Partnership Formation and Relationships

Question 1

What is the definition of a partnership?

Answer 1

An association of two or more legal persons who carry on a for-profit business as co-owners

Specific intent to do the above. No need to have intent to form partnership. Key test is sharing profits.

Question 2

What is a “person”?

Answer 2

Anyone or anything that has legal capacity to contract. Includes legal entities.

Question 3

Is there a presumption of a partnership when two or more persons share profits?

Answer 3

Yes.

Except

• Payment of a debt
• Interest payments
• Rent
• Wages
• Goodwill.

Question 4

Is there a writing requirement to form a partnership?

Answer 4

No, but is subject to SoF.

Question 5

Does joint ownership of property alone create a partenrship?

Answer 5

No, even with shared profits in property.

Question 6

What is the rule for purported partner?

Answer 6

Liability imposed when:

• There must be a representation - orally, in writing, or implied by conduct - that a person is a partner in an actual or purported partnership.
• the purported partner must make or consent to the representation
• A third party must have reasonably relied on the representation
• The third party must have suffered damages asa result of that reliance.

Question 7

Does someone who is held out (wrongfully) as a partner have a duty to deny?

Answer 7

No.

Question 8

What are the consequences of forming a partnership?

Answer 8

Separate Legal. Entity

Partners are personally liable for the partnerships obligations. No limited liability.

No entity-level taxation.

Partnership Agreement

• Need not be written.
• If no agreement, state law governs.
• Preempted by mandatory state law. (liability to 3rd parties, access to books and records, fiduciary duties cannot be eliminated)

Question 9

What is the duty of loyalty?

Answer 9

Partner’s must not:

• can’t compete with the partnership’s business.
• Advance an interest that is adverse to the partnership
• Usurp a partnership opportunity.

Limitations
- Cannot eliminate the duty of loyalty, but can limit the duty by describing it differently as long as it is not manifestly unreasonable.

Safe Harbor: If partner makes full disclosure of all material fact, then a certain percentage of the other partners may authorize or ratify the transaction.

Question 10

What is the duty of care?

Answer 10

Partners must not

• Engage in grossly negligent or reckless conduct
• Engage in intentional misconduct
• Engage in a knowing violation of the law

Partnership agreement may not unreasonably reduce the duty of care.

Question 11

Do the duties of loyalty and care apply to prospective partners or former partners?

Answer 11

No.

Question 12

What is the rule for the division of profits and losses?

Answer 12

Generally dictated by the partnership agreement.

Need not be the same.

When there is no agreement, profits are divided evenly and losses follow profits.

Question 13

Do partners have a right to demand distributions?

Answer 13

No. However, partners can agree in advance to allow distributions to be made pursuant to partnership agreement.

Question 14

What is the rule for transfer or partnership interest?

Answer 14

Default Rule: a parter does not ave the right to transfer their interest.

Can be changed by a majority vote of the partners.

Question 15

What is the rule for a new partner?

Answer 15

Default Rule: When a new partner is introduced, all existing partners must consent to the new partner.

Question 16

What is the rules for managing and governing realtionships?

Answer 16

Default Rule: Every partner has equal management rights and control of partnerships.
- Can be changed by agreement.

Ordinary Business Matters: Majority vote

Extraordinary Business Matters: Consent of all partners

No default rule for quorums

Access to records must be provided to partners and agents.

Question 17

What are the rules for dissociation?

Answer 17

Voluntary
- Partner may give notice

Involuntary

• Event triggered in agreement
• Partner exe;;ed
• Unlawful for partnership to carry on with partner
• Court ordered
• partner goes bankrupt
• partner dies
• partner becomes incapacitated
• one of the entities dissolves

Partnership can require certain things before withdraws: notice, written notice, liability for wrongful dissociation ,etc., but cannot prevent it entirely.

Question 18

What are the consequnces for dissociation?

Answer 18

One disconnected, former partner has no right to participate in management and no longer owes duties.

If partnership continues, must buy out partners interest.

Question 19

Is every partner an agent of the partnership?

Answer 19

Yes.

Question 20

What are the contract liabilities for partners?

Answer 20

Partners can enter contracts for which they have authority.

Express authority: may come from partnership agreement, an ad hoc authorization from meeting, or a statement of authority filing.

Implied authority: exists based on partners reasonable belief that an action is necessary to carry out express authority.

Apparent Authority: Ordinary course of dealings. Based on communications between partnerships and third parties.

Question 21

What are the tort liabilities for partners?

Answer 21

Scope of employment.

Question 22

What are the consequences that flow from liability?

Answer 22

Partners are personally liable for the debts or obligations of partnership.

Partner is jointly and severally liable for all partnership obligations.

Incoming partner not liable for conduct before he joined.

Outgoing partner may be liable for conduct before dissociation.