Partnerships Flashcards
What is a partnership? How is a Partnership formed? What type of partnership is formed when the basic requirements are met?
A partnership is (1) an association of two or more persons (2) to carry on as co-owners (3) a business for profit. This is a General Partnership.
- This is regardless of whether the parties intend to form a partnership.
- VERY IMPORTANT RULE!!!
What factors go into whether an association rises to the level of a partnership?
- PROFIT sharing (by far the most important!)
- Right to participate in CONTROL of the business (even if never exercised)
- Loss sharing
NOTE: TOTC test
What presumption applies when business associates are sharing profits? What circumstances do away with this presumption?
When people in business together are sharing profits, there is a LEGAL PRESUMPTION that they are partners.
- Getting profits in payment of a loan or rent does not create this presumption.
What presumption applies when business associates share revenues?
The sharing of gross revenues (revenue - expenses = profits) does not create any legal presumptions (unlike sharing profits).
What is a Partnership by Estoppel?
If a partnership was, in fact, not formed, partnership liability can be imposed to protect third parties.
- Do they hold themselves out to the world as if they are partners?
- It’s on a creditor-to-creditor basis–depends on who actually relied on the representations.
Is a partnership a legal entity distinct from its owners?
Yes. It’s considered different from the owners/partners.
How is a general partnership managed?
Unless otherwise agreed, all partners have equal rights as to the management of the business. They have equal votes.
- Ordinary business decisions require a majority vote.
- Matters outside of the ordinary course of business (extraordinary business decisions) require a unanimous vote.
What are partners’ default rights to salary? Why are these their rights?
No default salary because they’re getting profit distributions.
- Most partnership agreements change this.
How are profits shared among partners (default)? What about losses?
Unless otherwise agreed, profits are shared equally.
Unless otherwise agreed, losses are shared in the same manner as profits.
What liability does a partnership have for third party torts caused by a partner or employee?
A partnership is liable for third party torts when a partner or employee acting in the ordinary course of business of the partnership or authority of the partnership commits a tort.
When is a partnership liable for contracts?
A partnership is liable for contracts entered into on its behalf by partners with actual or apparent authority.
How can actual authority be created under a partnership?
- Partnership agreement
- Requisite vote of the partners
- Filing Statement of Partnership Authority with the Secretary of State and county (in the case of real property). This document files publicly limited partner’s authority to transfer real property.
— NOTE: Third parties are benefited by filed grants of authority and are not burdened by filed restrictions of authority unless it’s for real property.
How is apparent authority created under a partnership?
- A partner is automatically an agent under agency law and has apparent authority unless the third party has actual notice otherwise (when the contract is in the ordinary course of business); NOTE: this cannot be changed by agreement!
What liability is there for partners in a general partnership?
Each partner in a general partnership is jointly and severally liable for partnership obligations (tort and contract).
- The plaintiff must first exhaust partnership interests before coming after the partners’ personal assets (the partners are essentially guarantors).
How can new partners be admitted into a partnership?
As a default rule, new partners can be admitted via a UNANIMOUS vote.
To whom do partners in a general partnership owe fiduciary duties?
To the partnership AND to the other partners.
What duties do partners in a general partnership owe?
- Duty of loyalty
- Duty of care
- Duty of disclosure
What is the statutory Duty of Loyalty owed by partners in a general partnership?
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.
- Generally, must treat everyone with fairness!
What is the statutory Duty of Care owed by partners in a general partnership?
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.
What is the statutory Duty of Disclosure owed by partners in a general partnership?
A partner also has a duty to provide complete and accurate information concerning the partnership. The duty of disclosure is a statutory duty rather than a fiduciary one (although some judicial opinions treat it as fiduciary in nature). R.U.P.A. provides that each partner and 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 (except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances).
