Partnerships Flashcards
What is a partnership?
An association of 2 or more persons to carry on as
co-owners a business for profit.
Do you need a formal agreement to form a partnership?
No formalities or formal agreement are required to form a partnership; the parties’ intent may be implied from their conduct.
Is a writing required to form a partnership?
No writing is required to form a partnership. However, because of the Statute of Frauds, if partners wish to have an enforceable agreement to remain partners for more than 1 year, they generally must execute a writing reflecting their agreement.
What is the profit sharing test?
Profit sharing = presumed to be a partnership. Sharing profits does not create a rebuttable presumption of a P in six statutorily enumerated circumstances: debt payments; interest or loan charges; rent; wages; goodwill payments from the sale of a business; and annuities or other retirement or health benefits
Partner by estoppel
Rule—when no P exists, a person may be treated as a purported partner if there is an oral, written, or implied by conduct representation that a person is a partner in a P, the person makes or consents to the representation, a third party reasonably relied on the representation, and the third party suffered damages as a result of that
reliance
* No duty to deny the representation; merely being named as a partner by another is not enough to create liability as a partner
* It is not a defense that the purported partner was unaware that he had been held out as a partner to the specific third party when he has been held out as a purported partner in a public manner
* Purported partners are agents of the person making the representation
Is the partnership a separate legal entity?
Yes. a P may hold property and can sue and be sued
* Partners are not protected from personal liability for P’s obligations
* If there is a formal agreement, it governs when there is a conflict between the agreement and a VA statute
Partner as agent to Partnership
a partner can commit P to contracts with third parties
Duty of loyalty
Rule—no competing with P business, advancing an interest adverse to the P, or usurping a P opportunity
o Exception—a PA can designate certain activities as not violating the duty (but cannot eliminate the duty altogether) and may provide a safe harbor allowing the
other partners to authorize or ratify a transaction between a partner and the P after full disclosure of the material facts
Duty of care
Duty to refrain from engaging in grossly negligent or reckless conduct, intentional conduct, or a knowing violation of the law
o PA may not unreasonably reduce this duty
Duties during Dissociation/dissolution
duties do not apply unless the partner is engaged in
winding up P business
Good faith and fair dealing
the PA cannot eliminate this obligation but can
prescribe reasonable standards
How are profits and losses shared?
if there is no PA or the PA is silent, each partner gets an equal share of profits and losses; if the PA only specifies a division of profits, losses are shared in same percentage as profits are shared
Partner’s account
contains a partner’s contributions to P and share of the profits (less distributions, losses, and liabilities)
Distributions
a partner cannot demand a profit distribution but is entitled to have her account credited with her share of the profits
P’ship interest - transfer to third party
Rule—a partner can transfer all or part of the P interest (absent a restriction in the PA); the transferor partner retains all rights/duties of a partner (except for an
interest in the distributions); and the transfer does not cause dissolution or dissociation
o Transferee rights
Right to receive distributions, to seek a judicial order for dissolution, and to an accounting upon dissolution
No right to participate in the management or conduct of P business, access P records, or demand other information from P
Property ownership
Rule—all property acquired by P belongs to the P and not the individual partners; property may be acquired/titled in the name of the P or in the name of a partner in her
capacity as partner or indicating the existence of P
* Intent of partners controls—property is presumed to be P property if it was purchased with P assets or P credit was used to get financing; but if ownership is
unclear, consider other factors such as the property’s use, the tax treatment of the property, and the source of funds used to maintain or improve the property
Management rights
each partner has equal management rights in general; a majority of partners is needed to make ordinary P business decisions; the consent of all partners is
required for matters outside the ordinary course of a P’s business and for amendments to the PA
Remuneration
none except for reasonable compensation for winding up the P business
Reimbursement/indemnification
a P must reimburse a partner for loans in
furtherance of P business; and P is required to indemnify partners for personal liability incurred in the ordinary course of P business
Use of P property
a partner cannot derive personal benefit from the use of P property; must compensate P
Access to records
P must permit its partners and agents to access all P records
Lawsuits
a P can sue a partner for breach of the PA or a P duty; a partner may sue P or another partner to enforce his rights under the PA or the VA Code; a partner may sue
another partner for breach of fiduciary duty (loyalty, care, good faith and fair dealing)
What is a dissociation?
A change in the relationship of the partners caused
by any partner ceasing to be associated in the carrying on of the business. Dissociation of a partner doesn’t necessarily cause a dissolution and winding up of the partnership business.
Events triggering a partner’s dissociation
(1) notice of the partner’s express will to withdraw; (2) happening of an event the partners agreed would cause dissociation; (3) expulsion of the partner pursuant to agreement, by unanimous vote if unlawful to continue business with the partner, or by judicial decree; (4) the
partner’s bankruptcy; (5) the partner’s death or incapacity to perform partnership duties; (6) appointment of a receiver; or (7) termination of a business entity that is a partner.
Is a dissociated partner is permitted to participate in the management or conduct of P business?
No
What are the duties of a dissociated partner?
a partner’s duty not to compete terminates upon dissociation; the duties of care and loyalty terminate with respect to post-dissociation events unless the partner participates in winding up P’s business
When a P purchases a partner’s P interest, must the P indemnify a dissociated partner against all P liabilities?
Yes
Does the P need to buy out the dissociated partner’s interest?
Yes, The partnership must purchase (buy out) their interest at either liquidation or going-concern value
Dissociated partner’s liability
a dissociated partner is generally liable for P
obligations incurred before dissociation
Can a dissociated partner bind himself and P to a transaction?
Yes, a dissociated partner can bind himself and P to a
transaction if the other party reasonably believes the dissociated partner is a partner, does not have notice of dissociation, and is not deemed to have knowledge of the dissociated partner’s lack of authority; liability is limited to transactions within one year of dissociation
Actual Authority
Actual authority—a partner can contractually bind P when he acts with express authority (which can arise from the PA or partner authorization) or implied authority (based on the partner’s reasonable belief that an action is necessary to carry out his express authority)
Apparent Authority
the partner must perform the unauthorized act in the
ordinary course of P business; the third party with whom the partner was dealing cannot hold the P liable if the third party knew or was notified that the partner
lacked authority
Priority of distribution
Partnership assets are reduced to cash and partnership liabilities are paid in the following order:
First, the partnership must pay all creditors (creditors may include trade creditors or suppliers as well as partners who loaned money to the partnership)
Second, the partnership must repay all capital contributions paid into the partnership by partners (so, money paid in by partners— not loans) AND
Third, with respect to profits and losses, any money remaining must be shared equally in the absence of an agreement
Authority to transfer titled P property when
P property held in P’s name—execute an instrument of transfer in P’s name
P property held in partner’s name—execute an instrument of transfer in one or more partners’ names
Recovery of P property from transferee (P property transferred without authority)—recoverable if P interest was indicated in the transfer instrument or if the transferee was aware that the property belonged to the P and the partner executed the transfer without authority
Partner Who Pays More than Their Share Entitled
to Contribution
Where a partner is forced to pay more than their share of the partnership’s debts, they’re entitled to contribution from the other partners to equalize the shares.
P’s knowledge and notice
absent fraud, a partner’s knowledge/notice of a fact
relating to the P is immediately imputed to the P
Effect of partner’s tortious acts on partnership
a P is liable for a partner’s tortious acts committed in the ordinary course of the P business or with P authority (actual or apparent)
Are partners liable for P obligations?
Yes, partners are jointly and severally liable for all P obligations
What is dissolution?
the closing phase of a partnership.
Winding up
the period in which the remaining partners liquidate the assets to satisfy creditors.
Power of person winding up business—may dispose of and transfer P property and discharge the P’s liabilities
* After dissolution, P is bound by a partner’s act that is appropriate for winding up the P as well as any act undertaken by a partner that would have bound P before dissolution absent notice to other party (and each partner is liable to other partners for his share of P liability)
* Creditors have priority over partners to P’s assets
Events causing dissolution
P at will (open-ended with no fixed termination)—dissolved when a dissociating partner gives notice
* P for term/undertaking—dissolved when the term expires or the undertaking is completed; all partners agree to dissolve P; or a partner is dissociated due to death, bankruptcy, or other event and at least half of the other partners agree to dissolve within 90 days
* Any P—dissolved upon the occurrence of agreed-upon event, illegal P business activities, or judicial determination
Continuation of P after dissolution
before winding up is complete, P may resume
carrying on its business as if dissolution had never occurred
Limited liability partnerships (LLP)
an LLP partner is not personally liable as a partner for
an LLP obligation, only personally liable for his own personal misconduct; revocation of the state’s qualification of LLP status will have the same effect as cancellation
Limited partnerships
must be formed by at least one general partner and one limited partner; the limited partner’s liability for P debts is generally limited to her capital contribution to the P; and
limited P is not formed if certificate of limited P is not filed
Limited partner in LP
can only be admitted by written consent of all partners after creation;
has right to vote as permitted under the PA and right to inspect business/financial records;
can lend money and transact business like non-partner with LP;
and is generally not personally liable for LP obligation unless limited partner is also a general partner or participates in control of the business;
may only withdraw at time specified or upon the happening of events specified in writing in the PA
General partner in LP
Rule—can only be admitted by the written consent of all partners after creation; has the rights/powers of a normal partner; may contribute to LP, share in its losses and
profits, and receive distributions
* Liability to third parties—personally liable to third parties for obligations of LP
* Termination of status—can withdraw from LP by giving written notice to other partners, or other events causing termination
Contributions in LP
partners can contribute cash, property, or services, and are obligated to the LP with respect to any written, enforceable promise of a future contribution
Profits/losses in LP
may be allocated on any basis if in writing; otherwise based on each partner’s P contributions
Distributions in LP
may be allocated on any basis if in writing; otherwise based on how profits/losses are shared
Assignment of P interest in LP
a P interest in an LP is personal property that can be
assigned in whole or in part; the assignee generally has the right only to receive the distribution to which the assignor partner would otherwise be entitled
Termination of LP
occurs after dissolution and winding up
* P dissolved upon occurrence of a specified event, written consent of all partners, withdrawal of general partner, or judicial determination
* Winding up—general partners wind up, but if none, then the limited partners may; distribution of assets first to creditors and then to partners
Liabilities of LP
if general partner’s tortious act (e.g., fraud) is committed in the ordinary course of the partnership business, the LP may incur contractual obligation when general partner acts with actual or apparent authority
LP derivative action
a limited partner has the right to bring a derivative action on behalf of the LP
