Partnerships Flashcards
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 v. 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.
Limited Partnership
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.
Limited Liability Partnership
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.
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.
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.
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.
Liability of General Partners Personal Liability
→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.
Liability of General Partners 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
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.
Generally, a judgment creditor CANNOT 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.
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.
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.
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.
Right to Management & Control
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.
Transfer of Partnership Ownership
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.
Right to Partnership Property
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.
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.
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.
Management & Control in a LP
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).
