Partnerships Flashcards
PARTNERSHIPS
A Partnership (P-ship) is an association of two or more persons carrying on as co-owners of a business for profit. There are no particular formalities required to create a general partnership. Courts generally look to the intent of the parties to determine the existence of a P-ship.
Where the intent of the parties is unexpressed, courts will look to the following factors:
(1) title to property;
(2) designation of the entity by the parties;
(3) amount of activity involved;
(4) sharing of gross returns; and
(5) sharing of profits {note: prima facie evidence of partnership unless receiving payment as rent, wages or debt}.
Per SOF, if Partners wish to have an enforceable agreement to be Partners for more than a year, a writing is required.
MANAGEMENT AND OPERATION of P-Ship
“Absent an agreement to the contrary,” (key phrase) all partners have an equal right in the management and control of the partnership business and share equally in the profits and surplus remaining after all liabilities.
FINANCIAL RIGHTS AND OBLIGATIONS of P-SHIP
a. Sharing Profits/Losses. Absent an agreement to the contrary, all partners share equally in the profits and surplus remaining after all liabilities. Losses are shared the same as profits, unless agreement to the contrary.
b. Liability of Partnership to 3P. A partnership is liable for all debts incurred in the furtherance of the partnership under the principles of agency. Also liable for torts committed within the scope of the partnership business. However, a partnership is not liable for contracts entered into by partners who exceeded the scope of their authority.
c. Liability of Partners to 3P. General Partners of the partnership are jointly and severally liable for the debts and obligations incurred by the partnership. A partner is personally liable all contracts entered into by a Partner within the scope of partnership or with authority & torts. Each partner is also personally liable and individually for entire amount of Partnership obligations, but are entitled to contribution from other partners. A newly admitted partner is liable only to the extent of his capital contribution for debts incurred by the partnership PRIOR to his entry.
FIDUCIARY DUTIES OF PARTNERS
Partners in a general partnership owe fiduciary duties of care & loyalty to the partnership, and a statutory duty of disclosure.
Partnership Property vs. Personal Property
Partnership property embraces everything that the partnership owns, consisting of both the capital contributed by its members and the property subsequently acquired in partnership transactions. The controlling factor is the partners intent to devote the property for partnership purposes.
No one Partner can transfer (leases, land, equipment) ILLIQUID. Test: Whose $ was used to buy property?
Partner’s Ownership Interest
The ONLY assignable interest of a partner in the partnership is the partner’s share of the profits and surplus (personal property) of the partnership and the partner’s right to receive distributions, UNLESS the partnership agreement provides to the contrary.
The assignee does not become a partner and is not entitled to participate in the management or control of the partnership business. (LIQUID)
Dissolution
Dissolution is a change in the legal relationship. Unless there is an agreement to the contrary, dissolution occurs:
(1) by act of the partners (per agreement, mutual assent, expulsion of a partner, any partner if partnership at will);
(2) operation of law (death of a partner); OR
(3) by court decree (breach of agreement, unprofitability, misconduct, any other circumstances).
Winding Up
Upon dissolution, the partnership must be wound up. A partner has the authority to carry out the necessary acts to wind up the partnership business. Only transactions that are designed to terminate, rather than carry on the business, are within the scope of the partner’s actual authority.
Distribution of the Assets
Upon dissolution, partnership assets are converted to cash and then distributed in the following order:
(1) outside creditors;
(2) inside creditors;
(3) capital contributions;
(4) profits distributed among partners.
If the partnership assets are insufficient to pay the liabilities of the partnership, the loss will be divided among the partners.
Partner Dissociation
Occurs when a Partner leaves or dies. A change in relationship of Partners caused by any partner ceasing to be associated in carrying on the business. Does not necessarily cause dissolution. Partnership may buy out the dissociating partner’s interest.
May be bound by act of dissociated partner for up to 2 years after if:
(1) act would have bound partnership;
(2) 3P believed the dissociated partner was still in fact a partner; AND
(3) did not have notice of dissociation.
Ways to dissociate:
(1) Notice of Partner’s express will to withdraw;
(2) Happening of an agreed upon event;
(3) Expulsion pursuant to partnership agreement;
(4) Bankruptcy of partner;
(5) Death/incapacity;
(6) Appt of receiver; or
(7) Termination of a business entity that is a partner.
LIMITED PARTNERSHIP (LP).
a. Formation. A limited partnership that has both limited and general partners can be created in order to limit the personal liability of some partners. To form an LP, a certificate of limited partnership must be executed and filed with the secretary of state which must include names of all General Partners (GP) and Limited Partners (LPs). The name of the business must include “Limited Partnership”
b. Management. GP has the right to manage and control the business. LPs forfeit the right to manage the business in exchange for limited liability.
c. Partner Liability to 3P. A limited partner is NOT personally liable for any amount beyond her contribution for the limited partner’s obligations. A general partner IS personally liable for ALL liabilities and obligations of the limited partnership.
LIMITED LIABILITY PARTNERSHIP (LLP/RLLP)
A registered limited liability partnership is a business designation exclusively for professionals, such as lawyers, accountants, and architects. Name of the business must include “LLP/RLLP.” Can have both GP and LPs.
a. Formation. To form an LLP, a statement of qualification must be filed with the secretary of state. Must file annual reports.
b. Partner Liability to 3P. The LLP as an entity is liable for all debts, obligations and liabilities of the partnership. However, in an LLP, a partner is NOT personally liable for debts, obligations, or liabilities of the partnership. Each partner IS personally liable for their own tortuous acts (malpractice) AND for the acts of anyone under their supervision and control regarding business conducted for the partnership. (just like the ethical rules). Profits and losses depend on whether it is a general partnership or limited partnership.
LIMITED LIABILITY COMPANY (LLC/PLLC)
An LLC is intended to provide owners/members with:
(1) the same limited liability as a SH in a corporation but
(2) also receives the tax benefits of a partnership.
No personal liability of members and being taxed as a partnership is less costly than as corporation.
a. Formation. To form LLC, must file Articles of Organization with the SOS and a summary of AOO must be published in at least 2 newspapers.
b. Management. Members have the power to control the business, but may delegate to managers. This is typically done in the Operating Agreement. Management rights cannot be transferred.
c. Profits. Rights to receive profits/losses can be transferred and typically are distributed equally unless the OA provides to the contrary.
d. Dissolution.
(1) Death;
(2) resignation;
(3) incompetence of member can cause dissolution.
