Partnership & LLCs

Question 1

partnership

Answer 1

A partnership is an association of two or more persons to carry on as co-owners a business for profit. It’s formed as soon as that happens, regardless of whether the parties subjectively intend to form a partnership.

Question 2

intent requirement in partnerships

Answer 2

if the two or more people intended to carry on a business as co-owners, there is a partnership EVEN IF they did not subjectively intend to be partners

Question 3

the sharing of profits presumption

Answer 3

The most important factor in deciding whether and association rises to the level of a partnership is the sharing of profits. Sharing of profits raises a presumption of partnership unless the share was received as payment of a debt, as wages or compensation for services rendered, as rent payment, as an annuity or other retirement benefit, as interest on a loan, or for the sale of goodwill of a business.

Question 4

the right to participate in control (factor)

Answer 4

another important factor in the partnership inquiry is the person’s right to participate in the control of the business (even if the control is NEVER ACTUALLY EXERCISED)

Question 5

evidence to rebut the presumption of partnership (two examples)

Answer 5

no right to control; no sharing of losses

Question 6

consent (how to become a partner)

Answer 6

no one can become a partner without the express or implied consent of all the partners (unless otherwise agreed)

Question 7

voting requirement for decisions regarding matters within the ordinary course of the partnership business

Answer 7

majority vote

Question 8

voting requirement for decisions involving matters outside of the ordinary course of business

Answer 8

unanimous consent of all partners

Question 9

vote allocation among partners

Answer 9

one partner, one vote

Question 10

right to salary/compensation

Answer 10

a partner has NO RIGHT to compensation for services rendered to the partnership (with the exception of winding up the partnership)

Question 11

profit sharing (default rule)

Answer 11

profits are shared equally among the partners (by number)

Question 12

losses sharing (default rule)

Answer 12

losses are shared in the same manner as profits

Question 13

liability of the partnership in tort

Answer 13

a partnership is liable, in tort, for the loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting int he ordinary course of business of the partnership or with the authority of the partnership

Question 14

liability of the partnership in contract

Answer 14

a partnership is liable in contract for all contracts entered into by a partner in the scope of the partnership business or with actual or apparent authority of the partnership

Question 15

actual authority

Answer 15

actual authority is the authority a partner reasonably believes they have based on the communications between the partnership and the partner

it can come from the partnership agreement or a vote of the partners

a majority vote of the partners is required to authorize ordinary business; a unanimous vote of the partners is required to authorize extraordinary acts

Question 16

statement of partnership authority

Answer 16

actual authority can also be created by the partnership’s filing of a statement of partnership authority with the secretary of state

Question 17

transactions involving real property (binding third parties)

Answer 17

grants of and restrictions on partner authority to transfer partnership real property in the statement are binding on third parties if the statement is also recorded in the county where the property is located

third parties are deemed to have constructive knowledge of the statement if the secretary of state and county filings are made

Question 18

statutory apparent authority

Answer 18

the RUPA provides that a partner is an agent of the partnership and that a partner has apparent authority to bind the partnership to transactions within the (i) ordinary course of the partnership’s business or (ii) business of the kind carried out by the partnership (unless the third party is aware that the partner lacks actual authority to act)

Question 19

knowledge in partnership

Answer 19

knowledge means SUBJECTIVE KNOWLEDGE; what the person “should have known” in the circumstances is irrelevant

Question 20

liability of the partners

Answer 20

a defining characteristic of the general partnership is that each partner is jointly and severally liable for all obligations of the partnership

the plaintiff must first exhaust partnership resources before seeking to collect from an individual partner’s assets

the partners are essentially guarantors

Question 21

outgoing partner’s continuing liability

Answer 21

an outgoing partner generally remains liable for \all partnership obligations incurred while they were a partner

Question 22

incoming partner’s retroactive liability

Answer 22

an incoming partner generally has no liability for obligations incurred before they became a partner

Question 23

fiduciary duties of the partnership

Answer 23

the partners owe the duties of loyalty and care to each other and to the partnership; and they owe a duty of disclosure as w\ell as the duty of obedience

Question 24

duty of loyalty

Answer 24

this duty requires each partner (1) to account to the partnership for any benefit derived by the partner in conducting the partnership for business, using the partnership’s property, or appropriating a partnership opportunity; (2) to refrain from dealing with the partnership in the conduct of its business as (or on behalf of) a party having an interest adverse to the partnership; and (3) to refrain from competing with the partnership in the conduct of its business

Question 25

the duty of care

Answer 25

this duty requires each partner to refrain from engaging in GROSSLY NEGLIGENT or RECKLESS conduct, intentional misconduct, or a knowing violation of the law

Question 26

duty of disclosure (statutory)

Answer 26

a partner has a duty to provide complete and accurate information concerning the partnership

Question 27

duty of obedience

Answer 27

the duty of obedience requires the partner to obey all reasonable directions of the partnership and not act outside the scope of his or her authority

Question 28

a partner’s rights in partnership property

Answer 28

a partner is NOT a co-owner of partnership property and has no interest in particular partnership property that can be transferred

a partner can simply use partnership property for partnership purposes—meaning the partner can only use the property for the benefit of the partnership

Question 29

partnership interest

Answer 29

comprised of (1) management rights (that is, a partner’s right to participate int he management of the business, to obtain information about the partnership, and to be recognized as a “partner”); and (2) financial rights (that is, the partner’s right to receive his share of any profit distributions made by the partnership

Question 30

unilateral transfer of management rights

Answer 30

a partner cannot unilaterally transfer his management rights

Question 31

unilateral transfer of financial rights

Answer 31

a partner CAN unilaterally transfer his financial rights; the transferee merely has the right to receive profit distributions

Question 32

effect of a notice of a partner’s express will to withdraw from a partnership

Answer 32

this will automatically trigger a DISSOLUTION of the partnership

Question 33

wrongful dissociation

Answer 33

a partner who wrongfully dissociates is liable to the partnership for any damages caused by the dissociation

Question 34

at-will partnership

Answer 34

an “at-will” partnership is one where the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking

it is the DEFAULT FORM of partnership

Question 35

dissolution in a term partnership

Answer 35

in a term partnership, if one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up of the partnership are required only if, within 90 days after the dissociation, at least one-half of the remaining partners agree to wind up the partnership

Question 36

limited partnership

Answer 36

a limited partnership (“LP”) is a partnership with at least one general partner and at least one limited partner

the general partner is personally liable for partnership obligations, while the limited partner generally does not have any liability beyond the liability to make agreed-upon contribution

a limited partnership differs from a general partnership in that a limited partnership CAN ONLY be created by filing a certificate of formation with the state

Question 37

certificate of limited partnership

Answer 37

a certificate of limited partnership must be filed with the secretary of state

the certificate must be signed by all general partners; the information required in the certificates is minimal

it includes (1) the name of the partnership; (2) the names and addresses of the agent(s) for service of process; and (3) the names and addresses of each GENERAL partner

IF YOU FAIL TO FILE THIS, YOU ARE JUST A GENERAL PARTNERSHIP

Question 38

management of a limited partnership

Answer 38

the LP is managed by the general partners; each general partner has equal rights in the management and conduct of the LP’s activities

limited partners usually have no management rights unless the partnership agreement grants them rights

unless otherwise agreed, the vote of all the partners (general and limited) is necessary for extraordinary activities, including (1) to amend the partnership agreement; (2) convert the partnership to a limited liability limited partnership; (3) dispose of all or substantially all of the limited partnership’s property outside the usual and regular course of the partnership’s activities; (4) ADMIT A NEW PARTNER; and (5) compromise a partner’s obligation to make a contribution or to return an improper distribution

Question 39

financial rights of limited partners

Answer 39

unless otherwise agreed, distributions from an LP are made on the basis of the partner’s contributions (that is, in proportion to the value of each partner’s contributions) rather than the default “equal split” for general partnerships

Question 40

T/F: the transference of a partner’s ENTIRE transferable interest is a ground for expulsion

Answer 40

TRUE

Question 41

limited liability shield and torts

Answer 41

the limited liability shield of any business organization does NOT protect a person from liability for her own torts

Question 42

dissociation of a limited partner in a limited partnership

Answer 42

a limited partner has NO RIGHT to dissociate before termination of the limited partnership

Question 43

winding up (limited partnership)

Answer 43

a limited partnership continues after dissolution only for the purpose of winding up its activities

in winding up, the partnership must discharge liabilities, settle and close partnership activities, and marshal and distribute its assets

Question 44

distribution of assets upon winding up

Answer 44

upon the winding up of a limited partnership, the assets are distributed in the following order:

(1) first, to creditors (including those partners who made loans to the limited partnership); and
(2) second, any surplus made be paid in cash as a distribution

Question 45

distribution where assets are insufficient to satisfy debts (general partner obligation)

Answer 45

if limited partnership assets are insufficient to satisfy all obligation to the creditors, each person who was a GENERAL PARTNER when the obligation was incurred must contribute to the partnership to satisfy the obligation

Question 46

formation of an LLP

Answer 46

a partnership must file a statement of qualification with the secretary of state; the statement must be executed by at least two partners

the required minimal information: (1) the name/address of the partnership; (2) a statement electing to be an LLP

Question 47

limited liability company

Answer 47

a limited liability company is a hybrid business organization between a corporation and a partnership that (1) is taxed like a partnership (except for a single-member LLC), (2) offers its owners (called members) the limited liability of shareholders of a corporation; (and (3) can be run like either a corporation or a partnership

Question 48

formation of an LLC

Answer 48

file a certificate of organization with the secretary of state; the LLC must have at least one member

Question 49

management of the LLC

Answer 49

presumed to be by all members

Question 50

financial rights of the members in LLCs

Answer 50

IF the LLC makes any distribution to its members, the distribution must be made to the members in equal shares unless the operating agreement provides otherwise (under the uniform statute)

BUT in most states, profits and losses and distributions are allocated on the basis of contributions

Question 51

fiduciary duties owed by a member or manager to the LLC

Answer 51

fiduciary duties of care and loyalty

good faith and fair dealing

Question 52

duty of care

Answer 52

members (or managers if manager-managed) must act with the care that a person in like position would exercise under similar circumstances, in a manner reasonably believed to be in the best interest of the LLC

Question 53

taxation of LLCs and partnerships

Answer 53

partnerships and LLCS are taxed on a “pass-through” basis; there is no entity-level tax; instead business income is passed-through to the owners and reported on the owners’ individual tax returns (regardless of whether that business income is actually distributed to partners)

by contrast, a corporation is subject to “double taxation”