Partnerships Flashcards
A partnership is an
association of two or more legal entities (person or a corporation / other legal entity) who carry on a for-profit business as co-owners
Intent to form a partnership is
not needed to form a partnership, only
(1) Carry on as co-owners
(2) For profit
When two or more people or legal entities share profits there is a
presumption of a partnership relationship
Note: Does not apply to payments of a debt, interest payments, rent, wages, or goodwill
Partnerships are separate legal entities meaning
they are distinct from the partners and can hold property and sue/be sued independently of the partners
Partnerships have no entity-level taxation meaning
taxes are only paid when profits are distributed to partners
Partnership agreements will generally govern all rules of the partnership EXCEPT when
State law is mandatory (e.g. can’t waive personal liability)
Can’t:
(1) Waive liability to third parties
(2) Deny Partner access to books and records
(3) Eliminate fiduciary duties
The duty of loyalty owed to partnerships by its partners prevent
(1) partners from competing with the partnership business
(2) partners from advancing an interest adverse to the partnership
(3) partners from usurping partnership opportunities
The duty of loyalty may be
limited so long as it is not manifestly unreasonable
Safe-harbor for duty of loyalty violations is
full disclosure of all material facts and then either a certain percentage (or all) partners vote to authorize or ratify the transaction
The duty of care owed to partnerships is to not
(1) engage in grossly negligent or reckless conduct
(2) engage in intentional misconduct
(3) engage in a knowing violation of the law
Prospective / Former partners do not
owe duties of loyalty or care to the partnership
The division of losses and profits is
generally dictated by the partnership agreement
default rule = split profits evenly, and losses follow profits
Note: capital or financial contributions need not have an effect on the division of profits or losses
Financial distributions from a partnership to a partner may
be done if agreed upon in advance and made according to partnership agreement
generally there is NO right to demand distribution
Transferring of a property interest is
presumed allowed (old rule led to dissolving of partnership) though partners may still agree to change default rule to require majority vote of partners
The default rule for new partners is
all partners must consent (may be changed in partnership agreement)
Management and control of a partnership is
presumed equal between the partners (may be modified by partnership agreement and may reflect capital contribution)
Ordinary v. Extraordinary business matters
Ordinary = vote of majority of partners
Extraordinary = vote of all partners (unanimity)
Dissociation from a partnership may be either
voluntary or involuntary
Note: voluntary requires notice of intent and may be done at ANY time even if wrongful
Involuntary dissociation may arise when
(1) Event specified in partnership agreement occurs
(2) Partner is expelled pursuant to partnership agreement
(3) Court may order it
(4) A partner goes bankrupt
(5) A partner dies
(6) A partner has become incapacitated
(7) One of the entities of a partnership dissolves
Consequences of Dissociation are
former partner has no rights to participate in management but does not owe any duties to partnership
partnership must buy out dissociating partner if the partnership continues (may be affected if partner wrongfully dissociates)
Every partner is an
agent of the partnership
Partners may enter into contracts for which they have
authority
Express
Implied (partner’s reasonable belief action is necessary to carry out express authority)
Apparent (based on partnerships interactions with third party)
A partner is liable in tort for acts committed
within the scope of their partnership
Regarding liability in partnerships, partners are
personally, jointly, and severally liable for all partnership obligations
May go after partner for the entire sum owed by the partnership (generally must exhaust partnership funds first)
An incoming partner is not personally liable for
contract or tort obligations incurred prior to becoming partner (exception: partner’s capital contribution upon joining partnership)
2 steps of termination of a partnership
dissolution and winding up
Dissolution may be brought about by
a partner or operation of law
Partnership at Will is
a partnership with no fixed end date or term, and generally is dissolved when any partner dissociates (may be modified in partnership agreement)
Partnership for a Term or Undertaking is
a partnership which may dissolve when the term expires or the undertaking is complete
3 ways of dissolving a partnership
(1) Event set forth in partnership agreement
(2) Any event that makes it unlawful to continue if not cured within 90 days
(3) Judicial determination
The process of winding up a corporation may be done by
a partner who has not wrongfully dissociated or a legal representative of a deceased partner
note: judicial supervision may be sought
The powers of winding up include
transfer partnership property and discharge partnership liabilities
Note: may also include preserving the partnership business and maximizing value as a going concern
Statement of dissolution is a
filing that gives notice to third parties of dissolving 90 days after filing (limits apparent authority and liability)
Priority of proceeds at dissolution
(1) creditors
(2) partners
LLP is like a partnership but
eliminates personal liability
No liability for obligations of LLP but partners are liable for OWN personal misconduct
LLPs must be
filed with the state and always end with wither RLLP or LLP
LLPs may lose LLP status by either
voluntary transformation or cancelling of LLP status by the partners or revocation by the state
Limited Partnerships are partnerships that are
formed by two or more persons and have at least one general and one limited partner
In a Limited Partnership the
general partner has personal liability and the limited partner has limited liability
LPs require
filing a certificate of limited partnership including
(1) name of limited partnership
(2) in state address
(3) name of an agent in the state
(4) Name and address of all general partners
(5) Statement of duration
(6) Be signed by the general partner
Note: Effective when filed
Substantial compliance is sufficient
Both limited and general partners of a LP may join
at the creation of the LP or with agreement of all partners
Limited partners are not personally liable unless
they serve as a general partner or start to participate in the partnership (active participation)
Attending meetings, consulting general partner, being an officer or director or shareholder do not count as sufficient participation to be “running” partnership
A general partner may have their status terminated by
(1) voluntarily withdrawing
(2) tries to assign partnership interest
(3) goes bankrupt
(4) dies or becomes incapacitated
(5) business-entity partner is terminated
A partner may become a partner by estoppel if
(1) There is a representation that a person is a partner
(2) The person makes or consents to the representation
(3) A third party reasonably relied on the representation, and
(4) The third party suffered damages as a result of the reliance
A partner may use or possess partnership property only
on behalf of the partnership
A partnership may pursue a legal action against a partner for
breach of the partnership agreement or for violating a duty owed to the partnership that caused harm (e.g. duty of loyalty and duty of care)
For apparent authority to apply and bind the partnership to a contract, the partner must perform the unauthorized act in
the ordinary course of apparently carrying on either the partnership business or business of a kind carried on by the partnership
Note: 3rd party must NOT have notice of actual lack of authority
For a partnership that is unlimited by time or undertaking, a partner’s dissociation is wrongful only when
it is in breach of an express provision of the partnership agreement
A dissociating partner’s duties of care and loyalty terminate upon the moment of dissociation unless
the partner participates in winding up the partnership’s business if the partnership itself dissolves
A partner must perform the windup consistently with
the contractual obligation of good faith and fair dealing
A dissociated partner may maintain an action against the partnership to determine the buyout price and to compel the partnership to pay that amount to the partner if
the action is commenced within 120 days after the partnership has tendered payment or an offer to pay, OR within one year after written demand for payment if no payment or offer to pay is tendered.
Any partner has the actual authority to
commit the partnership to usual and customary matters, unless the partner has reason to know that other partners might disagree
Note: This may conflict with the individual right each partner has in equal rights in management and conduct of the partnership’s business
If there is a decision as to a matter outside the ordinary course of the partnership’s business, the decision requires
the consent of all partners
Each partner is liable to the other partners for
his share of partnership liability incurred by such post-dissolution acts (regardless of whether dissolution was caused by wrongful or proper dissociation of a partner)
