Partnerships Flashcards
A partnership is an association of two or more persons to carry out a for-profit business as co-owners. Is it possible to form a partnership between a corporation and another partnership?
YES.
In partnership law, a “person” is an individual, corporation, LLC, trust, estate, government entity, or another partnership.
What kind of intent is necessary to form a partnership?
To form a partnership, there needs to be at least two “persons” with intent to carry on a business for profit as co-owners. Specific intent is NOT required to form a partnership; the agreement can be express or implied through conduct of the parties
What six kinds of payments can be used to rebut the presumption that a partnership was intended and created even when the payments appear to be the sharing of profits?
WAR DIG
Wages Annuities Rent Debt Interest Goodwill
The sharing of profits from a business does not create a rebuttable presumption that the arrangement is a partnership if the sharing is actually payment of:
- A debt (including installment payments)
- Interest on a loan
- Rent
- Wages or other compensation paid to an employee or independent contractor
- Goodwill payments stemming from the sale of a business (including installment payments)
- Annuities (or other retirement of health benefits) paid to a surviving spouse or beneficiary, representative, or designee of a deceased or retired partner
When will a person be characterized as a partner by estoppel and be liable to third parties?
When a person represents himself either orally, in writing, or implied by conduct as a partner (or consents to or allows another to represent himself as a partner), he will be a partner by estoppel, and he will be liable to third parties if the third party reasonably relied on the representation and suffered damages as a result
Generally, a person who is held out by another as a partner (without consent) is not under a duty to deny that representation. When is it not a defense that the purported partner was unaware that she was being represented as a partner?
It is not a defense that the purported partner was unaware that she had been held out as a partner to a specific third party if the representation was made in a public manner
What two fiduciary duties does a partner owe to the partnership and to the other partners?
A partner owes the partnership and the other partners the duty of loyalty and the duty of care
Is a written agreement required to form a partnership?
NO.
*Unless the agreement cannot be performed within a year (because a partnership agreement is subject to the Statute of Frauds)
When is a partner entitled to remuneration for services rendered to the partnership?
Absent an agreement to the contrary, a partner is not entitled to remuneration for services rendered to the partnership.
Exceptions:
1. When the partner renders services in winding up
2. When the partners agree to pay a partner for her efforts
When must a partnership indemnify a partner who incurs a personal liabiltiy?
A partnership must indemnify partners that incur personal liability in the ordinary course of conducting partnership business or in order to preserve the partnership’s business property
A partnership can be contractually bound when a partner acts with either actual or apparent authority. What fact will allow a partnership to escape liability when a partner acts with apparent authority?
For a partnership to escape liability, the third party generally must possess actual knowledge of the partner’s lack of actual authority
What is the rule regarding use of partnership property?
A partner may use or possess partnership property only on behalf of the partnership. A partner who uses partnership property for personal benefit must compensate the partnership
What rights does a partner have with respect to access to records and information of the partnership’s business
Partners and their agents (including attorneys) have the right to access, inspect, and copy partnership records and books. Upon demand, partners must furnish any and all information affecting the partnership
Does a partnership agreement govern a partnership or does RUPA?
Although a formal agreement is not required to create a partnership, if the partners have entered into such an agreement, then the agreement, rather than RUPA, governs the relations among the partners and between the partners and the partnership.
Under what circumstances might a judicial expulsion of a partner occur?
An expulsion of a partner by a court order may occur because the partner has either:
1. Engaged in misconduct that adversely and materially affected the partnership business
2. Willfully and persistently caused a material breach of the partnership agreement; OR
3. Breached a duty owed to the partnership or other partners
When a partner dissociates from a partnership and that partner’s interest is purchased by the partnership, does the partner remain responsible for partnership obligations that occurred prior to dissociation?
When a partnership pruchases a dissociated partner’s interest, the partnership must generally indemnify the partner against all partnership liabilities, whether the liabilities were incurred before or after the dissociation. An exception exists for liabilities incurred by the partnership due to the dissociated partner’s post-dissociation actions
What does a statement of dissociation filed with the state do?
A statement of dissociation:
1. Constitutes a limit on the dissociated partner’s authority
2. Gives third parties notice of the dissociation as of 90 days after the statement is filed;
AND
3. Reduces the window of partnership liability for a dissociated partner’s actions from two years to 90 days
Under a duty of loyalty, what is a partner required to refrain from doing?
CAU
CAU
Competing Adverse Usurping
Under the duty of loyalty, a partner is required to refrain from:
1. Competing with the partnership
2. Advancing an interest adverse to the partnership; AND
3. Usurping a partnership opportunity (or otherwise using partnership property or business to derive a personal benefit) without notifying the partnership
What does a partner’s duty of care entail?
GRIK
GRIK
Grossly Reckless Intentional Knowingly
Under the duty of care, a partner is required to refrain from engaging in:
1. Grossly negligent or reckless conduct
2. Intentional misconduct;
OR
3. Knowingly violating the law
When is titled property in the name of an individual partner actually the property of the partnership?
Property titled in the name of an individual partner is partnership property when the instrument indicates either the named person’s capacity as a partner or the existence of the partnership
Property purchased with partnership assets or by using partnership credit to obtain financing is presumed to be partnership property
How is a judgment for a third party against a partnership usually satisfied?
A partnership creditor generally must first exhaust the partnership’s assets before levying on a partner’s personal assets
When a partner dissociates from the partnership, but the partnership is not dissolved, what happens to the partner’s interest?
When a partner dissociated and the partnership is not dissolved, the partnership must buy out that partner’s interest. The dissociated partner’s interest is valued as if the partnership business was wound up on the date of dissociation. The partnership is valued as the greater of the liquidation value of its assets or the value of the partnership as a goinf concern
What are the procedures for converting a limited partnership into a partnership?
To convert a limited partnership into a partnership, all of the general and limited partners must approve the conversion. Once approved, the limited partnership must cancel its limited partnership certificate. The conversion takes effect upon the cancellation of that certificate
Which partners can make decisions as to matters in the ordinary course of business? Which partners can make decisions as to matters outside the ordinary course of business?
Absent a partnership agreement to the contrary, all partners have equal rights in the management and conduct of the partnership.
A majority of the partners can make a decision as to a matter in the ordinary course of business, but a decision as to matters outside the ordinary course of business requires the consent of all partners
What happens when there is a partnership agreement that addresses the division of partnership profits, but it is silent on the division of partnership losses?
In general, if there is no agreement or the agreement is silent as to the division of 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 profits, then losses are to be shared in the same manner (same percentage as division of profits)
When is a partnership liable for a partner’s tortious acts, including fraud?
A partnership is liable for a partner’s tortious acts, including fraud, when the partner commits the tortious acts in the ordinary course of the partnership business or with partnership authority, whether actual or apparent. (The partnership will not be liable when the fraudulent act occurs outside of the scope of partnership business)
What powers does a person winding up the partnership business have?
PLVA
PLVA
Property Liabilities Value Assets
- Dispose of and transfer partnership property
- Discharge partnership liabilities
- Preserve the business or property to maximize value
- Distribute assets to settle partners’ accounts
What are the exceptions to first satisfying a judgment from partnership assets over a partner’s personal assets?
BCLIBE
Bankruptcy Consented Liable Insufficient Burdensome Equitable
While generally a judgment against a partnership must first be satisfied by partnership assets, exceptions exist when:
- The partnership is a debtor in bankruptcy
- The partner consented
- The partner is liable independently of the partnership (i.e. partner was primary tortfeasor)
- The partnership’s assets are clearly insufficient
- Exhaustion of partnership assets would be excessively burdensom,
OR - It is otherwise equitable to do so
How is the partnership affected by the criminal act of one of the partners?
A partnership may be convicted of a crime for which the penalty is a fine levied on partnership assets. Merely being a partner, however, is not sufficient to make a partner criminally liable for the acts of another partner
What is the exception to the general rule that a partner’s knowledge or notice of fact is immediately imputed to the partnership?
An exception to the general rule that a partner’s knowledge or notice of fact is immediately imputed to the partnership exists when a fraud on the partnership is committed by or with the consent of the partner
What are the procedures for converting a partnership into a limited partnership?
To convert a partnership into a limited partnership, all of the partners must approve the conversion, and then articles of conversion must be filed with the state. The conversion takes effect upon the filing of the articles of conversion, unless a later date is specified
What types of events can trigger a partnership’s dissolution?
PLJ
PLJ
Partners Law Judicial
The main causes of partnership dissolution are:
- By actions of partners
- By operation of law
- By judicial determination
How may a general partner withdraw from a limited partnership?
At any time, a general partner may withdraw from a limited partnership by giving written notice to the other partners
How may a person become a limited partner after the limited partnership is formed?
Once a limited partnership is created, a person may become a limited partner upon written consent of all partners, unless the partnership agreement provides otherwise
In a limited partnership, a general or limited partner may contribute a promise to pay cash, to provide property, or to perform services. What happens when a partner is unable to perform an enforceable promise for this kind of future contribution?
Generally, a partner is obligated to the limited partnership with respect to any written, enforceable promise of a future contribution. When a partner is unable to perform the promise due to death or disability, the partner or his estate must pay the cash value of the promise
Upon dissolution of a limited partnership, who may wind up the partnership’s business?
The general partners who have not wrongfully dissolved the limited partnership may wind up
When there are not any such general partners, the limited partners may wind up the partnership’s affairs
Which partners may participate in winding up a partnership’s business once it has dissolved?
Any partner who has not wrongfully dissociated from the partnership may participate in winding up the partnership’s business
Does a partnership have to repay a loan that a partner makes in furtherance of the ordinary course of partnership business?
A partnership is required to repay a loan or reimburse a partner for advances, including interest from the date of the loan or advance
What are the standing requirements for a limited partner to bring a derivative action on behalf of the limited partnership?
To bring the action, the limited partner must be a partner at the time of bringing the action as well as at the time of the wrongful transaction, unless the status of partner devolved on him by operation of law or pursuant to the terms of the operating agreement
Upon dissolution, how are partnership assets distributed?
Partnership assets are first applied to discharge partnership obligations to creditors, including partners who are creditors, and then to partners
What must the name of a limited liability partnership contain at the end?
A limited liability partnership’s name must include one of the following at the end:
Registered Limited Liability Partnership (R.L.L.P. or RLLP)
OR
Limited Liability Partnership (L.L.P. or LLP)
What is a partner’s liability for a tort committed by the limited liability partnership?
A partner in an LLP is not personally liable for an obligation of an LLP, including tortious obligations, unless the partner also engaged in the conduct that caused the obligation
What partnership roles are required in a limited partnership?
A limited partnership is required to have at least one general partner and at least one limited partner
What is the procedure for a limited partner to withdraw from a limited partnership?
Unless the written partnership agreement provides otherwise, a limited partner must give six months’ prior written notice to each general partner before withdrawing
A general partner in a limited partnership is personally liable to third parties and is typically liable to the partnership, as well. What kind of partner would take on this kind of liability?
Although the general partner in a limited partnership has unlimited liability, the typical general partner is an entity such as a corporation that has its own liability shield
What is a general partner’s accountability if he withdraws from a limited partnership in violation of the partnership agreement?
If a general partner withdraws from a limited partnership in violation of the partnership agreement, the general partner will be liable for damages caused by the breach of his agreement
What rights to distribution does a partner have in a limited partnership if those rights are not specified in the partnership agreement?
If a partner’s rights to distribution are not specified in a limited partnership’s agreement, then a partner does not have a right to receive a distribution before withdrawal or dissolution of the partnership
Upon withdrawal or dissolution, the partner has the right to receive a distribution of the fair value of his interest, as measured on the date of withdrawal
Can a partnership continue doing business after dissolution but prior to winding up
YES.
The partnership may resume carrying on its business as if dissolution had not occurred if all partners, including any properly dissociated partners, agree to waive rights to terminate the partnership
What must a certificate of limited partnership contain?
PANDAS
Partner Address Name Duration Agent Signatures
A certificate of limited partnership must contain the following:
- Name of the limited partnership
- In-state address
- Name and address of in-state agent for service of process
- Name and business address of each general partner
- Statement about the duration of the limited partnership
- Signatures of all general partners
When might a limited partner be personally liable for partnership obligations?
GPA
GPA
General Participates Allows
A limited partner is generally not personally liable for the obligations of a limited partnership unless the limited parter:
- Also serves as a general partner
- Participates in the control of the business;
OR - Allows their name to be used in the name of the limited partnership (liable then to a creditor who extends credit, unless the creditor had actual knowledge that the limited partner was not a general partner)
What happens when there is only one general partner in a limited partnership and that general partner withdraws?
The withdrawal of a general partner or other occurrence in which the general partner ceases to be a general partner terminates the partnership, unless all partners agree in writing to carry on the business and appoint a general partner within 90 days
What is the definition of a partnership?
A partnership is an association of two or more persons to carry on a for-profit business as co-owners. The key test applied to ascertain whether a business arrangement is a partnership is whether there is a sharing of the profits from the business.
Is a partner’s interest in the partnership transferable?
YES.
A partner may transfer the right to share in the profits and losses of the partnership and to receive distributions.
However, a transferee of this interest is not, absent consent from all the partners, make the transferee a partner herself and thus does not entitle the transferee to all the rights and benefits of a partner, other than the interest in profits transferred to her.
When is something the property of a partnership and what are the permitted uses of the property by individual partners?
Property is partnership property if it is acquired in the name of the partnership. It is property of the partnership and not of the partners individually. A partner may use or possess partnership property only on behalf of the partnership.
What types of conduct by multiple people WILL or WILL NOT create the presumption of a partnership?
Presumption of partnership:
Sharing in profits
Sharing control
No presumption of partnership:
Payment of a debt
Interest payments
Rent
Wages
Goodwill
What is the tax structure of a partnership?
There is no entity-level taxation
What is the effect of a partnership agreement or lack of a partnership agreement?
The partnership agreement is the governing law of a partnership, except when there is a mandatory state law
There need not be a written partnership agreement
If there is no partnership agreement, state law will govern the partnership with default rules
Which state laws are mandatory with regard to partnerships?
1. Liability to third parties
2. Cannot deny partners access to books and records
3. Fiduciary duties cannot be eliminated
Partnerships: Describe the fiduciary duty
Every partner is a fiduciary of the partnership, and owes the fiduciary duties of loyalty and care to the partnership
Partnerships: Describe the Duty of Loyalty
CAU
CAU
Compete Adverse Usurp
Partners must not:
1. Compete with the partnership business
2. Advance an interest that is adverse to the partnerships
3. Usurp a partnership opportunity
Limitations on the Duty of Loyalty
1. As a matter of state law, a partnership cannot eliminate the duty of loyalty, but
2. It can limit the duty of loyalty by describing it differently, as long as it is not manifestly unreasonable
If you are worried that something may be considered disloyal, there is a safe-harbor option:
-If a partner makes full disclosure of all material facts, then a certain percentage of the other partners may authorize or ratify the transaction
Partnerships: Duty of Care
GRMK
GRMK
Grossly Reckless Misconduct Knowing
Partners must not:
1. Engage in grossly negligent or reckless conduct
2. Engage in intentional misconduct
3. Engage in a knowing violation of the law
The partnership agreement may not unreasonably reduce the duty of care
Do the duties of partners of a partnership apply to former or future partners?
NO.
The duties of loyalty and care apply only to partners, not to prospective partners or former partners
Partnerships: When there is no agreement regarding the division of profits and/or losses, how are they divided?
As a matter of state law, the default rule is that a partnership agreement silent on the division of profits will have the profits divided equally, regardless of other factors.
As a general rule, unless stated otherwise in a partnership agreement, the division of losses in a partnership will be the same as the division of profits.
What are the default rules on partnership distributions?
Default Rule: Partners do not have the right to demand a distribution
Partners can agree in advance to allow distributions to be made according to the partnership agreement
What is the default rule on control over a partnership?
Regardless of capital contributions, management and control of a partnership is shared equally among the partners
What are the default requirements for ordinary and extraordinary business matters of a partnership?
Ordinary business requires a vote of the majority of the partners
Extraordinary business requires a vote of all the partners
-Remember that these are default rules that can be changed
What are the default rules of quorum for partnerships?
There is no default rule regarding partnership quorums for partnership voting
How does a partner voluntarily dissociate from a partnership and what are the consequences?
The partner may give notice to the partnership that the partner wants to withdraw
Consequences of Dissociation
If a partner is dissociated, the partnership does not necessarily dissolve
Once dissociated, a former partner has no right to participate in management of the partnership, and the partner no longer has any duties to the partnership
If the partnership continues, it must buy out the dissociated partner’s interest
A partnership cannot prevent a partner from withdrawing, but can require certain restrictions on withdrawal (e.g. written notice, liability for wrongful dissociation, etc.)
What are typical causes of involuntary dissociation of a partner from a partnership, and what are the consequences involuntary dissociation and of wrongful involuntary dissociation?
Any of the following scenarios may constitute involuntary dissociation
1. There may be an event triggered in the partnership agreement
2. They can be expelled pursuant to the partnership agreement. It is unlawful for a partnership to carry on business with that partner
3. A court may order that a partner must be dissociated
4. A partner goes bankrupt
5. A partner dies
6. A partner has become incapacitated
7. One of the entities of the partnership dissolves
-If a partner is dissociated, the partnership does not necessarily dissolve
-Once dissociated, a former partner has no right to participate in management of the partnership, and the partner no longer has any duties to the partnership
If the partnership continues, it must buy out the dissociated partner’s interest
Note that in the case of wrongful dissociation, the wrongfully dissociated partner may not be entitled to payment of the buyout price until the expiration of the term or completion of the undertaking of the partnership. Because the partner will also be liable for damages caused by the wrongful dissociation, if the partner’s liability meets or exceeds the buyout value, the partner may not be entitled to receive any buyout price
How does a partnership grant express authority to a partner to enter into a contract on behalf of the patnership?
- The partnership agreement
- A statement of authority filing;
OR - An ad hoc authorization by the partners at a meeting
Discuss Apparent Authority as it pertains to partnerships
-The partnership may be bound based on the partner acting in the ordinary course of dealings
-Based on interactions between the partnership and third-parties
-If you don’t see revocation of apparent authority, it is likely still in place
-If you see a contract or tort issue regarding a partnership, remember that the rules for authority are similar to those in the context of agency law
How does tort liability impact the partnership?
A partnership is liable in tort for torts that are committed by partners acting within the scope of their partnership
What are the consequences of the flow of liability in a partnership?
-Partners are personally liable for the debts or obligations of the partnership
–A partner is jointly and severally liable for all partnership obligations
–You can go after any partner for the entire sum owed by the partnership
–Generally, the partnership creditor must exhaust the partnership’s funds before going after the partners’ personal assets
-An incoming partner is not personally liable for contract or tortious obligations incurred prior to becoming a partner
–The incoming partner will be liable for the partner’s capital contribution
-An outgoing partner may be personally liable for a partnership obligation that occurred after dissociation
What are the two stages of partnership termination?
Dissolution
Winding Up
How does a partnership dissolve?
- Triggered by the occurrence of an event
- Can be brought about by a partner or by operation of law
- Partnership at Will: an open-ended partnership with no fixed term tied to time period or undertaking. Generally, the partnership at will is dissolved when any partner chooses to dissociate
- Partnership for a Term or Undertaking. The partnership may be dissolved when the term expires or when the undertaking is complete
Either type of partnership may also be dissolved in one of three ways
1. Any dissolving event set forth in the partnership agreement
2. Any event that makes it unlawful to continue if not cured within 90 days
3. Judicial determination
Who may wind up a partnership?
- Any partner that has not been wrongfully dissociated
- A legal representative of the last surviving partner
- Any partner, legal representative, or transferee may seek judicial supervision of winding up
What power does the person winding up have?
- The person winding up a partnership may dispose of and transfer partnership property, and discharge partnership liabilities
- The person can also preserve partnership business to maximize value as a going concern
What is a statement of dissolution of a partnership and what effect does it have?
A filing that gives notice to third parties that the partnership has been dissolved after ninety days
Why file? It limits the partners’ apparent authority and liability
What is the priority of distributions when a partnership winds up?
Creditors first, then partners
What is an LLP?
How is it formed?
What is required of its name?
What are its liabilities?
How is LLP status terminated?
Limited Liability Partnerships (LLP’s)
Definition: A partnership in which a partner’s personal liability is eliminated
Must file with the state
Formation: to transform a general partnership into an LLP, you must vote authorizing transformation
Name: must always end with wither:
Registered Limited Liability Partnership (RLLP)
Limited Liability Partnership (LLP)
Liabilities:
Limited partners are NOT personally liable for the obligations of the LLP
Limited partners are personally responsible for their own personal misconduct or negligence
Terminating LLP Status
Partners can voluntarily transform and cancel LLP status
The state can revoke an LLP’s status
What is an LP?
How is an LP formed?
When does an LP come into existence?
Limited Partnerships (LPs)
Definition: A partnership formed by two or more persons that has at least one general partner and one limited partner
Formation: file a certificate of limited partnership; it must contain:
1. Name of the limited partnership (including LP)
2. In-state address;
3. Name of an agent in that state
4. Names and addresses of all general partners
5. Statement of duration
6. Signed by the general partner
When does it come into existence?
When filed, or the effective date, if included
Substantial compliance with the requirements is sufficient to be effective
What is a limited partner?
How is a limited partner admitted?
What are the rights of a limited partner?
What liability does a limited partner have?
What can a limited partner do without jeopardizing status as a limited partner?
How does a limited partner withdraw?
Limited Partners
Admission: may join at the creation of the partnership or with the agreement of all partners
Voting:
Allowed only under the partnership agreement
Default rule: a limited partner does not vote
Right to access records
Liability to third parties: 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
The following are things that limited partners may do without running the business:
1. Be an officer, a director, or a shareholder of the general partner
2. Consult the general partner on partnership affairs
3. Act as a surety of the partnership
4. Request to attend meetings of the partnership
5. Wind up the partnership
6. Propose or approve of partnership matters
Withdrawing: the limited partner must give six months written notice
What is a General Partner?
How does one become a General Partner?
What are the rights and powers of a General Partner?
What liability does a General Partner have to third parties?
How does a General Partner terminate its status?
Becoming a general partner: join at the beginning or be admitted upon consent of the partners
Rights and powers: same as in a general partnership without limited partners, or as otherwise suggested in the partnership agreement
Liability to third parties
Personally liable to third parties for obligations of the partnership
To protect from liability, many general partners are corporations
Termination of status
1. A general partner may voluntarily withdraw
2. If the general partner tries to assign the partnership interest, the general partner may be removed
3. If he goes bankrupt or becomes insolvent may be removed
4. Death or incapacitation
5. A business-entity partner is terminated
When a partnership becomes an LLP, does it become a new partnership and thus shed old debt?
NO.
Old liabilities and debt are still attached to the partnership when it converts to an LLP because it is not a new partnership, it is the same partnership just with a changed feature (limited liability).
What is the nature of a partner’s personal liability to the debts of the partnership?
Joint and several
Is a new partner in a partnership personally liable for any of the partnership’s past obligations?
NO.
The new partner’s capital contribution can be used to pay these obligations, but the new partner is not personally liable for them.
What is a limited partner?
A limited partner is a partner of a partnership who is either:
1. a partner of a LP (limited partnership) who is not a general partner and thus not involved in the day-to-day operations of the business
OR
2. any partner in an LLP (limited liability partnership).
A limited partner (both kinds) are shielded from personal liability.
A general partner of an LP, or any partner of a standard partnership, becomes a limited partner when the partnership converts into an LLP, but may still be exposed to personal liability for any debts incurred in the first 90 days of limited liability partnership if the third party still reasonably believes the limited partner is still a general partner.
Which fiduciary duties does a partner owe to the partnership and fellow partners?
Duty of Loyalty - a partner is prohibited from using partnership property or business to derive a personal benefit without notifying the partnership
Duty of Care - a partner is prohibited from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law
What recourses does a partner or partnership have when a partner breaches the partnership agreement or violates a fiduciary duty?
A partnership may pursue legal action against a partner for breach of the partnership agreement or for violating a duty owed to the partnership that caused the partnership harm.
A partner may pursue legal action against the partnership or another partner to enforce the partner’s rights under the partnership agreement or the RUPA.
A partner may also seek an accounting as to the partnership business.
For which types of acts does a partner NOT have authority to conduct?
- Those that the partner has reason to believe the other partners would disagree with.
- Those that are outside the ordinary course of the partnership’s business, unless all the partners consent
What is a partnership at will?
A partnership at will is one that permits any partner to voluntarily dissociated with the partnership for any reason, provided they give notice. This is true even if the withdrawal is wrongful.
When a partner dissociates, what action must be undertaken to avoid winding the partnership up?
A majority of the remaining partners must agree to waive the right to terminate the partnership. This requires buying out the dissociating partner’s share UNLESS the dissociation was wrongful.
Is a dissociating partner entitled to a buyout payment if the dissociation was wrongful?
NO.
If the partnership does not vote to wind up following the dissociation, the dissociating partner is NOT entitled to any buyout payment IF the dissociation was wrongful. Buyout/payout will thus not occur until expiration of the term or completion of the undertaking.
However, if the dissociating partner can prove that a buyout payment will not cause undue hardship to the partnership, they may be awarded an earlier buyout payment.
A wrongfully dissociating partner is liable to the partnership for any damages caused by the dissociation.
When a partner dissociates and it is not wrongful, what is the effect on the partner and partnership?
The partnership may terminate and wind up, but can vote to waive termination and winding up and continue with business as usual.
The partner may not participate in the partnership after dissociation, and their duties to the partnership terminate.
The partnership MUST buyout the dissociating partner’s interest. The payment of the buyout is valued as if the partnership were winding up the day of the dissocation, and must be paid within 120 days of the dissociated partner’s written demand for payment, absent another agreement, or one year from dissociation if no demand is made.
The dissociated partner, once their interest in the partnership has been bought out, is indemnified against all partnership liabilities, even those incurred before dissociation, unless that partner was directly responsible for a particular liability.
What is the difference between dissolution of a partnership and winding up?
Once a partnership has been dissolved, but before the winding up of its business is complete, the partnership may resume carrying on its business as if dissolution had never occurred.
To continue as such, all the partners, including any properly dissociated partners, must agree to waive the right to terminate the partnership.
