Partnerships Flashcards
What is a partnership?
A partnership is an association of two or more persons to carry on as co-owners of a business for profit. If they intended to carry on a business as co-owners, there is a partnership even if they did not subjectively intend to be partners. If they intended to carry on a business as co-owners, there is a partnership, even if they did not subjectively intend to be partners. Where the parties’ intent is uncertain courts will look at (1) whether the co-owners shared in profits (creates a presumption of partnership), (2) the co-owner’s right to participate in the control of the business, (3) and whether the co-owners shared in losses. Other relevant evidence includes (1) whether the title to the property is held in joint tenancy or in common, (2) the parties designate their relationship as a partnership, (3) the venture undertaken by the parties requires extensive activity, and (4) sharing of gross returns.
Partnership by Estoppel: 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. When a person holds another out as a partner, he thereby makes that person his agent to bind him to third parties. If there is a partnership, only those partners who know of or consent to this holding out will be bound.
What are the rights of partners?
Voting: Unless otherwise agreed, 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 of the ordinary course of business require the unanimous consent of all partners.
Distributions: Partners have whatever rights are granted in the partnership agreement as to distribution of profits. If the agreement is silent, partners share profits (and losses) equally.
Remuneration: Partners have no right to remuneration for their services (meaning they are not entitled to a salary) to the partnership except for winding up the partnership business.
Indemnification: A partner has a right to be indemnified by fellow partners for expenses incurred on behalf of the partnership.
Contribution: A partner has a right to contribution from fellow partners where the partner has paid more than his share of a partnership liability.
Inspection: A partner has a right to inspect and copy the partnership book.
Lawsuits: Generally, a partner may sue his partnership and the partnership may sue a partner in an action at law or in equity.
What are the rules for profits and losses?
Unless otherwise agreed, profits are shared equally among the partners (by number). Unless otherwise agreed, losses are shared in the same manner as profits.
What are the rules regarding partnership liability?
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.
Actual authority is the authority a partner reasonably believes they have based on the communications between the partnership and the partner. It can come from the partnership agreement or a vote of the partners. Actual authority can also be created by the partnership’s filing of a statement of partnership authority with the secretary of state (for real property transfers, this must also be filed with the county recorder).
A partner 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.
Each partner is jointly and severally liable (so, one or more partners may be sued) for all obligations of the partnership, whether arising in tort or contract. But the plaintiff must first exhaust partnership resources before seeking to collect from an individual partner’s assets. Each partner is personally and individually liable for the entire amount of partnership obligations.
An outgoing partner generally remains liable for all partnership obligations incurred while they were a partner, whereas an incoming partner generally has no liability for obligations incurred before they became a partner.
What fiduciary duties do partners owe to the partnership?
Duty of Loyalty: This duty 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.
Duty of Care: The duty of care requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
Duty of Disclosure: A partner also has a duty to provide complete and accurate information concerning the partnership. The 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.
Duty of Obedience: 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.
Note: A partnership agreement may not eliminate the duties of loyalty or care.
What are the rules for partnership property?
RUPA: Property is deemed to be partnership property if it is acquired in the partnership’s name or in a partner’s name where it is clear from the document that they are acting for a partnership. Property is presumed to be partnership property where it was purchased with partnership funds. Property is presumed to be a partner’s separate property if (1) it is held in the name of one or more partners, (2) the instrument transferring title gives no sign that they’re acting for a partnership, and (3) partnership funds were not used to acquire the property.
Common Law: Courts will consider the following factor: (1) acquisition of the property with partnership funds, (2) use of the property by the partnership, (3) entry of the property in the partnership books, (4) a close relationship between the property and the business operations, (5) improvements of the property with partnership funds, and (6) maintenance of the property with partnership funds.
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.
What are the rules for partnership interest?
A partner’s ownership interest in a partnership is called his “partnership interest.” A partnership interest is comprised of (1) management rights (that is, a partner’s right to participate in the management of the business, to obtain information about the partnership, and to be recognized as a “partner”); and (2) financial rights (that is, the partner’s right to receive his share of any profit distributions made by the partnership). Management rights cannot be transferred unless the transfer is approved by a unanimous vote of existing partners. However, a partner can unilaterally transfer his financial rights.
What are the rules for disassociation of a partnership?
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. When a partner dissociates by express will in an at-will partnership, the partnership is dissolved and its business must be wound up. In a term partnership, if one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up of the partnership are required only if, within 90 days after the dissociation, at least one-half of the remaining partners agree to wind up the partnership. If the partner’s disassociation does not result in a dissolution and winding up, the dissociated partners are entitled to a buyout of their partnership interest.
A partnership can be bound by an act of a dissociated partner undertaken within two years after dissociation (assuming that dissolution has not occurred) if: (1) the act would have bound the partnership before dissociation, and (2) the other party to the transaction (a) reasonably believed the dissociated partner was still a partner and (b) did not have notice of the dissociation. The partnership can protect itself by notifying creditors directly of the dissociation (effective immediately) or by filing a public statement of dissociation (becomes effective 90 days after filing).
What are the rules for dissolution of a partnership?
Dissolution generally requires the partnership business to be wound up. The passage of 90 consecutive days during which the partnership does not have at least two partners terminates a partnership. Once a partnership is dissolved, the partnership must follow this order of distribution: (1) payment to all creditors (inside and outside), (2) capital contributions paid into the partnership by partners, and (3) profits or losses.
Partners retain apparent authority to bind the partnership to a third party on new business even after an event requiring winding up. A partnership can be bound after dissolution by any act of a partner appropriate for winding up the partnership’s business. The partnership will also be liable for other acts if the party with whom a partner dealt did not have notice of the dissolution. The partnership can protect itself by notifying creditors directly of the dissolution (effective immediately). In addition, any partner who has not wrongfully dissociated may file a statement of dissolution with the secretary of state; all persons are deemed to have notice of a dissolution 90 days after such a notice is filed.
What are the rules for limited partnerships?
A limited partnership (“LP”) is a partnership with at least one general partner and at least one limited partner. The general partner(s) is personally liable for partnership obligations, while the limited partner(s) generally does not have any liability beyond the liability to make agreed-upon contributions.
A limited partnership is formed if the following requirements are met: (1) a certificate of limited partnership is filed with the secretary of state and signed by all the general partners, (2) the limited partnership maintains a records office in the state of organization, (3) the limited partnership maintains an agent in the state for service of process, and (4) the limited partnership includes the phrase “limited partnership” or “L.P.”
General partners have management rights, but limited partners do not have management rights unless the partnership agreement grants them such rights.
General partners owe fiduciary duties to the limited partnership and other partners, but limited partners do not owe fiduciary duties to the partnership or any other partners.
What are the rules for limited liability partnerships?
In an LLP, all of the partners have limited liability (that is, no partner is personally liable for a partnership obligation beyond their contribution to the partnership). Partners are not personally liable for the LLP’s obligations.
To become an LLP, the partnership must file a statement of qualification with the secretary of state that is executed by at least two partners. The partnership becomes an LLP at the time of the filing of the statement or on the date specified in the statement, whichever is later.
A partner in an LLP is not personally liable (directly, indirectly, or by way of contribution) for the obligations of the LLP, whether arising in tort, contract, or otherwise. As always, however, a partner remains personally liable for their own wrongful acts.
What are the rules for limited liability companies?
A limited liability company (“LLC”) is a hybrid business organization between a corporation and a partnership that (1) is taxed like a partnership (except for a single-member LLC), (2) offers its owners (called members) the limited liability of shareholders of a corporation, and (3) can be run like either a corporation or a partnership.
An LLC is formed by filing a certificate of organization with the secretary of state. The LLC must have at least one member. The certificate must include (1) the name of the LLC, (2) the address of the LLC’s registered office, and (3) the name and address of its registered agent.
Management of the LLC is presumed to be by all members. Other management arrangements can be made (for example, management by outside managers), but they must be specified in the operating agreement. Each member (or manager, if the LLC is manager-managed) has equal rights in the LLC’s management. A majority vote of the members (or managers) is required to approve most (that is, ordinary business) decisions.
In most states, however, unless otherwise agreed, profits and losses and distributions are allocated on the basis of contributions.
Members and managers generally are not personally liable for the LLC’s obligations.
The fiduciary duties owed by a member (if member-managed) or a manager (if manager-managed) to the LLC and to its other members are the fiduciary duties of care and loyalty.
Financial rights are unilaterally transferable, but management rights are not. One can become a member (that is, management rights can be transferred) only with the consent of all members or as provided in the operating agreement.
A person has the power to dissociate as a member of an LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member.
Partnerships and LLCs are taxed on a “pass-through” basis. There is no entity-level tax; instead, business income is passed-through to the owners and reported on the owners’ individual tax returns (regardless of whether that business income is actually distributed to the partners).
