Partnerships Flashcards
what is a partnership?
1) an association of two or more persons 2) who form and operate a for-profit business 3) as co-owners
can a corporation/entity form a partnership?
Yes. RUPA defines a “person” as an individual or legal entity, such as a corporation, limited liability company (LLC), trust, estate, governmental entity, or partnership.
is specific intent required to form a valid partnership?
No. To form a partnership, at least two persons must intend to carry on a business for profit as co-owners.
It is not required that the persons specifically intend to create a partnership out of the business
can an incapacitated person or minor enter into a partnership?
No. A person needs legal capacity to form a partnership. This excludes minors, inebriated people, and mental incompetents
When is co-ownership, a necessary element of a partnership, created?
When the partners share control and share profits.
do partnership agreements need to be written?
No. If a partnership agreement isn’t written, then default state laws will govern the partnership
are partners liable for the partnership’s obligations?
Yes. The partners are personally liable.
What happens if the partnership agreement is written?
Then the written terms will govern the partnership, not the default state laws.
Exception is when the default state law is mandatory
What state laws are typically mandatory, and therefore unwaivable by a written partnership agreement?
1) liability to third parties cannot be waived
2) Cannot deny partners access to books and records
3) Fiduciary duties cannot be waived
Can partnerships be taxed in their own name?
No. The partnership members can be taxed and have their profits from the partnership taxed on an individual level, but the partnership as an entity cannot be taxed
what fiduciary duties do partner members owe?
Partners are fiduciaries of the partnership and owe a duty of loyalty and care to the partnership and the other partners
what actions can constitute a breach of a partner’s owed duty loyalty?
1) advancing an interest that is antithetical/harmful to the partnership
2) usurping a partnership opportunity for themself
3) competing with the partnership business
Can a partner limit/edit their fiduciary duty of loyalty?
The duty of loyalty cannot be eliminated. However, it can be limited by describing it differently in the partnership agreement, so long as the limitation isn’t manifestly unreasonable
what is a safe harbor in relation to the fiduciary duty of loyalty?
If a partner is worried that something they’re doing violates their duty of loyalty, they can fully disclose what they’re doing to the other partners
If a certain percentage of the partners may authorize/ratify the transaction
What could violate a partner’s duty of care?
1) engaging in grossly negligent or reckless conduct
2) intentional misconduct
3) engaging in a knowing violation of the law
are the duties of loyalty and care owed by prospective partners or former partners?
No, the fiduciary duties only apply to current partners
Other than the fiduciary duties of loyalty and care, are there other obligations a partner owes to the partnership?
Yes, the obligation of good faith and fair dealing
The partnership agreement cannot eliminate this obligation, but it can prescribe reasonable standards by which it’s measured
How are the partnership profits and losses divided amongst the partners?
The division of profits and losses is generally dictated or determined by agreement.
how are the profits and losses divided when the partnership agreement is silent about profit division?
The profits are divided evenly amongst all partners
The losses are divided based on the profits (ex. if Partner X gets 70% of the profits, then Partner X is liable for 70% of the losses)
what is a distribution in the context of partnerships?
a payment of profits to a partner
What is the default rule for distributions?
Partners do not have the right to demand/force a distribution
Partners can agree in advance to allow distributions to be made according to the partnership
agreement
Can a partner transfer their partnership interest to a third party?
Yes, although this right can be limited in the partnership agreement, such as requiring a majority vote of the other partners to approve the transfer of one partner’s interest to another person
Can a new partner freely enter a partnership?
No. The default rule is that all the other partners must consent to the new partner coming in
Again, default rule can be limited by terms in the partnership agreement
If a partner transfers their partnership interest to a third party, does that mean the partner is now kicked out of the partnership?
No. Transferring an interest to a third party does not trigger the partner’s dissociation from the partnership.
The transferor partner retains all rights and duties of a partner in the partnership apart from an interest
How are partnerships governed?
Every partner has an equal right in the governance/control of the partnership.
This can be changed by language in the partnership agreement
How are the ordinary business activities of the partnership governed?
Ordinary business requires a vote of the majority of partners.
Again, can be changed via language in partnership agreement
Can partners have their right to books and records restricted?
No. A partner and their agents have the right to look at the partnership’s books and records
Cannot be limited/changed by partnership agreement
How are the extraordinary business activities of the partnership governed?
Extraordinary business requires a vote of the majority of partners.
What is dissociation?
when a partner ceases to be associated with the partnership, either voluntary or involuntary
what is voluntary dissociation?
when a partner gives notice to the partnership that they want to withdraw
what is an involuntary dissociation?
Kicking the partner out against their will. Can occur in several ways:
1) partner goes bankrupt
2) partner dies
3) partner becomes incapacitated
4) An event in the partnership agreement is triggered
5) A court orders that the partner be dissociated
6) it’s unlawful for the partnership to carry on business with the partner
can a partner be restricted from withdrawing from the partnership?
No.
what are the consequences of a partner being dissociated from the partnership?
1) the partnership must buy out any remaining interests the dissociated partner had with the partnership
2) dissociated partner no longer owes any duties to the partnership
3) dissociated partner no longer has any rights to the profits or the right to govern the partnership
When is property considered owned by a partnership?
When a document (ex. a title) shows that property was acquired in the name of the partnership
How can property be bought/acquired in the name of a partnership?
When the property is transferred to either:
(i) the partnership in its own name or
(ii) one or more of the partners in their capacity as partners
If property is not expressly put in a partnership’s name, can it still be considered partnership property?
Yes, the property will be presumed to be owned by the partnership based on facts surrounding it.
These facts include:
1) if it’s purchased with partnership funds
2) intent of the partners
When is property presumed to belong to a partner instead of the partnership?
when:
(i) the property is acquired in the name of one or more partners,
(ii) the property instrument doesn’t indicate the person’s capacity as a partner or the existence of a partnership, and
(iii) partnership assets were not used to acquire the property.
Can a partner be liable for contracts that the partnership has?
Yes, when the partner has authority to enter into the contract
what are the two kinds of authority a partner can have to enter into a contract on behalf of a partnership?
express authority and implied authority
how is express authority given to a partner to make a contract on behalf of the partnership?
1) the partnership agreement
2) a statement of authority filing
3) An ad hoc authorization by the partners at a meeting.
how is implied authority given to a partner to make a contract on behalf of the partnership?
Exists when the partner reasonably believes that an action is necessary to carry out express authority
What is apparent authority, and when does a partner possess it?
Authority that is implicitly created based on the ordinary course of dealings and interactions between the partnership and third parties.
The partnership may be bound by a partner’s apparent authority based on the partner acting in the ordinary course of
dealings.
what sort of liability do partners have for the debts/obligations of the partnership?
A partner is personally, jointly and severally liable for all partnership obligations.
when is a partnership liable in tort law for the tortious actions of one of their partners?
When the partner commits the tort within the scope of their partnership
In terms of debt liability, is a partner liable for the entire sum of a partnership’s debt, or only the percentage based on their interest in the partnership?
The entire sum. Creditors can go after any partner for the entire sum of the debt owed by the partnership
Can a partner be liable for contract or tortious obligations incurred by the partnership prior to them becoming a partner?
No
Can a partner who’s leaving be liable for contract or tortious obligations incurred by the partnership after they’ve dissociated?
Yes
What are the 2 steps for dissolving a partnership?
First, dissolution.
Second, winding up
what is a partnership at will?
An open-ended partnership with no fixed term tied to time period or undertakings
Can be dissolved when any partner chooses to dissociate
what is a partnership for a term or undertaking?
A partnership that dissolves when a set term limit expires, or an undertaking is completed
what is a statement of dissolution?
A filing that gives notice of the dissolution 90 days after the statement is filed
What are the ways a partnership can be officially dissolved?
1) A dissolving event set forth in the partnership agreement
2) An event that makes it unlawful to continue the partnership, if that event isn’t cured within 90 days
3) Judicial determination
what effect does a statement of dissolution have?
If it’s been properly filed, it limits the partners’ apparent authority and liability
what is “winding up”?
When a partnership officially dissolves, but it still continues to do some of its business in order to “wind it up”
who has authority to wind up a dissolved partnership?
1) a partner that hasn’t been wrongfully dissociated
2) a legal representative of the last surviving partner
3) judicial supervision, if requested by a partner
what is a limited liability partnership (LLP)?
a partnership in which a partner’s personal liability is eliminated
how is an LLP formed?
1) The partners must vote authorizing
transformation.
2) must file notice of the transformation with the state
3) The partnership’s name must be changed so it ends with either “Limited Liability Partnership” or “Registered Limited Liability Partnership”
For what activities are LLP partners liable?
They aren’t personally liable for the obligations of the LLP
They are personally liable for their own personal misconduct or negligence
Can an LLP be turned back into a normal partnership?
Partners can voluntarily transform and cancel LLP status
The state can also revoke LLP status
what is a limited partnership (LP)?
A partnership formed by two or more persons that has at least one general partner and one limited partner
how is liability handled in a limited partnership?
limited partners have limited liability. General partners have personal liability
how is a limited partnership formed?
a formal filing must be made with the state. This filing must contain various information, including:
1) signed by the general partner
2) Statement of duration
3) Name of the limited partnership (including LP)
4) Name of an agent in that state
5) an in-state address
6) names and addresses for all general partners
when can a limited partner join an LLP or LP?
Like with a normal partnership, a limited partner can join right at the beginning or later on if all the partners vote them in
do limited partners get to vote?
No, unless the partnership agreement says they can
do limited partners have a right to access records?
yes
Can a limited partner be liable to a third party?
A limited partner is not personally liable for the obligations of the
partnership unless she serves as a general partner or starts to participate in the partnership
What must a limited partner do to withdraw from the partnership?
They must give 6 months notice to the partnership
How can a general partner’s status be terminated in an LP?
1) they voluntarily withdraw
2) If the general partner tries to assign the partnership interest, the general partner may be
removed
3) if the general partner goes bankrupt/insolvent
4) death or incapacitation
What doesn’t count as “running the business” when it comes to a limited partner becoming liable to third parties?
1) Consulting the general partner on partnership affairs
2) Winding up the partnership
3) Being an officer, shareholder, or director
4) Acting as surety for the partnership
5) Requesting to attend partnership meetings
are general partners in an LP liable to third parties?
Yes, they are personally liable
what is required to form a general partnership?
Incredibly easy to do. Two or more people only need to intend to engage in for-profit business.
No formal words, writing, or specific intent to form a partnership are needed.
If a partner transfers their partnership interest to a third party, can the third party dissolve the partnership?
Yes
If a partnership is dissolved and wound up, how are the assets/obligations given out?
Any creditors get paid out first. Anything left over goes to the partners
If a partnership is transformed into an LLP via the filing of a statement of qualification, does that form a new partnership?
No. the LLP is still the same partnership as the original partnership.
The LLP would therefore still be on the hook for any obligations/contracts the original partnership had
