Partnerships

Question 1

Creation of a General Partnership

Answer 1

A General Partnership is created when

(1) two or more persons,

(2) as co-owners,

(3) carry on a business for profit.

No written agreement or formalities are required. A person’s subjective intent to form a partnership or be partners is irrelevant and NOT required.

A partnership is presumed if there is an agreement to share profits equally.

Absent an agreement to the contrary each partner has an equal vote; profits are shared equally; and losses are shared the same as profits are shared.

Question 2

Formation of a Limited Partnership (LP)

Answer 2

A Limited Partnership is a partnership composed of general and limited partners, and MUST have at least one general partner.

It is formed upon the filing of a Certificate of Limited Partnership with the Secretary of State.

If the Certificate of Limited Partnership fails to meet the above requirements, then a General Partnership is created.

Question 3

Formation of a Limited Liability Partnership (LLP)

Answer 3

A Limited Liability Partnership (LLP) is one in which all partners have limited personal liability.

Any partnership may become an LLP upon:

(1) approval by the same vote that is necessary to amend the partnership agreement; AND

(2) by filing a Statement of Qualification with the Secretary of State.

Unless otherwise agreed, a unanimous vote is required to amend a partnership agreement.

Question 4

LLP Pre-existing Duties

Answer 4

The filing of a Statement of Qualification DOES NOT create a new partnership. Instead, the LLP continues to be the same partnership entity that existed prior to the filing. Thus, the LLP remains liable for any unfulfilled obligations of the partnership entity before it became an LLP.

Question 5

Partnership vs. Separate Businesses

Answer 5

To determine whether two businesses (or people running businesses) are separate entities, rather than operating as a general partnership, a court will consider whether the business:

(1) operates under a separate name;

(2) keeps the files of the business in a separate room;

(3) uses the same office staff;

(4) has contributed any money to the other person or entity;

(5) intends to share profits with the other person or entity; and

(6) pays rent for a separate office

Question 6

Partner Authority to Bind a Parntership

Answer 6

Each partner is an agent of the partnership, and generally has authority to bind the partnership for the purpose of its business (including entering into contracts).

An act or transaction is within the ordinary course of business if it is normal and necessary for managing the business – a person would reasonably conclude the act is directly and necessarily embraced within the partnership business.

Question 7

Partner Express Actual Authority

Answer 7

A partner has express actual authority to bind the partnership upon receiving said authority from the partners.

If the partnership agreement is silent on the scope of the partner’s authority, a partner has authority to bind the partnership to usual and customary matters, UNLESS the partner knows that:

(a) other partners might disagree; OR

(b) for some other reason consultation with fellow partners is appropriate.

Question 8

Partner Apparent Authority

Answer 8

A partner has apparent authority to bind the partnership for all acts apparently conducted within the ordinary course of the partnership business OR the kind carried on by the partnership.

However, a partner’s act will NOT bind the partnership if:

(1) the partner lacked authority; AND

(2) the third-party knew (actual knowledge) or had notice that the partner lacked authority.

For acts outside the scope of business, there must be a manifestation by the partnership that the partner had authority in order to bind the partnership.

Question 9

Partner Implied Actual Authority

Answer 9

A partner has implied actual authority (also known as incidental authority) to take actions that are reasonably incidental or necessary to achieve the partner’s authorized duties.

Question 10

General Partner Personal Liability

Answer 10

General Partners are personally liable for ALL obligations of the partnership UNLESS otherwise agreed by the claimant or provided by law.

General partners are jointly and severally liable for partnership obligations, which means that a claimant can collect the full amount of the debt from any one of the partners.

Question 11

Incoming Partners Personal Liability

Answer 11

Incoming partners admitted into an existing partnership are NOT liable for obligations incurred prior to their admission, even if the incoming partner has notice of a claim.

Even though that partner is not personally liable for the debts of the partnership, he is still at risk of losing any capital contributions he made to the partnership that are used to satisfy partnership obligations.

Question 12

Outgoing Partner Liability

Answer 12

An outgoing partner remains liable for debts of the partnership while he was still a partner UNLESS there has been novation, release, or payment.

Question 13

Judgment Enforcement Against a Partner’s Personal Assets

Answer 13

Generally, a judgment creditor CANNOT levy execution of the judgment against a partner’s personal assets for a partnership debt UNLESS:

(1) a judgment has been rendered against the partner; AND

(2) the partnership assets have been exhausted or are insufficient.

Question 14

Personal Liability of Limited Liability Partners

Answer 14

An obligation incurred by a Limited Liability Partnership (LLP) is solely the obligation of the LLP. Under RUPA, a partner in an LLP is NOT liable for partnership obligations.

However, certain exceptions to this rule exist.

(1) Partners are ALWAYS liable for their own misconduct or when they sign a personal guarantee for the obligation.

(2) Even if a partner is not personally liable for the debts of the partnership, he is at risk of losing any capital contributions he made to it.

(3) Obligations incurred before a partnership becomes an LLP are treated as obligations of the prior partnership entity (i.e. general partnership or limited partnership).

Question 15

Transfer of Ownership Interest in a Partnership

Answer 15

A partner can only transfer: (1) his interest in the share of the profits and losses; AND (2) his right to receive distributions.

All other incidents of partnership ownership belong to the partnership and CANNOT be transferred.

(Such as the right to access partnership property, the right to inspect books and records, and the right to participate in management of the partnership)

The partnership does not need to give effect to an assignee’s rights until the partnership has proper notice of the transfer of ownership.

Question 16

Transfer to Become a Partner

Answer 16

Unless a written partnership agreement states otherwise, ALL partners must consent for a transferee of a partnership interest to become a partner in the business.

If the transferee becomes a partner, the assignee may be liable for partnership obligations arising after their admittance, depending on the type of partnership entity (i.e. general partnership, limited partnership, limited liability partnership).

Question 17

Fiduciary Duties Owed by Partners

Answer 17

Partners owe the fiduciary duty of care and duty of loyalty to the Partnership and to other partners.

Question 18

Duty of Care

Answer 18

A partner is only in breach of the duty of care when he engages in:

(a) grossly negligent or reckless conduct;

(b) intentional misconduct; OR

(c) a knowing violation of law.

Question 19

Duty of Loyalty

Answer 19

A partner CANNOT:

(a) engage in self- dealing,

(b) usurp business opportunities, OR

(c) compete against the partnership.

Where a partner breaches the duty of loyalty, profits may be disgorged and any contracts may be revoked or rescinded.

Question 20

Dissolution

Answer 20

Upon dissolution, the partnership is NOT terminated, but continues until the winding up of partnership affairs is completed.

Question 21

Winding Up

Answer 21

Winding up is the process of settling partnership affairs after dissolution. The partnership is terminated when the winding up of its business is completed.

During the winding up process, partnership assets are converted to cash and then distributed in the following order:

(1) outside creditors;

(2) inside creditors – partners who made loans to the partnership;

(3) partners’ capital contributions; and

(4) profits to be distributed among the partners.

Each category must be fully satisfied before moving to the next category. If partnership assets are insufficient to pay the liabilities of the partnership, the loss will be divided among the partners.

Question 22

Partnership Profits and Losses

Answer 22

The partnership agreement controls a partner’s rights to share in the partnership’s profits and losses.

If there is no agreement, or if the agreement is silent as to the division of the profits and losses, each partner is entitled to an equal share of the partnership profits and losses.

When the agreement addresses only the division of partnership profits, partnership losses are shared in the same manner.

Question 23

Partnership Management Rights

Answer 23

Each partner has equal rights in the management and conduct of the partnership. Cannot alter another partners right unilaterally in this situation