Partnerships Flashcards
Partnership General Provisions
General partnership requires 2 or more persons (a person may be a legal entity)
Two or more people carrying on a business as co-owners for profit
No written agreement or filing with the state
Cash, property, and services are all valid forms of consideration and valid partnership contributions
Promise to perform services must be in writing to be enforceable
P’ship may hold property in its own name and can be sued or sue in its own name
A party who sues a partnership must specifically name individual partners AND the partnership in a complaint to have access to both partner and partnership assets.
Joint Venture
Partnership for a specific limited purpose.
Purported Partner
A person makes a representation or consents to representation + 3rd party detrimentally relies on assertion of partnership
No duty to deny representation
Partnership Duty of Loyalty
Loyalty – can only be violated in 3 ways:
- Stealing from P’ship
- Competing with P’ship
- Self-dealing is ok as long as it’s fair – treated like any other creditor
- Usurping a partnership opportunity to derive a personal benefit
Duty of loyalty cannot be eliminated by P’ship agreement but may modify what a breach of loyalty is.
P’ship may unanimously ratify an action that is breach of loyalty.
Partnerhsip Duty of Care
Must avoid grossly negligent or reckless conduct, intentionally negligent conduct, or knowing violation of law – P’ship agreement may reduce as long as not unreasonable.
Partnership Duty of Good faith
General duty to act in good faith and fair dealing – CANNOT be eliminated
Profits and Losses
Default: Partners share profits and losses EQUALLY
If agreement is silent on how losses will be split it will be the same way profits are split
P’ship agreement can share profits and losses however they want
A partner cannot demand distribution of partnership profits
Partnership Interest
Can unilaterally transfer right to receive profits to 3rd party
Cannot unilaterally transfer rights to control – adding a partner requires UNANIMOUS consent
Transferee has NO RIGHT TO: participate in management or wind up, access partnership records, or demand an accounting.
Transferee may seek judicial supervision in winding up.
Transferee is does not have to pay any partnership debts or obligations – ONLY GETS DISTRIBUTIONS.
Partnership Property
Property acquired in P’ship name
Property purchased with P’ship assets
A Partner cannot sell an interest in partnership property.
Property devised to P’ship.
Can only use P’ship property for P’ship business.
A partner may rent personal property to a partnership (i.e., owns a van and rents it to partnership for partnership use)
Partner can make a loan to the partnership and will be treated as any other creditor
A partner must compensate the partnership for personal benefit derived from personal use of partnership property
Goodwill is presumed to be an asset of a partnership but the partnership agreement can say that goodwill has no value which will control.
Voting Rights
Default: each partner gets equal vote and need majority approval for decisions – may be modified by P’ship agreement
Inspection Rights
FRUPA requires a partnership to provide its partners and their agents (including attorneys) with access to inspect and copy all its records, including its financial records
Inspection may be restricted through partnership agreement as long as restriction is reasonable
NO REASON NEEDED
The partnership must permit former partners to access and copy all records from the period when they were a partner without requiring a reason.
Dissociation
Partner can dissociate at any time even if wrongful but can be sued for damages
Disassociation may be done by
- Express will
- Happening of event in P’ship agreement
- Bankruptcy, death, or partner declared incompetent
Wrongful Dissociation
At-will partnership – can leave anytime, never wrongful.
P’ship for term – before term expires.
P’ship for undertaking – before purpose is complete.
Partners may continue partnership beyond term if all partners agree to waive termination (wrongfully dissociated partners have no right to vote or waive)
Effect: will NOT automatically cause dissolution and wind up
Post-dissociation liability
Partner can still bind P’ship if third party:
- Reasonably believes still a partner
- No notice (actual or constructive)
Liability last 1 year after dissociation
Partner who has not wrongfully dissociated may file statement of dissolution which will give 3rd parties notice 90 days after it is filed
Dissolution
Break-up the business
Term expires or undertaking is complete
All partners agree to dissolve
One partner dissociates + at least 50% of remaining partners agree to dissolve
Death of a partner is not grounds for dissolution unless 50% agree to terminate after death
Wind-up
The process of closing the business down
Creditors are paid before partners
Partners will recoup investment before profits are split
EXAMPLE: A contributes 20k, B contributes 80k after dissolution 200k remaining after liquidation – A gets 70k and B gets 130k
Judicial supervision of wind up can be sought by: partner, partner’s legal rep., transferee, executor, or trustee
Partnership Authority
Each partner is agent for purposes of its business
An act done in the ordinary course of business generally binds P’ship
No apparent authority if partner has no authority to act and the third party knew or received notice of the lack of authority
Statement of Authority
Filed with state
This generally means nothing and does not put any third party on notice UNLESS it is a transaction involving real estate.
Partnership Liability
- Partners are personally liable for the obligations of the partnership JOINT & SEVERAL LIABILITY
- Rule: creditor must first pursue and exhaust all remedies from partnership before going after individual partners (P’ship assets first)
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Torts – Partnership is liable for torts or negligence by a partner (Joint & Several Liability)
- A partner can sue another partner for indemnification for torts including fraud
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New Partners
- No liability for an existing obligation that occurred BEFORE becoming a partner
- Capital contributions by a new partner may be used to satisfy existing judgment (i.e., partnership is sued and has to pay 50k judgment, new partner has no liability for 50k judgment but if new partner contributes 10k capital upon becoming partner that 10k can be used to satisfy the preexisting judgment)
Limited Liability Partnership (LLP)
- Exactly the same as general partnership + limited liability (personal liability) + need to file with state
- Personal liability for own misconduct (negligence)
Limited Partnership: Name
Limited Partnership
Limited
LTD
LP
Limited Partnership: General Partner
Active in management + personally liable
No right to seek contribution from Limited Partners (LP’s)
Limited Partnership: Limited Partner
Passive partner with NO liability for P’ship debts
No liability no matter how much they participate in the management LIMITED PARTNER = NO LIABILITY – unless there is intentional misconduct
A limited partner does not have any fiduciary duty to the limited partnership or to any other partner – LP = NO FIDUCIARY DUTY – no duty of loyalty or care
A limited partner may withdraw upon express notice of her intent to withdraw but GP’s can deny the LP the right to dissociate
10 days’ notice to inspect – no purpose needed
Dual Role: A Limited Partner may also be a General Partner which opens him up to personal liability
Limited Partnership: Profit and Losses
Distributions are based on value of contribution. May be changed by P’ship agreement
General partner may be personally liable for wrongful distribution
