Partnerships

Question 1

Distribution of Assets Upon Winding Up

Answer 1

In winding up the general partnership business, the general partnership must apply its assets, including contributions required to be made by general partners upon winding up, in the following order:

(1) to discharge its obligations to creditors, including general partners who are creditors; and then

(2) any surplus to distributions in cash to the general partners according to their relative rights of distribution.

Question 2

What is a Partnership

Answer 2

A partnership is the association of two or more persons to carry on as co-owners a business for profit, whether or not the persons intended to form a partnership.

No intention, consent, or agreement is required. General partnerships are the default form.

A partnership may be formed for a specific undertaking, for a term, or at will.

Question 3

Profit Sharing Presumption

Answer 3

Sharing profits creates a presumption that a person is a party unless the profits were received in payment of a debt, rent to a landlord, wages, etc. However, this presumption can be rebutted.

Question 4

Liability for Partnership Debts

Answer 4

All general partners are jointly and severally liable for partnership debts. An incoming partner is not personally liable for prior debts of the partnership. Outgoing partners are personally liable for debts incurred during the time of their partnership.

Question 5

Creditors’ Claims

Answer 5

Creditors’ claims against a partner — creditor can obtain a partner’s interest in the partnership, but not management or voting rights.

Creditors’ claims against the partnership — creditor can try to collect from individual partners.

Question 6

General Partner Liability

Answer 6

Partners are jointly and severally liable for the obligations of the partnership. Even if a partner enters into a contract without actual authority to do so, the partnership and partners are bound (as long as the partner had apparent authority).

Question 7

Rights of General Partners

Answer 7

All partners have equal rights to manage and conduct partnership business and every partner is an agent of the partnership for the purpose of its business.

General partners are —
- Agents of the partnership;
- Co-manage the business;
- Share in profits equally, and losses in proportion to their interest in the partnership.

Question 8

Rights of Limited Partners

Answer 8

Limited Partners are passive investors in the partnership business, and therefore are not agents of the partnership and do not participate in the partnership business.

They are not generally exposed to personal liability.

Question 9

Establishing a General Partnership (RUPA)

Answer 9

Under RUPA, the sharing of profits is prima facie evidence of a partnership. A person sharing in profits is presumed to be a partner, but this can be rebutted.

Question 10

Requirements for Forming a Limited Partnership

Answer 10

Certain statutory requirements are set up ULPA —
- Must file a certificate of limited partnership with the secretary of state’s office;
- The certificate must be signed by all general partners listed in the certificate;
- The name of the partnership business must include “limited partnership” or “LP”

Failure to create a limited partnership will probably create a general partnership.

Question 11

Four Basic Characteristics of a General Partnership

Answer 11

1. General partner’s rights to co-manage the business;
2. General partner’s fidicuiary duties to other partners and the partnership itself;
3. Sharing of profits and losses;
4. Unlimited liability of general partners for all partnership assets.

Question 12

Partnership Agreement

Answer 12

Relations between partners are governed by the partnership agreement; where the partnership agreement is silent, the UPA applies.

No partnership agreement may unreasonably restrict a partner’s access to the books and records of the partnership.

The duties of loyalty, care, and the right to dissociate cannot be waived, but can be limited.

Question 13

Rights of Limited Partners

Answer 13

Limited partners do not have the right to co-manage the business along with the general partners, and are not authorized agents of the limited partnership.

They do have the right to seek information for purposes related to their interest as a limited parter, including —
- The right to inspect and copy partnership records and tax returns; and
- The right to obtain information relating to the financial condition of the partnership.

Question 14

Partnership Duties

Answer 14

Duty of loyalty, care, and disclosure.

Question 15

Duty of Care

Answer 15

Partners must not engage in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.

Question 16

Duty of Loyalty

Answer 16

Partners must not —
- Compete with the partnership or usurp a business opportunity;
- Engage in dealings that are intended to serve an interest adverse to the partnership’s interest;
- Appropriate partnership assets for personal use.

Must account for any benefit derived from a transaction connected to the partnership or the use of partnership property.

Question 17

Duty to Disclose

Answer 17

The duty to furnish, without demand, any information related to the partnership business.

The duty to furnish, with demand, any information that concerns the partnership as long as it is not unreasonable.

Question 18

Profits/Losses/Contributions

Answer 18

Absent an agreement to the contrary, each partner is entitled to share equally in the profits generated by the partnership business.

Partners share losses in proportion to their share of the profits.

Question 19

Transferring a Partnership Interest

Answer 19

A partnership interest may be transferred, and transfer does not automatically dissolve the transfer. The transferee is entitled to distributions, but not the right to participate in the management or control of the business.

Question 20

Liability to Third Parties — General Partners

Answer 20

• Liable for torts committed by a partners when the tortious act is committed in the ordinary course of business.
• All general partners are jointly and severally liable for all obligations of the partnership — unlimited liability.
• Incoming partners are not liable for liability incurred before the admission.
• Even though everyone is jointly and severally liable, the partnership can then sue the individual responsible for credit for the liability/judgment.

Question 21

Dissociation

Answer 21

Partnerships are a voluntary relationship. Dissociation is the withdrawal of a partner from this voluntary relationship.

A partner has the power to dissociate at any time, rightfully or wrongfully, by expressly stating the intention to do so.

A partner is dissociated from a partnership if the partnership receives notice of the partner’s express intention to withdraw.

In a partnership at will, a partner’s dissociation is not wrongful, so long as it is not in breach of an express provision of the partnership agreement.

Question 22

Events Causing Dissociation

Answer 22

1. Partner death;
2. Partner bankruptcy;
3. Appointment of a guardian for a partner;
4. Judicial determination that a partner is incapable;
5. Occurrence of an event specified in the partnership agreement to trigger dissociation.

Question 23

Partnership Expulsion

Answer 23

A partner may be expelled from a partnership pursuant to —
1. A provision in the partnership agreement;
2. A unanimous vote of the other partners;
3. A judicial determination made upon application by another partner.

Question 24

Consequences of Dissociation

Answer 24

If a partner is dissociated without a dissolution, the partnership must purchase the dissociated partner’s interest for a buyout price.

The buyout price must be equal to the greater of either the liquidation value or the value of the partnership’s assets based on a sale of the entire business as a going concern (plus interest).

If no agreement for the purchase of a dissociated partner’s interest is reached within 120 days after a written demand for payment, the partnership must pay the amount the partnership estimates to be the buyout price.

Question 25

Dissolution, In General

Answer 25

An individual partner may file an application with the court to have a partnership dissolved, which will be granted if a court determines that —

1. The economic purpose of the partnership is likely to be unreasonably frustrated;
2. Carrying on the business is not reasonably practicable;
3. Carrying on the business with that partner is not reasonable practicable.

Dissolution must be equitable.

Question 26

Buyout Price

Answer 26

Equal to the greater of either the liquidation value or the value of the partnership’s assets based on a sale of the entire business as a going concern (plus interest).

Question 27

Consequences of Breach of Fiduciary Duty

Answer 27

A partnership can maintain an action against a partner for violating his fiduciary duties to the partnership and thus causing the partnership harm.

A partner may maintain an equitable or legal action against another partner or the partnership to enforce the partner’s rights under the partnership agreement, RUPA, or any other rights otherwise protectable.

Question 28

Converting a General Partnership to a LLP

Answer 28

Under the Uniform Partnership Act, a partnership may be converted to a limited liability partnership by a vote of the partners sufficient to amend the partnership agreement, and by filing a statement of qualification.

When a general partnership registers as an LLP, all the partners gain protection from liability for obligations of the partnership and other partners, although they remain liable for their own negligence and the negligence of those they supervise.

Question 29

Partnership Liability in an LLP

Answer 29

Partners in an LLP are not personally liable for the obligations of the LLP, whether arising from tort, contract, or otherwise, but ARE personally liable for their own wrongful acts.

Also gain protection from liability for obligations of other partners, although they remain liable for their own negligence and the negligence of those they supervise