Partnership Formation and Relationships Flashcards
What are the requirements of a partnership formation?
Intent
-> two or more persons or entities must intend to carry on a for-profit business as co-owners but do not need the specific intent to form a P
What is the goal of a partnership agreement?
Must it be in writing, or can it be oral, or can it be implied?
Partnership agerement
-> to conduct a for-profit business as co-owners
-> CAN be implied by conduct in the absence of a written or oral agreement
Must a partnership adhere to the statute of frauds?
A written agreement is not required for formation so no need to adhere to the statute of frauds.
However, if a contract cannot be performed in one year then it must be in writing per the rules of the Statute of Frauds.
What type of evidence will the court look at to determine whether there is a P or not?
A court will consider the amount of related activities directed toward achieving a business’ end goal when determining whether a P exists or not.
What is the profit sharing test for determining if a P exists or not?
What are the exceptions to the rule?
Rule
-> if there is profit sharing, it is presumed to be a P
Exceptions - sharing profits does not create a presumption of a P in six statutorily enamored circumstances:
-> debt payments
-> interest or loan charges
-> rent
-> wages
-> goodwill payments from the sale of a business
AND
-> annuities or other retirement or health benefits
What are the two cases where a person is a partner by estoppel?
Case 1
-> P does not exist but a person is treated as a partner of a purported P
Case 2
-> P exists and a person who is not a partner of P is treated as a partner of P
When can a person be treated as a purported partner?
A person may be treated as a purported partner if
-> there is a representation (oral, written, or implied by conduct) that a person is a partner in a P
-> the person makes or consents to the representation
-> a third party reasonably relied on the representation
AND
-> the third party suffered damages as a result of that reliance
When is a purported partner liable?
-> P is liable
-> P is not liable
If P is liable
-> purported partner liable as if she were a partner
If P is not liable
-> purported partner jointly and severally liable with those who consented to the representation
Does a purported partner have a duty to deny the representation that they are a purported partner?
Is being named as a partner by another when person isn’t actually a partner, enough to impose liability on the purported partner?
No duty to deny the representation.
Being named by another is not enough to create liability
Purported partners are agents of who?
They are agent of the person making the representation.
Is it a defense that the purported partner was unaware that he had been held out as a partner to the specific third party if the representation was made in a public manner?
It is not a defense.
What is the nature of a partnership?
It is a separate legal entity
-> a P may hold property and can sue and be sued
Are partners protected from personal liability for the P’s obligations?
No, they are liable.
If there is a partnership agreement, which governs between a conflict between the PA and the Revised Uniform Partnership Act?
The PA generally governs.
Can a partner commit the P to binding contracts with third parties? Why?
Yes because partners are agents to the P.
What are the fiduciary duties the parents owe to a P?
Duty of loyalty
Duty of care
What is the rule relating to the duty of loyalty?
Are there any exceptions to the duty’s rule?
Rule
-> no competing with P business, advancing an interest adverse to the P, OR usurping a P opportunity
Exceptions - the PA can
-> designate certain activities as not violating the duty (but cannot eliminate the duty altogether)
AND
-> may provide a safe harbor allowing the other partners to authorize or ratify a transaction between a partner and the P after full disclosure of material facts
What is the rule regarding the duty of care?
Can the PA reduce this duty?
Dut to refrain form engaging in grossly negligent or reckless conduct, intentional conduct, or a knowing violation of the law.
The PA cannot unreasonable reduce this duty.
To the duties of loyalty and care apply after dissociation/dissolution?
Upon a partner’s dissociation or the P’s dissolution
-> the duties do not apply
-> UNLESS the partner is engaged in winding up the P’s business
What obligations can the PA not eliminate?
The PA cannot eliminate the obligations of good faith and fair dealing
-> BUT can prescribe reasonable standards.
How are profits and losses distributed?
If there is no PA or the PA is silent
-> each partner is entitled to an equal share of profits and losses
If the PA only specifies the division of profits
-> THEN losses are shared in same manner as profits
What is a partnership account?
Each partner has a partnership account with contains the contributions to the P and the partner’s share of the profits
-> less distributions, losses,, and liabilities
Is a painter allowed to demand a profit distribution?
A partner cannot demand a profit distribution but is entitled to have her account credited with her share of profits.
What is a partner’s personal property interest in P?
An interest consisting of the rights to share in the P’s profits and losses and to receive distributions.
Can a partner transfer their interest to a third party, what is the rule regarding this?
What does the transferor retain?
Does a transfer to a third party cause dissolution or dissociation?
A painter can transfer all or part of the P interest (absent a restriction in the PA).
Transferor partner retains all rights and duties of a partner, EXCEPT for an interest in the distributions.
Transfer to a third party causes neither.
What are the transferee’s rights?
What do they have a right to?
Right to
-> receive distributions
-> seek judicial order for dissolution
-> an accounting upon dissolution
No right to
-> participate in the management or conduct of P business
-> access to P’s records
OR
-> demand other information
What is the rule regrinding the P’s ownership of property?
When can a partner put their name on the title of property?
All property accrued by the P belongs to the P and not to the individual partners.
Property may be acquired ad titled in the name of the P or in the name of one or more partners who indicate their capacity as partners or the existence of the P.
When is property presumed to be property of the P?
If it’s unclear, what factors can you look at?
Property is presumed to be P property if it was purchased with P assets or if P credit is used to get financing.
If ownership is unclear, consider the following factors such as
-> property’s use
-> tax treatment of the property
AND
-> the source of funds to maintain or improve the property
What must a new partner do?
Secure the consent of ALL existing partners.
How are management rights distributed amongst partners?
How many partners needed to make
-> ordinary business decisions
-> matters outside of ordinary business decisions
-> amendments to the PA
Each partner has equal management rights and actual authority to conduct usual and customary P matters,
-> UNLESS there is reason to consult other partners
A majority of partners needed to make ordinary P business decisions.
All partners is required for
-> matters outside the ordinary course of the P’s business
AND
-> for amendments to the PA
Is a partner entitled to remuneration for services provided to the P?
No, except for reasonable compensation for winding up the P’s business or when partners agree to it.
When must P reimburse and indemnify a partner?
A P must reimburse a partner for loans made in furtherance of P business.
The P is required to indemnify partners for personal liability incurred in the ordinary course of P business.
Can a partner use P’s property for a personal benefit through the use or possession of it?
A painter cannot derive a personal benefit from the use or possession of P property.
-> The partner must compensate the P for such use or possession.
To who must. P permit access to its records?
To all partners and agents of P.
When can a P sue a partner?
When can a partner sue the P or another partner?
A P may sue a partner for breach of the PA or for violating a duty owed to the P.
A partner may sue the P or another partner to enforce the partner’s rights under the PA or RUPA.
What events cause dissociation?
The following events cause dissociation
-> partner’s notice of withdrawal
-> partner’s expulsion due to the PA, unanimous vote of the other partners, or the partner’s bankruptcy
-> partner’s death
-> appointment of a guardian for the partner or a judicial determination of the partner’s incapacity to perform his duties under the PA
-> termination of an entity partner (e.g. a limited liability company)
What is a partner liable for to the P and other partners for wrongful dislocation?
A painter is liable to the P and the other partners for damages caused by wrongful dissociation
When is a partner’s dissociation wrong with regards to a
-> P unlimited by time or undertaking
-> P for a definite term or undertaking
P unlimited by time or undertaking
-> a partner’s dissocaiotn is wrongful only when it is in breach of an express provision in the PA
P for a definite term or undertaking - a partner’s dissocaiton is wrongful IF, before the expiration of the term or completion of the undertaking, the partner
-> withdraws
-> is expelled by court order
-> is a debtor in bankruptcy
OR
-> is not an individual, trust, or estate AND the partner willfully dissolved or terminated
What is the effect of dissociation?
A dissociated partner is not permitted to participate in the management or conduct of P business.
A partner’s duty not to compete terminates upon dissociation; the partner’s other duties of loyalty and care terminate with respect to post-dissociation events.
An ongoing P must buy out the dissociated partner’s P interest.
What is the effect of dissociation on
-> indemnification
-> dissociated partner’s liability
Indemnification
-> the P must indemnify a dissociated partner against all P liabilities, whether incurred BEFORE OR AFTER the dissociation.
Dissociated partner’s liability
-> a dissociated partner is generally liable for P obligations incurred BEFORE the dissociation.
When can a dissociated partner bind himself and the P to a transaction?
For how long is the dissociated partner liable for such a a transaction?
A dissociated partner can bind himself and the P to a transaction if the other party
-> reasonably believes the dissociated partner is a partner
-> does not have notice of the dissociation
AND
-> is not deemed to have knowledge of the dissociated partner’s lack of authority
Dissociated partners’s liability is limited to transactions within two years of the partner’s dissociation.
Does a partner have the power to bind the P?
A partner is an agent of the P
-> a partner can contractually bind the P when the partner acts with actual or apparent authority
What forms of authority does actual authority include?
Includes both express authority and implied authority?
What is express and implied authority?
Express authority
-> can arise from the PA, the authorization of the partners, OR a statement of authority filed with the state
Implied authority
-> based on a partner’s reasonable belief that an action is necessary to carry out his express authority
How does apparent authority work?
When can the third party NOT hold the P liable for partner’s action under their apparent authority?
A partner must perform the unauthorized act in the ordinary course of P business.
The third party with whom the partner was dealing cannot hold the P liable if the third party knew or was notified that the partner lacked authority.
Under what circumstances does a partner have the authority to transfer titled P property?
P property held in the P’s name
-> a partner has the authority to execute an instrument of transfer in the P’s name
P property held in a partner’s name
-> a partner has the authority to execute an instrument of transfer in one or more partners’ names
When is it possible to recover P property from transferee?
P property transferred without authority.
Recoverable IF
-> the P interest was indicated in the transfer instrument through which the P acquired the property
OR
-> if the transferee was aware the property belonged to the P and that the painter executed the transfer without authority
When is a partner’s knowledge or notice of a fact relating to the P generally imputed to the P?
absent fraud, the knowledge is IMMEDIATELY imputed.
What power does a person who owns all partners’’ interests in the P have?
They effectively have title to all of the P property and has the power to transfer title to himself.
What are statements of P authority and denial, who can they filed with?
To clarify the existence and scope of a partner’s authority.
Statements of P authority and denial may be filed with the state.
When is a P liable for the tortious acts of a partner?
P is liable for a partner’s tortious acts committed in the ordinary course of the P business or with P authority.
Is P subject to a suit for its obligations to a third party? If so, are the partners also liable?
P is subject to suit for obligations
Partners are jointly and severally liable for all P obligations
When there is a judgment against the P, whose assets are used to pay the judgment?
A judgment against a P Is first satisfied from the P’s assets, and then the partner’s personal assets
Can a P be criminally liable?
A P can be convicted of a crime and a penalty levied on P assets.
