PARTNERSHIPS Flashcards
Partnership Formation
A general partnership is an association of two or more persons to carry on a for-profit business as co-owners who share profits
Agreement - only an agreement is required. No writing is required unless subject to the SOF
Sharing of Profits - a partnership is presumed if the business profits are shared
Intent - partners need not have the subjective intent to form a partnership. However, they must merely intend to do business as co-owners
Profits and Losses
The partnership agreement dictates the distribution of the partnership’s profits and losses.
However, absent an agreement, each partner will receive an equal share of the profits and losses.
If the agreement only dictates as to the distribution of partnership profits, partnership losses will be distributed using the same method.
Management Rights and Termination of Authority
Each partner has equal rights in the management and conduct of the partnership.
Unless otherwise stated in the agreement, matters arising within the ordinary course of business may be decidedly by a majority of the partners.
Matters outside the ordinary course of business require unanimous consent of the partners
Power to Bind Partnership
A partnership may be liable for a contract entered into by a partner if the partner had either the actual or apparent authority to bind the partnership to the contract
Express Actual Authority - Partnership
A partnership can grant express authority to a partner through the partnership agreement, statement of authority, or an authorization from the partners
Implied Actual Authority - Partnerships
With implied actual authority, a partner may take whatever actions are necessary to achieve the partnership’s goals.
To establish if implied actual authority has been created, courts look to the partner’s reasonable understanding of the partnership’s objective
Apparent Authority - Partnerships
Apparent authority exists when a partnership causes a third party to reasonably believe that a partner has been authorized to act on its behalf.
The act of any partner for apparently carrying on in the ordinary course of the partnership business binds the partnership unless the partner lacked authority, and the person with whom the partner was dealing had notice that the partner lacked authority.
Partnership’s Liability for Partner’s Torts
A partnership is liable for torts committed by a partner within the ordinary course of business or with partnership authority
Liability to Third Parties
A partnership, as an entity, can sue or be sued.
An action may be brought against the partnership and any or all of the partners in the same or separate actions.
All partners are liable jointly and severally for all obligations of the partnership.
Liability to Third Parties
Incoming Partners
An incoming partner to an existing partnership is not liable for any partnership obligation incurred before his admission.
However, an incoming partner’s investments may be used for the satisfaction of existing partnership debt.
Liability to Third Parties
Outgoing Partners
Absent a release, or novation, an outgoing partner will continue to be liable for partnership obligations incurred while he was still a partner, despite his dissociation.
Indemnification
Where one partner satisfies beyond his share of the obligation, he may seek indemnification from the partnership for the excess.
If the partnership cannot indemnify, then contribution may be sought from his co-partners
Effect of Judgment
A creditor must deplete the partnership’s assets before seizing an individual partner’s assets.
Unless a partner is also sued as an individual alongside the partnership and the judgment against the partnership goes beyond its assets, the partner cannot be held liable for the partnership obligation.
Duty of Loyalty
Under the duty of loyalty, a partner must not
(i) compete with the partnership
(ii) advance interest adverse to the partnership, or
(iii) engage in self-dealing or usurp a partnership opportunity
Usurping Partnership Opportunity
If a partner is presented with a business opportunity that would be fit for the partnership, the partner has a duty to present the opportunity to the partnership first and may personally pursue the opportunity only if rejected by his co-partners.
Duty of Care
Under the duty of care, a partner must not engage in
(i) grossly negligent or reckless conduct
(ii) intentional misconduct
(iii) a knowing violation of the law
Dissociation
Dissociation occurs when a partner ceases to be associated with the partnership.
Dissociation may be voluntary or involuntary.*
If a partner dissociates, the partnership does not necessarily dissolve.
If the partnership continues, it must buy out the dissociated partner’s interest.
(*involuntary dissociation is triggered by an agreed upon event, expulsion, bankruptcy, court order, partners death, or partner’s incapacity)
Dissolution - At Will
A partnership at will is one that does not have a fixed termination date or undertaking.
It is dissolved when a partner dissociates from the partnership by giving notice.
Dissolution - For a Term or Undertaking
A partnership for a term or undertaking dissolves when the term expires or when the partners agree
Winding Up
A partnership continues after dissolution only for the purpose of winding up its business.
Order of Distribution of Assets
Upon dissolution, assets are distributed in the following order
(i) to pay off creditors, including partners who are creditors
(ii) to repay partners for monetary contributions, and
(iii) to allocate any profits, if any, equally among the partners.
If the assets are insufficient to pay off debts, the losses are divided among the partners
Limited Partnership
A limited partnership is one that is formed by two or more persons and has at least one general partner and at least one limited partner.
To validly form a limited partnership, a certificate of limited partnership must be filed with the Secretary of State.
Liability of Partners
Limited Partners - if a limited partner participates in the control of the business or is a general partner, then he is personally liable for the obligations of the limited partnership
General Partners - a general partner is personally and jointly and severally liable to third parties for obligations of the limited partnership
Limited Partnership - Failure to FIle
If a limited partnership certificate is not filed with the Secretary of State, a person who contributes to a purported limited partnership and believes in good faith he is a limited parter may be personally liable to a third party with whom the limited partnership conducts business
Limited Liability Partnership
Partners of an LLP are not personally liable for the obligations of the partnership but are liable for their own misconduct.
A limited liability partnership requires a statement of qualification to be field with the Secretary of State.
