Partnership Formation & Relations

Question 1

Introduction

Answer 1

Partnership - legal entity who can sue and be sued and whose partner are personally liable for the obligations of a general partnership

Note - governed by agreement, not by statute; courts try to preserve the benefit of the partner’s bargain; if conflict between agreement and Ohio Uniform Partnership Act, the partnership agreement trumps

Question 2

Formation - General

Answer 2

Rule - an association of two or more persons to carry on a for profit business as co-owners and no formal agreement need be drafted or signed

Intent - subjective intent is not required nor does intent not to join matter

Conduct - agreement may be implied by conduct

Person - person need not be a natural person but can be a legal entity, corp, LLC, trust, estate, etc.; need only capacity to contract

Key Test - sharing of profits; presumed to be partnership and can bind upon 3P

Exceptions to Profit Sharing Rule - debt payments, rent, wages

Question 3

Formation - Subpartnership, Joint Venture, Partnership by Estoppel

Answer 3

1. Subpartnership - agreement between partner and 3P for the 3P tos hare in that partner’s profits from the partnership

Note - does not become a partner of the partnership and only has a claim against parter who tried to ojin

2. Joint Venture - partnership for a specific limited purpose; partnership rules apply to there
3. Partnership by Estoppel - four elements needed to hold liable as a real partner:
4. there must be a representation (oral or written or conduct) that the person is a partner
5. the representation must be made by or with the consent of the purported partner
6. a third party must reasonbly rely on the representation
7. 3P suffered damages as a result

Question 4

Relations of Partners - Status and Duties

Answer 4

Partner - is an agent of the partnership and can bind the partnership in contracts with third parties

Two primary duties, duty of loyalty and care

Duty of Loyalty - partner cannot:

1. compete with the partnership business,
2. advance an interst adverse to the partnership
3. usurp a partnership opportunity or otherwise conduct partnership business to derive a personal benefit

Note - may add other activites so long as they are not manifestly unreasonable; may include a safe harbor

Breach - if duty of loyalty is breach then partnership may file action against partner for compensation for losses or to receive the return of profits

Duty of Care - must avoid grossly negligent or reckless conduct, intentional misconduct, or knowing violation of the law (general obligation of good faith and fair dealing)

Question 5

Relations of Partners - Sharing in Partnership Profits and Losses

Answer 5

How Divide? - however the partnership agreement addresses profit and loss sharing

Silent - if agreement is silent (or if there is no agreement) then all profits and losses are shared equally

Losses - if agreement does not specify loss allocation, it will be proportional to profit allocation

Question 6

Relations of Partners - Partner’s Account

Answer 6

Partnership account tracks contributions made by a partner and tracks allocaitons and distributions made to the partner

Partner cannot demand a distribution of partnership profits, nor can a partner demand that specific partnership property be distributed to him

Question 7

Relations of Partners - Partnership Interst

Answer 7

Interest is not - right is not ownership, not entitled to salary, etc

interest is - right to transfer all or part of his partnership interest toa third party

Transfer - transfer of an interest does not trigger a dissolution of the partnership, but transferor retains all rights and duties of partnership except his interest in the partnership distributions; transferee does not receve any governance rights

Question 8

Relations of Partners - Managment Rights

Answer 8

Each partner has equal rights in the managment and conduct of the partnership; ordinary business requires majority approval; non-ordinary matters requires unanimity

Question 9

Relations of Partners - Access to Records

Answer 9

Partnership must provide its partners and their agents with access to all records including financial and are permitted to copy such records

Question 10

Relations of Partners - Lawsuits

Answer 10

Partnership may sue partner for breach of a partnership agreement or violating a duty that caused the partnership harm

Partner can sure partnership to enforce statutory rights, the agreement, or to force accounting

Question 11

Relations of Partners - Dissociation

Answer 11

The voluntary or involuntary dissociation of a partner from a partnership (does not collapse the partnership like a dissolution)

Events that automatically trigger dissociation

1. partners death
2. triggering of an event specified in the partnership agreement
3. expulsion pursusal to the agreement
4. partner’s giving notice of an intention to withdraw form the partnership

Agreement cannot restrict right to withdraw or from seeiking judicial expulsion of a partner.

Partner who wrongfull dissociates in violation of the partnership agreement is liable to the partnership and the other partner for damages caused.