Partnership Flashcards
Partnership formation
An association of two or more legal persons who carry on a for profit business as co-owners. Profit sharing creates a presumption of a partnership unless (money paid for debt, rent to a landlord)
A partnership may be formed by an individual or a company
no writing or certificate needs to be filed
NO intent requirement
Who can form a partnership
anyone with legal capacity to contract
-if a minor or incapacitate–> can’t
When 2 or more ppl share profits
there’s a presumption of a partnership relationship
not for debts, rent payments, wages employer to employee, goodwill
Fiduciary duties in partnership
duty of loyalty
duty of care
Every partner is a fiduciary of the partnership and owes the above duties to partnership and other
Duty of Loyalty includes
- Good Faith
- Not to Compete
- Not to advance interest ADVERSE to partnership
- Must not usurp partnership opportunity
-Cannot take a business opportunity that the partnership could have profited from (unless you presented it to partners first)
- Duty to Disclose
- Duty to Account
Duty of care Includes
- Act as a reasonable partner
- Each partner owes to the partnership a duty of care to refrain from engaging in a) grossly negligent or reckless conduct, b) intentional misconduct, or c) a knowing violation of the law.
Obligation of Good Faith and Fair Dealing
Partners are in a fiduciary relationship with one another and must act fairly and in good faith
Profits and Losses
Absent a partnership agreement, each partner will share profits and losses equally
Transfer of Financial Interest
A partner has a transferable partnership interest, i.e., a partner may transfer the right to share in the profits and losses of the partnership and to receive distributions.
o Partner is still a partner with remaining rights and obligations
o Third party does not become a partner, but can seek judicial dissolution of the partnership
o A creditor of a partner can enforce a judgment against the partner’s financial interest.
Property Ownership
All property acquired by a partnership is the property of the partnership, NOT the partners individually.
Any personal use of partnership property requires the consent of the other partners partnership.
Management Rights
Each partner has EQUAL rights in the management and conduct of the partnership.
o A majority of the partners can make a decision as to ordinary business matters.
o All partners must consent to a matter outside the course of ordinary business.
Access to Records
Partnership must provide partners and their agents with access to records during business hours
Tort Liability
A partner is an agent of the partnership
Partnership is Liable for a partner’s tortious acts, including fraud, committed in the ordinary course of
partnership business or with partnership authority
General Partnership Liability
Partners are personally liable for the partnership’s obligations
No limited liability
Partnership Agreement
There’s no requirement that partnership agreements must be written
However a provision partnership agreement will govern
can’t deny partners access to the partner’s books, fiduciary duties can’t be eliminated, and can’t waive liability to 3rd parties
Timing of Fiduciary duties
doesn’t apply to prospective or former partners
no duty of care or loyalty to these ppl
Liability to 3rd parties
a. As a separate entity, a partnership can be subject to a lawsuit for its obligations.
b. Partners are jointly and severally liable for all partnership obligations
c. Even if a partner enters into a contract but lack actual authority to do so, partnership and partners are BOUND so long as the partner had APPARENT authority
c. A creditor must obtain a judgment against the partners personally to go after the partner Partnership creditor should exhaust the partnership’s assets before taking the partner’s individual assets
Termination of partnerships
Step 1: dissolution
Step 2: Winding up
Dissolution
The dissolution of a partnership is the change in the relation of the partners. Dissolution does not end the partnership.
Prior creditors entitled to personal notice of the dissolution
Others who knew of partnership= newspaper notice
Any partner can choose to dissociate from the partnership by giving notice (or involuntary dissolution)
A partnership cannot prevent a partner from withdrawing, but can require certain restrictions on withdrawal (e.g., written notice, liability for
wrongful dissociation, etc.).
Effects of Dissolution
Once dissociated, a former partner has no right to participate in management of the partnership, and owe no more duties to partnership
Partnership may dissolve
A judgment creditor of 1 partner may not
A judgment creditor of an individual partner may not attach and execute upon partnership real
estate
Termination of Partnership:
Winding Up
Partnership assets are liquidated and partnership creditors are paid.
A partnership that is dissolved only continues to exist to “wind up” its business.
a. Assets: Creditors have priority over partners to the partnerships’ assets.
b. then distributed to the partners.
Limited Partnership (LP)
- Generally, limited partners are NOT liable for obligations of the Limited Partnership (LP)
- Individual partners are liable for their own misconduct.
participating in the removal of a director is NOT
considered to be participating in management and control.
Formation of LLP
o Requires filing a statement of qualification with the sec. of state (name of partner, statement of that partnership elects to be LLP, date)
o Failure to form an LLP will typically result in a general partnership
LLP- Limited Partners
o Partners are agents of the LLP
o Not personally liable for LLP obligations
Limited partners are personally responsible for their own misconduct/negligence
Transition from General Partnership to LLP
Changed through vote
• If a general partnership incurs liability and then becomes an LLP, the LLP is liable for those
obligations.
- If an individual partner in a general partnership is liable, and then an LLP is formed, the partner is still liable for that obligation.
- A new partner admitted to the LLP is not liable for pre-transition obligations.
LP—Limited Partnerships
Formed by 2 or more people, at least one general partner and one limited partner
LP- Access to Records
limited partners have a right to inspect and copy records upon reasonable
demand
LP-
Liability for a limited partner
limited partner is not liable for partnership obligations
o Can be liable if the limited partner participates in control of the partnership
o Removing a general partner does not amount to “control” of the partnership
o Limited partner only liable to third parties who reasonably believe the limited partner is a general partner
Terminating LLP Status
- partners can voluntarily terminate
2. the state revokes the llp status
LP- General Partners
Engages in Control of the partnership and therefore can be liable
incoming partner Liability
An incoming partner is NOT personally liable for prior debts of the partnership although their capital contributions can be used to satisfy such debts.
Authority to Bind the Partnership
Each partner is an agent of the partnership and generally has authority to bind the partnership in the ordinary course of business transactions (including entering into contracts)
Express Actual Authority
to bind
A partner has express actual authority to bind the partnership upon receiving said authority from the partners.
Implied actual authority to bind
A partner has implied actual authority (incidental authority) to take actions that are reasonably incidental or necessary to achieve the partner’s authorized duties
duty to account
account for any property, profit, or benefit derived by the partner from the partnership property or business (this includes the obligation to refrain from appropriating partnership assets for personal use)
Acts within the ordinary course of the partnership business need only be approved, votes needed
majority of partners
While acts outside the ordinary course of business must be approved by, votes needed
unanimously by partners;
change partnership agreement= unanimous vote
