Partnership - General Partnerships

Question 1

How is a general partnership formed?

Answer 1

By two or more people with the intent to carry on as co-owners of a business for profit. Can be very informal.

Question 2

What is the key to determining whether people have formed a general partnership?

Answer 2

Profit sharing!

Profits are NOT wages, salary, commissions, etc.

Question 3

What is the general partnership’s liability to third parties?

Answer 3

Think of Partners as Agents of the Partnership!

Partnership is liable for the torts of partners when committed in scope of the partnership.

Partnership is liable for authorized contract entered into by partners.

Question 4

What is the liability to third parties of partners in a general partnership?

Answer 4

1. personally liable for all debts of the partnership

2. personally liable for all torts of co-partners

Question 5

What is the liability to third parties of incoming general partners?

Answer 5

they are not personally liable on pre-existing debts, but they money they pay in to enter the partnership can be used to pay those debts.

Question 6

What is the liability to third parties of general parties who are withdrawing/dissociating from the partnership?

Answer 6

They retain liability until (1) creditors have actual notice of the withdrawal, and (2) potential creditors have publication notice.

Question 7

Define general partnership liability by estoppel.

Answer 7

When a person holds his or herself out as general partner, even though they’re not. They will be estopped from disclaiming the partnership, and will be liable just like a general partner.

Question 8

What duties to general partners owe to each other and the general partnership?

Answer 8

The duty of loyalty, because they are fiduciaries.

• No self dealing
• No usurping opportunities
• No secret profits

Question 9

What is the partnership’s remedy for a general partner’s breach of fiduciary duty?

Answer 9

An action for accounting:

• recoup losses that result from the breach
• disgorge partner of the profits

Question 10

Define specific partnership assets.

Answer 10

Assets acquired and owned by the partnership. Individual partners may not independently transfer these to third parties (partnership assets are not liquid).

Question 11

What are general partners’ rights in the partnership?

Answer 11

1. share the profits and surplus (this is liquid, and the partner can transfer their share at any time)
2. share in management
3. right to vote

Question 12

How do you know whether an asset belongs to the partnership or is a personal asset?

Answer 12

If the partnership paid for the asset, it belongs to the partnership.

If the individual partner paid for the asset, it is personal property.

Question 13

What is the general rule about management rights in a general partnership?

Answer 13

All partners share the right to manage equally (equal voting rights) - unless specifically agree otherwise.

Question 14

What percentage of partner votes is required for ordinary partnership matters?

Answer 14

A majority

Question 15

What percentage of partner votes is required for fundamental partnership matters?

Answer 15

Unanimity

Question 16

What is the rule about salary for partners?

Answer 16

The default is that partners do NOT get a salary. Look out: doesn’t matter who works or doesn’t.
This can be changed by agreement.
Exception: partners will be compensated for work done during windup.

Question 17

What is the exception to the general rule that partners do not receive salary?

Answer 17

Partners will be compensated for the work they do during windup.

Question 18

How are profits shared in a general partnership?

Answer 18

If the agreement is silent: profits are shared equally (no matter how much or little work anyone does)

Question 19

How are losses shared in a general partnership?

Answer 19

If the agreement is silent: loss division follows profit division.

Question 20

When is a general partnership automatically dissolved?

Answer 20

When there is a material change in the partnership, like the death or withdrawal of any partner.

Question 21

Define termination.

Answer 21

The real end of the partnership (after windup).

Question 22

What is the period between dissolution and termination called?

Answer 22

Windup

Question 23

During windup, what is the partnership’s liability for business entered into prior to windup?

Answer 23

Partnership and partners are liable for all of it.

Question 24

During windup, what is the partnership’s liability for new business?

Answer 24

Partnership and partners retain liability until actual dissolution notice to creditors and publication notice to potential creditors.

Question 25

What is the priority of distribution at the end of a partnership?

Answer 25

1. outside creditors
2. inside creditors (partner loans to partnership)
3. partners for capital contributions
4. profits and surplus (if any)

Question 26

What is the basic formula for determining what each partner will take home at the end of windup?

Answer 26

All loans/capital they put in, they’ll get back
+ share of the profits OR
- share of the losses