Partnerships Flashcards
What is a statement of qualification, and what is the effect of its filing?
The filing of a statement of qualification transforms a partnership into an LLP but does not create a new partnership. LLP status is generally only effective as of the filing date of the statement of qualification.
(Note: A partnership that is sued and then transforms into an LLP will still be liable for the judgment)
What is an LLP?
A limited liability partnership (LLP) is a partnership in which a partner’s personal liability is eliminated. In other respects, however, an LLP is governed by the same rules as a partnership.
Explain partner liability in a partnership vs. an LLP
A partner is jointly and severally liable for all partnership obligations. A limited partner of an LLP is not personally liable for an obligation of the LLP.
Explain the liability of new partners to an existing partnership
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 the incoming partner is at risk for the satisfaction of partnership obligations.
Example: Investor becomes partner of LLP by contributing $50k; no personal liability, but $50k may be used in satisfaction of partnership obligation
Generally, a limited partner is not personally liable. However, when can a limited partner be personally liable?
A limited partner in an LLP is personally liable for their own personal misconduct.
What fiduciary duties (describe them) does a partner owe and to whom?
A partner owes the partnership and the other partners two fiduciary duties – the duty of loyalty and the duty of care.
Under the duty of loyalty, a partner is prohibited from using partnership property or business to derive a personal benefit without notifying the partnership.
Under the duty of care, a partner is prohibited from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.
Who may pursue legal action against a partner for breach of fiduciary duties?
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 or the RUPA.
What is a partnership at will and when is it dissolved?
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.
What are the rights and duties of a dissociated partner?
A dissociated partner generally does not have the right to participate in the management or conduct of the partnership business. A partner’s duty not to compete terminates upon dissociation. The dissociated partner’s other duties of loyalty and care terminate with respect to post-dissociation events, unless the partner participates in the winding up.
What may a person who is winding up the partnership business do?
The person who is winding up may dispose of and transfer partnership property and may discharge the partnership’s liabilities.
What duties are encompassed by the duty of loyalty?
Under the duty of loyalty, the partner is required to refrain from (i) competing with the partnership business, (ii) advancing an adverse interest to the partnership; and (iii) usurping a partnership opportunity or otherwise using partnership property/business to derive a personal benefit, without notifying the partnership.
What duties are encompassed by the duty of care?
Under the duty of care, a partner is required to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.
What is the applicability of the duties of loyalty and care to a partner who is winding up?
When a partner is engaged in winding up the business, the duties of loyalty and care are generally applicable, with the exception of the non-compete aspect of the duty of loyalty. A partner must perform her duties consistently with the contractual obligation of good faith and fair dealing.
