no knowledge of notice of dissolution, and the fact of dissolution had not been advertised in a newspaper of general circulation where the partnership business was regularly carried on.

Question 26

Does a dissolution discharge the existing obligaions of the partners?

Answer 26

No.

Rule:

The dissolution of a partnership does not, of itself, discharge the existing obligation of any partner.

Exception:

A partner is discharged from existing liabilities upon dissolution of the partnership by an agreement to that effect between himself, the partnership’s creditor, and those continuing in the partnership business.

Question 27

What is the act of “winding up” a partnership?

Answer 27

RULE:

Upon dissolution, the partnership is not immediately terminated, but continues until the winding up of partnership affairs is completed.

Think of it like probating an estate.

Question 28

Who has the right to wind up the partnership after a dissolution?

Answer 28

Right to Wind Up:

Unless otherwise agreed, partners who have not wrongfully dissolved the partnership have a right to wind up the partnership affairs.

Any partner, upon good cause shown, may petition the court for the right to wind up.

Question 29

What are the rights of partners upon winding up the partnership when the dissolution was not caused by a contravention of the partnership agreement?

Answer 29

Unless otherwise agreed upon, when dissolution is caused in any way other than in contravention of the partnership agreement, each partner may:

1. have the partnership property applied to discharge the partnership’s liabilities; and
2. have the surplus applied to pay in cash the net amount owing to the respective partners.

Question 30

What are the rights of partners upon winding up the partnership when the dissolution was caused by the expulsion of a partner?

Answer 30

When dissolution is caused by the expulsion of a partner in accordance with the terms of the partnership agreement, and if the expelled partner is discharged from all partnership liabilities, he will receive in cash only the net amount due to him from the partnership.

Question 31

What are the rights of partners upon winding up the partnership when the dissolution was caused in contravention of the partnership agreement?

Answer 31

When dissolution is caused in contravention of the partnership agreement:

1. each partner who has not caused dissolution wrongfully has the right:
   
   • (a) to have partnership property applied to partnership liabilities and the surplus paid in cash; and
   • (b) as against each partner who caused the wrongful dissolution, to damages for breach of the partnership agreement;
2. the partners who have not caused the wrongful dissolution may, if they all agree, continue the business in the same name, by themselves or jointly with others, and for that purpose possess the partnership property; and
3. a partner who has caused the wrongful dissolution:
   
   • (a) if the business is not continued, has all the rights of a partner to have partnership property applied to partnership liabilities and the surplus paid in cash; and
   • (b) if the business is continued, has the right to have the value of his interest in the partnership at the time of dissolution, less damages caused to his co-partners by the dissolution, paid to him, and be released from all existing partnership liabilities.

Question 32

What happens if a partnership continues to carry on after termination / dissolution?

Answer 32

• When a partnership for a fixed term or particular undertaking is continued after termination of the term or undertaking without any express agreement, the rights and duties of the partners continue as they were prior to such event, if consistent with a partnership at will.
• If the partnership business is continued after dissolution without liquidation of partnership affairs, creditors of the dissolved (first) partnership become creditors of the continuing (second) partnership as if an assignment of liabilities was made from the first partnership to the second.

Question 33

In what order must liabilities of the partnership be paid?

Answer 33

Order of Distribution:

Absent a contrary agreement, liabilities must be paid in the following order:

1. those owing to creditors other than partners;
2. those owing to partners other than for capital and profits;
3. those owing to partners in respect of capital; and
4. those owing to partners in respect of profits.

The assets are to be applied to these liabilities first out of partnership property and then out of contributions from the partners.

NOTE: If partnership property is insufficient to satisfy liabilities, the partners must contribute the amount necessary to satisfy the liabilities.

If any of the partners are insolvent or refuse to contribute, the other partners must contribute their shares of the liabilities and, in a proportion in which they share in profits, the additional amount necessary to pay the liabilities.

NOTE: Any partner has the right to enforce contribution to the extent of the amount which he has paid over his share of the liability.

Question 34

What is a Limited Liability Partnership [L.L.P.]?

Answer 34

A general partnership may register as a Limited Liability Partnership so that the partners gain protection from liability for obligations of the partnership and other partners, although they remain liable for their own negligence and the negligence of those they supervise.

LLPs are taxed like partnerships (pass-through taxation), unless they elect to be taxed like corporations (double taxation).

Partners in an LLP have the same fiduciary duties as partners in a general partnership.

Question 35

How is an LLP formed?

Answer 35

An LLP is formed by filing an application with the Secretary of State, executed by a majority in interest of the partners, which must include:

1. the name of the LLP [must contain the words “Registered Limited Liability Partnership” or “LLP”];
2. the address of its principal office;
3. the name and address of an agent for service of process;
4. the number of partners; and
5. a brief statement of the business in which the LLP engages.

Question 36

How is liability shared and distributed among an LLP?

Answer 36

• A partner in a LLP is not liable, directly or indirectly, for debts, obligations, and liabilities chargeable to the LLP arising from negligence, wrongful acts, or misconduct committed in the course of partnership business by another partner, employee, agent, or representative.
• A partner in a LLP remains liable for his negligence, wrongful acts, and misconduct, or that of a person under his direct supervision or control.

Question 37

What steps can an LLP take in order to ensure that it can meet its obligations and liabilities?

Answer 37

An LLP must ensure that it can meet its obligations for any liability by:

1. maintaining insurance;
2. keeping an escrow account or similar interest as security for payment of liabilities;
3. having each partner guarantee payments; or
4. maintaining a net worth above a specified amount.

South Carolina requires an LLP to carry at least $100k of liability insurance to cover the kinds of negligence, wrongful acts, and misconduct of which liability is limited by statute and which insures the partnership and the partners.

Question 38

What is a Limited Partnership [LP]?

Answer 38

A Limited Partnership (LP) is a partnership formed by 2 or more persons having one or more general partners and one or more limited partners.

Question 39

What is the difference between a General Partner and a Limited Partner in an LP?

Answer 39

A general partner manages the business and is personally liable without limitation for partnership obligations.

A limited partner contributes capital and shares in the profits, but generally takes no part in the control or management of the business; his liability is limited to his contributions.

Question 40

In South Carolina, what law governs Limited Partnerships?

Answer 40

SC has adopted the Revised Uniform Limited Partnership Act (RULPA). Where the statutory provisions on limited partnerships do not provide an applicable rule, provisions relevant to general partnerships govern.

Question 41

What is required in order to form an LP?

Answer 41

A LP is formed by filing with the Secretary of State a Certificate of Limited Partnership, signed by all general partners, which must state:

1. The name of the LP
   
   1. Name must contain the words “limited partnership” or “LP”
   2. Name must not contain the name of a limited partner, UNLESS it is also the name of a general partner, or if the business of the LP has been carried on under that name before the limited partner’s admission.
2. The address of the office and name and address of the agent for service of process;
3. The name and the business address of each general partner; AND
4. the latest date upon which the limited partnership is to dissolve.

Question 42

How are contributions and allocations made within an LP?

Answer 42

• A general or limited partner may contribute to the LP in the form of cash, property, services rendered, or a written promissory note to contribute cash, or property, or to perform services.
• NOTE: A partner’s obligation to perform any promise to contribute is not excused by the partner’s death, diability, or other inability to perform personally.

The profits and losses of a limited partnership are allocated, and all distributions are made, among the partners:

1. in accordance with the partnership agreement; OR
2. absent such a provision, on the basis of the amount of each partner’s contribution.

Question 43

What are the rights and obligations of a Limited Partner in an LP?

Answer 43

A limited partner may be subject to personal liability on the debts and obligations of the LP if he participates in the control of the business, but his liability only extends to persons or entities who transact business with the LO reasonably believing that he is a general partner.

A limited partner has a right to:

1. Inspect and copy partnership records;
2. obtain from the general partners, upon reasonable demand, true and full information regarding the state of the business and financial conditions of the LP.

Question 44

How does one become a limited partner in an LP?

Answer 44

A person can become a limited partner in an LP in accordance with the partnership agreement or upon written consent of the parties:

1. by acquiring a partnership interest from the LP; or
2. by benefit of an assignment,

Question 45

What are the rights and obligations of a General Partner in an LP?

Answer 45

General Partners in an LP have the same rights and powers, and are subject to the same liabilities, as partners in a general partnership.

A person may become a general partner in an LP as provided in the partnership agreement or with the written consent of all the partners.

Question 46

May a partner in a LP assign his interest in the partnership?

Answer 46

Except as provided in the partnership agreement, a partner’s interest in the partnership is assignable, and such conveyance does not dissolve the LP; however, the assignee receives ONLY the distributions to which his assignor would have been entitled.

An assignee may become a limited partner if and to the extent that:

1. the assignor gives him that right in accordancee with the certificate; OR
2. absent such authority, all other partners consent.

An assignee who becomes a limited partner has all the rights and powers, and is subject to all the restrictions and liabilities, of a limited partner, but is not liable for obligations of his assignor that were unknown to hom at the time he became a partner.

Question 47

What are the rights with regard to distributions to partners in an LP?

Answer 47

Distributions:

• A partner has no right to receive his distribution in any form other than cash.
• A partner entitled to receive a distribution has the status of a creditor of the LP, and is entitled to all remedies available.
• A partner may not receive a distribution to the extent that, after giving effect to the distribution, the liabilities of the LP exceed the fair value of its assets.

Question 48

May a limited partner withdraw from an LP?

Answer 48

Yes. A limited partner may withdraw at the time, or upon the happening of certain events, specified in the partnership agreement. Absent such a provision, a limited partner may withdraw upon not less that six (6) months’ prior written notice to each general partner.

Upon withdrawal, the withdrawing partner is entitled to receive any distribution to which he is entitled under the partnership agreement, or if not provided in the partnership agreement, the fair value of his partnership interest in the LP as of the date of withdrawal, based on his right to share in distributions.

Question 49

May a general partner withdraw from an LP?

Answer 49

A general partner may withdraw at any time by giving written notice to the other partners. However, if a general partner’s withdrawal violates the partnership agreement, the LP can recover from the withdrawing partner damages for the breach of the partnership agreement, which may be offset against the amoung otherwise distributable to him.

Upon withdrawal, the withdrawing partner is entitled to receive any distribution to which he is entitled under the partnership agreement, or if not provided in the partnership agreement, the fair value of his partnership interest in the LP as of the date of withdrawal, based on his right to share in distributions.

Question 50

How is an LP dissolved?

Answer 50

A limited partnership is dissolved and its affairs wound up:

1. at the time specified in the certificate of limited partnership;
2. at the time, or upon the happening of the events, specified in the partnership agreement;
3. upon the written consent of all the partners;
4. upon the withdrawal of all general partners; OR
5. upon entry of a decree of judicial dissolution.

EXCEPTION:

Within 90 days after the withdrawal, all remaining partners may agree in writing to continue the business of the LP and appoint one or more general partners, in which case the LP is not dissolved.

NOTE:

On application by a partner, a court may decree the dissolution of an LP whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement.

Question 51

Who participates in the Winding Up of an LP upon dissolution?

Answer 51

Upon dissolution, partnership affairs are wound up by the general partners who have not wrongfully dissolved the LP, or if none, by the limited partners.

Alternatively, a court may wind up the LP’s affairs upon application of any partner.

Question 52

After winding up a LP, what is the priority for the distribution of assets?

Answer 52

After winding up, assets are distributed in the following order of priority:

1. to creditors (including limited partners) in satisfaction of liabilities of the LP other than those for distributions to partners;
2. to partners and former partners in satisfaction of lilabilities for distributions;
3. to partners, for the return of their contributions; and
4. to partners, with respect to their partnership interests in the proportion in which they share in distributions.