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Partnerships Flashcards

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1
Q

Definition of partnership

A

An association of 2 or more [legal] persons who carry on a for-profit business as co-owners. I.e., Partnership = dividing up control and profits.

Can be formed by individuals or companies.

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2
Q

What is a legal person? Who is legally incapacitated?

A

Anyone or anything that has legal capacity to contract. Can include any legal entity.

Legal incapacity: Minors, temporarily inebriated, longterm incapacity from illness or other reasons, etc.

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3
Q

What is the required intent for forming a partnership?

A

No intent requirement for forming a partnership specifically; rather, just have to have the specific intent to do the two required elements (co-owners, for profit).

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4
Q

Are corporations easier or harder to form than partnerships?

A

Harder

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5
Q

When two or more persons share profits, there is a presumption that they are…

A

A partnership

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6
Q

T/F: All transfer of money = profits

A

False

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7
Q

Consequences of forming a partnership:

A
  1. Separate legal entity
  2. Liability flows
  3. No entity level taxation
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8
Q

What does it mean to be a separate legal entity?

A

Partnership is distinct from each of the partners inside the partnership.

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9
Q

What is partnership liability?

A

Partners in a partnership are personally liable for its obligations. No limited liability, like with corporations.

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10
Q

What does no entity level taxation mean?

A

If partnership has profits, not taxed. When distributed to partners, then taxed. Vs. corporations which are taxed as entities.

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11
Q

The partnership agreement is…

A

the law of partnerships. Meaning that partners can basically set the terms for their partnership.

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12
Q

Do you need a written partnership agreement?

A

No. Not a contract, no SOF.

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13
Q

If parters agree to other terms, do those need to be written down?

A

No, will be incorporated into partnership agreement.

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14
Q

If no partnership agreement, what rules apply?

A

State law governs and applies default rules.

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15
Q

When there is a partnership agreement, does that or state law apply?

A

Partnership agreement trumps state law.

Exception: When state law is mandatory. Ex: liability to third parties; cannot deny partners access to books and records; fiduciary duties

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16
Q

How do fiduciary duties relate to the internal affairs of a partnership?

A

Every partner owes each other and the partnership a fiduciary duty.

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17
Q

What are the different fiduciary duties that partners owe each other?

A
  1. Duty of loyalty: Partners must not be disloyal. They cannot compete with partnership business, advance an adverse interest to it, or usurp a partnership opp (unless disclose and partnership passes up on it).
  2. Duty of care: Act as a reasonably prudent partner. Partner must not engage in grossly neg or reckless conduct; engage in intentional misconduct; engage in knowing violation of law.

Obligation of good faith and fair dealing (in carrying these two duties out).

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18
Q

Can partners modify duty of loyalty?

A

As matter of state law, cannot eliminate duty of loyalty. BUT can limit it by redefining a bit as long as not manifestly unreasonable.

Ex: retaining commissions ok

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19
Q

If unsure if you’re doing something disloyal, what is a safe harbor?

A

If partner makes full disclosure of all material facts, then certain percentage of other partners may authorize or ratify the transaction.

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20
Q

Can partnership agreement modify duty of care?

A

May not unreasonably reduce duty of care. Can exempt a few kinds of activities.

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21
Q

Do the duties of loyalty and care apply to prospective or former partners?

A

No

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22
Q

Division of profit and losses is generally dictated/determined by…

A

agreement

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23
Q

When there is no partnership agreement regarding division of profits and losses…

A

Profits are divided evenly. Losses follow profits.

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24
Q

What is a distribution?

A

Getting money out of partnership and putting it in the partners’ pockets.

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25
Q

What is the default rule about distributions?

A

Partners do not have right to distributions. But partners can agree in advance to allow them to be made according to partnership agreement.

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26
Q

What is the default rule about transferring partnership interest?

A

You do have right to transfer partnership interest. Partners can still agree to change default rule by, for example, creating a majority vote approval requirement.

But remember that when financial interest transferred, original partner remains a partner in the partnership. 3rd party does not become a partner in getting that transfer. But transferee does have right to bring a motion to dissolve the partnership.

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27
Q

Default rule about new partners:

A

All exiting partners must consent. Can agree otherwise in the partnership agreement.

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28
Q

What is the default rule about management and governance of partnerships?

A

Every partner has equal rights in management and control of partnership. Can be changed by agreement.

A common change: reflect partners’ capital contributions rather than equal shares.

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29
Q

Wrt ordinary business, need what kind of vote (per default rule)?

A

Majority of the partners, but can agree otherwise.

Ex: distributions

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30
Q

Wrt extraordinary business, need what kind of vote (per default rule)?

A

Unanimity, but can agree otherwise.

Ex: changing partnership agreement

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31
Q

Wrt a quorum, what is the default rule for partnership voting?

A

No default rule.

32
Q

Access to records must be provided to…

A

Partners and their agents.

33
Q

Standard procedure for voluntary dissociation:

A

Partner can give notice they want to dissociate.

34
Q

How can there be involuntary dissociation?

A
  1. Partnership agreement establishes a trigger
  2. Partnership agreement establishes a procedure
  3. Court order
  4. Bankruptcy (of partner)
  5. Death or incapacity
  6. Entity (that is partner) dissolves

It will then be unlawful for partnership to carry on business with that ex-partner.

35
Q

Can you prevent a partner from dissociating?

A

No, but can set up requirements, like notice.

36
Q

Consequences of dissociation?

A
  1. Partnership does not necessarily dissolve.
  2. Former partner has no right to participate in management of partnership, and no longer has duties to partnership either.
  3. If partnership continues without this person, must buy out dissociated partner’s business.
37
Q

Can partner be involuntarily dissociated by a majority of partners voting him out?

A

No?

38
Q

Every partner is a(n) ___ of the partnership, so…

A

agent; partnership as principal may be responsible for contracts/torts of partners.

39
Q

Partners can enter into contracts when they have…

A

Authority (express, implied, apparent)

40
Q

How can there be express authority for partner to enter into contract for partnership?

A
  1. Partnership agreement
  2. Statement of authority filing with SoS, or
  3. Ad hoc authorization by partners at a meeting
41
Q

When does a partner have implied authority?

A

When he has a reasonable belief that an action is necessary to carry out express authority.

42
Q

When is there apparent authority wrt partners in a partnership?

A

Partnership may be bound based on partner acting in ordinary course of dealings. Even if partner told by partnership not to do something, if the third party has not been told and there is still apparent authority, partnership still liable. (About partnership’s communication with third parties.)

Ex: business cards, letterheads, etc.

43
Q

When is a partnership liable in tort for torts committed by partners?

A

When they are acting within scope of partnership.

44
Q

What liability do partners themselves have?

A

Partners are personally liable. Partner is jointly and severally liable for all of partnership’s obligations.

First step is to exhaust the funds of the partnership, though.

45
Q

What contracts/torts violations are incoming partners liable for?

A

NOT anything happening before they became a partner. But may be liable for your capital contribution.

46
Q

What contracts/torts violations are outgoing partners liable for?

A

They may be liable for violations that occurred after they left.

47
Q

How is a partnership terminated?

A
  1. Dissolution

2. Winding up

48
Q

How can a partnership be dissolved (step one in termination)?

A
  1. Any dissolving event set forth in partnership agreement.
  2. Any event that makes it unlawful to continue if not cured within 90 days.
  3. Judicial determination
  4. If at will: Dissolved when any partner chooses to dissociate. Rare.
  5. If for term/undertaking: Dissolved when term expires or undertaking complete.
49
Q

What is a partnership at will (vs. partnership for term/undertaking)?

A

Open ended partnership with no fixed term that’s not tied to any time period or particular undertaking.

50
Q

Who can wind-up a parternship?

A
  1. Any partner that has not been wrongfully dissociated.
  2. Legal rep of last surviving partner.
  3. Any partner or legal rep can ask for judicial supervision of winding up.
51
Q

What power does person winding up have?

A
  1. Dispose of and transfer partnership prop
  2. Discharge partnership liabilities
  3. Preserve partnership business to max value as growing concern
52
Q

What is a statement of dissolution?

A

Filing that gives notice to third parties that partnership has been dissolved after 90 days.

53
Q

Priority of distributions if there is money left from partnership:

A
  1. Creditors
  2. Third parties
  3. Partners/their estates
54
Q

What is a limited liability partnership (LLP)?

A

A partnership in which partners’ personal liability is eliminated.

But remember that if an individual in an LLP commits a tort, personally liable for that.

55
Q

To create an LLP…

A
  1. Vote: Need to vote an authorizing transformation. (Extraordinary business so unanimity default unless partnership agreement says otherwise.)
  2. Name: Name must end with RLLP or LLP
  3. File: Need to file something with the state. Must be filed appropriately or you are treated just as a general partnership.
56
Q

What liabilities exist in an LLP?

A

Limited partners not personally liable for obligations of LLP.

But limited partners are personally responsible for their own personal misconduct or neg.

57
Q

How can LLP status be terminated?

A
  1. Partners can voluntarily transform/transfer LLP status.

2. State can revoke LLP status.

58
Q

What is a limited partnership (LP)?

A

Partnership formed by two or more persons that has at least one general partner and one limited partner.

59
Q

What kind of liability do the different partners in an LP have?

A

Limited partners enjoy limited liability–liability limited to how much they contributed to the partnership. General partners do not enjoy limited liability.

60
Q

How do you form an LP?

A

Have to file certificate of limited partnership.

Has to contain:

  1. Name of limited partnership with LP at end
  2. In-state address
  3. Name of agent in that state
  4. Name and addresses of all general partners
  5. Statement of duration
  6. Signed by general partner (business or human)

If mistake, treated as a general partnership.

61
Q

When does LP come into existence?

A

Comes into existence when docs filed.

If you do stuff before it was formed, might be liable for that stuff as a general partnership.

62
Q

If you substantially comply with certificate of limited partnership (but not fully)…

A

You will still enjoy benefits of limited partnership.

63
Q

How can you join a limited partnership as a limited partner?

A

Limited partner can join at creation or agreement of all partners.

64
Q

Do limited partners vote in an LP?

A

Default is no, but partnership agreement may allow them to.

65
Q

Do limited partners have a right to access books and records?

A

Yes

66
Q

What do limited partners owe to third parties liability-wise?

A

Not personally liable unless you’re a general partner or start to participate in the partnership (i.e., start participating in running the business).

Examples of things limited partners can do WITHOUT “running the business”:

  1. Can be officer, director or shareholder of general partner.
  2. Can consult general partner on partnership affairs.
  3. Can act as surety of partnership.
  4. Can request to attend meetings.
  5. Can wind-up of partnership.
  6. Can propose or approve of partnership matters.
67
Q

How do limited partners withdraw from LPs?

A

Must give 6 months written notice.

68
Q

How do you become a general partner in an LP?

A

General partner can join at creation or agreement of all partners.

69
Q

What are rights and powers of a general partner in an LP?

A

Same as in general partnership or as otherwise suggested in partnership agreement.

70
Q

What are liabilities of general partner to third parties in an LP?

A

Personally liable, like in general partnerships.

Why many general partners are corporations that also enjoy limited liability.

71
Q

How can general partners in LP withdraw?

A
  1. Voluntarily.
  2. If they try to assign partnership interest might be removed.
  3. Bankruptcy or insolvency
  4. Death or incapacitation
  5. If business and terminated
72
Q

To have a partnership, will any division of money do?

A

No, need a division of profits specifically.

73
Q

Can creditors go after a partner’s financial interest?

A

Yes. But cannot go after partnership to satisfy judgment against that individual partner.

74
Q

Any property acquired for the partnership can only be used for…

A

The partnership, not personal use.

75
Q

If someone personally liable while partnership is a general partnership and then it becomes an LLP…

A

Individual partner still personally liable.

76
Q

If someone in an LLP has an obligation but then the LLP becomes a general partnership, personally liable now or still protected?

A

Still protected, not personally liable.

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