Partnerships

Question 1

Forming a general partnership

Answer 1

• Formalities
  
  • No formalities required
  • Look to intent of parties
• Elements
  
  • An agreement between
  • Two or more persons (legal or natural—so long as they have capacity)
  • To carry on a for-profit business

Question 2

Presumption in favor/against partnership

Answer 2

• When 2+ persons share profits, there is a presumption of a partnership relationship
• Presumption does not apply for:
  
  • Payment of debt
  • Interest payments
  • Rent
  • Wages
  • Goodwill payments from the sale of a business
  • Retirement or health benefits paid to a retired parter or deceased partner’s beneficiary

Question 3

Consequences of a partnership

Answer 3

• Creates separate legal entity: can hold property, sue, and be sued
• No limited liability: partners are personally liable for P obligations
• Pass-through taxation: the partnership is not taxed separately from the partners

Question 4

Parties a partner has duties towards

Answer 4

• To the partnership
  
  • Traditional agency liability applies
• To other partner(s)
  
  • Fiduciary duties
• To third parties
  
  • Traditional agency liability principles apply

Question 5

Partner duties to each other

Answer 5

Every partner is a fiduciary of the partnership and owes the fiduciary duties of loyalty and care to the partnership

• Duties of loyalty: partners must not
  
  • Compete with partnership business
  • Advance an interest that is adverse to the partnership
  • Usurp a partnership opportunity
• Duty of care: partners must not
  
  • Engage in grossly negligent or reckless conduct
  • Engage in knowing misconduct
  • Engage in a knowing violation of the law

Question 6

Limitations on fiduciary duties (partnerships)

Answer 6

• Duty of loyalty
  
  • Pursuant to state law, partnerships cannot completely eliminate the duty of loyalty, but they may describe it differently (so long as not manifestly unreasonable)
  • Safe harbor: if a partner makes full disclosure of all material facts, then a certain percentage of other partners may authorize or ratify the conduct
• Duty of care:
  
  • The partnership agreement cannot unreasonably reduce the duty of care

Question 7

Timing/duration of partners’ duty

Answer 7

Partners’ duties of loyalty and care apply only to current partners, not prospective or former partners

Question 8

Extent of general partner’s liability to third parties

Answer 8

A partner is jointly and severally liable for all partnership obligations

• An incoming partner’s liability for pre-existing P obligations is limited to his capital contribution
• A dissociated partner is liable for obligations incurred before dissociation, and after dissociation if the 3P was without notice of the dissociation

Question 9

Partner rights in management

Answer 9

• Management and control: by default, each partner has an equal right to manage and control
  
  • Can be changed by agreement
  • Common division is to reflect partners’ capital contributions
• Ordinary business: requires approval by a majority of partners
• Extraordinary business: requires approval by all partners
• Access to records: for parters and their agents
  
  • Cannot be abridged by partnership agreement

Question 10

Distribution of property of the partnership

Answer 10

• Profits and losses: Partnership agreement will govern
  
  • If agreement is silent, profits will be divided evenly, and losses will follow profits
• Distributions: unless provided for in partnership agreement, partners do not have a right to demand distributions

Question 11

Transferring partnership interest

Answer 11

A partner has a partnership interest (i.e., the right to share of profits, losses, and distributions)

• A transfer of a partnership interest does not cause a dissolution or dissociation.

Question 12

Transferring partnership property

Answer 12

• A partner may have apparent authority to transfer P property on behalf of the partnership
• Property transferred without authority can be recovered unless the transferee was a BFP (no interest + gave value)

Question 13

Determination of ownership of property (partnerships)

Answer 13

• Whether property belongs to a partner or the partnership is determined by:
  
  • How it is titled
  • The type of funds used
  • In whose name it is held
• Untitled property ownership is determined by intent of the partners and presumed partnership property if acquired with partnership funds or credit

Question 14

Use of partnership property

Answer 14

A partner does not have the right to use or possess partnership property for personal use and must compensate the partnership for any resulting personal gain

Question 15

Changes to a partnership

Answer 15

• Joinder (adding a partner)
• Dissociation (voluntary or involuntary withdrawal of a partner)
• Partnership changes (GP ⇠⇢ LP)

Question 16

Addition of a partner (joinder)

Answer 16

Requires unanimous consent of other partners

Question 17

Dissociation of a partner

Answer 17

• Voluntary: A partner may withdraw by providing notice
  
  • If in breach, partner will be liable for damages
• Involuntary: The P may expel a partner per the agreement or by unanimous consent, or it may occur due
  to death, bankruptcy, incapacity, court decree, or by termination of an entity partner
• Consequences:
  
  • The partnership must purchase the partner’s interest and indemnify her against liabilities
  • Dissociation will not necessarily trigger dissolution and winding up, except in an at-will partnership
  • If dissociation wrongful, the remaining partners may vote to continue the business
  • The partner has the power to bind the partnership unless notice filed with the state + 90 days

Question 18

Two stages of partnership termination

Answer 18

1. Dissolution
2. Winding up

Question 19

Dissolution

Answer 19

• According to type
  
  • Partnership at-will—if no fixed term or undertaking, the P dissolves when any partner dissociates
  • Partnership for a specific term or undertaking—may dissolve by
    
    • Its terms with unanimous consent or
    • After a partner is dissociated + at least half of remaining partners consent
• Triggering events—any P may dissolve:
  
  • Dissolving event per the partnership agreement
  • An event that makes it unlawful to continue if not cured within 90 days
  • By judicial determination

Question 20

Winding up

Answer 20

The process of fully concluding a partnership. Must liquidate assets, pay creditors, and distribute remainder to the partners

• A partnership continues after dissolution until the winding up is complete
• Any partner who has not wrongfully dissociated may wind up the partnership business
• The person winding up may dispose of and transfer P property and discharge P liabilities
• The appropriate acts of a partner while winding up will bind the P
• Statement of dissolution
  
  • Filed with the state
  • Tells creditors that the partnership has been dissolved by 90 days
  • Rationale: limits partners’ apparent authority and liability
• Creditors (including partners who are creditors) are paid before partners

Question 21

Types of limited partnerships

Answer 21

• LLPs: no personal liability for partnership obligations
• LPs: reduces a limited partner’s liability to his capital contribution

Question 22

LLPs

Answer 22

• Formation
  • Created by filing a statement of limitation with the state, effective on the date filed
  • Name must end with abbreviation of LLP or RLLP or words describing such status
  • Transformation of P ⇢ LLP requires approval by all partners or per the P agreement
• Liabilities
  
  • A partner is only liable for her own personal misconduct not for LLP obligations
• Termination
  
  • Cancelling statement will transform LLP ⇢ P

Question 23

LPs (formation)

Answer 23

An LP consists of at least one general and one limited partner

• Created by filing a certificate of LP with the state, effective on the date filed
• Certificate must be signed by all general partners and include LP name, address, local agent for service of process, name and address of each general partner, and the duration

Question 24

Rights and liabilities of limited partners (LPs)

Answer 24

• Rights of Limited Partners
  
  • Joinder after formation requires unanimous written consent or per the agreement
  • May vote only if allowed under the P agreement
  • Right to inspect/copy records and demand information from the general partners about the financial condition and affairs of the P
• Liabilities
  
  • Only if she participates in the control of the business
    and the 3P reasonably believes she is a general partner based on conduct, or if she also
    serves as a general partner
  • Withdrawal requires six months’ advance written notice to the P or per the agreement

Question 25

General parters (LPs)

Answer 25

• Rights
  
  • Same rights/limitations as in a general P
• Liabilities
  
  • Personally liable for the LP obligations
  • A general partner
    is often a corporation to provide a shield from liability
• Withdrawal requires written notice and if in breach, the partner will be liable for damages
  
  • The partner may withdraw per the agreement, by transferring his interest, or in the event of death, bankruptcy, incapacity, court decree, or upon termination of an entity
    partner

Question 26

Other features of LPs

Answer 26

• Profits and losses—absent a written agreement, profits, losses, and distributions are allocated based upon each partner’s contributions
• Assignment—upon assignment, the assignee is entitled to receive any distribution and will not become a limited partner unless the P agreement provides or all partners consent
• Derivative suit—a limited partner may sue on behalf of the P against the general partners
• Termination (requires dissolution and winding up)
  
  • Dissolution may occur per the P agreement, unanimous written consent, after withdrawal
    of the only general partner, or by judicial decree
  • General partners who have not wrongfully dissolved the P may perform the wind up
• Priority of distribution—creditors (including partners who are creditors) are paid before partners with accrued distributions before other partners