Partnership Formation/ money stuff Flashcards
State Statutes role with partnership formation
State Statutes will allow the
partners to alter certain default
rules via agreement amongst
themselves
Defintion of Partnership
An association of two or more
persons to carry on as co-owners a
business for profit (UPA 1914 §6 and RUPA 1997 § 202)
unless it fits within another entity
Partnership definition
Association
Group of persons with a common goal
Partnership definition
Persons
- person includes another business entity
- those persons are called partners
Partnership definition
carrying on a business
splitting profits
RUPA 1997 adds to the definition of partnership, whether or not the persons intended to form a partnership
“mere words will not bind us to realities”
“call it what you want”
General partnerships can be created informally with no
written agreement or any organizational documents filed with the state
Read the Partnership Agreement
- Must read the Partnership Agreement to know the
rules for a specific partnership. - Need to know the default rules so you can know how and what you can change.
Choice of Law
Look at
- the partnership agreement
- where the chief executive office address is
Common Themes for Partnerships
6 pts
- Every partner has the right to perform the partnership’s business and to
participate in the management of the partnership. Partners have equal voting
power. - Partners share equally in the profits and losses of the partnership.
- The partnership is liable for contracts entered into by partners acting with actual or apparent authority. The partnership is also liable for torts committed by partners acting with authority or in the ordinary course of the partnership business. Partners are personally liable to third parties for
the obligations of the partnership. - It takes unanimous agreement to admit new partners.
- Partners owe fiduciary duties to each other.
- Every partner may dissolve an at-will partnership.
4 factors of a partnership
- Agreement to share profits
- Agreement to share losses
- Mutual right of control or
management of the
enterprise - Community of interest in
the venture
When deciding if something is a partnership what 2 things to look at
- the defintion of a partnership
- the 4 factors of a partnership
Partnership vs. Joint Venture
- Partnerships are for running a
business for profit generally.
Could be for the foreseeable
future. - Joint ventures are for pulling
resources to accomplish a
specific task or goal (Goal could be to make a profit or something else)
In determining whether a partnership exists, these rules shall apply:
- Persons who are not partners as to each other are not partners as to third persons
- Joint tenancy, tenancy in common, tenancy by the entireties,
joint property, common property, or part ownership does not of
itself establish a partnership, whether such co-owners do or do not share any profits made by the use of the property. - The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint
or common right or interest in any property from which the returns
are derived.
Receipt of profits is prima facie/creates a presumption of a
partnership unless profits are payment for:
- Debt or interest on a loan
- Wages or compensation of an employee or independent
contractor - Rent to a landlord
- Retirement benefits paid to the former employee or their
designees - Purchase of property that is paid for in installments
The sharing of revenue does not by itself establish
a partnership
If all the factors of a partnership are not present
a partnership can still exist
Partnership by Estoppel
When someone represents themselves or consents to be represented as a partner
they are liable to whoever the representation is made and relies on that representation
- if representation made in a public way, RUPA says only liable to those that rely on the representation
- UPA is vauge if have to rely on the representation
Partnership by estoppel
representation can be by
words or conduct
Partnership by estoppel
Partnership’s liability for acts of purported partner
- All partners consent to representation – act of
partnership and purported partner is liable as if a partner - Only some partners consent to representation –
purported partner is an agent of those consenting and
the purported partner and consenters are jointly and
severally liable
How partnership formation keeps it casual
3
- no state filing
- technically no written agreement
- no specific intention
Showing that a party consented to being held out as partner in general is OK, dont need to consent to being held out
directly to a 3rd party
Aggregate v. Entity status
- Entity: 1 entity with multiple parts
- Aggregate: nothing more then a collection of individuals
A partnership is an entity distinct from its
partners
Admitting New Partners vs. Assigning
- Horcruxing your rights
=Rights to $
=Right to have a say,
see what is going on,
etc - Admitting a new partner
= both - Transferring partnership
interest = just $
UPA is silent on whether a partnership may sue to
enforce its own rights
RUPA allows
the partnership to be sued and sue in
its own name.
Partnerships (all 4 kinds) are taxed on a
pass-through basis
Partnerships (all 4 kinds) are taxed on a pass-through basis meaning
- File information
- Partners pay on their individual returns
- Advantages of pass-through tax treatment
- No double tax
- Partners can use losses to offset other income
Disadvantages of pass-through tax treatment
Partners are taxed regardless of if the partnership
distributes the income
Partners as Agents of Partnership
4 pts
- Every partner is an agent of the partnership.
- If the partnership agrees the partners doesn’t have authority to act, even
in the ordinary course, no actual authority. - Each partner has apparent authority for acts in the ordinary course of
business except if other party knew or received a notification of the lack of
authority. - Acts not in the ordinary course bind the partnership only if authorized by
other partners (default is all partners) (RUPA specifically says ordinary course or business of the kind carried out
by the partnership. UPA has been interpreted to look at the businesses
in the industry as well as the particular business.)
Unless authorized by the other partners or unless they have
abandoned the business, one or more but less than all the partners have no authority to:
- (a) Assign the partnership property in trust for creditors or on the
assignee’s promise to pay the debts of the partnership, - (b) Dispose of the good-will of the business,
- (c) Do any other act which would make it impossible to carry on the
ordinary business of a partnership, - (d) Confess a judgment,
- (e) Submit a partnership claim or liability to arbitration or reference
10 Rules that Apply to General Partnerships
- Equal rights to management and voting (default rule)
- Equal rights to profits and losses (default rule) (If this is tweaked, losses follow in the same percentage as profits as a default rule)
- Liability (Partners are personally liable to third parties for liabilities of the partnership)
- Unanimous agreement to admit new partners (default rule)
- Partners owe fiduciary duties to each other (can be tweaked but not
eliminated under the uniform act) - Every partner has the power to leave the partnership
- Majority rule for ordinary course matters where there is a difference of opinions (default rule)
- No act in contravention of any agreement between the partners
without unanimous consent. (default rule) - Unanimous consent for acts outside ordinary course (default rule)
10.Partnership must indemnify partners for payments made and personal
liabilities reasonably incurred in the ordinary course of business
(default rule)
No person can become a member of a partnership without the
consent of all the partners.
ny difference arising as to ordinary matters connected with
the partnership business may be decided by a majority of the
partners; but no act in contravention of any agreement between
the partners may be done rightfully without the
consent of all the
partners.
What are Contributions?
- What the owners put into the company in exchange for ownership in the company
- Can occur periodically after the initial contribution
Types of Contributions
- Cash
- Property
- *Services
- Intangibles
Captital account reflect the
value of what the partners contributed to the business
Share of profits
- Income the partnership has made that year
- Contributions of services = right to share in profits
Contributions of services=
right to share in profits
share of the capital
- What the partnership has
- Contributions of services might not = right to share in capital
Default Rules for Sharing Profits and Losses
- profits shared equally (can agree otherwise)
- Losses are shared like the profits are (can agree otherwise)
Draw
is a cash distribution to partners
Draw default rule
a majority vote of the partners determines that draw of each partner
Draw is deducted from
the capital accounts
