Partnerships

Question 1

What is a partnership?

Answer 1

A partnership is an association of two or more persons to carry on as co-owners a business for profit. It is formed as soon as it happens, regardless of whether the parties subjectively intended to form a partnership.

Question 2

Are there any formal requirements to form a partnership?

Answer 2

No. Look to the intent of the parties—if they intended to carry on a business as co-ownership, there is a partnership even if they did not subjectively intend to be partners.

Question 3

What are some factors that can be helpful in determining whether a partnership exists?

Answer 3

1. Profit-sharing: Sharing of profits raises a presumption of partnership. This presumption is rebuttable by showing that a partner has no right to control or sharing of losses.
2. Right to participate in control: to state that partners are co-owners of a business is to state that they each have the power to control the business.
3. Additional factors indicative of a partnership (do not raise presumption of partnership):
   * Title to property is held in joint tenancy or tenancy in common
   * The parties designate their relationship as a partnership
   *The venture undertaken by the parties requires extensive activity
   *The parties share the gross retruns

Question 4

Is a writing required to form a partnership?

Answer 4

No. But, if the partners wish to have an enforceable agreement to remain partners for more than one year, under SOF, they generally must execute a writing reflecting their agreement.

Question 5

When might a partnership be formed by estoppel?

Answer 5

If no partnership was formed in fact, parties may still be liable as if they were partners to protect reasonable reliance by third parties.

Question 6

What is the liability of a person held out as a partner?

Answer 6

When a person by words or conduct represents himself as a partner or consents to being represented by another as a partner, he will be liable to third parties who extend credit to the actual or apparent partnership in reliance on the representation.

But the person held out by another as a partner is not liable as a partner unless they actually consent to the holding

Question 7

What is the liability of the person who holds another out as a partner?

Answer 7

When a person holds another out as a partner, he thereby makes that person his agent to bind him to third parties.

Question 8

What is the significance of a partnership agreement?

Answer 8

While no agreement is necessary to form a partnership, a partnership agreement allows the partners to contract around almost all of the statutory provisions (RUPA). A partnership agreement can be written, oral, or implied.

Question 9

What is the default voting rule for partnerships?

Answer 9

Unless otherwise provided, all partners have equal rights in the management of the business and equal votes. Decisions regarding matters within the ordinary course of the partnership business require a majority vote of the partners. Matters outside fo the ordinary course of business require the unanimous consent of all partners.

Question 10

If there is no other agreement, what is a partner’s right to compensation for services rendered to the partnership?

Answer 10

A partner has no right to compensation for services rendered to the partnership.

Question 11

Can a partnership sue?

Answer 11

Yes. A partnership may sue or be sued in its name.

Question 12

What is the default profit rule?

Answer 12

Profits are shared equally among the partners by number.

Question 13

What is the default losses rule?

Answer 13

Losses are shared in the same manner as profits.

Question 14

What is a partnership liability in tort?

Answer 14

A partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner or employee acting in the ordinary course of business of the partnership or with the authority of the partnership.

Question 15

What is a partnership’s liability in contract?

Answer 15

A partnership is liable for all contracts entered into by a partner in the scope of partnership business or with actual or apparent authority of the partnership.

Question 16

Are filed statements granting or restricting a partner’s authority to transfer partnership real property binding on third parties?

Answer 16

Yes. Grants of and restrictions on partner authority to transfer real property in the statement are binding on their parties if the statement is recorded in the county where the property is located.

Question 17

Is the previous rule the same for transactions not involving real property?

Answer 17

No. Grants of partner authority in the statement are binding on the partnership (unless the third party had actual knowledge that the partner lacked authority), but restrictions on partner authority in the statement are not binding on third parties.

Third parties are benefited by filed grants and not burdened by filed restrictions.

Question 18

How can a partnership agent (a partner) bind a partnership?

Answer 18

A partner is an agent of the partnership and has apparent authority to bind the partnership to transactions within the ordinary course of the partnership’s business or business of the kind carried out by the partnership (unless the third party is aware that the partner lacks actual authority to act).

Question 19

In what ways are partnership to a partnership liable?

Answer 19

Each partner is jointly and severally liable for all obligations of the partnership, whether arising in tort or contract.

A plaintiff must first exhaust partnership resources before seeking to collect from an individual partner’s assets.

Question 20

If the partnership admits a new partner, is that partner liable for debts incurred by the partnership before their admission?

Answer 20

A newly admitted partner is not personally liable for partnership obligations that arose before their admission.

Question 21

How might a dissociating partner be liable?

Answer 21

An outgoing or dissociated partner remains liable for obligations arising while they were a partner unless there has been payment, release or novation. An outgoing partner can also be liable for acts done after dissociation.

Question 22

What are the fiduciary duties of a partner?

Answer 22

Each partner owes four fiduciary duties to the partnership: the duty of loyalty and the duty of care to each other partner and to the partnership; the statutory duty of disclosure and the duty of obedience.

Question 23

What does the duty of loyalty require of each partner?

Answer 23

The duty of loyalty requires each partner:
1. to account to the partnership for any benefit derived by the partner in conducting the partnership business, using the partnership’s property, or appropriating a partnership opportunity;
2. to refrain from dealing with the partnership in the conduct of its business as (or on behalf of) a party having an interest adverse to the partnership; and
3. to refrain from competing with the partnership in the conduct of its business.

Question 24

What does the duty of care require of a partner?

Answer 24

The duty of care requires each partner refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

Question 25

What does the statutory duty of disclosure require of a partner?

Answer 25

A partner has a duty to provide complete and accurate information concerning the partnership.
RUPA provides that each partner and partnership shall furnish to a partner:
1. without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties; and
2. on demand, any other information concerning the partnership’s business and affairs.

Question 26

What does the duty of obedience require of a partner?

Answer 26

The duty of obedience requires the partner to obey all reasonable directions of the partnership and not act outside the scope of his or her authority.

Question 27

Which duties could a partnership agreement eliminate?

Answer 27

The duty of disclosure may be eliminated.

A partnership agreement may NOT eliminate the duties of loyalty or care.

Question 28

What is partnership capital?

Answer 28

Partnership capital is the proeprty or money contributed by each partner for the purpose of carrying on the partnership’s business.

Question 29

What is partnership property?

Answer 29

Partnership property is everything the partnership owns, including both capital and property subsequently acquired in partnership transactions.

Question 30

When is property deemed to be partnership property?

Answer 30

Titled property is partnership property if it is acquired in the partnership’s name or in a partner’s name where it is apparent from the document that they are acting for a partnership.

Question 31

Which property is presumed partnership property?

Answer 31

Under RUPA, property is rebuttably presumed to be partnership property if it was purchased with partnership funds, regardless of in whose name title is held.

Question 32

Which property is presumed a partner’s separate property?

Answer 32

Under RUPA, property is rebuttably presumed to be a partner’s property if (1) it is held in the name of one or more partners; (2) the instrument transferring title gives no sign that they are acting for a partnership; and (3) partnership funds were not used to acquire the property.

Question 33

What factors might be used to determine whether property is partnership property or the separate property of a partner?

Answer 33

1. Acquisition of the property with partnership funds;
2. Use of the property by the partnership in conducting the partnership’s business;
3. Entry of the property in the partnership books as a partnership asset;
4. A close relationship between the property and the business operations of the partnership;
5. improvement of the property with partnership funds;
6. maintenance of the property with partnership funds.

Question 34

Is a partner a co-owner of partnership property?

Answer 34

No. A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred. A partner can simply use partnership property for partnership purposes.

Question 35

What is dissociation?

Answer 35

Withrdrawal. Dissociation is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business.

Question 36

How might a partner become dissociated?

Answer 36

A partner becomes dissociated from the partner by:
1. oral or written notice of the partner’s express will to survive;
2. happening of an agreed event;
3. valid expulsion of the partner;
4. the partner’s bankruptcy or the appointment of a receiver for a partner;
5. the partner’s death or incapacity to perform partnership duties;
6. the decision of a court that the partner is incapable of performing a partner’s duties; or
7. termination of a business entity that is a partner.

Question 37

What is an at-will partnership?

Answer 37

An at-will partnership is one where the partners have not agreed to remain partners until the expiration of a definite term of the completion of a particular undertaking.

Question 38

What is a term partnership?

Answer 38

A term partnership is one where the partners have agreed, explicitly or implicitly, to remain partners for a definite term or until the completion of a particular undertaking.

Question 39

When a partner dissociates, what are the two things that could happen?

Answer 39

Either:
1. The partnership is dissolved and the business is wound up—the partnership will be liquidated; or
2. The partnership continues in existence with the dissociated partner becoming entitled to a buyout of their partnership interest.

The nature of the event of dissociation dictates which of these avenues will be implicated.

Question 40

When must a partnership be dissolved and wound up?