Partnerships Flashcards
Transfer of GP to LLP
The filing of a statement of qualification, which transforms a partnership into an LLP, does not create a new partnership. An LLP is a partnership in which a partner’s personal liability for obligations of the partnership is eliminated. In other respects, an LLP is governed by the same rules as a partnership.
Partner Liability during Transfer
A partner is jointly and severally liable for all partnership obligations. Though a limited partner in an LLP is not personally liable for an obligation of an LLP, limited liability partnership status is generally only effective on the date that the statement of qualification is filed with the state and not before.
New Partner Liability
A person admitted as a partner into an existing partnership is not personally liable for any prior partnership obligations. However, any capital contribution made by an incoming partner to the partnership is at risk for the satisfaction of such partnership obligations.
What is Partnership?
A partnership is an association of two or more persons to carry on a for-profit business as co-owners. The key test applied to ascertain whether a business arrangement is a partnership is whether there is a sharing of the profits from the business; if so, such an arrangement generally is presumed to be a partnership, and persons who share in the profits are partners. However, a partnership does not exist between persons when one person receives profits in payment of a debt.
Transfer of Interest
A partner has a transferable partnership interest, i.e., a partner may transfer the right to share in the profits and losses of the partnership and to receive distributions. The transfer of that partnership interest creates in the transferee a right to receive distributions to which the transferor would otherwise be entitled.
Transferee’s Rights and Becoming a Partner
A partnership must provide its partners and their agents with access to all its records but a transferee is not entitled to participate in the management or conduct of the partnership business or access partnership records. A transfer of a partner’s partnership interest does not make the transferee a partner unless the other partner or partners consent to making the transferee a partner.
Use of Partnership Property
Property is partnership property if it is acquired in the name of the partnership. It is property of the partnership and not of the partners individually. A partner may use or possess partnership property only on behalf of the partnership.
Partner as an Agent
A partner is an agent of the partnership for the purpose of its business and can contractually bind the partnership when the partner acts with either actual or apparent authority. A partner’s act that was authorized by the partnership binds the partnership
Partner Liability in an LLP
A limited liability partnership (LLP) is a partnership in which a partner’s personal liability for obligations of the partnership is eliminated. To enjoy LLP status, the partnership must file a statement with the state. In other respects, an LLP is governed by the same rules as a partnership. A limited partner in an LLP is not personally liable for an obligation of an LLP, regardless of the type of obligation. However, a limited partner is personally liable for his own personal misconduct.
Partners’ fiduciary duties
A partner owes the partnership and the other partners two fiduciary duties—the duty of loyalty and the duty of care. Under the duty of loyalty, a partner is prohibited from using partnership property or business to derive a personal benefit without notifying the partnership. Under the duty of care, a partner is prohibited from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.
Repercussions for breach of fiduciary duty
A partnership may pursue a legal action against a partner for breach of the partnership agreement or for violating a duty owed to the partnership that caused the partnership harm. A partner may pursue a legal action against the partnership or another partner to enforce the partner’s rights under the partnership agreement or the RUPA.
Partner: Withdrawal –> Dissociation
A partnership at will is an open-ended partnership that does not have a fixed termination based on a period of time or particular undertaking. A partnership at will is dissolved when a partner chooses to dissociate from the partnership by giving notice of his withdrawal. A dissociated partner generally does not have the right to participate in the management or conduct of the partnership business. A partner’s duty not to compete terminates upon dissociation. The dissociated partner’s other duties of loyalty and care terminate with respect to post-dissociation events, unless the partner participates in winding up the partnership’s business if the partnership itself dissolves. Finally, a person who is winding up the partnership business may dispose of and transfer partnership property and may discharge the partnership’s liabilities.
Legal effects of one partner withdrawing from a 2 partner partnership
A partnership at will is an open-ended partnership that does not have a fixed termination based on a period of time or particular undertaking. A partnership at will is dissolved when a partner chooses to dissociate from the partnership by giving notice of his withdrawal. A dissociated partner generally does not have the right to participate in the management or conduct of the partnership business. A partner’s duty not to compete terminates upon dissociation. The dissociated partner’s other duties of loyalty and care terminate with respect to post-dissociation events, unless the partner participates in winding up the partnership’s business if the partnership itself dissolves. Finally, a person who is winding up the partnership business may dispose of and transfer partnership property and may discharge the partnership’s liabilities.
Partnership: Duty of Loyalty
A partner owes the partnership and the other partners two fiduciary duties—the duty of loyalty and the duty of care. Under the duty of loyalty, a partner is required to refrain from (i) competing with the partnership business, (ii) advancing an interest adverse to the partnership; and (iii) usurping a partnership opportunity or otherwise using partnership property or business to derive a personal benefit, without notifying the partnership. A partner is also required to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law. As stated above, when a partner is engaged in winding up the partnership business, those duties are generally applicable, with the exception of the noncompete aspect of the duty of loyalty. A partner must perform his duties consistently with the contractual obligation of good faith and fair dealing.
Partner Authority
A partner is an agent of the partnership for the purpose of its business and can contractually bind the partnership when the partner acts with either actual or apparent authority. Acting individually, a partner has the actual authority to commit the partnership to usual and customary matters, unless the partner has reason to know that other partners might disagree. On the other hand, each partner has equal rights in the management and conduct of the partnership’s business. If there is a decision as to a matter outside the ordinary course of the partnership’s business, the decision requires the consent of all partners.
