Partnerships Flashcards
partnership
an association of two or more legal persons (including legal entities) who carry on a for profit business as co-owners
no specific intent needed, presumed partnership when two or more persons share profits & control
*However, a partnership does not exist between persons when one person receives profits in payment of a debt (just a creditor).
*passive co-ownership of property by itself does not create a partnership.
partnership liability & taxation
partners are personally liable for the partnership’s obligations (no limited liability)
partnerships do not have entity-level taxation
*However, a judgment against a partnership is not a judgment against its partners. Unless there is also a judgment against the partner, a judgment against a partnership cannot be satisfied from a partner’s assets, only the partnership’s assets.
partnership agreement
doesn’t need to be written
if doesn’t exist, use default rules
written partnership agreement governs except when state law is mandatory
- can’t waive personal liability
- liability to third parties
- can’t deny partners access to books & records
- can’t eliminate fiduciary duties (but can limit)
fiduciary duties
every partner owes duty of loyalty & care to partnership
duty of loyalty: partners must not
- compete with partnership business
- advance interest adverse to partnership
- usurp partnership opportunity (Cannot take a business opportunity that the partnership could have profited from)
- partnership can’t eliminate duty of loyalty but can reasonably limit it
- safe harbor: partner makes full disclosure of material facts, certain percentage of partners can authorize transaction
duty of care: partners must not
- engage in grossly negligent/reckless conduct
- engage in intentional misconduct
- engage in knowing violation fo law
- partnership agreement can’t unreasonably reduce the duty of care
*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
profits & losses
generally determined by agreement, need not be the same
when no agreement, profits divided evenly & losses follow profits
partners don’t have right to demand distribution but can agree in advance
default rule: partner has right to transfer partnership interest
- in the past, it would dissolve partnership
- partners may require majority of vote of partners
default rule: all existing partners must consent to new partner
Transfer of Financial Interest
Partner can transfer the right to receive distributions from the partnership to a third party
Partner is still a partner with remaining rights and obligations
Third party does not become a partner, but can seek judicial dissolution of the partnership
A creditor of a partner can enforce a judgment against the partner’s financial interest.
Property Ownership
Property acquired by the partnership must be used for the benefit of the partnership.
managing/governing relationships
default rule: every partner has equal rights in the management & control of the partnership
-can be changed by agreement, e.g. reflect partners’ capital contribution
ordinary business requires vote of majority of partners, extraordinary business requires vote of all partners
*Acting individually, a partner has the actual authority to commit the partnership to usual and customary matters, unless the partner has reason to know that other partners might disagree. On the other hand, each partner has equal rights in the management and conduct of the partnership’s business. If there is a decision as to a matter outside the ordinary course of the partnership’s business, the decision requires the consent of all partners.
dissociation
when a partner ceases to be associated with the partnership
voluntary dissociation:
-partner may give notice to partnership that he wants to withdraw
involuntary:
- event triggered in partnership agreement
- unlawful to carry on
- court can order
- partner goes bankrupt
- partner dies
- becomes incapacitated
- one of the entities of the partnership dissolves
consequences:
- partnership doesn’t necessarily dissolve
- partnership must buy out dissociated partner’s interest
liabilities of partnership
every partner is an agent of the partnership; partnership may be liable for partner’s contract & tort liabilities
contract liability:
(1) express authority: from
- partnership agreement
- statement of authority filing, or
- ad hoc authorization by partners at meeting
(2) implied authority:
- based on partner’s reasonable belief that an action is necessary to carry out express authority
(3) apparent authority:
- partnership bound based on parter acting in ordinary course of dealings
- based on interactions btw partnership & 3rd parties
tort liability:
-partnership liable for torts committed by partners acting within scope of partnership
consequences:
- partners are personally liable for debts/obligations of partnership
- jointly and severally liable
- can go after any partner for entire sum owed by partnership
- generally, creditor must exhaust partnership’s funds before going after partner’s personal assents
*Because a partner is an agent of the partnership, the partnership is liable for a partner’s tortious acts, including fraud, committed in the ordinary course of the partnership’s business or with the partnership’s authority, whether actual or apparent. Unless there is also a judgment against the partner, a judgment against a partnership cannot be satisfied from a partner’s assets, only from the partnership’s assets. Even though a partner is personally liable for a partnership obligation, a partnership creditor generally must exhaust the partnership’s assets before levying on the partners’ personal assets.
terminating a partnership
dissolution & winding up
dissolution:
-by partner or operation of law
- partnership at will: no fixed term, dissolved whenever any partner chooses to dissociate (*important!!)
- partnership for term or undertaking: can be dissolved when term expires or undertaking is complete
- either kind can also be dissolved by:
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
winding up:
- who can wind up: any partner that hasn’t wrongfully dissociated, legal rep of last surviving partner, any partner can seek judicial supervision of it
- power: person winding up may dispose of and transfer partnership property, and discharge partnership liabilities (can also preserve partnership business to maximize value)
- statement of dissolution: filing that gives notice to 3rd parties that its been dissolved after 90 days
- priority of distributions: creditors first, then partners
limited liability partnerships
partnership in which a partner’s personal liability is eliminated
*MUST FILE WITH STATE (effective the date of filing)
must vote authorizing transformation, name must have LLP in it
limited partners not personally liable for obligations of the LLP, but personally responsible for own personal misconduct/negligence
partners can voluntarily transform or cancel LLP status & state can revoke
*A limited liability partnership (LLP) is a partnership in which a partner’s personal liability for obligations of the partnership is eliminated. A limited partner in an LLP is not personally liable for an obligation of an LLP, but can be personally liable for his own personal misconduct including negligence.
limited partnerships
partnership formed by 2 or more persons that has at least 1 general partner and 1 limited partner
limited partners have limited liability; general partners have personal liability
formation: FILE certificate of limited partnership, must contain:
- name (LP), address, name of agent, names & addresses of all general partners, statement of duration, signed by general partner
limited partners
limited partners:
may join at creation of partnership or with agreement of all partners
default rule: limited partner doesn’t vote (partnership agreement can allow)
right to access records
not personally liable for obligations of partnership unless she serves as GP or starts to participate in the partnership.
Allowed to:
-be an officer, director, or SH of GP
-consult GP on partnership affairs
-act as a surety of partnership
-request to attempt meetings
-wind up partnership
-propose or approve partnership matters
*Removing a general partner does not amount to “control” of the partnership. And only liable to third parties who reasonably believe the limited partner is a general partner
withdrawal: LP must give 6 months written notice
general partners
join at beginning or be admitted upon consent of all partners
same rights & powers as general partnership without limited partners or as says in agreement
personally liable to 3rd parties for obligations of partnership
-to protect from liability, many GPs are corporations
termination:
- voluntary withdraw
- attempt to assign partnership interest
- goes bankrupt/becomes insolvent
- death/incapacity
- business-entity partner is terminated
wrongful dissociation
A partner has the power to dissociate from the partnership at any time, even if the dissociation is wrongful. For a partnership that is unlimited by time or undertaking, a partner’s dissociation is wrongful only when it is in breach of an express provision of the partnership agreement. A partner who wrongfully dissociates is liable to the partnership and the other partners for damages caused by the dissociation. In addition, a dissociated partner generally does not have the right to participate in the management or conduct of the partnership business and cannot participate in winding up the business.
Dissociation may, but does not necessarily, result in dissolution of the partnership and the winding up of its business. Wrongful dissociation creates a possibility of dissolution, if, within 90 days of dissociation, a majority of the remaining partners express a will to wind up the business. If the partnership does not dissolve and wind up, the wrongfully dissociated partner is not entitled to payment of any portion of the payout until the expiration of the term or completion of the undertaking, unless the partner proves to the court that earlier payment will not cause undue hardship to the business of the partnership.
*A partnership at will is an open-ended partnership that does not have a fixed termination based on a period of time or particular undertaking. It is dissolved when a partner chooses to dissociate from the partnership by giving notice of his withdrawal. Any partner who has not wrongfully dissociated may participate in winding up the partnership’s business. He may also may dispose of and transfer partnership property and may discharge the partnership’s liabilities.
continuing partnership after dissolution
Once a partnership has been dissolved, but before the winding up of its business is complete, the partnership may resume carrying on its business as if dissolution had never occurred. To do so, all partners (including any properly dissociated partners) must agree to waive the right to terminate the partnership. When a partner dissociates from the partnership but the partnership is not dissolved, the partnership must buy out the dissociated partner’s partnership interest. A dissociated partner may maintain an action against the partnership to determine the buyout price and to compel the partnership to pay that amount to the partner. The action must be commenced within 120 days after the partnership has tendered payment or an offer to pay or within one year after written demand for payment if no payment or offer to pay is tendered.
-if not all partners agree that partnership isn’t dissolved, then dissociated partner doesn’t get buyout payment
Once a partnership has been dissolved, but before the winding up of its business is complete, the partnership may choose to resume carrying on its business as if dissociation had never occurred. To do so, all partners (including any properly dissociated partners) must agree to waive the right to terminate the partnership. A person winding up the partnership business may preserve the business or property as a going concern for a reasonable time to maximize its value.
Liability for partnership debts incurred during winding-up after partner dissociates
The partnership is not terminated until the partnership business is wound up. After dissolution, the partnership is bound by a partner’s act that is appropriate for winding up the partnership. Each partner is liable to the other partners for his share of partnership liability incurred by such post-dissolution acts.
Liability for new partners
A person admitted as a partner into an existing partnership is not personally liable for any prior partnership obligations. However, any capital contribution made by an incoming partner to the partnership is at risk for the satisfaction of such partnership obligations.
reimbursement for partner’s personal loan/advance
A partner may make a loan in furtherance of the ordinary business of the partnership or to preserve the partnership’s business or property. The partnership is required to repay the loan or reimburse the partner for the advances, including interest from the date of the loan or advance.
Compensating partner for services
A partner is not entitled to remuneration for services performed for the partnership. An exception exists when the partners agree to pay a partner for his efforts. Some courts require that partners explicitly agree to this compensation while others permit compensation based on an implied agreement to compensate a partner.
How can creditor of individual partner reach partnership
-partnership property
-partnership interest
All property acquired by a partnership is partnership property and belongs to the partnership, not the individual partners. A partner cannot transfer an ownership interest in partnership property, voluntarily or involuntarily.
A creditor of a partner who has obtained a judgment against that partner may enforce that judgment against that partner’s partnership interest only by obtaining a judicial charging order. The charging order constitutes a lien on the partner’s partnership interest. A creditor can only pursue a partner’s partnership interest, which consists of the rights to share in the partnership’s profits and losses and to receive distributions.
