Partnership Formation & Liabilities

Question 1

What do you need to file to create a partnership?

Answer 1

Nothing

Question 2

What’s the definition of a partnership?

Answer 2

An association or two or more people who are carrying on, as co-owners, a business for profit.

Question 3

When will there be a presumption of a partnership?

Answer 3

When there is a contribution or money or services in return for a share of profits

Question 4

What is the individuals’ relationship to the partnership?

Answer 4

They are agents of the partnership for the purpose of carrying on normal partnership business.

Question 5

Because the partners at the agents of the partnership, what does that mean in terms of liability for the partnership?

Answer 5

Partnership is liable for each partners torts committed in the scope of business; AND for each partners authorised contracts.

Question 6

Can a partnership sue/be sued or does it have to do it through the partners?

Answer 6

A partnership or its partners can sue and be sued.

Question 7

What’s the position of liability of one partner to another?

Answer 7

Each partner is liable for the debts and obligations of the general partnership; AND for each of his/her co-partner’s torts.

Question 8

If a partner comes into an existing partnership, does the new partner become liable on prior debts of the partnership? What’s the exception?

Answer 8

No

But any money they pay in can be used to satisfy the partnership’s prior debts.

Question 9

Once you leave the partnership, are you still liable for the debts of the partnership?

Answer 9

Yes, disassociating partners retain liability until:

(1) Actual notice of their association is given to creditors; OR
(2) 90 Days after filing a Notice of Dissociation with the State

Question 10

In which 2 instances can liability by Estoppel arise?

Answer 10

Either:

(1) A person, by words or conduct, represents themselves to be a partner, or consents to someone else representing them as a partner; AND a third party extends credit to the apparent partnership in reliance of this representation
(2) A person, by words or conduct, holds another person out to a third party as though they are a partner, thereby creating a power to bind as though they were actually in partnership.

Question 11

Because the general partners are fiduciaries of one another, they owe what duties to all other partners?

Answer 11

(1) Duty of Loyalty
(2) Duty of Care
(3) Duty of Obedience
(4) Duty to provide complete and accurate information

Question 12

The Duty of Loyalty Standard, which all partners owe to one another, means what?

Answer 12

The partners must:

— ACCOUNT for all profits or other benefits derived from the partnership

— Not deal with the partnership as if you had an ADVERSE INTEREST to it; and

— Not compete with the partnership

Question 13

The Duty of Care Standard, which all partners owe to one another, means what?

Answer 13

The partners must refrain from acting negligently, recklessly, engaging in intentional or unlawful misconduct.

Question 14

The Duty of Obedience, which all partners owe to one another, means what?

Answer 14

The partners must obey all reasonable directions from the partnership

And

Not act outside the scope of their authority.

Question 15

What remedies are available to the partnership if one of the partners breaches their fiduciary duties?

Answer 15

Partnership may recover:

— Loses caused by the breach

— Seek an indemnity

— Seek disgorgement from breaching partner

Question 16

How will you know whether property/an asset belongs to the partnership or the individual?

Answer 16

Look at who paid for it (e.g. was it paid for out of personal finances)

Question 17

Which partnership assets are transferable to third parties?

Answer 17

Your share of the profits.

Question 18

Which partnership assets are NOT transferable to third parties without authority from the partnership?

Answer 18

— Specific Partnership Assets, like land, leases or equipments

— Share in Management (e.g. voting right)

Question 19

When will a partner have Actual authority to act?

Answer 19

Actual Authority = Authority the partner believes they have based off communications with the partnership.

It can be:

— Express
— Implied
— Through custom
— Acquiescence 
— Necessity

Question 20

What is the rule regarding a partner’s Apparent authority to act?

Answer 20

A partner may act

For apparently carrying on BUSINESS IN THE ORDINARY COURSE; or

BUSINESS OF THE KIND carried out by the partnership

This bonds the partnership, unless

—The partner has NO authority to act for the partnership on that PARTICULAR MATTER; and

— The Third Party with whom the partner was dealing knew or was on notice that the partner lacked authority

Question 21

What are the 3 rules you need to know when it comes to management of the partnership?

Answer 21

Absent an agreement:

— Equal Control (one partner, one vote)

— Majority vote governs ordinary affairs

— Unanimous consent for fundamental change to the partnership or business OUTSIDE the ordinary course.

Question 22

What is the general rule regarding salary for partners?

Answer 22

No salary, but partners do get compensation for helping wind-up the business.

Question 23

Absent an agreement, how are profits and loses shared?

Answer 23

Equally

Question 24

If an agreement states that profits are shared 80/20, but is silent on loses, how are they shared?

If an agreement states that loses are shared 60/40, but is silent on profits, how are they shared?

Answer 24

Loses are treated the same as profits, so shared 80/20

Profits are still shared equally!