Partnerships

Question 1

What is a general partnership? What is the difference between a creditor/partner?

Answer 1

General Partnership (GP) – is created when:
1) two or more persons;
2) as co-owners;
3) carry on a business for profit.
*Intent to form a partnership is NOT required.
A joint venture or sharing in gross profits DOES NOT automatically create a partnership.

Creditor vs. Partner – A person who receives a share of the profits is presumed to be a partner UNLESS the
payment is received in payment:

a) of a debt;
b) for wages as an employee or independent contractor;
c) of rent;
d) of an annuity or retirement benefit;
e) of interest/loan charges; OR
f) for the sale of goodwill of a business.

Question 2

What is a limited Partnership?

Answer 2

A limited Partnership (LP) – is composed of limited partner(s) AND at least one general partner.

Formation – An LP is formed upon filing a Certificate of Limited Partnership with the Secretary of State, which must include:

1) name of Pship;
2) address of Pship’s principal office;
3) name & address of Pship’s registered agent;
4) name & address of each general partner;
5) whether the Pship is an LLLP; AND
6) signed by all general partners.

Question 3

What is a limited liability Partnership?

Answer 3

Limited Liability Partnership (LLP) – In an LLP, all partners have limited personal liability.

To Become an LLP:

1) It must be approved by the same vote necessary to amend the Pship Agreement; AND
2) A Statement of Qualification must be filed with the Secretary of State containing:
i. name and address of Pship;
ii. statement that the Pship elects to become an LLP; and
iii. a deferred effective date (if any)

Filing DOES NOT create a new partnership (if a GP or LP existed prior to filing).
− The Pship remains liable for any obligations before it became an LLP.

Amending the Pship Agreement – Unless agreed otherwise, the Pship agreement may be amended at any time with a unanimous vote.

Question 4

How does a partner bind a partnership? What is express actual authority?

Answer 4

Authority to Bind the Partnership – A partner is an agent of the Pship, and generally has authority to bind the Pship for its business (including contracts). To bind the Pship, the partner MUST have authority.

Express Actual Authority – A partner receives such authority from the partners.
− Differences among partners for Acts within the ordinary course of business → must be approved by a majority of the partners.
− Acts outside the ordinary course of business → must be approved unanimously.
− If Pship Agreement is silent → a partner has authority for usual & customary matters UNLESS he knows: (a) other partners might disagree, or (b) that consultation is appropriate.

Ordinary Course of Business = normal and necessary for managing the business.

Question 5

What is implied actual authority? What is apparent authority?

Answer 5

Implied Actual Authority (Incidental Authority) – A partner may take actions reasonably incidental or necessary to achieve the partner’s authorized duties.

Apparent Authority – A partner has apparent authority for acts:

a) conducted within the ordinary course of the Pship business; OR
b) of the kind carried on by the Pship.

BUT, a partner’s act will NOT bind the Pship when the:

1) Partner lacked authority; AND
2) Third-party knew (or received notice) of a lack of authority.

*For acts outside the scope of business → need a manifestation by Pship that partner had authority in order
to be binding.

Question 6

What authority is required to bind the partnership after dissolution?

Answer 6

Authority to Bind the Partnership After Dissolution – A partner’s authority is limited after dissolution.

Actual Authority → limited only to acts appropriate for winding up the business.

Apparent Authority → a partner has apparent authority to bind the Pship if the:

1) Partner’s acts would have normally bound the Pship; AND
2) Third-party did not have notice of dissolution.

Question 7

What is the liability of General Partners?

Answer 7

Personal Liability → General partners are personally liable for ALL obligations of the Pship UNLESS: (a)
otherwise agreed by a claimant, or (b) provided by law.
− UPA (1997) → partners are jointly and severally liable.
− UPA (1914) → partners are jointly liable.

Incoming Partners → Partners admitted into an existing partnership are NOT liable for obligations incurred prior
to their admission.
− BUT, incoming partners risk losing their capital contributions to the Pship

Question 8

What is the effect of a judgment enforced against partner’s personal assets?

Answer 8

A judgment against the Pship is NOT a judgment against the individual partner(s).
− BUT, a judgment may be sought against the Pship and individual partners in the same action.

Generally, a judgment creditor CAN NOT levy execution of a judgment for a Pship debt against a partner unless:

1) The partner is found personally liable;
2) A judgment is rendered against the partner; AND
3) Pship assets are exhausted/insufficient to satisfy the judgment.

Question 9

What is liability of limited partners?

Answer 9

Liability of Limited Partners – Limited partners are NOT personally liable for obligations of the LP.

Exceptions:

a) Liable for their own misconduct;
b) At risk of losing their capital contribution to the Pship; OR
c) May become personally liable if the partner participates in management (depends on the jurisdiction)

Liability for Participating in Management:
− ULPA (2001) → no personal liability created when a limited partner participates in the management or control of the business.
− ULPA (earlier versions) → personal liability is created for participating in management (but removal of a director is not considered participation in management and control).
− RULPA → personal liability created, BUT a partner is liable only to persons who transact business with the LP reasonably believing that the limited partner is a general partner.
▪ RULPA has a safe harbor provision excluding certain acts from liability.

Question 10

What is the liability of limited liability partners?

Answer 10

Liability of Limited Liability Partners – Under RUPA, a partner in an LLP is NOT liable for partnership obligations.

But a partner in an LLP is liable:

a) for their own misconduct;
b) when the partner signs a personal guarantee for an obligation; OR
c) for obligations incurred before the Pship became an LLP

Question 11

What is the default rule for the sharing of profits and losses?

Answer 11

Sharing of Profits and Losses – Unless otherwise agreed, profits are shared equally and losses are shared in the same ratio as profits.

− Any partner who pays more than his fair share in losses is entitled to contribution from the other partners.

Question 12

What is the default rule for the right to management and control?

Answer 12

Unless otherwise agreed, each partner has equal rights in the management and control of the business.

− A disagreement for ordinary Pship business need only be approved by a majority of the partners.
− Acts outside the ordinary course of business MUST be approved unanimously

Question 13

What is the effect of transferring a partnership ownership?

Answer 13

A partner can only transfer:

1) his interest in the share of profits and losses; AND
2) the right to receive distributions.

Any other rights CANNOT be transferred, unless the partnership agreement provides otherwise.

− ALL partners MUST CONSENT for an assignee of a partnership interest to become a partner

Question 14

What are the rules surrounding partnership property?

Answer 14

All property acquired by a Pship (or with Pship assets) is owned by the Pship, not the partners individually.

− Partners have an equal right to use property for Pship purposes.
− Personal use of Pship property requires the consent of the other partners.

Property acquired in the name of the partner is presumed to be separate property as long as:

1) no Pship assets are used to acquire it; AND
2) title to the property does not reference the Pship.

Judgment Solely Against a Partner → CANNOT be satisfied with Pship property because the partner has no ownership interest in Pship property.
− However, a creditor may seize the partner’s financial interest in the Pship

Question 15

What is remuneration and when is it triggered?

Answer 15

Remuneration (Payment for Partner’s Services)

A partner is NOT entitled to remuneration for services performed for the Pship UNLESS:

a) There is an agreement to the contrary; OR
b) It’s for reasonable compensation for services rendered in winding up the Pship business.

Question 16

What are the rules surrounding advancement of funds & reimbursement of partners?

Answer 16

Advance of Funds & Reimbursement – Pship MUST reimburse a partner for an advance to the Pship beyond their capital contribution amount.

− For Reimbursement → (1) payment must be in proper course of Pship business, AND (2) partner must comply with duty of care & loyalty

Question 17

Describe the two roles that impact management and control in a Limited Partnership?

Answer 17

General Partner → Has full management rights and control.

Limited Partner → Has NO say or control as to how the LP is run, and DOES NOT have the right to manage or control day-to-day business.
− Generally, they are passive and have voting rights only in extraordinary situations (i.e. sale of Pship or all its assets, amending Pship agreement, or admitting a new partner).

Question 18

What are the rights of a limited partner to inspect records?

Answer 18

RULPA → Limited partners have the right to inspect and copy records the LP is legally required to keep.

Upon reasonable demand, a limited partner may obtain:

1) True and full info regarding the state of the business and financial condition;
2) LP’s tax returns; and
3) Any info that’s just and reasonable.
* These rights may be exercised for any purpose.

Question 19

Describe the duty of care in Partnerships

Answer 19

– A partner owes the fiduciary duty of care to the Pship and other partners.

Under RUPA, a partner only breaches the duty of care if he engages in:

a) Grossly negligent or reckless conduct;
b) Intentional misconduct; OR
c) A knowing violation of law.

*If a partner breaches, he may be held personally liable to the Pship for any losses.

A breach of duty has been found in the following situations:
▪ Violating an agreement or policy of the Pship.
▪ Failing to thoroughly investigate facts before entering into contracts (if it’s gross negligence).
▪ Acting outside the scope of Pship business without the consent of the other partners

Question 20

Describe the duty of loyalty in a Partnership

Answer 20

Duty of Loyalty – A partner owes the fiduciary duty of loyalty to the Pship and other partners. This requires a partner to act in the best interests of the Pship.

Under RUPA, a partner must:

1) Account for any property, profit, or benefit derived from Pship property or business (including refraining from appropriating Pship assets);
2) Not have an interest adverse to the Pship (a conflict of interest); AND
3) Not compete with the Pship (unless agreed otherwise).

If a partner breaches, he may be held personally liable to the Pship for any losses.

Partnership Opportunity → is one that:

1) is closely related to the Pship’s existing or prospective line of business;
2) would competitively advantage the Pship; AND
3) the Pship has the financial ability, knowledge, and experience to pursue.

Question 21

When is a partner not liable for violated of the duty of care?

Answer 21

BUT, a partner is NOT liable if:

1) He fully discloses information; AND
2) Either:
a) the Pship agreement is amended; OR b) all partners consent.

If reasonable, the Pship agreement MAY eliminate or alter a duty of loyalty.
Fiduciary duties apply during dissolution (except the duty not to compete).

Question 22

What is the duty provide full information?

Answer 22

UPA → Partners shall render (on demand by any partner) true and full information of all things affecting
the Pship.

RUPA → Partners shall disclose (without demand) full information concerning the Pship’s business and affairs.

If a partner breaches this duty, he may be held personally liable to the Pship for any losses.

Question 23

When can a Partnership sue a Partner?

Answer 23

The Pship can maintain an action against a partner for misconduct. A partner can also maintain a direct action against
another partner to enforce the partner’s right, including an action for violating fiduciary duties.

− BUT, a partner CANNOT maintain a derivative action

Question 24

When can Dissociation occur and what triggers it?

Answer 24

Dissociation (Withdrawal of a Partner) – A partner may dissociate (withdraw) from the Pship at any time upon notice.

Dissociation Events – A partner becomes dissociated from the Pship upon:

a) The partner providing notice of their express will to withdraw;
b) The occurrence of an agreed upon event;
c) Expulsion pursuant to the Pship agreement;
d) Expulsion by unanimous vote if it’s (i) unlawful to carry on the business with that partner or (ii) he transferred all of his Pship interest (other than for security purposes);
e) Judicial expulsion;
f) Bankruptcy;
g) Incapacity or death;
h) Appointment of a personal representative or receiver; OR
i) Termination of an entity partner (who is not an individual, pship, corporation, trust, or estate)

Question 25

When is a dissociation wrongful?

Answer 25

Wrongful Dissociation – Dissociation is deemed wrongful if:

a) It’s in breach of an express provision of the Pship agreement; OR
b) Before the completion of an agreed upon term or undertaking.

*A wrongfully dissociated partner CANNOT participate in management or the winding up process.

A partner may be liable to the Pship (and other partners) for damages caused by his wrongful dissociation.

Question 26

What is the dissolution of a general partnership?

Answer 26

Dissolution Events – Unless agreed otherwise, dissolution occurs upon:

a) Notice of a partner’s express will to withdraw;
b) Occurrence of an agreed upon event;
c) The business becoming unlawful; OR
d) Judicial dissolution.

Dissolution of a Pship for a Definite Term occurs:

a) within 90-days after a partner’s dissociation by death or wrongful dissociation, if it’s the express will of at least half of the remaining partners to wind up (rightful dissociation constitutes the expression of the partner’s will to wind-up);
b) upon the express will of all partners to wind up; OR
c) upon the expiration of the term or completion of the Pship’s purpose.

Question 27

Does Dissociation Cause Dissolution?

Answer 27

Under RUPA (2013):
− Dissolution may be rescinded by the affirmative vote or consent of ALL remaining
partners to continue the business.
− Buyout → In such instance, the dissociated partner is entitled to a buyout of their interest (value of interest = greater of liquidation or going concern value + interest).
*Apply RUPA (2013) unless instructed otherwise.

Under RUPA (1997):
− If wrongful dissociation → ALL remaining partners may waive their right to windup/terminate the Pship, and instead choose to continue the Pship by buying out the dissociated partner’s interest.
− If rightful dissociation → The dissociated partner is allowed to vote on whether to waive winding-up and termination of the Pship. Regardless, the other partners MAY choose to continue the business for a reasonable amount of time.

Question 28

When does dissolution of a limited partnership occur?

Answer 28

A non-judicial dissolution of an LP occurs upon:

a) Happening of an event specified in the Pship agreement;
b) Consent of (i) all general partners and (ii) limited partners owning a majority interest;
c) After the dissociation of a general partner either (i) upon the consent of the partners owning majority rights to receive distributions (if LP has at least 1 general partner), or (ii) the passage of 90 days after the dissociation (unless the LP admits at least 1 general partner);
d) 90 days after dissociation of the last limited partner, unless the LP admits at least one limited partner; OR
e) the filing of a declaration of administrative dissolution by the Secretary of State

Question 29

Describe winding up and the termination of a Partnership

Answer 29

Dissolution vs. Winding Up vs. Termination:
− Dissolution → Occurs upon the occurrence of any specified statutory event (see above).
− Winding Up → Is the period between dissolution and termination, in which assets are liquidated to satisfy creditors.
− Termination → Occurs when the winding-up process is complete. The real end of the Pship, in which the Pship ceases to exist.

Distribution of Partnership Assets – During the winding-up process, the Pship assets are converted to cash and distributed in the following order:

1) Outside creditors.
2) Inside creditors (partners who loaned money to the Pship).
3) Partner’s capital contributions.
4) Any remaining profits or surplus goes to the partners equally (unless agreed otherwise).

*If there are insufficient assets to satisfy creditors, the loss will be divided among the partners