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Partnership Flashcards

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1
Q

General Partnership: Definition

A

A partnership is formed as soon as 2 or more persons associate to carry on as co-owners a business for profit, regardless of whether the parties subjectively intend to form a partnership.

No state filing or other formalities required.

Subjective intent irrelevant.

Did parties intend to carry on as co-owners a business for profit.

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2
Q

Does an Association Rise to the Level of a Partnership

Factors to Consider

A

Most important factor: sharing of profits.

  • A person who receives a share of the profits is presumed to be a partner UNLESS profits received in payment
    • of a debt
    • as wages or other compensation
    • as rent
    • as interest on a loan

Sharing of gross returns does not presumptively make you a partnership. Can rebut this presumption with evidence suggesting lack of co-ownership status: no right to control or sharing of losses.

Other important factors: right to control

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3
Q

Formation of Partnership: Writing

A

Partnership law does not require one, but the statute of frauds may

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4
Q

Partnership by Estoppel

A

If no partnership was formed in fact, parties may still be liable as if they were partners to protect reasonable reliance by 3rd parties.

Person who does holding out also liable.

Recovery on a creditor by creditor basis

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5
Q

Partnership Agreement

A

No agreement required to form a partnership.

Look for a partnership agreement because partnership law allows partners to contract around almost all of statutory provisions.

Look for agreement first and fall back on statutory default rules in absence of agreement.

May be written, oral, or implied (by conduct)

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6
Q

Entity Status

A

Once formed, a partnership is considered to be a legal entity distinct from its partners

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7
Q

General Partnership Voting

A

Unless otherwise agreed, all partners have equal rights in the management of the business and equal votes (i.e. one partner, one vote)

Decisions re: matters in the ordinary course of business: majority vote of the partners

Matters outside ordinary course of business: consent of ALL partners

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8
Q

General Partnership: Right to Salary/Other Compensation

A

Unless otherwise agreed, partners get NO compensation (w/ exception of a right to reasonable compensation for services rendered in winding up partnership business)

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9
Q

General Partnership: Sharing Profits and Losses

A

Unless otherwise agreed, profits are shared equally among the partners (by #)

Unless otherwise agreed, losses are shared in the same manner as profits

Losses follow profits
Profits do not follow losses

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10
Q

Liability of Partnership in Tort

A

W/r/t the partnership liability in tort, a partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting in the ordinary course of business of the partnership or with authority of the partnership

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11
Q

Liability of Partnership to Contract

A

W/r/t the partnership’s liability in contract, a partnership is liable for contracts entered into on its behalf by partners with actual or apparent authority

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12
Q

Partnership: Actual Authority

A

Can be created by the partnership agreement or by the requisite vote of the partners (e.g. majority for ordinary biz). Can also be created by partnership’s filing of a “statement of partnership authority” with the secretary of state. Effect differs depending on whether transfer involves real property.

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13
Q

Partnership: Apparent Authority

A

Partnership statute states that a partner is an agent of the partnership and that a partner has apparent authority to bind partnership within ordinary course of business (unless 3rd party aware)

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14
Q

Actual Authority: Grants of and Restrictions on Partner Authority to Transfer Partnership Real Property

A

Binding on 3rd parties if the statement is also recorded in the county where the property is located.

  • 3rd parties deemed to have constructive knowledge of the statement if the secretary of state and county filings are made
  • 3rd parties are benefitted by filed grants of authority (unless they have actual knowledge that the partner lacked authority)
  • 3rd parties burdened by filed restrictions on property
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15
Q

Actual Authority: All Other Transactions of the Partnership (Except Real Property)

A

Grants of partner authority in the statement are binding on the partnership (unless the 3rd party has actual knowledge that the partner lacked authority).

Restrictions on partner authority in this statement are not binding on third parties:

  • only deemed to have constructive knowledge of filed grants of authority, not restrictions
  • benefitted by filed grants (unless have actual knowledge)
  • NOT burdened by filed restrictions (only actual knowledge burdens them)
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16
Q

Liability of Partners

A

Each partner is jointly and severally liable for all of the obligation of the partnership (in tort or in contracts) BUT
-plaintiff must first exhaust partnership resources before seeking to collect for an individual partner’s assets (so the partners are essentially guarantors

Where one partner pays a partnership obligation, he is entitled to indemnification from partnership.
May also require other partners to contribute pro rata shares of payment if partnership unable to indemnify

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17
Q

Limiting Liability to 3rd Parties

A

Partners cannot limit a 3rd party’s rights without the 3rd parties consent.

Agreement is effective among the partners themselves

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18
Q

Liabilities of Admitted Partners

A

If the partnership admits a new partner (unless otherwise agreed, this requires a unanimous partner vote), is that partner is NOT personally liable for debts incurred by the partnership before his admission

He can only lose the amount of his investment in the partnership

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19
Q

General Partnership Duties (3)

A

(1) Duty of Loyalty*
(2) Duty of Care*
(3) Duty of Disclosure
* fiduciary

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20
Q

Partnership: Duty of Disclosure

A

Statutory (not fiduciary) duty

Each partner and the partnership shall furnish to a partner
(1) w/o demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partners rights and duties AND

(2) on demand, any other information concerning the partnership’s business and affairs (except to the extent the demand or the information demanded in unreasonable or otherwise improper under the circumstances

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21
Q

Partnership: Duty of Loyalty

A

Fiduciary Duty

Requires each partner

(1) to account to the partnership for any BENEFIT DERIVED by the partner in conducting the partnership business, using the partnership’s property or appropriating a partnership opportunity
(2) to refrain from dealing with partnership in the conduct of its business as (or on behalf of) a party having an interest ADVERSE to partnership
(3) to refrain from competing with the partnership in the conduct of its business

*May not be eliminated by partnership agreement

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22
Q

Partnership: Duty of Care

A

Requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowing violations of the law.

*May not be eliminated by partnership agreement

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23
Q

3 Rules for Determining Partnership Property

A

(1) partnership property acquired in the partnership’s name or in a partner’s name where it is apparent from the document that she is acting for a partnership (e.g. it mentions a partnership or says she is a partner)
(2) it is presumed to be a partnership property if partnership funds are used
(3) it is presumed to be a partner’s property if acquired in her name without partnership funds and there is no sign she is acting for a partnership

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24
Q

Rights in Partnership Property: The Partnership

A

Rights are totally unrestricted

The partnership owns the property

Can be pledged as collateral for a loan or sized by a creditor to satisfy the partnership’s debt

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25
Q

Rights in Partnership Property: A Partner

A

NOT a co-owner of the property and has no interest in partnership property which can be transferred

Partner can simply use partnership property for partnership purposes

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26
Q

Partner’s Ownership Interest in the Partnership

A

“Partnership Interest:” personal property of the partner, although there are restrictions on what a partner can do with it.

(1) Partnership interest comprised of
MANAGEMENT RIGHTS: a partner’s right to participate in the management of the business, to obtain information about the partnership, and to be recognized as a partner, and
FINANCIAL RIGHTS: share of profit distributions

(2) Unless otherwise agreed, a partner cannot unilaterally transfer management rights and thereby make the transferee a partner. Default rule for admission of new partners= unanimous vote of the existing partnership
(3) Unless otherwise agreed, partner can unilaterally transfer his financial rights. Transferee merely has right to receive profit distributions– NOT a partner.

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27
Q

Dissociation

A

A withdrawal: when a partner “bows out” of a partnership

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28
Q

Events of Dissociation

A

(1) partner giving notice to the partnership of his desire to withdraw (dissociation by express will)
(2) a partner’s expulsion, death, or bankruptcy
(3) an agreed upon event
(4) the appointment of a receiver for a partnership

29
Q

Wrongful Dissociation

A

A partner will be deemed to have wrongfully dissociated if the disassociation is in breach of an express term in the partnership agreement.

Dissociation is wrongful in a term partnership if the partner withdraws, is expelled, or becomes bankrupt before the end of the term.

A partner who wrongfully dissociates is liable to the partnership for any damages caused by dissociation.

30
Q

At-Will Partnership

A

One where the partners have not agreed to remain partners until the expiration of a definite term or the completion of the undertaking.

Default form of partnership

31
Q

Term Partnership

A

Partnership where the parties have agreed, explicitly or implicitly, to remain partners for a definite term or until the completion of a particular undertaking.

32
Q

Consequences of Dissociation

A

One of 2 statutory avenues implicated by partners dissociation from a partnership:

(1) partnership dissolve and business must be wound up. Means partnership business will be liquidated (“sold off”)
(2) partnership continues in existence with the dissociation and partner becoming entitled to a buyout of his partnership interest.
* Nature of dissociation dictates which avenue is implicated

33
Q

Dissolution

A

Dissolution and winding up only required in limited circumstances (e.g. event in agreement requiring winding up, business becomes illegal, issuance of judicial degree, unanimous consent of the partners in a term partnership, expiration of a term partnership)

34
Q

Dissolution: 2 Key Circumstances

A

(1) in an at-will partnership, any partner who dissociates by express will may compel dissolution and winding up
(2) in term partnership, if one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up required only if within 90 days 1/2 of partnership agrees to wind up

35
Q

Buyout and Continuation of the Business

A

If a partner’s dissociation does not result in a dissolution and winding up, the partner is entitled to receive a buyout in his partnership interest.

If the dissociation is wrongful, any damages will be offset against the buyout price.

36
Q

Liability of Dissociated Partner

A

A dissociated partner remains liable for pre-dissociation partnership obligations (a creditor can agree to release the withdrawing partner, however, from specific obligations)

May also be liable for post-dissociation partnership liabilities incurred within 2 years after the dissociation (assuming that dissolution has not occurred). He can protect himself by notifying creditors directly of his dissociation (effective immediately) or by filing a public statement of dissociation (becomes effective 90 days after filing). Partnership can make filing as well.

37
Q

Apparent Authority of Dissociated Partner

A

A dissociated partner has apparent authority to bind the partnership for a period of time not exceeding two years after the dissociation (assuming the dissolution has not occurred).

The partnership can protect itself by notifying creditors directly of the dissociation (effective immediately) or by filing a public statement of dissociation (becomes effective 90 days after filing).

38
Q

Dissolution and Winding Up Mechanics

A

When dissolution and winding up occur (causes of dissolution are stated above), partnership assets must be applied to the discharge of partnership liabilities.

If assets are insufficient, individual partners are requried to contribute (“pay in”) in accordance with their loss shares.

If there are excess assets, they are distributable to the partners in cash in accordance with their profit shares.

Priority of distribution: each level of priority must be fully satisfied before beginning next level.

39
Q

Dissolution and Winding Up: Priority of Distribution

A

each level of priority must be fully satisfied before beginning next level!

First pay all creditors (inside and outside)

Partnership must repay all capital contributions paid into partnership by partners

Profits and losses, if any

40
Q

Right to Wind Up

A

Partners who have not wrongfully dissociated may participate in the winding up of the partnership’s business

41
Q

Dissolution and Apparent Authority

A

Partners retain apparent authority to bind the partnership to a 3rd party on new business even after the event requiring winding up.

The partnership can protect itself by notifying creditors directly of dissolution (effective immediately)

Any partner who has not wrongfully dissociated may file a public statement of dissolution (becomes effective 90 days after filing)

42
Q

Limited Partnership Definition

A

A partnership with at least one general partner and at least one limited partner.

Because its a partnership, general partnership principles typically apply unless displaced by LP-specific provisions.

43
Q

Limited Partnership Formation

A

Must file a certificate of limited partnership with secretary of state.

If you fail to file, you are just a general partnership.

44
Q

Limited Partnership Formation: 3 Filing Requirements

A

(1) Name of limited partnership
Name must contain phrase “limited partnership” alerting public to limited liability nature

(2) Name and address of agent for service of process
(3) Name and address of each general partner

45
Q

Limited Partnership: Partnership Agreement

A

Detail on operation and governance of LP typically found in LP agreement.

Can be oral, written, or implied.

Can displace almost all statutory provisions.

46
Q

Limited Partnership: Management and Operation

A

Managed by the general partner(s).

Each general partner has equal rights in the management and conduct of the LP’s activities.

Vote of majority of general partners is necessary for ordinary business activities.

Limited partners usually have NO management rights unless the partnership agreement grants them rights.

Unless otherwise agreed, vote of ALL partners (general and limited) necessary for extraordinary activities (incl. amendment of partnership agreement)
Ex: admission of new general or limited partner, sale of partnership property

47
Q

Limited Partnership: Financial Rights

A

Unless otherwise agreed, distributions from an LP are made on the basis of the partner’s contributions (i.e. in proportion to the value of each partner’s contribution)

48
Q

Limited Partnership: Liability

A

General partners: liable for the obligations of the LP, just as they are in a general partnership

Limited partners: NOT personally liable for an obligation of the LP solely by reason of being a limited partner. Limited partners have limited liability, meaning that they can only use the value of their investment.
Limited liability= owner not liable for the debts of the business

NOTE: limited and general partners are ALWAYS liable for their own torts

49
Q

Limited Partnership: Fiduciary Duties

A

General partner owes the LP and other partners the same fiduciary duties of loyalty and care that general partners owe in a general partnership.

Limited partner does NOT have any fiduciary duty of the LP or to any other partner solely by reason of being a limited partner.

Fiduciary duties are slapped on people with control.

50
Q

Limited Liability Partnership (LLPs)

Registered Limited Liability Partnerships (RLLPs)

A

An LLP is typically a general partnership where all of the partners have limited liability.

Apply general partnership rules to LLPs with a few exceptions

51
Q

LLP/RLLP: Formation

A

Must file a statement of qualification with the secretary of state.

Partnership becomes an LLP at the time of filing of the statement or on the date specified int he statement. No filing, no LLP!

52
Q

LLP/RLLP: 3 Filing Requirements

A

(1) name and address of partnership
Name must include RLLP or LLP

(2) statement that the partnership elects to be an LLP
(3) a deferred effective date, if any

53
Q

LLP/RLLP: Liability

A

A partner in an LLP is NOT personally liable (directly, indirectly, or by way of contribution) for obligations of the LLP, whether arising in tort, contract, or otherwise.

A partner remains personally liable for her own wrongful acts.

54
Q

Limited Liability Limited Partnership

A

RARE

General partners and limited partners have limited liability for the obligations of the business.

In general, apply limited partnership rules to LLLPs, with some exceptions

55
Q

Limited Liability Companies (LLCs)

A

Hybrid between corporation and partnership where owners (“members”) have limited liability as well as the benefits of partnership tax treatment

Not a corporation or a partnership– it’s own business form.

Treated as separate legal entity distinct from its members

56
Q

LLC: Formation

A

Must file articles/certificate of organization with the secretary of state.

Information required minimal.

57
Q

LLC: 3 Filing Requirements

A

(1) Name
Must include indication that it is an LLC

(2) Address of LLC’s registered office
(3) Name and address of registered agent

58
Q

LLC: Operating Agreement

A

Detail on operation and governance typically found in operating agreement.

Can displace almost all statutory provisions.

59
Q

LLC: Management and Operation

A

Management of LLC presumed to be by all of the members.

Other management arrangements can be made, but they must be specified in the operating agreement.

Majority vote of members (or managers if manager-managed) is required to approve ordinary business decisions.

Unanimous vote of members or managers if manager-managed) is required to approve extraordinary business decisions (including amending operating agreement).

60
Q

LLC: Financial Rights

A

Unless otherwise agreed, profits and losses are allocated on the basis of contributions

61
Q

LLC: Liability

A

Members generally not personally liable for LLC’s obligations.

Have limited liability and can only lose the amount of their investment.

Members are liable for their own torts.

62
Q

LLC: 2 Fiduciary Duties

A

Owed by a member (if member-managed) or a manager (if manager-managed) to the LLC AND to its members.

Duty of care: must act with care that a person in a like position would exercise under similar circumstances in a manner reasonably believed to be in the best interests of the LLC. Business judgment rule provided (liability for gross negligence or worse, not mere negligence).

Duty of loyalty: must (1) account to and hold for the LLC any benefit he derives from the LLC’s activities or from the appropriation of an LLC opportunity; (2) refrain from treating the LLC as/on behalf of a person with an interest adverse to the LLC– unless transaction fair to LLC; and (3) refrain from competing with the LLC’s business.
HOWEVER: after disclosure of all material facts, all of the members may authorize or ratify a specific act by a member (or manager if manager-managed) that would otherwise violate the duty of loyalty.

63
Q

LLC: Transferability of Ownership Interest

A

Essentially partnership rules apply–

Financial rights are unilaterally transferable, but management rights are not.

One can become a member only with consent of all members.

64
Q

LLC: Dissociation

A

A person has the power to dissociate as a member of an LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member.

Generally, the events that will cause dissociation of a partner in a partnership will also cause the dissociation of a member in an LLC. A wrongfully dissociating member may be liable to the LLC for damages.

65
Q

LLC: Dissolution

A

An LLC will be dissolved when any of the following events occur:

(1) an even or circumstance that the operating agreement states causes dissolution
(2) the consent of all of the members, or
(3) the passage of 90 consecutive days during which the LLC has no members

66
Q

LLC: Dissolution– Judicial Dissolution

A

Member may apply for judicial dissolution of the LLC. Court may grant application if:

(1) the conduct of all/substantially all LLC’s activities is unlawful
(2) it is not reasonably practicable to carry on the company’s activities in conformity with the certificate of the organization and the operating agreement

Court may also dissolve LLC if the managers or those members in control of the LLC have

(1) acted, or are acting, or will act in a manner that is illegal or fraudulent
(2) acted, or are acting, in a manner that is oppressive and was, is, or will be directly harmful to the member applying for dissolution

67
Q

Partnership & LLC Taxation

A

Partnerships and LLCs are taxed on “pass through basis”

No entity-level tax, instead business income is passed through to owners and reported on the owner’s individual tax returns (regardless of whether the business income is actually distributed to partners)

68
Q

Why are LLPs and LLCs generally the best vehicles for closely held businesses?

4 Reasons

A

(1) protect ALL of the owners from liability for the obligations of the business
(2) allow owners to contract around almost all of the statutory provisions (so the business can run as the owners desire)
(3) allow all of the owners to participate in the management of the business
(4) provide pass-through income tax treatment

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