Partnerships

Question 1

A partnership is an association of two or more persons to carry out a for-profit business as co-owners. Is it possible to form a partnership between a corporation and another partnership? Why or why not?

Answer 1

For the purpose of forming a partnership, a “person” is an individual, corporation, LLC, trust, estate, government entity, or another partnership. Therefore, a partnership can be formed between a partnership and a corporation. For example, Partnership X and Corporation Y can form Partnership Z.

Question 2

What kind of intent is necessary to form a partnership?

Answer 2

To form a partnership, there needs to be at least two “persons” with intent to carry on a business for profit as co-owners. Specific intent is not required to form a partnership; the agreement can be express or implied through conduct of the parties.

Question 3

What six kinds of payments can be used to rebut the presumption that a partnership was intended and created even when the payments appear to be the sharing of profits?

Answer 3

The sharing of profits from a business does not create a rebuttable presumption that the arrangement is a partnership if the sharing is actually payment of:

(i) A debt (including installment payments);
(ii) Interest on a loan;
(iii) Rent;
(iv) Wages or other compensation paid to an employee or independent contractor;
(v) Goodwill payments stemming from the sale of a business (including installment payments);
(vi) Annuities (or other retirement or health benefits) paid to a surviving spouse or beneficiary, representative, or designee of a deceased or retired partner.

Question 4

When will a person be characterized as a partner by estoppel and be liable to third parties?

Answer 4

When a person represents himself either orally, in writing, or implied by conduct as a partner (or consents to or allows another to represent himself as a partner), he will be a partner by estoppel, and he will be liable to third parties if the third party reasonably relied on the representation and suffered damages as a result.

Question 5

Generally, a person who is held out by another as a partner (without consent) is not under a duty to deny that representation. When is it not a defense that the purported partner was unaware that she was being represented as a partner?

Answer 5

It is not a defense that the purported partner was unaware that she had been held out as a partner to a specific third party if the representation was made in a public manner.

Question 6

What two fiduciary duties does a partner owe to the partnership and to the other partners?

Answer 6

A partner owes the partnership and the other partners the duty of loyalty and the duty of care.

Question 7

Is a written agreement required to form a partnership?

Answer 7

A written agreement is not required to form a partnership unless the agreement cannot be performed within a year (because a partnership agreement is subject to the Statute of Frauds).

Question 8

When is a partner entitled to remuneration for services rendered to the partnership?

Answer 8

Absent an agreement to the contrary, a partner is not entitled to remuneration for services rendered to the partnership.
Exceptions:
1. When the partner renders services in winding up
2. When the partners agree to pay a partner for her efforts

Question 9

When must a partnership indemnify a partner who incurs a personal liability?

Answer 9

A partnership must indemnify partners that incur personal liabilities in the ordinary course of conducting partnership business or in order to preserve the partnership’s business or property.

Question 10

A partnership can be contractually bound when a partner acts with either actual or apparent authority. How can a partnership escape liability when a partner acts with apparent authority?

Answer 10

For a partnership to escape liability, the third party generally must possess actual knowledge of the partner’s lack of actual authority.

Question 11

What is the rule regarding use of partnership property?

Answer 11

A partner may use or possess partnership property only on behalf of the partnership. A partner who uses partnership property for personal benefit must compensate the partnership.

Question 12

What rights does a partner have with respect to access to records and information of the partnership’s business?

Answer 12

Partners and their agents (including attorneys) have the right to access, inspect, and copy partnership records and books. Upon demand, partners must furnish any and all information affecting the partnership.

Question 13

Does a partnership agreement govern a partnership or does RUPA?

Answer 13

Although a formal agreement is not required to create a partnership, if the partners have entered into such an agreement, then the agreement, rather than RUPA, governs the relations among the partners and between the partners and the partnership.

Question 14

Under what circumstances might a judicial expulsion of a partner occur?

Answer 14

An expulsion of a partner by a court order may occur because the partner has either:

(i) engaged in misconduct that adversely and materially affected the partnership business;
(ii) willfully and persistently caused a material breach of the partnership agreement; or
(iii) breached a duty owed to the partnership or other partners.

Question 15

When a partner dissociates from a partnership and that partner’s interest is purchased by the partnership, does the partner remain responsible for partnership obligations that occurred prior to dissociation?

Answer 15

When a partnership purchases a dissociated partner’s interest, the partnership must generally indemnify the partner against all partnership liabilities, whether the liabilities were incurred before or after the dissociation. An exception exists for liabilities incurred by the partnership due to the dissociated partner’s post-dissociation actions.

Question 16

What does a statement of dissociation filed with the state do?

Answer 16

A statement of dissociation:

(i) Constitutes a limit on the dissociated partner’s authority;
(ii) Gives third parties notice of the dissociation as of 90 days after the statement is filed; and
(iii) Reduces the window of partnership liability for a dissociated partner’s actions from two years to 90 days.

Question 17

Under the duty of loyalty, what is a partner required to refrain from doing?

Answer 17

Under the duty of loyalty, a partner is required to refrain from:

(i) Competing with the partnership;
(ii) Advancing an interest adverse to the partnership; and
(iii) Usurping a partnership opportunity (or otherwise using partnership property or business to derive a personal benefit) without notifying the partnership.

Question 18

What does a partner’s duty of care entail?

Answer 18

Under the duty of care, a partner is required to refrain from engaging in:

(i) Grossly negligent or reckless conduct;
(ii) Intentional misconduct; or
(iii) Knowingly violating the law.

Question 19

When is titled property in the name of an individual partner actually the property of the partnership?

Answer 19

Property titled in the name of an individual partner is partnership property when the instrument indicates either the named person’s capacity as a partner or the existence of the partnership. [Property purchased with partnership assets or by using partnership credit to obtain financing is presumed to be partnership property.]

Question 20

How is a judgment for a third party against a partnership usually satisfied?

Answer 20

A partnership creditor generally must first exhaust the partnership’s assets before levying on a partner’s personal assets.

Question 21

When a partner dissociates from the partnership, but the partnership is not dissolved, what happens to the partner’s interest?

Answer 21

When a partner is dissociated and the partnership is not dissolved, the partnership must buy out that partner’s interest. The dissociated partner’s interest is valued as if the partnership business was wound up on the date of dissociation. (The partnership is valued as the greater of the liquidation value of its assets or the value of the partnership as a going concern.)

Question 22

What are the procedures for converting a limited partnership into a partnership?

Answer 22

To convert a limited partnership into a partnership, all of the general and limited partners must approve the conversion. Once approved, the limited partnership must cancel its limited partnership certificate. The conversion takes effect upon the cancellation of that certificate.

Question 23

Which partners can make decisions as to matters in the ordinary course of business? Which partners can make decisions as to matters outside the ordinary course of business?

Answer 23

Absent a partnership agreement to the contrary, all partners have equal rights in the management and conduct of the partnership.

A majority of the partners can make a decision as to a matter in the ordinary course of business, but a decision as to matters outside the ordinary course of business requires the consent of all partners.

Question 24

What happens when there is a partnership agreement that addresses the division of partnership profits, but it is silent on the division of partnership losses?

Answer 24

In general, if there is no agreement or the agreement is silent as to the division of profits and losses, each partner is entitled to an equal share of the partnership profits and losses. When the agreement addresses only the division of profits, then losses are to be shared in the same manner (same percentage as division of profits).

Question 25

When is a partnership liable for a partner’s tortious acts, including fraud?

Answer 25

A partnership is liable for a partner’s tortious acts, including fraud, when the partner commits the tortious acts in the ordinary course of the partnership business or with partnership authority, whether actual or apparent. (The partnership will not be liable when the fraudulent act occurs outside of the scope of partnership business.)

Question 26

What powers does a person winding up the partnership business have?

Answer 26

• Dispose of and transfer partnership property
• Discharge partnership liabilities
• Preserve the business or property to maximize value
• Distribute assets to settle partners’ accounts

Question 27

What are the exceptions to first satisfying a judgment from partnership assets over a partner’s personal assets?

Answer 27

While generally a judgment against a partnership must first be satisfied by partnership assets, exceptions exist when:

(i) The partnership is a debtor in bankruptcy;
(ii) The partner consented;
(iii) The partner is liable independently of the partnership (ex. partner was primary tortfeasor);
(iv) The partnership’s assets are clearly insufficient,
(v) Exhaustion of partnership assets would be excessively burdensome, or
(vi) It is otherwise equitable to do so

Question 28

How is the partnership affected by the criminal act of one of the partners?

Answer 28

A partnership may be convicted of a crime for which the penalty is a fine levied on partnership assets. Merely being a partner, however, is not sufficient to make a partner criminally liable for the acts of another partner.

Question 29

What is the exception to the general rule that a partner’s knowledge or notice of fact is immediately imputed to the partnership?

Answer 29

An exception to the general rule that a partner’s knowledge or notice of fact is immediately imputed to the partnership exists when a fraud on the partnership is committed by or with the consent of the partner.

Question 30

What are the procedures for converting a partnership into a limited partnership?

Answer 30

To convert a partnership into a limited partnership, all of the partners must approve the conversion, and then articles of conversion must be filed with the state. The conversion takes effect upon the filing of the articles of conversion, unless a later date is specified.

Question 31

What types of events can trigger a partnership’s dissolution?

Answer 31

The main causes of partnership dissolution are:

• By actions of partners
• By operation of law
• By judicial determination

Question 32

How may a general partner withdraw from a limited partnership?

Answer 32

At any time, a general partner may withdraw from a limited partnership by giving written notice to the other partners.

Question 33

How may a person become a limited partner after the limited partnership is formed?

Answer 33

Once a limited partnership is created, a person may become a limited partner upon written consent of all partners, unless the partnership agreement provides otherwise.

Question 34

In a limited partnership, a general or limited partner may contribute a promise to pay cash, to provide property, or to perform services. What happens when a partner is unable to perform an enforceable promise for this kind of future contribution?

Answer 34

Generally, a partner is obligated to the limited partnership with respect to any written, enforceable promise of a future contribution. When a partner is unable to perform the promise due to death or disability, the partner or his estate must pay the cash value of the promise.

Question 35

Upon dissolution of a limited partnership, who may wind up the partnership’s business?

Answer 35

The general partners who have not wrongfully dissolved the limited partnership may wind up.

When there are not any such general partners, the limited partners may wind up the partnership’s affairs.

Question 36

Which partners may participate in winding up a partnership’s business once it has dissolved?

Answer 36

Any partner who has not wrongfully dissociated from the partnership may participate in winding up the partnership’s business.

Question 37

Does a partnership have to repay a loan that a partner makes in furtherance of the ordinary course of partnership business?

Answer 37

A partnership is required to repay a loan or reimburse a partner for advances, including interest from the date of the loan or advance.

Question 38

What are the standing requirements for a limited partner to bring a derivative action on behalf of the limited partnership?

Answer 38

To bring the action, the limited partner must be a partner at the time of bringing the action as well as at the time of the wrongful transaction, unless the status of partner devolved on him by operation of law or pursuant to the terms of the operating agreement.

Question 39

Upon dissolution, how are partnership assets distributed?

Answer 39

Partnership assets are first applied to discharge partnership obligations to creditors, including partners who are creditors, and then to partners.

Question 40

What must the name of a limited liability partnership contain at the end?

Answer 40

A limited liability partnership’s name must include one of the following at the end:

Registered Limited Liability Partnership; Limited Liability Partnership; R.L.L.P; L.L.P.; RLLP; or LLP

Question 41

What is a partner’s liability for a tort committed by the limited liability partnership?

Answer 41

A partner in an LLP is not personally liable for an obligation of an LLP, including tortious obligations, unless the partner also engaged in the conduct that caused the obligation.

Question 42

What partnership roles are required in a limited partnership?

Answer 42

A limited partnership is required to have at least one general partner and at least one limited partner.

Question 43

What is the procedure for a limited partner to withdraw from a limited partnership?

Answer 43

Unless the written partnership agreement provides otherwise, a limited partner must give six months’ prior written notice to each general partner before withdrawing.

Question 44

A general partner in a limited partnership is personally liable to third parties and is typically liable to the partnership, as well. What kind of partner would take on this kind of liability?

Answer 44

Although the general partner in a limited partnership has unlimited liability, the typical general partner is an entity such as a corporation that has its own liability shield.

Question 45

What is a general partner’s accountability if he withdraws from a limited partnership in violation of the partnership agreement?

Answer 45

If a general partner withdraws from a limited partnership in violation of the partnership agreement, the general partner will be liable for damages caused by the breach of his agreement.

Question 46

What rights to distribution does a partner have in a limited partnership if those rights are not specified in the partnership agreement?

Answer 46

If a partner’s rights to distribution are not specified in a limited partnership’s agreement, then a partner does not have a right to receive a distribution before withdrawal or dissolution of the partnership. [Upon withdrawal or dissolution, the partner has the right to receive a distribution of the fair value of his interest, as measured on the date of withdrawal.]

Question 47

Can a partnership continue doing business after dissolution but prior to winding up?

Answer 47

Yes, the partnership may resume carrying on its business as if dissolution had not occurred if all partners, including any properly dissociated partners, agree to waive rights to terminate the partnership.

Question 48

What must a certificate of limited partnership contain?

Answer 48

A certificate of limited partnership must contain the following:

• Name of the limited partnership
• In-state address
• Name and address of in-state agent for service of process
• Name and business address of each general partner
• Statement about the duration of the limited partnership
• Signatures of all general partners

Question 49

When might a limited partner be personally liable for partnership obligations?

Answer 49

A limited partner is generally not personally liable for the obligations of a limited partnership unless the limited partner:

(i) also serves as a general partner;
(ii) participates in the control of the business; or
(iii) allows their name to be used in the name of the limited partnership (liable then to a creditor who extends credit, unless the creditor had actual knowledge that the limited partner was not a general partner)

Question 50

What happens when there is only one general partner in a limited partnership and that general partner withdraws?

Answer 50

The withdrawal of a general partner or other occurrence in which the general partner ceases to be a general partner terminates the partnership, unless all partners agree in writing to carry on the business and appoint a general partner within 90 days.