Partnerships Flashcards
Partnerships for MEE
Partnership
An association of two or more people to co-own an ongoing business for profit. Distinct legal entity apart from the partners
Types of Partnerships
- General Partnership (GP) = Two or more general partners
- Limited Partnership (LP) = At least one general partner and one limited partner
- Limited Liability Partnership (LLP) = Protects general partners from personal liability
- Any partnership other than an LP can become an LLP Formation
Formation of a General Partnership
Formed by an objective agreement between two or more persons to co-own an ongoing business for profit
- Agreement can be made expressly (oral or written) or implicitly (from the parties’ conduct)
- Parties’ subjective belief is immaterial
- No formal or statutory requirements
Proof of Association: Sharing of profits is prima facie evidence that the profit-receiving person is a partner in a GP
- “Sharing of profits” ≠ being paid for a loan, collecting rent, or earning a salary
Formation of a Limited Partnership
- Formed by complying with statutory requirements:
- execute a certificate of LP signed by all named general partners, and
- file a certificate of LP with the secretary of state’s office
- The name of the LP must say “limited partnership” or an abbreviation (L.P. or LP)
Formation of a Limited Liability Partnership
- Formed by filing with the secretary of state’s office a certificate of registration signed by at least one person •
- Usually must also pay a filing fee
- The name of the LLP must say “limited liability partnership” or an abbreviation (R.L.L.P., L.L.P., LP, etc.)
Partnership Agreement
In general, relations between partners and the partnership are governed by the PA, or, if the PA is silent, by the default provisions of the UPA
A Partnership cannot opt out of what rules in the partnership agreement?
The partnership agreement cannot:
- unreasonably restrict a partner’s access to the books and records,
- remove the partner’s duties of loyalty and care, or
- disallow a partner’s right to dissociate (but can require the partner to give written notice of her intent to withdraw)
Rights of General Partners (GP/LP)
- Each general partner has equal rights to manage the partnership and conduct business
- Unless the PA says otherwise
- A general partner binds the partnership when acting within the ordinary course of business
- Acts outside the ordinary course of business bind the partnership only if all general partners consent to the action
How are disputes between General Partners resolved? (GP/LP)
- Acts within the ordinary course of business = majority vote
- Acts outside the ordinary course of business = unanimous consent
Rights of Limited Partners (GP/LP)
- Right to seek information for a purpose reasonably related to their interest as a limited partner, including the right to:
- inspect and copy tax returns and other documents required by law, and
- obtain true and full information as to the financial condition and state of the partnership’s business
- No right to co-manage the partnership or engage in partnership business (limited partners aren’t agents of the LP)
Duties Within the Partnership
- A partner is personally liable to the partnership and the other partners for damages caused by a breach of a fiduciary duty
- Duty of Care
- Duty of Loyalty
- Duty to Disclose
Duty of Care
Can’t engage in
- grossly negligent or reckless conduct,
- intentional conduct that harms the partnership, or
- a knowing violation of the law
- Applies to general partners in a GP or LP
- Applies during the partnership and throughout the winding-up process
Duty of Loyalty
Can’t:
- compete with the partnership or appropriate a partnership opportunity, or
- enter deals with the partnership that are adverse to the partnership’s interest
- A partner who does must account for any benefit and hold any profit in trust
- Applies to general partners in a GP or LP
Duty to Disclose
Disclosures to General Partners
- Without demand: Any information related to the partnership and reasonably required to exercise a partner’s rights and duties under the PA
- On demand: Any other information concerning the partnership if the demand is reasonable and made for a proper purpose o
Disclosures to Limited Partners
- Must provide the opportunity to inspect financial and tax records, and other documents reasonable related to the limited partner’s interest in the LP (i.e., financial interest)
Duties of Limited Partners
Duties of good faith and fair dealing (less demanding than duties of care and loyalty)
Sharing of Profits and Losses
- Profits are shared equally
- Losses are shared in proportion to the sharing of profits
- These are the UPA’s default rules; if the partners are silent on this apply default rule
- If a partner pays more than his portion of losses, they have a right to contribution from any partner who didn’t pay their share
Partner’s Interest in the Partnership
- A partner’s interest in partnership is personal property, which includes:
- the financial interest in his share of the profits and losses, and
- the right to receive distributions
- Interest in the partnership is freely transferable, but the transferee has no right to:
- participate in the management and control of the partnership, and
- demand access to the partnership’s information, books, and records
- A transfer of a partner’s partnership interest does not automatically dissolve the partnership
General Partners Liability to Third Parties
- Personally liable for all partnership debts, which includes torts committed by a partner if done:
- in the ordinary course of business, or
- with authority from the partnership
- The general partners are jointly and severally liable
- A partner may sue partners who didn’t pay their pro rata share for contribution
- Applies to all general partners in a GP and an LP, but not an LLP
Limited Partners Liability to Third Parties
Not personally liable (except the partner’s capital contribution) for debts of the LP, even if the limited partner participated in the management
Partner’s Power to Dissociate
- Partners always have the power to dissociate upon giving notice to the partnership
- Wrongful dissociation = dissociation in violation of an express provision of the PA
- The partner who wrongfully dissociates is liable for any damages caused
Events causing a partner’s dissociation
- death
- bankruptcy
- Wrongful if the partnership is for a definite term or undertaking
- appointment of a guardian
- a judicial determination that a partner is incapable of performing the duties of a partner
- occurrence of an event specified in the PA that triggers dissociation
- expulsion from the partnership pursuant to:
- a provision in the partnership agreement,
- unanimous vote of the other partners, or
- judicial determination made upon application of a partner
Dissociation of a Partner in a Limited Partnership
- General Partner: dissociation is wrongful if it occurs before the termination of the LP
- Limited Partner: no right to dissociate
Consequences of Dissociation
- Ends the partner’s rights to co-manage and conduct partnership business
- Still liable for partnership obligations incurred before dissociation
- Ends the partner’s duties of loyalty and care going forward (still under duty for matters occurring before dissociation)
- May compete with the partnership
Causes of Dissolution (all partnerships)
- It becomes illegal to carry on the partnership’s business
- Upon occurrence of an event agreed upon and specified in the PA
- A partner may file an application to dissolve the partnership, which will be granted if:
- The economic purpose of the partnership is likely to be unreasonably frustrated,
- Carrying on the business in conformity with the PA isn’t reasonably practicable, or
- Carrying on the business with that particular partner is no longer reasonably practicable because of that partner’s conduct
- Application to dissolve by a transferee of a partnership interest may be made only on the ground that equity demands the partnership be wound up
- In a partnership at-will –> the transferee can file the application at any time
- In a partnership for a definite term or particular undertaking –> transferee can file only after completion of the term or undertaking
Dissolution Cause Applicable to At-Will Partnerships Only
Dissolution occurs if one partner gives the partnership notice of his express will to withdraw
Dissolution Cause Applicable to Partnership for Definitely Term/Particular Undertaking Only
If a partner wrongfully dissociates –> automatic dissolution in 90 days unless a majority of partners vote to continue the partnership
Dissolution of Limited Partnerships
- If the sole general partner dissociates –> automatic dissolution in 90 days unless a majority of limited partners vote to continue the business and a general partner is appointed
- If only one of multiple general partners dissociates –> no automatic dissolution unless the majority of all partners (general and limited) vote to dissolve the LP
- If the sole limited partner dissociates –> automatic dissolution unless a limited partner is admitted within 90 days
Consequences of Dissolution
- Partnership continues to exist only for the purpose of winding up the business (paying debts and distributing assets)
- Partnership terminates after the winding-up process
- Partnership’s liability on post-dissolution contracts: liable if the transaction would have bound the partnership before dissolution and the other party did not have notice of the dissolution
- Partnership’s assets are distributed
Order a Dissolved Partnership’s Asssets Are Distributed:
- First, pay creditors (including partners who are creditors)
- If not enough to pay creditors, partners are jointly and severally liable for the entire amount of the outstanding debt (but may seek contribution from other partners)
- Second, reimburse partners for their capital contributions
- Third, pay the balance to partners in accordance with their share of profits
