Partnerships Flashcards
What is required for a partnership to form?
- Association (express or implied, no writing required)
- Of two or more persons (or legal entities)
- To carry on a for-profit business
- Intent is required to carry on business, not to form partnerships
- Sharing of profits (not merely gross returns) presumes a partnership
When does profit sharing not trigger a presumption of partnership?
Payments for a debt (contrast a loan vs. a partnership)
♦ Interest on a loan
♦ Rent
♦ Wages
♦ Goodwill payments from sale of a business
♦ Retirement or health benefits paid to a deceased or retired partner’s beneficiary
What are the consequences of a valid partnership?
Creates separate legal entity—can hold property, sue, and be sued
No limited liability—partners are personally liable for P obligations
What is a partnership by estoppel?
Third party (3P) can recover as if a valid P were formed if one is held out as a partner with consent, and a 3P relies and suffers damages (agency principles)
What fiduciary duties and liabilities does a partner owe?
- To the partnership: same as any agent (loyalty, reasoanble care, obedience, notification)
- To other partners: Duty of Loyalty—a partner has a duty not to compete, advance an adverse interest, or self-deal (just as with corporations) unless approved per P agreement after full disclosure; the P agreement cannot eliminate the duty of loyalty
- Duty of Care—a partner must not knowingly violate the law or engage in reckless or grossly negligent conduct or intentional misconduct
3P Liability: * An incoming partner’s liability for pre-existing P obligations is limited to his capital contribution - A dissociated partner is liable for obligations incurred before dissociation, and after dissociation if the 3P was without notice of the dissociation
What are partnership rights in management and voting?
MANAGEMENT AND CONTROL—unless provided in the agreement, each partner has an equal right to manage and control
ORDINARY BUSINESS—requires approval by a majority of the partners
SPECIAL BUSINESS—requires approval by all of the partners
INSPECT AND COPY—access to the records must be provided to a partner or his agent
INDEMNIFICATION required if a partner incurs liability while preserving P property or business
How are profits and losses shared in a partnership?
Absent an agreement, profits and losses are shared equally (regardless of unequal status or contribution); losses follow (shared like) profits if agreement is silent
How can a partnership interest be transferred?
A partner has a partnership interest (i.e., the right to share of profits, losses, and distributions); a transfer of a partnership interest does not cause a dissolution or dissociation
When is something partnership property? When can it be transferred?
Whether property belongs to a partner or the P is determined by how it is titled, the type of funds used, and in whose name it is held; untitled property ownership is determined by intent of the partners and presumed P property if acquired with P funds or credit.
A partner may have apparent authority to transfer P property on behalf of the P; property transferred without authority can be recovered unless the P’s interest was not indicated and transferee was without notice.
A partner does not have a right to use or possess P property for personal use and must compensate the P for any resulting personal gain.
When can a partner be added or removed?
A. ADDITION—a partner can be added only through unanimous consent of the other partners
B. DISSOCIATION (voluntary or involuntary withdrawal of a partner)
1. A partner may withdraw by providing notice; if in breach, she will be liable for damages
2. The P may expel a partner per the agreement, by unanimous vote if it is unlawful to carry on business with the partner, or it may occur due to death, bankruptcy, incapacity, court decree, or by termination of an entity partner
3. Consequences:
* The P must purchase the partner’s interest and indemnify her against liabilities
* Dissociation will not necessarily trigger dissolution and winding up, except in an at-will P
* If dissociation wrongful, the remaining partners may vote to dissolve the business
* The partner has the power to bind the P unless notice filed with the state + 90 days
When does a partnership dissolve?
According to type
* At-will—if no fixed term or undertaking, the P dissolves when any partner dissociates
* For a specific term or undertaking—may dissolve by its terms, with unanimous consent, or after a partner is dissociated if at least half of remaining partners consent
2. Triggering events—any P may dissolve per the P agreement, due to an event that causes unresolved illegality, or by judicial determination
What are LLPs and LPs?
LIMITED LIABILITY PARTNERSHIP (LLP) no personal liability for partnership obligations. Cancelling statement will transform LLP into a general P.
LIMITED PARTNERSHIP (LP)—reduces a limited partner’s liability to his capital contribution. Reqruies a general partner and limited partner (GP is often corporation for liability reasons).
A limited partner is liable only if she participates in the control of the business and the 3P reasonably believes she is a general partner based on conduct, or if she also serves as a general partner
