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Partnerships Flashcards

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1
Q

What is a partnership?

A

An association of two or more persons who carry on a for profit business as co-owners

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2
Q

Who may form a partnership?

A

An individual or company

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3
Q

What is a person under the definition of a partnership?

A
  • Anyone or anything that has legal capacity to contract;
  • Not humans who are incapacitated (e.g., minority, inebriation, etc.);
  • Includes legal entities, such as corporations, LLCs, etc. in addition to humans.
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4
Q

What is the required intent to form a partnership?

A

To (i) carry on as co-owners, (ii) for profit

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5
Q

When is there a presumption of a partnership relationship?

A

When two or more persons share profits. But make sure to ask whether there is sharing of control

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6
Q

When does the partnership presumption not apply?

A 
o Payment of a debt;
o Interest payments;
o Rent;
o Wages;
o Goodwill.
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7
Q

What are the consequences of forming a partnership?

A
  • You form a separate legal entity
  • You have partnership liability
  • There is no entity-level taxation
  • It is governed by a partnership agreement
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8
Q

Partnership as a separate legal entity

A
  • The partnership is distinct from each of the entity inside the partnership.
  • The partnership can hold property and sue and be sued in its own name.
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9
Q

What is partnership liability?

A
  • Partners are personally liable for the partnership’s obligations.
  • No limited liability
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10
Q

Partnership taxation

A
  • No entity-level taxation (unlike a corporation)
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11
Q

What is the partnership agreement?

A

“The partnership agreement is the law of partnerships.”

  • Does not need to be written
  • If no partnership agreement, then state law governs.
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12
Q

What state laws regarding partnerships are mandatory?

A
  • Liability to third parties
  • Cannot deny partners access to books and records
  • Fiduciary duties cannot be eliminated
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13
Q

What are the fiduciary duties of partners?

A

every partner is a fiduciary of the partnership, and owes the fiduciary (1) duties of loyalty and (2) care to the partnership

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14
Q

What would violate a partner’s duty of loyalty?

A

Partners must not:

  • Compete with the partnership business
  • Advance an interest that is adverse to the partnership
  • Usurp a partnership opportunity
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15
Q

What are the limitations on the duty of loyalty?

A

As a matter of state law, a partnership cannot eliminate the duty of loyalty; but it can limit the duty of loyalty by describing it differently, as long as it is not manifestly unreasonable

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16
Q

What is the safe-harbor for duty of loyalty?

A

If a partner is worried that something may be considered disloyal, she can make a full disclosure of all material facts, then a certain percentage of the other partners may authorize or ratify the transaction

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17
Q

What is a partner’s duty of care?

A

Partners must not: RINK

  • Engage in grossly Negligent or Reckless conduct;
  • Engage in Intentional misconduct;
  • Engage in a Knowing violation of the law
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18
Q

When does the duty of loyalty stop and end?

A

The duties of loyalty and care apply only to partners, not prospective partners or former partners

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19
Q

How are profits and losses divided in a partnership?

A

The division of profits and losses is generally dictated or determined by agreement.

  • The division of profits and losses need not be the same
  • Financial contributions/capital contributions need not have an effect on the division of profits and losses
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20
Q

How are profits and losses divided when there is no partnership agreement regarding profits and losses?

A

When there is no partnership agreement regarding division of profits and losses, profits are divided evenly and losses follow profits.

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21
Q

Distributions

A

Default rule: partners do not have the right to demand a distribution. Partners can agree in advance to allow distributions to be made according to the partnership agreement.

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22
Q

Transfer of partnership interests: default rule

A

A partner does not have the right to transfer their partnership interest. Partners may still agree to change the default rule to require a majority vote of the partners.

23
Q

Transfer of partnership interests: old rule

A

If a partner attempted to convey her interest to somebody else, it would dissolve the entire partnership.

24
Q

Adding a new partner: default rule

A

When a new partner is introduced, all existing partners must consent to the new partner

25
Q

Partner power to manage/govern: default rule

A

Every partner has equal right in the management and control of the partnership. This can be changed by agreement. The common division is to reflect the partners’ capital contribution rather than even share

26
Q

Votes required for ordinary v extraordinary business matters

A

Ordinary - requires a vote of a majority of the partners

Extraordinary - requires a vote of all the partners

27
Q

Quorums

A

No default rule regarding partnership quorums for partnership voting

28
Q

Access to records

A

Access to records must be provided to the partners and their agents. This is mandatory and cannot be abridged by the partnership agreement

29
Q

What is dissociation and what are the two types?

A

When a partner ceases to be associated with a partnership.

- Can be voluntary or involuntary

30
Q

How may a partner voluntarily dissociate?

A

The partner may give notice to the partnership that the partner wants to dissolve. A partnership cannot prevent a partner from withdrawing, but can require certain restrictions on withdrawal.

31
Q

What constitutes involuntary dissociation? CUBED DIE

A

CUBED DIE

  • a Court orders that a partner must be dissociated
  • it is Unlawful for a partnership to carry on business with that parter
  • a partner goes Bankrupt
  • Event triggered by partnership agreement
  • a partner Dies
  • one of the entities of the partnership Dissolves
  • a partner has become Incapacitated
  • Expelled under partnership agreement
32
Q

What are the consequences of the dissociation for the partnership?

A

If a partner is dissociated, the partnership does not necessarily dissolve. If the partnership continues, it must buy out the dissociated partner’s interest.

33
Q

What are the rights of the dissociated partner?

A

A former partner has no right to participate in management of the partnership, and the partner no longer has any duties to the partnership

34
Q

What are the consequences of wrongful dissociation?

A

The wrongfully dissociated partner may not be entitled to payment of the buyout price until the expiration of the term or completion of the undertaking of the partnership.

Because the partner will also be liable for damages caused by the wrongful dissociation, if the partner’s liability meets or exceeds the buyout value, the partner may not be entitled to receive any buyout price

35
Q

What is the partnership’s liability for actions of a partner?

A

Every partner is an agent of the partnership; this means the partnership may be liable for a partner’s contract and tort liabilities.

36
Q

When can a partner enter a K?

A

Partners can enter Ks when they have authority, either express or implied.

37
Q

Contract liability - How is express authority given?

A

May come from:

  • Partnership agreement
  • Statement of authority filing; or
  • An ad hoc authorization by the partners at a meeting
38
Q

K liability - implied authority

A

Exists based on the partner’s reasonable belief that an action is necessary to carry out express authority

39
Q

K liability - apparent authority

A

The partnership may be bound based on the partner acting in the ordinary course of dealings (based on interactions between the partnership and third parties).

40
Q

When is a partnership liable for the tort of a partner?

A

For torts that are committed by partners acting within the scope of their partnership

41
Q

Individual partner liability

A

Partners are personally liable for the debts or obligations of the partnership

  • A partner is jointly and severally liable for all partnership obligations
  • You can go after any partner for the entire sum owed by the partnership
  • Generally, the partnership creditor must exhaust the partnership’s funds before going after the partners’ personal assets
42
Q

Liability of incoming and outgoing partners

A

An incoming partner is not personally liable for K or tortious obligations incurred prior to becoming a partner (the incoming partner will be liable for the partner’s capital contribution). An outgoing partner may be personally liable for a partnership obligation that occurred after dissociation.

43
Q

Admission of a limited partner

A

May join at the creation of the partnership with the agreement of all partners

44
Q

Limited partner voting

A

Allowed only under the partnership agreement. Default rule is that a limited partner doesnt vote

45
Q

Limited partner liability to third parties

A

A limited partner is not personally liable for the obligations of the partnership unless she serves as a general partner or starts to participate in the partnership

46
Q

What may limited partners do without running the business?

A

RAW COP

  • Be an officer, director, or a shareholder of the general partner
  • Consult the general partner on partnership affairs
  • Act as a surety of the partnership
  • Request to attend meetings of the partnership
  • Wind up the partnership
  • Propose or approve of partnership matters
47
Q

How much notice does a limited partner have to give before withdrawing?

A

6 months written notice

48
Q

How can a general partner join?

A

Join at the beginning or be admitted upon consent of all partners

49
Q

What are the rights and powers of a general partner?

A

Same as a general partnership without limited partners, or as otherwise suggested in the partnership agreement

50
Q

General partner liability to third parties

A

o Personally liable to third parties for obligations of the partnership

51
Q

How to terminate general partner status?

A

o A general partner may voluntarily withdraw;
o If the general partner tries to assign the partnership interest, the general partner may be removed;
o If he goes bankrupt or becomes insolvent may be removed;
o Death or incapacitation;
o A business-entity partner is terminated

52
Q

How is an LLP created?

A

The filing of a statement of qualification, which transforms a partnership into an LLP, does not create a new partnership.

53
Q

When is limited liability effective under the LLP?

A

limited liability partnership status is generally only effective on the date that the statement of qualification is filed with the state and not before.

54
Q

What actions can be taken against a partner who breaches a duty or violates a partnership agreement?

A

A partnership may pursue a legal action against a partner for breach of the partnership agreement or for violating a duty owed to the partnership that caused the partnership harm. A partner may pursue a legal action against the partnership or another partner to enforce the partner’s rights under the partnership agreement or the RUPA.

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