Partnership Formation & Liabilities Flashcards
What do you need to file to create a partnership?
Nothing
What’s the definition of a partnership?
An association or two or more people who are carrying on, as co-owners, a business for profit.
When will there be a presumption of a partnership?
When there is a contribution or money or services in return for a share of profits
What is the individuals’ relationship to the partnership?
They are agents of the partnership for the purpose of carrying on normal partnership business.
Because the partners at the agents of the partnership, what does that mean in terms of liability for the partnership?
Partnership is liable for each partners torts committed in the scope of business; AND for each partners authorised contracts.
Can a partnership sue/be sued or does it have to do it through the partners?
A partnership or its partners can sue and be sued.
What’s the position of liability of one partner to another?
Each partner is liable for the debts and obligations of the general partnership; AND for each of his/her co-partner’s torts.
If a partner comes into an existing partnership, does the new partner become liable on prior debts of the partnership? What’s the exception?
No
But any money they pay in can be used to satisfy the partnership’s prior debts.
Once you leave the partnership, are you still liable for the debts of the partnership?
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
In which 2 instances can liability by Estoppel arise?
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.
Because the general partners are fiduciaries of one another, they owe what duties to all other partners?
(1) Duty of Loyalty
(2) Duty of Care
(3) Duty of Obedience
(4) Duty to provide complete and accurate information
The Duty of Loyalty Standard, which all partners owe to one another, means what?
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
The Duty of Care Standard, which all partners owe to one another, means what?
The partners must refrain from acting negligently, recklessly, engaging in intentional or unlawful misconduct.
The Duty of Obedience, which all partners owe to one another, means what?
The partners must obey all reasonable directions from the partnership
And
Not act outside the scope of their authority.
What remedies are available to the partnership if one of the partners breaches their fiduciary duties?
Partnership may recover:
— Loses caused by the breach
— Seek an indemnity
— Seek disgorgement from breaching partner
How will you know whether property/an asset belongs to the partnership or the individual?
Look at who paid for it (e.g. was it paid for out of personal finances)
Which partnership assets are transferable to third parties?
Your share of the profits.
Which partnership assets are NOT transferable to third parties without authority from the partnership?
— Specific Partnership Assets, like land, leases or equipments
— Share in Management (e.g. voting right)
When will a partner have Actual authority to act?
Actual Authority = Authority the partner believes they have based off communications with the partnership.
It can be:
— Express — Implied — Through custom — Acquiescence — Necessity
What is the rule regarding a partner’s Apparent authority to act?
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
What are the 3 rules you need to know when it comes to management of the partnership?
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.
What is the general rule regarding salary for partners?
No salary, but partners do get compensation for helping wind-up the business.
Absent an agreement, how are profits and loses shared?
Equally
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?
Loses are treated the same as profits, so shared 80/20
Profits are still shared equally!
