Partnership Flashcards
Partnership definition
An association of 2+ legal persons who carry on a for-profit business as co-owners
LP limited partners’ liability for LP obligations
Not personally liable unless
(1) he serves as general partner or
(2) participates in the control of the business
LP Limited partner’s “participation in the control of business”
“Participation in the control of business” does NOT include: being officer/shareholder of general partner, consulting GP, acting as a surety of the partnership, winding up partnership, proposing/approving partnership matters.
© If control of business, liable only to 3rd p who reasonably believe LP is a GP
LP general partners’ liability for LP obligations
personally liable. (can limit by becoming corporations)
General partner of LP can terminate its GP status by
voluntary withdrawal, removal (if GP tries to assign partnership interest), removal after bankrupt, death/incapacitation, termination of business-entity partner
Partnership formation requirement
(a) intent to carry on business for profit as co-owners (not intent to form a partnership); and (b) sharing of profits © receipt of profit as payment of debt, interest, rent
Partnership formation presumption
Presumption of a partnership if 2+ persons share profits © no division of control
Partnership partner
anyone with legal capacity to contract with intent to carry on as co-owners for profit.
At-will partnership definition
open ended partnership with no fixed termination based on a period of time or particular undertaking
Partners personal liability
partners are personally, jointly and severally liable for partnership obligations
Partners personal liability: creditors of partnership can reach individual partner assets when
To reach partner’s assets, creditor must ∑2
(a) obtain a judgment against the partner individually; AND
(b) must first exhaust partnership assets unless © (1) partner consented (2) is the primary tortfeasor or (3) partnership is a debtor in bankruptcy
Partners personal liability: incoming partner
Incoming partner is not personally liable for prior partnership obligations, but his capital contributions to the partnership can be used to satisfy those obligations
Partners personal liability: dissociated partner
Dissociated partner when bought out are not liable for partnership obligations © post-dissociation conduct under apparent authority
Partner’s fiduciary duty
Every partner owes duties of loyalty and care to the partnership and other partners
No duty to prospective or former partners
Partner’s fiduciary duty: loyalty
Duty of loyalty—3 components:
(1) cannot compete with partnership business,
(2) cannot usurp a business opportunity,
(3) cannot advance an interest adverse to the partnership
Partner’s fiduciary duty: loyalty safe harbor
© Partner makes full disclosure of material facts and other partners authorize the transaction
Partner’s fiduciary duty: care
act as a reasonable partner.
cannot engage in (1) grossly negligent/reckless conduct; (2) intentional misconduct (3) knowing violation of law
Partner dissociation: possible ways
voluntary (notice or specified event in agreement) or
involuntary 1. expulsion 2, court order 3, bankruptcy 4, death/adjudicated incapacity 5. dissolution of a partner entity
Partner dissociation by expulsion
Expulsion by unanimous vote if unlawful to carry on the partnership business
Partner dissociation by court order
Court order to dissociate if partner misconduct that
(1) adversely and materially affect partnership
(2) willful and persistent material breach of partnership K; OR
(3) breach of duty
Wrongful dissociation
if at-will, wrongful ONLY IF breach of express provision
If definite undertaking/term: expulsion, bankruptcy, court order, partner entity’s willful dissolution
Dissociated partner right to buyout
Right to buyout—if the partnership continues after dissociation, partnership must buy out the dissociated partner’s interest.
© Wrongful dissociation: Liable for damages; Not entitled to buyout until expiration of the term/partnership undertaking is completed, UNLESS proves early payout is not unduly burdensome
Dissociated partner right to participate in winding up
can participate © wrongful dissociation
Dissociated partner liability for partnership obligations incurred after dissociation
Not liable after bought out
© post-dissociation conduct that bind partnership
Partnership liability for dissociated partner’s post-dissociation conduct
partner can bind partnership under apparent authority for 2 years © filed statement of dissociation (90 days)
Partnership dissolution following wrongful dissociation
Wrongful dissociation will dissolve partnership IF a majority of remaining partners express a will to wind up the business within 90 days
If not, partnership continues and wrongfully dissociated partner not entitled to buyout until the end of the term/undertaking UNLESS early payout is not unduly burdensome
Partnership dissolution following rightful dissociation
Rightful dissociation will dissolve at-will partnership UNLESS all partners (including any rightfully dissociated partners) express a will to continue partnership within 90 days
Partnership agreement limitations
partnership agreement (written or oral) controls, except
(1) can’t waive liability to 3rd party
(2) must allow partners and agents to access records
(3) can’t eliminate fiduciary duty © may modify if reasonable
Partnership default rule: division of profits and losses
Profits are divided equally and losses follow profits. © LP: based on contribution
Partnership default rule: distribution of assets
partners have no right to demand a distribution
Partnership default rule: transfer of interest
Partners can transfer their partnership interests, but remains a partner with remaining rights and obligations.
Transferee doesn’t become a partner but can seek judicial dissolution. Partner’s creditor can seek judgment against partner’s interest
Partnership default rule: new partner
every existing partner must consent
Partnership default rule: expulsion
unanimous vote if its unlawful to carry on partnership business with partner
Partnership default rule: right to management/control
every partner has equal rights
Partnership default rule: right to vote
ordinary business matters: requires majority vote of partners.
extraordinary business: every partner must consent
Use of partnership property
A partner CAN ONLY use partnership property only on behalf of the partnership.
If deriving a personal benefit from use/possession of partnership property, must compensate the partnership.
Partnership property
all property acquired by partnership (whether by contribution or transfer)
Partnership property if it is purchased in partnership’s name (titled). If not titled, intent of the partners controls. Presumed to be partnership property if purchased with partnership assets
Partnership’s liabilities for partner’s K
Partner is an agent of the partnership.
partner can enter K for which they have authority
Partner express authority
Partnership agreement or authorization
Partner implied authority
based on partner’s reasonable belief that action is necessary to carry out express authority
Partner apparent authority
based on
(a) partner acting in the ordinary course of partnership and
(b) partnership causes 3rd party to reasonably believe that P consents partner to act on its behalf
Partnership’s liabilities for partner’s torts
liable for partner’s torts committed when
(1) acting within the scope of the partnership or
(2) acting with partnership authority
Partnership termination
consists of ∑ (a) dissolution and (b) winding up
Partnership dissolution 5 ways
Dissolution can occur when
(1) dissolving event specified in the agreement
(2) any event that makes it unlawful to continue if not cured within 90 days (e.g. not making state filings)
(3) judicial determination
(4) at-will: when any partner chooses to dissociate by giving notice © wrongful
(5) term/undertaking: can also dissolve when term expires or when undertaking is complete
Partnership winding up
Winding up is a process that entails liquidating partnership assets, pay debt, distribute assets to settle partner’s accounts.
A dissolved partnership only continues to wind up its business
Partnership winding up: who can wind up
Any partner that has not wrongfully dissociated. Legal representative of last surviving partner. Judicial supervision
Partnership winding up: partner liability
Each partner, including dissociated partners (both rightful and wrongful), are personally liable for his share of partnership liability incurred during winding up (e.g., improper distribution)
Partnership winding up: fiduciary duty
duties of loyalty and care are generally applicable, with the exception of the noncompete aspect of the duty of loyalty
Partnership liability after dissolution:
apparent authority
© Statement of dissolution limits partners’ apparent authority and liabilities to up to 90 days after filing
Partnership winding up: distribution of partnership assets
Creditors have priority over partners to partnership assets
LLP partners liability
: partner has no personal liability for partnership liability © personal liability for their own personal misconduct or negligence
LLP Creation
(a) Filing—file with the state, effective on the date of filing unless specified otherwise.
(b) Name—must include LLP or RLLP
To transform general partnership to LLP:
all partners must vote to authorize before filing
LP
a partnership formed by 2+ persons with at least one general partner and one limited partner
LP creation
Filing—certificate of limited partnership, incl. instate address, name of agent, name/address of all GP, statement of duration, signed by GP.
Effective on the date of filing unless specified otherwise
Limited partners voting right:
unless agreement, a limited partner does not vote
Limited partner liability to 3rd party:
Not personally liable unless (1) he serves as general partner or (2) participates in the control of the business
Limited partner liability to 3rd party: “Participation in the control of business”
safe harbor activities: does NOT include:
being officer/shareholder of general partner,
consulting GP,
acting as a surety of the partnership, winding up partnership,
proposing/approving partnership matters
© liable only to 3rd p who reasonably believe LP is a GP
Limited partner withdrawal
6 months prior written notice to each GP unless agreement
General partner liability to 3rd party:
personally liable. (can limit by becoming corporations
Termination of GP status
- voluntary withdrawal (written notice)
- removal (if GP tries to assign partnership interest),
- removal after bankrupt,
- death/incapacitation,
- termination of business-entity partner
Withdrawal of a sole GP and dissolution
Triggers dissolution UNLESS majority of LPs within 90 days consent to continue the business and appoint GP
