Partnership

Question 1

Definition of Partnership

Answer 1

A partnership is formed as soon as two 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 filings or formalities are required.

A partnership is at-will if not otherwise agreed upon, meaning there is no agreement on a definite term and the parties may dissociate at any time.
A term partnership exists when the partners agree that the partnership will last for a definite term.

Question 2

Factors to determine whether there was a partnership

Answer 2

1) Sharing profits: creates a presumption of a partnership unless the profits were in payment of debt, wages, rent, or interest
2) Right to control of the business
3) Sharing of losses (presumed to be the same as profit sharing)
4) A writing - not required unless S.O.F.

Question 3

Partnership by Estoppel

Answer 3

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

Question 4

Voting

Answer 4

Unless otherwise agreed on, all parties have equal voting rights in the management of the business and equal votes

Decisions in the ordinary course of business require a majority vote.

Decisions outside the ordinary course of business requires a unanimous vote.

Question 5

Liability in tort

Answer 5

With respect to the partnership’s 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 acting in the ordinary course of business or with the authority of the partnership.

Question 6

Liability in contracts

Answer 6

A partnership is liable for contracts entered into on its behalf by partners with actual or apparent authority.

Question 7

Actual authority in partnership

Answer 7

• Can be created by the partnership agreement or requisite vote of the partners
• Can be created by filing statement of partnership with secretary of state
• Restrictions: third parties are presumed to have notice if there’s a filing

Question 8

Apparent authority in partnership

Answer 8

RUPA provides:
The act of any partner, in the ordinary course of business or business of the kind, binds the partnership unless:
1) the partner did not have authority for the particular matter, or
2) the third party knew the partner lacked authority

Question 9

Liability of Partners

Answer 9

Each partner is jointly and severally liable for all of the obligations of the partnership (tort or contract) but the plaintiff must first exhaust partnership resources.

A newly admitted partner is not personally liable for partnership obligations that arose before his admission.

Question 10

Fiduciary Duties

Answer 10

Partners in general partnership owe fiduciary duties of 1) loyalty and 2) care to the partnership.

They also owe a duty of 3) disclosure.

A) Duty of loyalty: requires each partner to

1) account to the partnership for any benefit derived by the partner in conducting partnership business, using the partnership’s property, or appropriating a partnership opportunity,
2) to refrain from dealing with the partnership in the conduct of its business as or on behalf of a party with adverse interests to the partnership and
3) to refrain from competing with the partnership in the conduct of its business

Question 11

Duty of Care

Answer 11

Requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law

Question 12

Duty of Disclosure

Answer 12

The partnership shall furnish 1) without demand, any info concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties and 2) on demand, any other info concerning partnership’s business and partnership ≤

Question 13

Partnership Property

Answer 13

The partnership has unrestricted rights in partnership property.

A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred.

Question 14

Partner’s Ownership Interest

Answer 14

1) management rights
2) financial rights
- unless otherwise agreed, partner cannot unilaterally transfer management rights.
- admission of a new partner requires unanimous vote pf existing partners

Question 15

Dissociation

Answer 15

This occurs when a partner withdraws from the partnership.

Events:

1) partner gives notice to the partnership of his desire to withdraw
2) partner’s expulsion, death, or bankruptcy,
3) an agreed-upon event
4) appointment of a receiver for a partner

Question 16

Wrongful Dissociation

Answer 16

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

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

• A dissociating partner is liable for damages to the partnership

Question 17

Consequences of Dissociation

Answer 17

Options:

• Business is wound up. Partnership will be liquidated and sold off, or
• Partnership continues to exist and dissociated partner is entitled to a buyout of his partnership interest.

Question 18

Dissolution

Answer 18

Dissolution and winding up are required only in limited circumstances
- event in agreement requiring winding up, business becomes illegal, issuance of judicial decree, unanimous consent of partners in term partnership, expiration of term

At-will partnership: any dissociating partner by express will may compel dissolution and winding up

Term partnership: wrongful dissociation = dissolution only required if within 90 days, one half of remaining partners agree to wind up the partnership

• a dissociated partner is liable for pre-dissociation partnership obligations and may be liable for post-dissociation partnership obligations incurred within 2 years after dissociation (can protect himself by notifying creditors or filing a public statement that becomes effective 90 days after filing)

Question 19

Apparent Authority of Dissociated Partner

Answer 19

A dissociated partner has apparent authority to bind the partnership for a period of time not exceeding two years after dissociation
- Partnership can protect itself by notifying creditors or by filing public statement (effective after 90 days)

Question 20

Dissolution and Distribution

Answer 20

Dissolution and winding up: partnership assets must be applied to the discharge of partnership liabilities

• If assets are insufficient, individual partners are required to contribute in accordance with their loss shares.
• Excess assets: distribute to partners in cash in accordancce with their profit shares

Question 21

Priority of Distribution

Answer 21

1) Pay of all creditors
2) Repay all capital contributions paid into the partnership by partners
3) Profits or losses if any

Question 22

Winding up

Answer 22

• Partnership will be bound by acts of a partner that are appropriate for winding up the business
• Partners who have not wrongfully dissociated may participate in the winding up of the partnership’s business.
• Partners retain apparent authority to bind the partnership to a third party on new business even after an event requiring winding up

Question 23

LPs

Answer 23

• A limited partnership has at least one general partner and one limited partner.
• Must file a certificate of limited partnership with the secretary of state.
  Certificate must include:
  1) name of the LP (must contain “limited partnership”)
  2) name and address of the agent for service
  3) name and address of each general partner

Question 24

LPs Management

Answer 24

• Managed by general partners, each with equal rights
• Vote of majority of general partners is required for ordinary business activities
• Limited partners usually have NO management rights unless partnership agreement grants otherwise

Question 25

Financial Rights

Answer 25

Unless otherwise agreed, distributions are proportional to contributions.

Question 26

Liability

Answer 26

General partners: liable for the obligations of the LP
Limited partners: not personally liable for LP obligations, generally only lose the value of their investments
- Limited partner is always liable for her own torts
- A general partner owes the LP and other partners the same fiduciary duties of loyalty and care
- Limited partner owes no fiduciary duties

Question 27

LLPs

Answer 27

• A partnership where all of the partners have limited liability
• Must file a statement of qualification with the secretary of state which requires
  1) name and address of partnership
  2) statement that the partnership elects to be an LLP and
  3) a deferred effective date, if any
• Partnership becomes an LLP at the time of the filing of the statement or on the date specified in the statement
• Must indicate that it’s an LLP in the name
• A partner is not persoally liable for obligations of the LLP other than their own wrongful acts

Question 28

LLCs

Answer 28

• Hybrid between a corporation and a partnership
• Limited liability as well as partnership tax treatment
• Separate legal entity distinct from its members
  Formation:
• Must file articles or certificate of organization
  1) name of LLC (must include LLC in the name)
  2) address of LLC’s registered office,
  3) name and address of its registered agent
• Operating agreement provides detail of governance, can displace most statutory provisions

Question 29

Management of LLCs

Answer 29

• Management is presumed to be by all the members
• Other arrangements must be specified in operating agreement
• Majority vote of members (or managers if manager-managed) is required for ordinary business decisions
• Unanimous vote of members (or managers if manager-managed) for decisions outside the ordinary course of business
• Unless otherwise agreed, profits and losses are allocated based on contributions

Question 30

Fiduciary Duties LLCs

Answer 30

Duty of care and loyalty to the LCC and members owed by whoever manages (either members or managers)
Duty of care: must act with the 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: members (or managers if manager-managed) cannot be held liable for negligent decisions but can be liable for grossly negligent decisions or worse
Duty of Loyalty: 1) must account to and hold for the LLC any benefit he derives from the LLC’s activities or from appropriation of an LLC opportunity, 2) refrain from dealing with the adverse interests unless the transaction is fair to the LLC, 3) refrain from competing with the LLC’s business
- acts may be ratified that would otherwise violate a duty of loyalty

Question 31

Dissociation from LLC

Answer 31

• 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 cause dissociation of a partner in a partnership will also cause dissociation of a member of an LLC
• Wrongfully dissociating member may be liable for damages

Question 32

Dissolution of LLC

Answer 32

An LLC will be dissolved when any of the following events occur:
1) event or circumstance that the operating agreement states causes dissolution,
2) the consent of all of the members
3) the passage of 90 consecutive days during which the LLC has no members
- member may also apply for judicial dissolution of the LLC
- court may grant an application for judicial dissolution if
1) the conduct of all or substantially all of the LLC’s activities is unlawful or
2) it is not reasonably practicable to carry on the company’s activities in conformity with the certificate of organization and the operating agreement
3) if the managers or those members in control of the LLC
A) have acted, are acting, or will act in a manner that is illegal or fraudulent, or
B) have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the member applying for dissolution

Question 33

LLC taxation

Answer 33

Pass-through taxation: no entity-level tax, instead business income is passed through to the owners and reported on the owners’ individual tax returns (regardless of whether that business income is actually distributed to the partners)

• By contrast, a corporation is subject to double taxation
• LLPs and LLCs are generally the best vehicles for closely held businesses
• Protect all owners from liability
• All owners have participation in the business
• Pass through taxation