Partnership

Question 1

*General Partnership definition

Answer 1

An association fo 2 or more persons to carry on as CO-OWNERS of a business for profit, whether they intend to form a partnership or not.

No writing required.

Question 2

*General partnership factors

Answer 2

1. capital: though a capital contribution si NOT required to be a partner.
2. control: right to control, even if controls is never exercised.
3. Sharing profits: just one factor; no presumption fo a partnershipl

Question 3

Joint venture

Answer 3

treated same way as general partnership.

*only difference: requires express agreement on how the losses will be shared.

Question 4

Estoppel for general partnerships

Answer 4

if no partnership was formed, parties may still be liable AS IF they are partners to protect reasonable reliance by third party (like apparent authority)

Question 5

*Determining partnership property

Answer 5

1. IS PARTNERSHIP PROPERTY: Acquired in the partnership’s name or in a partner’s NAME where it’s apparent from the document he’s acting for a partnership.
2. PRESUMED to be PARTNERSHIP prop: if partnership funds are used.
3. PRESUMED to be a PARTNER’s prop: if acquired in his name without partnership funds and there’s no sign he’s acting for a partnership.

Question 6

*Rights in partnership property

Answer 6

PARTNERSHIP’s rights: totally unrestricted (it owns the property)

PARTNER’s rights: extremely limited rights. A partner can use partnership property only for partnership purposes [must ask permission]. Right is not transferable.

Question 7

Partnership’s economic interest in partnership

Answer 7

Definition: a partner’s share of the profits/financial stake (25% stake)

IS transferable: like any other financial asset (e.g. stock) you can assign/devise/use it as collateral.

Question 8

Default rule of how partners share profits and losses

Answer 8

Partnerships share profits EQUALLY, not in proportion to capital contribution.

UOG (unless otherwise agreed), the partners will share in the same way as they share profits

Question 9

Default Rules of partnership

Answer 9

1. Profits:
   Partnerships share profits EQUALLY, not in proportion to capital contribution.

UOG (unless otherwise agreed), the partners will share in the same way as they share profits

2. No right to compensation (except for winding up)
3. Equal management rights (but ordinary business is decided by majority in interest)
4. Indemnification and interest (if she pays 10K loan on partnership debt, she gets interest)

Question 10

Duties in a partnership

Answer 10

Care, loyalty, good faith, but may not limit or even eliminate them in partnership agreement.

Question 11

Admission of new partners

Answer 11

New partner requires unanimous consent.
New partner liable for his interest in the business for debts incurred before he came, but not more-so. ANd yes is liable for future debts.

Question 12

*Actual authority within a partnership

Answer 12

Created by partnership agreement, majority vote of partners, or the statute, which makes every partner an agent of the partnership for carrying on the business in the usual way [statutory authority can be negated by other partners, so is not absolute]

Question 13

*Apparent authority in a partnership

Answer 13

1. Partner’s title

2. Prior conduct

Question 14

*Partner’s or employee’s tort

Answer 14

• partnership cannot waive liability for torts

Partner is always liable for her own tort (but use respondeat superior for employee/IC), but partnership can also be liable for the tort if the partner committed the tort in the ordinary course of the partnership’s business

*if partner committed tort and third party was not aware of the partnership, then partnership and other partners not liable

Question 15

Partner conveying real property without authority

Answer 15

Partnership can get the property back from the initial transferee (who should have check on authority) but not from a subsequent BFP (who had no reason to check)

Question 16

*Partner liability for partnership

Answer 16

Partners are liable for partnership obligations.

*Partners are JOINT AND SEVERALLY LIABLE but the plaintiff must first exhaust PARTNERSHIP resources (so partners are basically guarantors)
===this is a nice balance: protects 3Ps but also exhausts partnership resources before partner to give partner some slack.

*Exception: limited liability partnership (LLP): no liability on contracts or for the torts of others (“broad shield” statute)

Question 17

Withdrawal of a partner

Answer 17

Event of withdrawal:

1. notice of express will to withdraw
2. an agreed-on event
3. a partner’s expulsion, death, bankruptcy, or incapacity
4. appointment of a trustee, receiver, or liquidator for a partner
5. redemption of a transferee’s interest

Partnership buys out withdrawing partner and continues without her.

Question 18

*Apparent authority of withdrawing partner

Answer 18

-May have apparent authority to bind partnership to an innocent TP for ONE YEAR - but partnership can protect itself by notifying creditors

Question 19

*Liability of withdrawn partner

Answer 19

1. to existing creditors (unless released)
2. to subsequent creditors (who are unaware of withdrawal - can let them to know to protect herself)
3. to other partners - if she withdraws before the term is up or before the specific task is completed (“wrongful withdrawl”)

Question 20

Partnership at will

Answer 20

you can withdraw at any time without penalty (liability to the other partners for breach).

Most partnerships are “at will” - no term or specific task, they’re open-ended.

Question 21

Triggering events for winding up a partnership

Answer 21

1. business becomes illegal
2. all assets are sold outside the usual course of business
3. entry of judicial decree
4. term is up/task is completed
5. all partners consent
6. a majority-in-interest consent in a partnerhsip at will.

Question 22

Right to wind up

Answer 22

Partners who have not wrongfully withdrawn may wind up

Question 23

*Liability after winding up

Answer 23

May be apparent authority to bind the partnership to an innocent 3P on a new business even after an event requiring winding up (but the partnership can protect itself by notifying the potential creditors).

Question 24

*Distribution of partnership assets on winding up

Answer 24

1. To creditors (including partners who are creditors). [if not enough for these: they split pro rata]
2. To partners for what is in their capital accounts (capital contributions + profits - losses)

Question 25

*Creditors rights on a wound up partnership

Answer 25

Partnership creditors have PRIORITY over a partner’s creditors on partnership property, and EQUAL CLAIMS on a partner’s separate property.

Question 26

*Limited partnership

Answer 26

Partnership with one or more general partners (generally liable) and one or more limited partners (liability limited to their investment)

*liability limited only up to the contribution amount

General partnership law governs except where LP statute is inconsistent.

Question 27

*Liability of limited partners

Answer 27

Limited partners can only lose their capital contributions

General partners still liable as they would be in a general partnership.

Exception: when limited partner takes part in CONTROL.

Question 28

“Control” in limited partnerships

Answer 28

Not defined, but contains a laundry list of safe harbor exceptions that are NOT control:

What if, in addition to being an LP:

• employed by LP
• guarantee a note for LP
• advising the GP
• officer or director of the corporate general partner

If she does all these things and MORE…then she crosses the line and risks losing the LP shield.

Question 29

Liability for LP participating in control

Answer 29

Limited by a RELIANCE test.

If the 3P reasonably believes she’s a GP based on her conduct.

Question 30

*If LP not filed with SOS

Answer 30

Joint and several liability (b/c it’s a GP); BUT…a limited partner can avoid FUTURE liability by filing a certificate or withdrawing from the LP within a reasonable time after discovering the failure to file.

Question 31

Rights and obligations of limited partners

Answer 31

1. promise to contribute must be in a signed writing to be enforceable
2. may withdraw ONLY IF the agreement permits.

Question 32

*LLLP

Answer 32

Limited liability limited partnership:
shields GPs from personal liability just like an LLP does

Formula; L.P. (shields limited partners) + LLP (shields general partners) = LLLP

LLLP = LP.
Vicarious liability is limited.

So why would you form an LP instead of an LLLP? only on the bar!

Question 33

*LLCs

Answer 33

Limited Liability Companies

Professionals (PLLC): members and managers must be licensed to render professional services somewhere but no MIXING of professions.

*No liability for members!!! (other than tortfeasor individually)

Question 34

LLC Management structure

Answer 34

1. Flexible management: can be structured like a corp or partnership (centralized) but MANAGERS run the LLC unless otherwise provide din the certificate.
2. Series LLC: can partition assets/liabilities among separate (independent) series…designed to protect the LLC”s assets. Asset protection device.

Question 35

Liability for each business form

Answer 35

GP: joint and several liability

LP: J&S liability for general partners (unless LLLP); No liability for limited partners (unless control)

LLP: NO liability

LLC: NO liability

Question 36

Why LLP and LLC are Best

Answer 36

LLP/LLCs have NO liability (compared to others)

Flexible management: ALL owners may exercise control, unlike LP. Exactly HOW control is allocated is usually determined by agreement among the owners.

Less tax to pay: income is PASSED THROUGH to the owners, unlike a corporation, which is subject to DOUBLE taxation (a corporation pays tax on its income, tehn shareholders pay tax AGAIN on corporate income distributed to them as a dividend).

Question 37

Conversion/Merger

Answer 37

If you choose the wrong form, you can convert to another form or merge one into another by getting the owners’ approval and filing appropriate documents.

Question 38

When a creditor can proceed against a partner on a partnership obligation

Answer 38

Creditor can’t proceed UNLESS/UNTIL:

1. Partnership is bankrupt.
2. CR first obtained a judgment against the partnership that remains unsatisfied for 90 days, or
3. CR and the partnership have agreed that obtaining a judgment against the partnership is not required.

Because all partners are jointly and severally liable for all obligations of the partnership, an action may be brought against any one or more of the partners or the partnership.

Question 39

Actions requiring affirmative vote of ALL LLC members

Answer 39

(i) amending the certificate of formation or company agreement;
(ii) issuing new membership interests in the LLC; and
(iii) changing the structure of the LLC from member-run to manager run, or vice versa.

Question 40

Partnership by Estoppel (Liability)

Answer 40

When a person, by words or conduct, represents herself or permits another to represent her as a partner, she will be liable to third parties who extend credit to the actual or apparent partnership.

When a person, by words or conduct, holds another person out to be her partner, she thereby makes the alleged partner her agent with the power to bind her to third parties as if the other were, in fact, a partner.

Question 41

How can a person who erroneously believes herself to be a LP avoid being held liable as GP?

Answer 41

On ascertaining the mistake, she either:

(i) files an appropriate certificate of formation or certificate of amendment with the secretary of state, or
(ii) withdraws from future equity participation in the enterprise and files a certificate to that effect with the secretary of state.

Question 42

• if there is no filing, what type of partnership is it?

Answer 42

it must be a general partnership if the proper certificate is not filed with the secretary of state

so even if liability is limited in the agreement, it does not make it anything other than a general partnership unless the proper filings are made

Question 43

*Partner Liability for K

Answer 43

A partner can act as an agent for the partnership in the regular course of the partnership’s business.

However, the partners may agree to limit a specific partner’s actual authority.

A partner may still be held liable under the principle of apparent authority if, by their title and conduct, the third party reasonably believes they have the authority to bind the partnership.

Question 44

*Is agent (employee or partner) personally liable for K on behalf of partnership if she disclosed that she was an agent?

Answer 44

Under agency law, the principal is liable to third parties on contracts made by the agent.

The agent is only personally liable for a contract made on behalf of a principal if the agent did not disclose her status as an agent and the third party did not have reason to know.

Question 45

*If a partner(s) withdrawal from partnership and there is only one partner remaining, what happens?

Answer 45

partnership must begin winding up.

Question 46

*Who is liable in partnership?

Answer 46

For Ks: partnership, and each partner J+S

For torts: partnership and each partner J+S

Question 47

*Steps to Form LLP

Answer 47

LLP can be formed by
(i) filing a certificate of formation with the Texas
Secretary of State and paying a fee.

The certificate of formation must provide: (1) the name of
the LLP, which must include the words “limited liability partnership” or some abrieviation
thereof; (2) the address of its principal place of business; (3) the names and addresses of its
partners; and (4) the name and address of an agent for service of process.

Question 48

*Steps to form LLC

Answer 48

An LLC may be formed by (i) filing a certificate of formation with the Texas Secretary of
State.

The certificate of formation must include:

(1) the name of the LLC which must contain the
words “limited liability company”; (2) its duration; (3) purpose: (4) address of the LLC’s
principal place of business; and (5) set forth whether the LLC is to be member run or manager
run.

Question 49

*Steps to form LP

Answer 49

An LP may be formed by (i) filing a certificate of formation with the Texas Secretary of
State and paying a fee.

The certificate of formation must be: (1) signed by all general partners;
(2) give the name of the LP, which must inlcude the words “limited partnership” or some
variation thereof; (3) give the address of the LP place of business; (4) set forth the name and
address of all general partners; and (5) provide the name and address of an agent for service of
process.

Question 50

*Assumed name certificate.

Answer 50

An entity formed by filing, which is any anything besides a general partnership and a sole proprietorship, has a requirement for its name that it designate its
entitle type in the name.

This means a limited partnership would have to include “limited partnership” in its name or an abbreviation of that.

But any entity may operate under such a name by filing an assumed name certificate in the county of the principal office is located.

The assumed name certificate sets forth the owner, it states the legal name of the entity if it is an entity that filed a certificate of formation with the
secretary of state and the assumed name under which the business will be operating.

The name must also not be misleading.

Question 51

*Reimbursement for funds spent

Answer 51

ordinary rule is that profits are to be split evenly regardless of how much is contributed by each person (unless agreement says otherwise)

But if partnership property is wrongly used (e.g. breach of loyalty), there can be reimbursement for the amount taken.

Question 52

*If employee or partner acted negligently, who can be liable?

Answer 52

the person or the partnership

person is always liable for their own negligence independently of agency principles

Question 53

*PLLC

Answer 53

limited liability company for professionals

members are not personally liable on the company’s obligations.

Only one profession can be represented in a
PLLC.

if membership interest transferred to non-professional, then non-professional can still have economic interest but not managing interest

Question 54

*Are these valid?

1. restricting rights to access books and records
2. restricting power to admit new partners
3. restricting court’s ability to expel partners
4. limit personal liability to amount of contributions (if general partnership)
5. restricting fiduciary duties
6. restricting partnership withdrawals
7. changing which state’s laws partnership affairs are governed by

Answer 54

1. In partnerships in general, any partner with a financial interest may access the partnership’s books and records. A partnership may place reasonable place and time restrictions on this access, but cannot deny a partner the right to access.
2. absent an agreement otherwise, a partnership can only admit a new partner by unanimous vote. However, a partnership agreement can specify the ways in which a partnership may admit new partners so long as it does not outright prohibit the admission of new partners.
3. A partnership agreement cannot prohibit or abrogate a court’s ability from asserting its judiciary rights.
4. In a general partnership under Texas Law, the partners to such are personally liable, jointly and ever ably
   for the liabilities of the partnership. A General Partnership cannot limit the personal liability of its
   partners.
5. General Partnership can abrogate but not eliminate fiduciary duties. By agreeing to have the court
   determine breaches of fiduciary duties, as is the case here, the partnership merely abrogated their
   fiduciary duties, and did not eliminate them.
6. Prohibiting withdrawal of a partner only by death or incapacity unduly burdensome on a partner and
   constitutes an invalid restraint.
7. partnership operating solely in Texas with its only office in Texas may not agree to be governed by the
   law of another state.

Question 55

*If company is a general partnership or limited partnership and then switches to a partnership with all or some limited liability, who is liable for torts or Ks that happened under the old partnership?

Answer 55

any person and the entity liable under the old company, and the new entity

Question 56

*Difference between LLC and LLP liability?

Answer 56

Rules for members’ liability for their own torts is the same for PLLCs and LLPs

Rules for organization’s liability for the torts of its members (for a PLLC) or partners (LLP) are the same (e.g. only liable up to amount of contribution).

However, rules are different for liabilty of other partners in an LLP.

*Partners in LLP are only liable for the torts of their fellow partners if they (i) were involved (ii) were supervising the partner that committed the tort, or (iii) knew about the tort and did nothing to stop it.

Question 57

*When partnership rights are transferred (e.g. voluntarily, by death), what does the transferee get?

Answer 57

when partner conveys his interest in the partnership to other, transferee gets (a) the right to financial distributions from the partnership and (b) right to inspect the records

Transferee does not get to become a partner (unless voted in), nor does she get any management rights.

Question 58

*What duties does a transferee of partnership interests owe the other partners?

Answer 58

same duties as any other partner

-loyalty
-care
good faith

Question 59

• steps to wind up partnership

Answer 59

• *notify all creditors of the dissolution,
• evaluate all claims against the partnership,
• liquidate the partnership assets,
  -pay the claims in order of priority;
• and file a notice of dissolution with the
  Texas Secretary of State.