Partnerships Flashcards
partnership definition
an association of two or more persons to carry on a business for profit as co-owners
separate legal entity: may own property/sue
GPs are not protected from personal liability
General partnership requirements
1)two or more persons: any individual or legal entity
capacity based on K law
2)intent: to carry on a business for profit(not revenue) as co-owners
subjective intent does not matter
3)written agreement is not necessary but if written could be subject to SOF
4)passive co-ownership is not enough- look for activities designed to obtain a specific business purpose
profit sharing
general presumption that an agreement to share business profits creates a partnership
not apply in six statutorily enumerated circumstances:
1)pay debt
2)pay interest
3)pay rent
4) pay wages or compensation
5)make goodwill payments stemming from the sale of a business, or
6)pay a retirement/healthcare benefit to beneficiary
sub-partnership
an arrangement where a partner contracts with a third party to share in partner’s profits
3rd party becomes a sub partner- not a true member
has a contractual claim but is not a partner
partnership by estoppel
person might be treated as a partner even when true partnership doesnt exists
arise when:
1)D makes or consents to a representation to the P that he is a partner in an actual or purported partnership, and
2)the plaintiff reasonably relies on the representation and suffers damages as a result of the reliance
no duty to deny: merely being named partner is not enough
public holding out: D may not be able to defend claim she was unaware
the falsely named partner can act as an agent for the person incorrectly naming the party as a partner
duties owed by partners to the partnership
every partner is an agent- owes fiduciary duties
duty of loyalty
due of care
duty of good faith and fair dealing
duty of loyalty
a partner cannot:
1)compete with the partnership business,
2)pursue an interest adverse to the partnership
3)take an opportunity that belongs to the partnership without notifying partnership
4)use the assets of the partnership for personal benefit without notifying partnership
can carve out activities that will not violate
certain number of partners can authorize/ratify transaction between partner and partnership
duty of care
a partner cannot engage in grossly negligent, reckless or intentional misconduct
parties can reduce this duty by agreement but must be reasonable
timing of duties
are only for current partners
duty to get out clean: duties still apply to partners who are preparing to quit
duty of good faith and fair dealing
can be modified in the agreement but must be reasonable
Profits and losses
by default, each partner entitled to an equal share- but can be change and profits versus losses can be a different distribution
partnership accounts
reflects each partner’s net worth
increased by contributions and profits
decreased by liabilities, distributions, and losses
partnership distributions
partner cannot demand a distribution
when partnership earns a profit, each account will be credited its share
partnership interest
the right to share in profits and losses, not an interest in the underlying property
can be transferred to a third party, but the transferee doesnt become a partner and the transferor remains a partner
transferee just has the right to receive distributions, no control or management rights
property ownership
all property acquired by the partnership is partnership property
if titled in name of partnership- partnership property
if not titled, intent of the partners control
property is presumed to be partnership if it is purchased with partnership assets/credit
presumed to be partner proper if acquired in their name or with their assets
Partnership decisions
admitting a new partner: must be approved by all existing partners
management rights: by default each partner has equal rights
ordinary business decisions: majority vote
special/extraordinary decisions: consent of all
indemnification
partnership must indemnify each partner for personal liability incurred in the ordinary course of conducting the partnerships’ business
access to record
each partner has the right to inspect and copy records, including the finances of the partnership
lawsuits
a partnership can sue and be sued in its own name
partnership may sue individual partner for breach of partnership agreement or violating a duty
partner may sue the partnership or another partner to enforce the partners rights under the agreement- include the right to an accounting of the business
dissociation
an individual partner’s relationship with the partnership is terminated
may be either voluntary or involuntary
events causing dissociation
1)partner gives notice of express will to withdraw
2)occurrence of an event specified in Pship agreement
3)the partner is expelled pursuant to pship agreement
4)partner expelled pursuant to unanimous vote if it is unlawful to carry on the business with that partner
5)partner is expelled by a court order
6)partner files for bankruptcy
7) partner dies/entity partner terminated
8)guardian is appointed for the partner or it is determined that they cant perform their duties
wrongful dissociation in a pship not for a term
only occurs when there is an express breach of a provision in the agreementw
wrongful dissociation in a pship for a term
wrongful if:
1) partner withdraws
unless it follows within 90 days of
i)a wrongful dissociation by another partner, or
ii)dissociation by another partner for the reasons listed avoce at 6-8
2)the partner is expelled by court order, or
3)partner is a debtor in bankruptcy
is wrongful dissociation effective
yes but the partner is liable to the partnership and other partners for damages caused by the dissociation
consequences of dissociation
loss of management rights
elimination of fiduciary duties to partnership
partnership must buy out the dissociated partner’s interest
valuation of the buyout
values as if the partnership was wound up on the day: the greater of either the liquidation value or the going concern value of the partnership
how soon does the buyout have to happen
payment must be made, by default, within 120 days of the partners written demand for payment
must provide financial info and how payment was calculate- if disagree can bring judicial action
indemnification following buyout
partnership must generally indemnify the dissociated partner against all partnership liabilities- including liabilities incurred before the dissociation
liability of dissociated partner for obligation incurred before dissociation
they are liable
two exceptions:
1)A partnership creditor, with notice of the dissociation and without the dissociated partner’s consent, agrees to a material change in terms; or
2) A partnership creditor, and the remaining partners grant the dissociated partner a release.
liability for obligations incurred after dissociation
not generally, but can be liable if:
1)The partnership does not dissolve and wind up;
2. The obligation takes place within one year of the dissociation;
3. The obligation is one for which she would have been liable if she were a partner; AND
4. The other party reasonably believed the dissociated partner was a partner at the time of
the transaction (and had no notice of the dissociation).
when can a dissociated partner bind the partnership after dissociation
- The third party does not have knowledge of the dissociation;
- The third party reasonably believes that the dissociated partner is still a partner;
- The third party is not deemed to have knowledge of the dissociated partner’s lack of
authority to bind the partnership; AND - The transaction is conducted within one year of the dissociation.
statement of dissociation
treated as giving all 3rd parties notice of the dissociation as of 90 days after the filing
authority of a partner to bind the partnership
each partner is an agent for the purpose of partnership business
can bind the partnership in a contract as long as has actual or apparent authority
actual authority
actual express: an explicit grant, either from agreement, authorization of partners, or a filed statement of authority
actual implied: does not depend on an explicit instruction: partner understood to be given authority for activities that are properly related to their reasonable understanding of their objectives
apparent authority
authority to bind is derived from the 3rd party’s reasonable perception of the authority granted to the partner by the partnership
can also look to the position of the partner in the partnership
a partners ability to transfer partnership property titled in the name of the pship
partner needs to execute a title transfer document in pship’s name
can limit/remove right of partner to do this in statement of pship authority
ability to transfer pship property in name of one+ partners
individual partner still has authority
if they dont have authority, pship can recover:
1)from the initial transferee if pship interest is indicated in transfer document
2)if not indicated, can only be recovered from a transferee that was aware it belonged to pship and partner didnt have authority
the shelter rule
a partnership cannot recover property transferred without authority from a substequent purchaser if it could not have recovered from an earlier transferee
imputation of knowledge
an individual partner’s knowledge of a fact related to the partnership is generally imputed to the entire partnership
exception: fraudd
grant of authority
filed to provide conclusive evidence that a partner has authority to bind the pship to a transaction
will not protect counterparty if he has actual knowledge that partner lacked authority
limitation of authority
filed to publicly state the limitation of a partners authority
does not provide constructive notice to 3rd parties
statement of denial
filed to deny facts stated in a prior grant of authority or to specifically deny any grant of authority to a partner
effect of a partner’s tort
a partnership is liable for torts committed by a partner in the ordinary scope of business
immunity of a partner doesnt transfer to pship
liability for partnership oblifations
partners are typically jointly and severally liable for all obligations
newly admitted: not personally liable for prior obligations
dissociated partner: remains liable for obligations before dissociation
might be liable for obligations incurred within one year of dissociation
effect of a judgment against the pship
individual partner must be named in judgment for P to recover their personal assets
P must generally exhaust pship assets before recovering personally from partners
effect of crimes
a pship can be convicted of a crime
one partner will not be criminally liable for acts of another partner
three type of Pship changes
conversion
merger
termination
two types of conversion
general partnership to limited partnership
limited to general
converting a general partnership to limited and liability
requires whatever approval is required to amend pship agreement- if silent, unanimous
Pship must file a certificate of limited partnership
liability- still liable if:
1) obligation incurred prior to conversion
2)obligation incurred within 90 days after conversion and counterparty reasonably believes was still a general partner
converting a limited pship to a general and liability
requires positive vote of all partners no matter what
file to cancel its certificate of limited partnership
liability:
1) not liable if obligation incurred prior to conversion
2)but liable if obligation after conversion
merger requirements
1)plan of merger must be filed describing:
who is merging
name of surviving entity
type of entity that will survive
what terms/conditions apply
what each party will get for their interest, and
address of surviving entity
approvals:
general: all the partners
limited: all or the vote required by the jurisdiction governing the LP
what a merger means
all parties besides surviving cease to exist
all property/obligations go to surviving
any former partner is dissociated
general partner of surviving liable for:
1)obligations for which she was personally liable prior to merger
2)obligations incurred by surviving entity prior to merger
3) obligations incurred subsequent to merger
termination of a pship
two step process:
dissolution: beginning of the end
winding up: liquidating assets to creditors/individual partners
what triggers dissolution for a Pship at will
1)when a partner choose to dissociate by giving notice of withdrawal
what triggers dissolution for pship for definite term/ undertaking
dissolved when:
1)term expires or undertaking is completed
if continues- at will
2)all partners agree to dissolve, or
3)partner is dissociated by death, bankruptcy, or other circumstances and at least half the remaining partners agree to dissolve within 90 days
ways of dissolution for either type of pship
1) dissolving event as defined in agreement
2) event occurs that makes it unlawful for all or substantially all business to continue
90 days to cure
3)judicial determination that the purpose is frustrated or that a partner has engaged in conduct that makes it not reasonably practicable to carry on
4) transferee of a pship interest obtains a judicial determination that it is equitable to wind up the business
who winds up the business
1)any partner who has not wrongfully dissociated
2)the legal representative of last surviving partner
3) any partner, representative, or transferee may seek judicial supervision of winding up
what happens when the business is wound up
the person winding up the business has the power to dispose and transfer property and to discharge liability
rules for winding up assets
1) assets are first applied to pay off creditors
includes partners who made loans
2) each partner’s account will be settled
continuation of a partnership
after dissolution, a partnership can change its mind as long as the winding up is not complete and partners agree to waive the right to terminate
waiver will not adversely impact any third party who dealt with pship before knowing about waiver
Limited liability partnership
a legal entity where a partner’s liability for obligation of the LLP is eliminated
otherwise governed by same rules
forming an LLP
partners need to file a statement with VA SCC
transformation to an LLP requires vote necessary to amend
name must have special word
liability of partner in an LLP
partner may still be personally liable for any personal misconduct
they are just not liable for the obligations of the pship
the llp itself can still be liable for a contract or tort claim
termination of an LLP
terminated by cancelling a statement of registration- transforms to a general
state regulators may revoke statement of registration for certain events
Limited partnership
a pship formed by 2+ persons with at least one general partner and one limited partner
limited partner’s liability is limited to capital contribution
formation of a LP
must filed a certificate with VA including:
1)in state address
2)name/address of instate agent
3)name/address of each GP
4)a statement about the duration
5)all GPs must sign
LP will not come into effect if parties fail to file certificate- limited partners cant escape liability to 3rd parties
limited partners of LLPs
arise with the creation of the LP or by acquiring a limited partner interest with the written consent of all partners, unless otherwise provided
voting of a limited partner
may only vote to the extent allowed in the agreement
liability of a limited partner
generally not liable to 3rd parties for obligations but will lose if participates in some control of the business
things that are fine to do:
1)acting as an agent
2)participates as a shareholder/officer
3)consults or advise GP with respect to the business
4)name on the business
if limit is lost, only liable to parties who transact with the LP reasonably believing that they are a general partner
the withdrawal of a limited partner
may withdraw only at the time specified or upon the happening of events specified in agreement
general partner in an LLP
functions just like a partner in a general partnership
contributions in an LLP
a general or limited partner may contribute cash, property, services, or a promise
can be adjusted if all parties agree
profits and losses in an LLP
allocated anyway the partners want
if not stated: based on their contribution
distributions in an LLP
decided by partners
if not: same as profits and losses
special problem: pship makes a distribution to a partner that reduces her share of net assets to less than her contribution and LP cant discharge its obligation to a creditor:
1) partner will have to return the contribution to extent necessary
2) obligation last for one year
6 if wrongful
assignments in an LLP
limited partners can assign their interest
the assignee only becomes a partner if all parties agree or otherwise states
termination of an LLP
dissolved and the wound up
events causing dissolution in an LLP
1) occurrence of an event specified in agreement
2)termination of a date specified in agreement
3)written consent of all partners
4) withdrawal of a GP, unless there is another GP
5) a decree of judicial dissolution
who winds up an LLP
the GPs who have not wrongfully dissolved the LP
distribution of assets in winding up an LLP
1)LP creditors
2)partners and former partners entitled to distributions that have not been paid
3)partners for the return of their contributions
4)partners in proportions in which they share distributions
derivative action in an LLP
a limited partner may bring a derivative action
requirementsL
1) Demand: must show GPs refused to bring the claim or that any attempt to cause them to bring the claim will fail
2) continuing status: LP must generally be a partner at the time the action is filed and the time of the wrongful transaction
3) recovery: goes to the LP, limited may recover reasonable expenses
Limited Liability Limited Pship
combines LLPs and LPs
operates as an LP except all partners received limited liability protection
must contain special word
