Partnerships

Question 1

. Formation

Answer 1

• Requires an association of two or more persons to carry on a for-profit business as co-owners
• Requires sharing of profits
• No intent requirement
• No formal agreement or writing required
Note 2: Repaying a loan with business profits does not necessarily make the
lender a partner.

Question 2

Fiduciary Duties

Answer 2

Partner owes the partnership and the other partners fiduciary duties of loyalty and care

Question 3

Duty of Loyalty

Answer 3

 Must not compete with the partnership
 Must not advance an interest adverse to the partnership
 Must not usurp a partnership opportunity

• Cannot take a business opportunity that the partnership could have profited from
• Can present the opportunity to the partnership first, and if the partnership declines,
the partner can take it without violating the duty of loyalty

Question 4

Duty of Care

Answer 4

 Required to act as a reasonable partner
 Cannot engage in grossly negligent or reckless conduct, intentional misconduct, or a
knowing violation of the law

Question 5

Profits and Losses

Answer 5

Absent a partnership agreement, each partner will share profits and losses equally

Question 6

Obligation of Good Faith and Fair Dealing

Answer 6

Must act fairly and in good faith

Question 7

Transfer of Financial Interest from a partner

Answer 7

Partner can transfer the right to receive distributions from the partnership to a third party
o Partner is still a partner with remaining rights and obligations
o Third party does not become a partner, but can seek judicial dissolution of the partnership
o A creditor of a partner can enforce a judgment against the partner’s financial interest.

Question 8

Property Ownership

Answer 8

Property acquired by the partnership must be used for the benefit of the partnership

Question 9

Management Rights

Answer 9

Each partner has equal rights in the management and conduct of the partnership.
o A majority of the partners can make a decision as to ordinary business matters.
o All partners must consent to a matter outside the course of ordinary business.

Question 10

Access to Records

Answer 10

Must provide partners with access to records during business hours

Question 11

Partnership’s Contractual Liability

Answer 11

Partnership’s Contractual Liability
a. Express Actual
Express authority can arise from the partnership agreement or authorization by partners.

b. Implied Actual
Based on partner’s reasonable belief that an action is necessary to carry out his express
authority

c. Apparent Authority
Exists when a partner acts in the ordinary course of partnership business and the third party
reasonable believes the partner has authority to act

Question 12

Partnership’s Tort Liability

Answer 12

Liable for a partner’s tortious acts, including fraud, committed in the ordinary course of
partnership business or with partnership authority

Question 13

Partners’ Liability

Answer 13

A judgment creditor of an individual partner may not attach and execute upon partnership real
estate

Question 14

Liability to Third Parties

Answer 14

o As a separate entity, a partnership is subject to a lawsuit for its obligations.
o Partners are also jointly and severally liable for all partnership obligations
o Partnership creditor must exhaust the partnership’s assets before taking the partner’s
individual assets

Question 15

Partnership Changes and Termination: Dissolution

Answer 15

Dissolution
o Any partner can choose to dissociate from the partnership by giving notice.
o Partnership may dissolve when a partner dissociates, but dissociation does not necessarily
cause dissolution

Question 16

Partnership Changes and Termination: Winding Up

Answer 16

A partnership that is dissolved only continues to exist to “wind up” its business.
a. Assets: Creditors have priority over partners to the partnerships’ assets.
b. Obligations: Partnership assets are first applied to pay off obligations to creditors (creditors
may include partners who made loans to the partnership) before being distributed to the
partners

Question 17

LLP—Limited Liability Partnerships

Answer 17

• Partners’ personal liability for partnership obligations is eliminated
• Individual partners are liable for their own torts.

Question 18

LLP—Formation, and Limited Partners

Answer 18

Formation
o Requires filing a statement of qualification with the state
o Failure to form an LLP will typically result in a general partnership

Limited Partners
o Partners are agents of the LLP

Question 19

Transition from General Partnership to LLP

Answer 19

• If a general partnership incurs liability and then becomes an LLP, the LLP is liable for those
obligations.
• If an individual partner in a general partnership is liable, and then an LLP is formed, the partner
is still liable for that obligation.
• A new partner admitted to the LLP is not liable for pre-transition obligations.

Question 20

LP—Limited Partnerships

Answer 20

Formed by 2 or more people—at least one general partner and one limited partner
o Limited partner’s liability is limited to amount contributed to LP
• Formation—must file a certificate with the state
• Access to Records—limited partners have a right to inspect and copy records upon reasonable
demand
• Liability—limited partner not liable for partnership obligations
o Can be liable if the limited partner participates in control of the partnership
o Removing a general partner does not amount to “control” of the partnership
o Only liable to third parties who reasonably believe the limited partner is a general partner