Partnerships

Question 1

Partnership federal taxes:

Answer 1

the partnership is not a separately taxed entity. It is a flow-through entity, meaning that the profits and losses flow through the partnership and are taxed to the partners on their individual tax returns unless the partnership elects to be taxes as a corp

Question 2

Partnership texas taxes

Answer 2

For franchise tax purposes, the partnership is included in the definition of a taxable entity

Question 3

What is a partnership?

Answer 3

§152.056 – A partnership is an entity distinct from its partners.

152.051:
An association of 2 or more persons to carry on a business for profit as owners creates a partnership, regardless of whether:
(1) the persons intend to create a partnership; or
(2) the association is called a “partnership,” “joint venture,” or other name

Question 4

What are the factors indicating that persons have created a partnership?

Answer 4

§152.052(a) –
(1) receipt or right to receive a share of profits of the business;

(2) expression of an intent to be partners in the business;

(3) participation or right to participate in control of the business;

(4) agreement to share or sharing:
(A) losses of the business; or
(B) liability for claims by third parties against the business; and

(5) agreement to contribute or contributing money or property to the business

The factors are analyzed using the totality of the circumstances (0 = no partnership, 1 is generally not enough, 5 is conclusive evidence of a partnership)

TX: most important are profit sharing and control/management

Question 5

Can parties agree not to form a partnership?

Answer 5

FINE LINE between just saying in a contract it’s not a partnership and there actually being a condition precedent on partnership formation.

Rule: An agreement not to be partners unless certain conditions are met will ordinarily be conclusive on the issue of partnership formation as between the parties.

Question 6

What is partnership by estoppel?

Answer 6

Where a person/company either holds himself out as being a partner or consents to being held out as a partner, and another party relies on this representation, he is estopped from denying the partnership.

No duty to deny, but if you don’t deny if could look like consent or holding out to be a parnter.

Question 7

Is a partner an agent of the partnership?

Answer 7

Yes! Each partner is an agent and has actual authority to act on behalf of the partnership.

Question 8

What if a partner does not have actual authority to act on behalf of the partnership like they usually do?

Answer 8

152.302 - Unless a partner does not have authority to act for the partnership in a particular matter and the person with whom the partner is dealing knows that the partner lacks authority, an act of a partner, including the execution of an instrument in the partnership name, binds the partnership if the act is apparently for carrying on in the ordinary course:
(1) the partnership business; This particular business or
(2) business of the kind carried on by the partnership. A similar business generally

(b) An act of a partner that is not apparently for carrying on in the ordinary course a business described by Subsection (a) binds the partnership only if authorized by the other partners.

Question 9

What are the decision-making requirements in a partnership?

Answer 9

152.209 (Default rule if no partnership agreement)
(a) a difference arising in a matter in the ordinary course of the partnership business may be decided by a majority-in-interest of the partners

§151.001(4) – “Majority-in-interest” means partners who own more than 50% of the current percentage in the profits of the partnership

(b) an act outside the ordinary course of business of a partnership may be undertaken only with the consent of all partners

Question 10

What if the partners are in a stalemate?

Answer 10

Deadlock or stalemate means status quo continues!

If the disagreement is latent (one partner doesn’t know that the other partner disagrees), remember that the partner is an agent and determine whether the partner had actual or apparent authority to take the action he did.

Question 11

What is the liability of a partnership when acting within the scope of business or with the authority of the partnership?

Answer 11

A partner is liable for loss or injury to a person, including a partner, or for a penalty caused by or incurred as a result of a wrongful act or omission or other actionable conduct of a partner.

Question 12

What is the liability of a partnership if a partner misappropriates funds?

Answer 12

a partnership is not liable for the loss of money or prop of a person who is not a partner that is:
(1) received in the course of the partnership’s bus; &
(2) misapplied by a partner while in the custody of the partnership

Question 13

When is a partner personally liable?

Answer 13

General rule: all partners are jointly & severally liable unless otherwise agreed by claimant or provided by law. (Exceptions)

Question 14

When is a partner NOT personally liable if they entered into a pre-existing partnership?

Answer 14

A person who is admitted as a partner into an existing partnership does not have personal liability under Subsection (a) for an obligation of the partnership that:
(1) arises before the partner’s admission to the partnership; or
(2) relates to an action taken or omission occurring before the partner’s admission to the partnership; or
(3) arises before or after the partner’s admission to the partnership under a contract or commitment entered into before the partner’s admission.

Question 15

If a partner withdrawals from the partnership, how does that affect their liability?

Answer 15

Withdrawal of a partner does not by itself discharge the partner’s liability for an obligation of the partnership incurred before the date of withdrawal.

Question 16

What is an LLP?

Answer 16

A limited liability partnership is a partnership that has availed itself of statutory procedures so as to alter the traditional rule that the partners have personal liability for all partnership debts and obligations

A partner in an LLP is not individually liable for obligations of the partnership incurred while the partnership is an LLP

LLP status does not shield a partner from liability imposed by law or contract independently of the partner’s status as a partner

Question 17

Does becoming an LLP affect liability for obligations previously incurred?

Answer 17

NO! A partnership must be an LLP at the time an obligation is incurred for the liability limitations to apply

An obligation is incurred while the partnership is an LLP if the obligation relates to an act or omission occurring while the partnership is an LLP or the obligation arises under a contract or commitment entered into while the partnership is an LLP

Question 18

What designator must an LLP’s name contain?

Answer 18

“limited liability partnership”, “limited”, or an abbreviation

Question 19

What is required in the application for a LLP that is filed with the SOS?

Answer 19

1. Name of the partnership
2. Federal taxpayer identification number
3. Street address of the partnership’s principal office in or outside of Texas, as applicable
4. Number of partners as of the date of the application; and
5. A brief statement of the partnership’s business

Must be accompanied by a $200-per-partner fee

Must be executed by a majority-in-interest of the partners, or by 1 or more partners authorized by a majority-in-interest of the partners

Question 20

What is the LLP annual reporting requirement?

Answer 20

The report is due on 6/1 of each year

The failure to file the report by that date will not result in automatic loss of LLP status. The LLP will have a period of 1-year to cure the delinquency

If the delinquent report is not filed by 5/31 of the following year, the LLP’s registration will automatically terminate

But, there is a 3-year period following the date of termination during which the registration may be retroactively reinstated. The annual reports and fees for each year since the last annual report was filed must be filed at the same time as the application for reinstatement

Question 21

When can a plaintiff sue just the partnership?

Answer 21

§152.305 – An action may be brought against a partnership & any or all of the partners in the same action or in separate actions

In order to get a judgment against the partners, must be named and individually served. Citation served on one member of the partnership authorizes a judgement against the partnership and the partner actually served.

Question 22

If a plaintiff sues just the partnership and gets a judgement, what happens if they partnership is insolvent?

Answer 22

Plaintiff may sue the partners in their individual capacity. Does not require the relitigation of a claim (so no collateral estoppel defense). Must only prove that a judgment exists against the partnership and that the partners were in fact partners at the time of the injury alleged.

Cause of action against the partner doesn’t accrue until the creditor can proceed against the partner’s assets (usually upon the expiration of 90 days). So, the SOL to sue the partners after the partnership judgement is rendered is 4 years after the 90 day expiration period.

Question 23

Under what circumstances may a claimant enforce a judgment against an individual partner without also obtaining a judgment against the partnership that remains unsatisfied after 90 days?

Answer 23

(1) the partnership is a debtor in bankruptcy;
(2) the creditor and the partner or partners agree that the creditor doesn’t have to wait
(3) a court orders otherwise, based on a finding that partnership property subject to execution in the state is clearly insufficient to satisfy the judgment or that compliance with Subsection (b)(2) is excessively burdensome; or
(4) liability is imposed on the partner by law or contract independently of the person’s status as a partner.

Question 24

How do you calculate credits and charges to a partner?

Answer 24

§152.202 – Credits of and charges to partner
(b) Each partner is charged with an amount equal to:
(1) the cash and the value of other property distributed by the partnership to the partner; and
(2) the partner’s share of the partnership’s losses

(c) Each partner is… is chargeable with a share of the partnership’s capital or operating losses in proportion to the partner’s share of the profits

Question 25

What are the rules for profit sharing and losses if there isn’t a comprehensive agreement?

Answer 25

If they didn’t agree about either one, share equally

If they only agreed on sharing profits and didn’t mention losses, share losses in the same way as profits.

If they agreed on losses but didn’t mention profits, profits NOT shared in the same way as losses! One way street. They share profits equally.

Question 26

When can someone who is not already a partner become a partner?

Answer 26

§152.201 – A person may become a partner only with the consent of all partners

Question 27

When may a partnership agreement be amended?

Answer 27

§152.208 – A PA may be amended only with the consent of all partners

Question 28

When may a partner receive compensation for services rendered?

Answer 28

§152.203(c) – A partner is not entitled to receive compensation for services performed for a partnership other than reasonable compensation for services rendered in the winding up of the business of the partnership

Question 29

What is a partner’s duty of care?

Answer 29

(a) a partner’s duty of care to the partnership and the other partners is to act in the conduct and w/u of the partnership business with the care an ordinarily prudent person would exercise in similar circumstances

(b) an error in judgment does not by itself constitute a breach of the duty of care

(c) a partner is presumed to satisfy the duty of care if the partner acts on an informed basis and in compliance with §152.204(b)

Doesn’t say fiduciary duty!

Question 30

When may a partner be reimbursed?

Answer 30

§152.203(d) – A partner who, in the proper conduct, of the business of the partnership or for the preservation of its business of property, reasonably makes a payment or advance beyond the amount the partner agreed to contribute, or who reasonably incurs a liability, is entitled to be repaid and to receive interest from the date of the:
(1) payment or advance; or
(2) incurrence of the liability

Reimbursed (but not compensation for services rendered) + interest

Question 31

Can a partnership agreement waive a duty of care?

Answer 31

No, cannot eliminate the duty of loyalty or duty of care, but may specify activities that do not violate the duty (if watered down duty, then no breach, so no liability for breach)

Question 32

What is a partner’s duty of loyalty?

Answer 32

152.205: A partner’s duty of loyalty includes:

(1) accounting to and holding for the partnership property, profit, or benefit derived by the partner:
(A) in the conduct and winding up of the partnership business; or
(B) from use by the partner of partnership property;

(2) refraining from dealing with the partnership on behalf of a person who has an interest adverse to the partnership; and

(3) refraining from competing or dealing with the partnership in a manner adverse to the partnership.

Doesn’t say fiduciary duty!

Question 33

What is the nature of a partner’s partnership interest?

Answer 33

(a) A partner’s partnership interest is personal property for all purposes.

(b) A partner’s partnership interest may be community property

(c) A partner is not a co-owner of partnership property.

Question 34

If the partnership paid for the property, what is the property interest?

Answer 34

If the partnership paid for it → it’s likely partnership property.

§152.102(b) raises a presumption of partnership property when using partnership property to acquire property, but this presumption may be rebutted

Question 35

If the partner paid for something from their checking account, what is the property interest?

Answer 35

If the partner paid for it from their checking account → if title is in partnership’s name, it’s likely partnership property. But, If title is in partner’s name, it’s likely partner’s personal property

§152.102(c) raises a presumption of partner’s property if the title does not indicate partnership and property isn’t acquired with partnership property

Question 36

When is something conclusively partnership property?

Answer 36

152.102(a) property is partnership property if acquired in the name of the partnership or if 1 or more partners, regardless of whether the name of the partnership is indicated, if the instrument transferring title to the property indicates:
(A) the person’s capacity as a partner; or
(B) the existence of a partnership

Question 37

If a partner gives someone the property of the partnership, what happens?

Answer 37

§152.101 – Partnership property is not property of the partners. A partner or a partner’s spouse does not have an interest in partnership property

§154.002 –A partner does not have an interest that can be transferred, voluntarily or involuntarily, in partnership property

Question 38

If a partner gives their interest in the partnership to a non-partner, what happens?

Answer 38

§154.001(a) – A partner’s partnership interest is personal property for all purposes

§152.401 – A partner may transfer all or part of the partner’s partnership interest

Question 39

What is a “partnership interest”

Answer 39

a partner’s interest in a partnership.

The term includes the partner’s share of profits & losses or similar items & the right to receive distributions.

The term does NOT include a partner’s right to participate in management

Question 40

If a bank gets a personal judgment against a partner, is the partnership’s property available tot the creditor?

Answer 40

No, the bank can only get a charging order on the partner’s interest. (a lien on interest for any distributions if and when they are made)

Question 41

If someone becomes a partner in TX during marriage (therefore interest is community property!) what interest would the spouse have if the partner dies?

Answer 41

If the partnership interest of the deceased partner is subject to redemption, the partner’s surviving spouse is a creditor of the partnership until the interest is paid.

If the partnership interest of the deceased partner is not subject to redemption, the partner’s surviving spouse is a transferee of the partnership interest

Question 42

If someone becomes a partner in TX during marriage (therefore interest is community property!) what interest would a charity have if the spouse dies and leaves everything to the charity?

Answer 42

on the death of a partner’s spouse, an heir, devisee, PR, or other successor of the spouse, other than the partner, to the extent of their respective partnership interest, if any, is a transferee of the partnership interest. (So the charity would have a 1/2 interest as a transferee)

Question 43

If someone becomes a partner in TX during marriage (therefore interest is community property!) what happens upon divorce?

Answer 43

152.506(a)(1) on the divorce of a partner, the partner’s spouse, to the extent of the spouse’s partnership interest, if any, is a transferee of the partnership interest.

So, community property means ex-spouse has ½ interest as transferee.

Question 44

What are the rights and duties of a partner?

Answer 44

§152.203
(a) each partner has equal rights in the management & conduct of the bus of a partnership. A partner’s right to participate in the management & conduct of the bus is not community prop

(b) a partner may use or possess partnership prop only on behalf of the partnership

Question 45

What does a transfer of a partner’s interest do?

Answer 45

§152.402 – A transfer of all or part of a partner’s partnership interest:
(1) is not an event of withdrawal

(2) does not by itself cause a winding up of the partnership bus; &

(3) against the other partners or the partnership, does not entitle the transferee, during the continuance of the partnership, to participate in the management or conduct of the partnership bus

§152.403 - After transfer, the transferor (partner transferring an interest) continues to have the rights & duties of a partner other than the interest transferred

Question 46

What are the rights and duties of a transferee?

Answer 46

(a) A transferee of a partner’s partnership interest is entitled to receive, to the extent transferred, distributions to which the transferor otherwise would be entitled.

(b) If an event requires a winding up of partnership bus…, a transferee is entitled to receive, to the extent transferred, the net amount otherwise distributable to the transferor.

(c) Until a transferee becomes a partner, the transferee does not have liab as a partner solely as a result of the transfer.

Question 47

Partners rights to distributions and distributions in kind

Answer 47

Statute only requires distributions to be made on winding up, but most partnerships do it before. A partner has no right to demand distribution other than cash. But, partnerships may choose to distribute other than cash.

Question 48

What is the effect of an event requiring winding up?

Answer 48

On the occurrence of an event requiring winding up of a partnership business under Section 11.051 or 11.057:
(1) the partnership continues until the winding up of its business is completed, at which time the partnership is terminated; and
(2) the relationship among the partners is changed as provided by this subchapter.

Question 49

When is winding up required?

Answer 49

(1) the expiration of any period of duration specified in the DE’s governing documents
(2) a voluntary decision to wind up the DE;
(3) an event specified in the governing documents
(4) an event including the following:
(a) in a general partnership for a particular undertaking, the completion of the undertaking, unless otherwise provided by the PA;
(b) an event that makes it illegal
(c) the sale of all or substantially all of the property outside of the ordinary course of business
(5) a decree by a court requiring the winding up.

Question 50

When is a decree by a court requiring winding up allowed?

Answer 50

See 11.314

Question 51

What vote does it take for an at-will partnership to voluntarily wind up?

Answer 51

requires the express will of a majority-in-interest of the partners who have not assigned their interests

Question 52

What is an at-will partnership?

Answer 52

a partnership with no specified duration or particular undertaking or event requiring winding up.

Question 53

What vote does it take for a not at-will partnership to voluntarily wind up?

Answer 53

requires the express will of all of the partners.

Question 54

When is a partnership not at will?

Answer 54

period of duration, or is for a particular undertaking,

Question 55

What is an event of withdrawal?

Answer 55

See 152.501

Question 56

When is a withdrawal wrongful?

Answer 56

See 152.503

Question 57

What if there is only 1 partner left in the partnership?

Answer 57

Texas doesn’t address directly, but there is an argument that the partnership could exist with only 1 partner as long as it was created with 2, as withdrawal is not a w/u event!
If only one partner, probably treated as a sole proprietor.
BUT if LLP, the SOS will reject a filing of a report as LLP with only 1 partner. (But technically the surviving partner could create an LLC and admit the LLC as a partner

Question 58

What is a partner’s liablity to other partners after an event requiring winding up?

Answer 58

a partner who incurs, with notice that an event requiring a w/u of the partnership business has occurred, a partnership liability under §152.704(2) by an act that is not appropriate for w/u is liable to the partnership for a loss caused to the partnership arising from that liability.

Question 59

When may a partnership be reinstated after termination?

Answer 59

Partnerships can reinstate a terminated/completely wound-up partnership by agreeing in writing to reinstate within 3 years after it was terminated

Question 60

If a partner withdrawals, is that an even requiring winding up?

Answer 60

No! If C’s withdrawal was not wrongful, then partnership interest is automatically redeemed (bought out). His redemption price is the fair value of his interest at the date of withdrawal. It is not the fair market value of the partner’s interest. Use the fair value of the partnership (not book value) to derive the fair value of the partner’s interest

If wrongful withdrawal redemption price would be the lesser of fair value and the amount he would of received if winding up.

Question 61

What is fair value of a partnership interest?

Answer 61

Fair value does NOT equal fair market value because the business is a going concern. NO FORMULA for fair value, but remaining partners would argue it should be discounted because it can’t be market value.

Also NOT book value.