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mee > Partnerships > Flashcards

Partnerships Flashcards

1
Q

Forming a general partnership

A
  • 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
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2
Q

Presumption in favor/against partnership

A
  • 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
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3
Q

Consequences of a partnership

A
  • 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
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4
Q

Parties a partner has duties towards

A
  • To the partnership
    • Traditional agency liability applies
  • To other partner(s)
    • Fiduciary duties
  • To third parties
    • Traditional agency liability principles apply
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5
Q

Partner duties to each other

A

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
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6
Q

Limitations on fiduciary duties (partnerships)

A
  • 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
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7
Q

Timing/duration of partners’ duty

A

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

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8
Q

Extent of general partner’s liability to third parties

A

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
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9
Q

Partner rights in management

A
  • 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
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10
Q

Distribution of property of the partnership

A
  • 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
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11
Q

Transferring partnership interest

A

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.
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12
Q

Transferring partnership property

A
  • 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)
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13
Q

Determination of ownership of property (partnerships)

A
  • 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
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14
Q

Use of partnership property

A

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

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15
Q

Changes to a partnership

A
  • Joinder (adding a partner)
  • Dissociation (voluntary or involuntary withdrawal of a partner)
  • Partnership changes (GP ⇠⇢ LP)
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16
Q

Addition of a partner (joinder)

A

Requires unanimous consent of other partners

17
Q

Dissociation of a partner

A
  • 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
18
Q

Two stages of partnership termination

A
  1. Dissolution
  2. Winding up
19
Q

Dissolution

A
  • 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
20
Q

Winding up

A

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
21
Q

Types of limited partnerships

A
  • LLPs: no personal liability for partnership obligations
  • LPs: reduces a limited partner’s liability to his capital contribution
22
Q

LLPs

A
  • 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
23
Q

LPs (formation)

A

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
24
Q

Rights and liabilities of limited partners (LPs)

A
  • 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
25
Q

General parters (LPs)

A
  • 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
26
Q

Other features of LPs

A
  • 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

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