Partnerships

Question 1

General Partnership (GP)

Answer 1

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.

Question 2

Creditor v. Partner

Answer 2

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 3

Limited Partnership

Answer 3

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 4

Limited Liability Partnership

Answer 4

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 5

Authority to bind the Partnership

Answer 5

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.

Question 6

Ordinary course of business

Answer 6

Normal and necessary for managing the business.

Question 7

Implied Actual Authority (Incidental Authority)

Answer 7

A partner may take actions reasonably incidental or necessary to achieve the partner’s authorized duties.

Question 8

Apparent Authority

Answer 8

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 9

Authority to Bind the Partnership After Dissolution

Answer 9

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 10

Liability of General Partners Personal Liability

Answer 10

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

Question 11

Liability of General Partners Incoming Partners

Answer 11

→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
Judgment Enforcement Against a Partner’s Personal Assets – 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.

Question 12

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

Answer 12

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 13

Liability of Limited Partners

Answer 13

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).

Question 14

Liability for Participating in Management

Answer 14

− 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 15

Liability of Limited Liability Partners

Answer 15

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 16

Sharing of Profits and Losses

Answer 16

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 17

Right to Management & Control

Answer 17

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 18

Transfer of Partnership Ownership

Answer 18

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 19

Right to Partnership Property

Answer 19

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.

Question 20

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

Answer 20

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

Question 21

Judgment Solely Against a Partner

Answer 21

→ 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 22

Remuneration (Payment for Partner’s Services)

Answer 22

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 23

Advance of Funds & Reimbursement

Answer 23

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 24

Management & Control in a LP

Answer 24

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 25

Limited Partner’s Right to Inspect Records RULPA

Answer 25

→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 26

Duty of Care

Answer 26

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 the 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 27

Duty of Loyalty

Answer 27

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.

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 28

Partnership Opportunity

Answer 28

→is done 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 29

Duty to provide full information

Answer 29

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 30

Action Against a Partner for Misconduct

Answer 30

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 31

Dissociation (Withdrawal of a Partner)

Answer 31

A partner may dissociate (withdraw) from the Pship at any time upon notice.

Question 32

Dissociation Events

Answer 32

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 33

Wrongful Dissociation

Answer 33

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 34

Dissolution of a General Partnership

Answer 34

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.

Question 35

Dissociation Under RUPA

Answer 35

(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 wind- up/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.

Under UPA (1914)
→ The Pship MUST be wound up and terminated (regardless if rightful or wrongful).
− But, all partners who did not wrongfully cause dissolution may choose to continue the business in the same name.

Question 36

Dissolution of a Pship for a Definite Term occurs

Answer 36

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 37

Dissolution of a Limited Partnership

Answer 37

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 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 38

Dissolution vs. Winding Up vs. Termination

Answer 38

− 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.

Question 39

Distribution of Partnership Assets

Answer 39

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.