Partnership (JDA One Sheet) Flashcards
General Partnership Formation
A general partnership is created when two or more people as co-owners carry on a business for profit regardless of whether or not they intended to form a partnership. No written agreement or formalities are required.
Profit-sharing creates a presumption that a person is a partner unless profits were received as payment of a debt, rent to a landlord, wages, etc.
Part or common ownership of property or joint ventures alone are not enough to create a partnership.
A general partnership is the default partnership form and can sometimes be inadvertently created when the required formalities to form a Limited Partnership or Limited Liability Partnership are not followed.
Partnership by estoppel
Where no partnership exists, parties may be held liable to third parties as a partnership if they actively held themselves or others out as partners or consented to being held out as partners.
General Partnership Liability
Joint & Several Liability
Under the Uniform Partnership Act, all partners in a general partnership are jointly and severally liable for partnership obligations. Thus, an action can be brought against any one or several of the partners as individuals or against the partnership. While any one partner can be liable for the entire amount of all partnership obligations, an individual partner can seek indemnification from the other partners if compelled to satisfy more than his proportionate share of the partnership obligation.
General Partnership Liability
Personal Liability of an Incoming Partner
Incoming partners are not liable for obligations the partnership incurred prior to their admission, even if the incoming partner had notice of a claim. While that incoming partner is not personally liable for the debts of the partnership before his admission, he is still at risk of losing any capital contributions he made to the partnership that are used to satisfy partnership obligations.
General Partnership Liability
Enforcing Judgment on Partnership or Partner’s Personal Assets
If a creditor has a claim against a partner, the creditor can obtain an interest in the partnership. This includes profits but not management or voting rights. If a creditor has a claim against the partnership, the creditor generally cannot try to go after a partner’s personal assets unless a judgment has been rendered against the partner and the partnership assets have been exhausted or are insufficient.
Under the Uniform Partnership Act, a judgment against the partnership is not by itself a judgment against the individual partners. However, a judgment may be sought against the partnership and the individual partners in the same action.
Limited Partnership
A limited partnership contains 2 types of partners. General partners manage and control the day-to-day operations and owe the same fiduciary duties as partners in a general partnership. Limited partners are usually passive investors with limited authority who do not owe fiduciary duties to the partnerhsip. Unless a partnership agreement provides otherwise, they may even compete and/or have interests adverse to the partnership.
Liability - General partners are personally, jointly, and severally liable for all partnership obligations. However, incoming partners are not liable for obligations the partnership incurred before they became general partners. Limited partners are liable only to the extent of their investment
Formation - A limited partnership must have at least one general partner. A limited partnership is formed by filing a certificate of limited partnership with the state, which generally contains the names and addresses of each general partner and their signatures.
Limited Liability Partnership
A limited liability partnership is one in which all partners have limited personal liability. This means that a partner in an LLP is not personally liable for partnership obligations of any sort. However a partner does remain liable for their own acts or acts that they supervise or direct.
Any partnership may become an LLP upon: (1) approval of partners by vote and (2) by filing a Statement of Qualification with the Secretary of State including the name and address of the partnership and partners, a statement that the partnership elects to become an LLP, and a deferred effective date, if any.
The filing of a Statement of Qualification DOES NOT create a new partnership. Instead, the LLP continues to be the same partnership entity that existed prior to the filing. Thus, the LLP remains liable for any unfulfilled obligations of the partnership entity before it became an LLP.
Partner’s Authority to Bind the Partnership
Express Authority
Each partner is an agent of the partnership, and generally has authority to bind the partnership for the purpose of its business (including entering into contracts)
Express Actual Authority - A partner has express actual authority to bind the partnership upon receiving said authority from the partners. Differences among the partners as to acts within the ordinary course of the partnership business need only be approved by a majority of the partners. Acts outside the ordinary course of business must be approved unanimously. If the partnership agreement is silent on the scope of the partner’s authority, a partner has authority to bind the partnership to usual and customary matters, UNLESS the partner knows that: (a) other partners might disagree; OR (b) for some other reason consultation with fellow partners is appropriate. Hiring an employee is normally within the ordinary course of partnership business, unless the partnership agreement states otherwise.
Partner’s Auth to Bind Partnership
Implied Actual Authority
A partner has implied actual authority to take actions that are reasonably incidental or necessary to achieve the partner’s authorized duties.
Partner’s Authority to Bind Partnership
Apparent Authority
A partner has apparent authority to bind the partnership for all acts apparently conducted within the ordinary course of the partnership business OR the kind carried on by the partnership. However, a partner’s act will NOT bind the partnership if: (1) the partner lacked authority; AND (2) the third-party knew (actual knowledge) or had notice that the partner lacked authority.
Partner A can be liable for fraud committed by partner B in the course of the partnership business, even though A had no knowledge or participation in the fraud.
For acts outside the scope of business, there must be a manifestation by the partnership that the partner had authority in order to bind the partnership. An act or transaction is within the ordinary course of business if a person would reasonably conclude the act is normal and necessary for managing the partnership business.
Partner’s Rights in Property
Partnership property consists of capital contributed by each partner and all property owned by the partnership. Everyhting else is individual property.
Determining Partnership vs. Separate Property - Property deemed the partnership’s includes anything titled in the partnership’s name or in the name of one or more partners in their capacity as partnership members. Property presumed to be the partnership’s includes property purchased with partnership funds, regardless of who has title. In the absence of the above, courts may look at other factors including: use of property by the partnership, entry of property in partnership books, and improvement and maintenence of property with partnership funds.
Partners’ interests in partnership property - Partners have no individual interest in partnership property. Thus, a partner’s creditors cannot look to partnership property to satisfy a personal debt.
Partnership Rights in Profits/Losses
Unless otherwise agreed, profits are shared equally between partners, and losses will be shared in the same ratio as profits. If an agreement is only made to how losses are shared (no matter the ratio), then profits will be shared equally. Any partner who pays more than his fair share in partnership losses is entitled to receive a contribution from the other partner(s) for their proportional share of the losses.
Remuneration
Remuneration is payment for a partner’s services. A partner is NOT entitled to remuneration for services performed for the partnership UNLESS: (a) there is an agreement to the contrary; OR (b) it is for the reasonable compensation of services rendered in winding up the business of the partnership. Some courts have permitted remuneration based on an implied agreement to compensate a partner.
Advance of Funds to the Partnership & Reimbursement
A partnership shall reimburse a partner for an advance to the partnership beyond the amount of capital the partner agreed to contribute.
To be entitled to reimbursement: (1) the payment must be made in the proper course of the partnership business; AND (2) the partner must comply with his fiduciary duties of care and loyalty in making such payment.
If the partnership has insufficient funds to reimburse the partner, the partner has the right to be reimbursed for a portion of the contribution from the other general partners based on each’s percentage of ownership
Transfer of Ownership Interest in Partnership
A partner can only transfer: (1) his interest in the share of the profits and losses; AND (2) his right to receive distributions. All other incidents of partnership ownership belong to the partnership and CANNOT be transferred.
Unless a written partnership agreement states otherwise, ALL partners must consent for a transferee of a partnership interest to become a partner in the business.
If the transferee becomes a partner, he may be liable for partnership obligations arising after his admittance, depending on the type of partnership entity (i.e. general partnership, limited partnership, limited liability partnership).
