Partnerships Flashcards
What makes up the legal organisation of a corporation?
(From bottom to top) Shareholders, Board of Directors and CEO
What is the main distinction between a company and a partnership?
A company is an extensive legal entity for which no individual carries responsibility, which is different from a partnership.
What are the differences between an individual enterprise and a collective enterprise?
- Individual enterprise - also known as sole entrepreneur/trader, is when a single individual is liable for the wins and losses of the company
- Collective enterprise - when there is a sharing of wins and losses, partnership is the fundamental form of collective enterprise
What is the limitation with partnerships?
That there has to be a meeting of the minds and no foul play as all wins an losses are shared by the parties
What is the legal nature of a partnership?
It is a contract among parties who wish to carry out a business collectively. Partnerships are private compared to many companies who are public
What are the three most common types of partnerships and their classification?
- Standard/general partnerships (GP) - All members are liable towards the business
- Limited partnerships (LP) - A mix between general and limited partners, where limited partners usually are investors who can not be actively involved in the business (engaging in the business makes a limited partner fully liable)
- Limited liability partnerships (LLP) - a partnership where all parties are limited partners, which makes it close to a corporation. Is not allowed in all jurisdictions, e.g France and Spain
What are the five points that define a partnership?
- The nature of the relationship is a contractual one
- It is a requirement that a business be carried out
- Any business must be carried out in common
- Partnerships may be created for the purpose of a single venture
- The business must be carried out with a view to a profit - a focus on contributing to society does not legally make it a partnership
What is the difference between contractual relationships vs legal personalities?
- Contractual relationships - the legal relationship between parties formed through a contract
- Legal personalities - the status of companies being recognized as separate legal entities
How can partnerships be formed?
- Partnership agreements (usually but not necessarily in writing), also known as Articles of Partnership
- De facto partnerships - acting as if one is in a partnership can legally bind one to a partnership agreement without it being explicit
What is special about the alteration of a partnership agreement?
The unamity principle rules, stating att all parties involved need to agree on the terms in order for them to be valid. The veto right gives partners the privelege of blocking changes to the agreement
What are the seven typical contents of a partnership agreement?
- Nature of the business (what are we going to do together?) - a general plan which states the purpose and plan of the partnership. Also acts as a limitation
- Name of the firm - cannot refer to a limited partner as it would make them liable
- Contribution made or to be made by partners - something of value (e.g a trademark or money)
- Methods of determination and sharing of profits - partnerships have a non-proportional sharing of profits and losses. A bigger participation allows for more influence
- Internal organisation (usually simple) - the top management has to be partners
- Term/dissolution (how long will the partnership last?) - upon expiration there is an option for liquidating the partnership or extending its validity. The agreement can be open-ended (without a set time)
- Arbitration/jurisdiction - where disputes among partners are handled. Standard court of justice is preferred over arbitration as it is less costly and complex
What is the relationship among partners?
A partnership is a contract but also involves a principal/agent relationship since the action of one party affects the other parties
What needs to be considered in terms of loyalty and partnerships?
That there has to be a mutual loyalty for a partnership to work. There is a fiduciary (trust-based) nature of the relationship. Partners are not to be chosen lightly as it is not easy to back out of a partnership and you’re also legally bound towards a common cause. “The partner is more important than the activity itself… “
What are the four general duties of partners?
- The general duty to act in good faith - comes from the fact that a partnership is contractual in nature
- Duty to disclose - entails transparency of information
- Duty to account - shareholders have a responsibility of documenting and reporting processes and events, especially important when dealing with limited partners
- Duty not to compete - it is not allowed to compete with your partners unless agreed upon
What are the rights of partners (five in total)?
- To share the capital and profits of the business proportionally with the contributions. Unless specified, the sharing will be made equally
- To be indemnified for any liability incurred in the course of the business - e.g if I pay a partnership debt, my partners have to pay their part to me
- To take part in the management - however not all decisions are necessarily managerial and limited partners can not take part in management
- To access the firm’s books - access to financial and general information
- To prevent admission of a new partner or significant changes to the partnership agreement - veto right
