Partnership

Question 1

What rights/interests in the partnership can a partner transfer?

Answer 1

ONLY partner’s interest in profits - entitles transferee to receive distributions to which the transferring partner would be entitled

Partner CANNOT transfer and transferee is NOT entitled to:

• management rights
• demand accounting of partnership transactions
• inspect the partnership books
• partnership property

Question 2

How are decisions approved in a partnership?

Answer 2

Matters within ordinary course of business - majority vote of all partners

Matters OUTSIDE ordinary course of business - consent of ALL partners

Question 3

Do the acts of partners bind the partnership?

Answer 3

Act of any partner carrying on in the ordinary course of the partnership binds the partnership unless the partner had no authority (express, implied, or apparent) and the third party knew partner lacked authority
– If a third party would reasonably believe a partner has authority based on his being held out by the partnership as a partner, then partner has apparent authority and can bind the partnership

Question 4

Procedure for Dissolution

Answer 4

1) file statement of dissolution with secretary of state
2) winding up of business
- -> partnership will still be bound by partner’s post-dissolution acts if this third party did not have notice of dissolution (within 90 days after statement of dissolution is filed)
- -> partnership will be bound by acts related to winding up
3) completion of winding up = partnership is terminated

Question 5

When may a member of an LLC bring a derivative action?

Answer 5

• member may bring derivative action to enforce a right of the LLC
• member must first make a demand on other members unless demand would be futile
• If members do not bring an action, then demanding member may bring action
• she must be member of the LLC at the time the action is commenced and remain a member while action continues

Question 6

Member of an LLC may apply for dissolution of the LLC if:

Answer 6

i) the conduct of all or substantially all of the LLC’s activities is unlawful;
(ii) it is not reasonably practicable to carry on the LLC’s activities in conformity with the certificate of organization and the operating agreement; or
(iii) the managers or controlling members have acted or are acting in a manner that is illegal, fraudulent, or oppressive.

Question 7

Are partnerships required to share losses?

Answer 7

No - sharing losses is not necessary to form a partnership, but this is evidence of a partnership. The lack of an agreement to share losses is evidence that the parties did not intend to form a partnership

Question 8

Partnership by estoppel -

Answer 8

Even though there is no partnership agreement and the parties don’t intend to be partners, they may be held liable to third parties as if they were partners if a person:

(i) represents herself as a partner and a third party extends credit to the apparent partnership in reliance on the representation; or
(ii) holds another person out to be her partner, making the alleged partner her agent with the power to bind her to third parties as if the other were, in fact, a partner.

Question 9

Duty of Loyalty of Partners:

Answer 9

1) to account for profits, property, opportunities, or other benefits derived by the partner in connection to partnership business
2) to refrain from doing business with the partnership on behalf of a party that is adverse to the partnership
3) to refrain from competing with the partnership

Question 10

Duty of Care of Partners

Answer 10

1) to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or violations of the law

Question 11

Does a partner have actual authority to act on behalf of the partnership by virtue of being a partner?

Answer 11

No - partner must be granted actual authority (either in partnership agreement or by consent of the other partners - generally, majority vote)
But partner might have apparent authority to act within scope of partnership by virtue of being a partner

Question 12

When will a dissociated partner still be liable for obligations incurred by the partnership?

Answer 12

Dislocated partner remains liable for

• obligations incurred by the partnership before the partner’s dissociation, and
• obligations incurred after the dissociation if the other party to the transaction: (i) reasonably believed when entering the transaction that the dissociated partner was still a partner, and (ii) did not have notice of the partner’s dissociation.

Question 13

Wrongful dissociation

Answer 13

• if dissociation is in breach of an express term of the partnership agreement
• partnership is for a definite term or a particular undertaking and the partner withdraws, is expelled, or becomes bankrupt before the end

Question 14

After a partnership is dissolved, how are its assets paid out?

Answer 14

• to creditors (including partners who loaned partnership money)
• partners in settlement of their accounts (their capital contributions)

Question 15

What is needed for dissolution of a limited partnership?

Answer 15

• consent of ALL general partners AND of limited partners holding a majority of the right to receive distributions (“majority interest”)

Question 16

Who manages an LLC?

Answer 16

Presumably, the members

• • However, can create other management arrangements in the operating agreement (can be manager-managed instead of member-managed)
• • Members have equal rights in the management and conduct of the LLC

Question 17

A partner is NOT liable for:

Answer 17

crimes committed by a co-partner within the scope of the partnership even if partner had knowledge

• Partners are only liable for the torts, contracts, and frauds committed by co-partners within the scope of partnership business

Question 18

Do partners have authority to enter into transactions for the partnership?

Answer 18

Each partner is an agent of a partnership - must act with either actual or apparent authority

For actual authority:

• for transactions within the ordinary course of business - majority vote needed
• for transactions outside the ordinary course of business - unanimous consent of all partners

If a partner acts without authority to act on behalf of partnership (no actual or apparent) - then partnership is not bound by the contract, and only this partner is personally liable

Question 19

How does a creditor recover from the partners individually?

Answer 19

Partners are all jointly + severally liable for all obligations of the partnership (occurred in the ordinary course of business)

• • C must secure judgment against both the partnership entity and the individual partners - individual partners must be named in the action and served
• • C must first go after partnership’s assets before it can try to recover from the individual partners