Partnerships

Question 1

Formation of a General Partnership

Answer 1

A general partnership is formed when:

1. Two or more persons . . .
2. Associate as co-owners . . .
3. To carry on a business for profit.

⇒ The parties’ subjective intent to form a partnership is irrelevant. The only question: did two or more parties associate as co-owners to carry on a business for profit?

Question 2

What factors indicate the formation of a general partnership?

Answer 2

Relevant factors in determining whether a partnership has formed include:

1. ♦♦♦ Whether the parties share profits; (presumptino of partnership)
2. Whether the parties share control;
3. Whether the parties share losses.

Question 3

When does recieving profits not indicate that a partnership has formed?

Answer 3

Recieving profits does not indicate that a partnership has formed if profits are recieved . . .

1. In order to repay debt;
2. As wages or compensation;
3. As rent;
4. As interest on a loan.

The key point is that partners recieve profits as a right of ownership.

Question 4

Is a writing required to form a partnership?

Answer 4

In general, a writing is not required to form a partnership. However, a writing is required under the Statute of Frauds if the object of the partnership would require one. For example, a partnership that is to last two years or is to dispose of real property.

Question 5

Partnership Agreement

Answer 5

Partnerships do not need to enter into a partnership agreement, but if a partnership agreement exists, its terms displace the default rules. A partnership agreement may be express or implied.

Question 6

What “status” does a partnership have?

Answer 6

A partnership is a legal entity that is distinct from the partners.

Question 7

How are decisions regarding a partnership made among partners?

Answer 7

• If a decision is within the partnership’s ordinary course of business, then a majority vote controls.
• If a decision is extraordinary and outside of the partnership’s ordinary course of business, then a vote must be unanimous to control.

Question 8

How are profits shared in a general partnership?

Answer 8

Unless otherwise agreed to, profits are shared equally among the partners.

Question 9

How are losses distributed among partners?

Answer 9

Unless otherwise agreed to, losses are distrubuted in the same manner as profits.

Question 10

Partnership’s Liability for Partner’s Torts

Answer 10

A partnership is liable for a partner’s torts if those torts were committed while the partner was acting in the ordinary course of the partnership’s business or with authority.

Question 11

How does a partner acquire actual authority to act as the partnership’s agent?

Answer 11

A partner has express actual authority to bind the partnership upon receiving said authority from the partners.
* Acts within the ordinary course of the partnership business need only be approved by a majority of the
partners.
* Acts outside the ordinary course of business must be approved unanimously. Hiring an employee is normally within the ordinary course of partnership business, unless the partnership agreement states otherwise.

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.

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).

Question 12

Statement of Partnership Authority

Answer 12

A statement of partnership authority can be filed with the Secretary of State (and the county) to indicate the extent of a partners authority. It gives third parties constructive notice of affirmative grants of authority to a partner. However, it it gives third parties constructive notice only of limits to a partner’s authority if those limits concern the power to transfer real property.

Question 13

How does a partner acquire apparent authority to act as the partnership’s agent?

Answer 13

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.

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 14

Liability of Partners

Answer 14

Partners are jointly and severally liable for all of the partnership’s obligations, whether arising in contract or tort. However, plaintiffs must exhaust the partnership’s resources before reaching the individual partners’ assets.

Question 15

Fiduciary Duties of Partners

Answer 15

Partners have several fiduciary duties that they owe both the each other and to the partnership:

1. Duty of Care
2. Duty of Loyalty
3. Duty of Disclosure

Question 16

Duty of Care

(Partnerships)

Answer 16

Partners must not engage in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.

⇒ Mere negligence isn’t enough for a partner to breach their fiduciary duties.

Question 17

Duty of Loyalty

(Partnerships)

Answer 17

Partners must:

1. Account to the partnership for benefits derived by the partner in the conduct of partnership business;
2. Refrain from dealing with the partnership as an adverse party;
3. Refrain from competing with the partnership.

Question 18

Duty of Disclosure

(Partnerships)

Answer 18

The duty of disclosure is a statutory duty. It requires the following:

• The partnership and the partners must furnish, without demand, any information concerning the partnership reasonably necessary for a partner to exercise her rights and duties.
• The partnership and the partners must furnish, on demand, any information concerning the partnership’s business and affairs.

Question 19

Can the partners waive fiduciary duties in through the partnership agreement?

Answer 19

• The partners may not waive the duties of care and loyalty.
• The partners may waive the duty of disclosure.

⇒ This is because the duty of disclosure is a statutory duty rather than a true fiduciary duty.

Question 20

What four rules apply to determine whether property is partnership property or an individual partner’s property?

Answer 20

Partnership’s:

1. Property is partnership property if it is acquired in the partnership’s name;
2. Property is partnership property if it is apparent that the partner acquired the property on the partnership’s behalf;
3. Property is presumed to be partnership property if it is acquired using partnership funds;

Partner’s:

1. Property is presumed to be a partner’s property if it is acquired using a partner’s funds and there is no sign that the partner is acting for the partership.

Question 21

Does a partner have interest in partnership property?

Answer 21

No! Partnership property is owned by the partnership, which has unrestricted property rights in its property.

Question 22

Components of a Partner’s Ownership Interest

Answer 22

A partner’s ownership interest is comprised of financial rights and management rights.

Question 23

To what extent can a partner transfer their management and financial rights in the partnership?

Answer 23

Financial Rights: A partner can unilaterally transfer their financial rights. A partner’s financial rights are personal property. As such, creditor’s can reach them.

Management Rights: A partner cannot transfer her management rights.

Question 24

The “Pick Your Partner” Rule

Answer 24

Under the “Pick Your Partner” Rule, a new partner may be admitted to the partnership only by a unanimous vote of the partners.

Question 25

Dissociation

Answer 25

Dissociation refers to a partner’s withdrawal from a partnership.

Question 26

Dissociation by “Express Will”

Answer 26

A partner dissociates by express will when she gives the partnership notice of her desire to withdraw. (Voluntary dissociation.)

Question 27

Wrongful Dissociation

Answer 27

Dissociation is wrongful if:

1. A partner dissociates in violation of a term of the partnership agreement;
2. A partner dissociates before the conclusion of a term partnership.

Question 28

At-will Partnership

Answer 28

At-will partnerships are the default form of partnerships. They have no definite term.

Question 29

Term Partnership

Answer 29

A term partnership is a partnership where the partners have agreed to remain partners for either a definite term or until the completion of an undertaking.

Question 30

What are the possible consequences of dissociation?

Answer 30

Upon dissociation, a partership may either . . .

1. Dissolve and wind up its business; or
2. Continue and buy out the dissociated partner.

Question 31

When must a partnership wind up?

Answer 31

A partnership generally must wind up under two circumstances:

1. When a partner dissociates by express will from an at-will partnership;
2. When a parnter wrongfully dissociates from a term partnership and, within 90 days, at least half of the remaining partners agree to wind up the partnership.

Question 32

To what extent are dissociated parters liable for the partnership’s liabilities?

Answer 32

Dissociated partners are liable for . . ..

• Liabilities incurred by the partnership while they were a partner;
• Liabilities incurred within 2 years of dissociation;
• If they file a statement of dissociation, liabilities incurred within 90 days of filing.

Question 33

To what extent does a dissociated parter’s apparent authority survive dissociation?

Answer 33

A dissociated partner’s apparent authority lasts . . .

• Two years if the partnership takes no action;
• If the partnership files a statement of dissociation, the dissociated partner’s apparent authority lasts 90 days after filing.

Question 34

In the event of dissolution, to whom are proceeds paid and in what order?

Answer 34

If a partnership dissolves and is wound up, the proceeds are paid . . .

• First to repay creditors;
• Second to repay capital contributions made by partners;
• Third, profits or losses are distributed among the partners.

Question 35

May partners who have wrongfully dissociated participate in winding up the partnership?

Answer 35

No.

Question 36

Can a partnership be bound on contracts entered into after the partnership dissolves?

Answer 36

Yes, if:

• The party with whom the a partner contracts does not have notice that the partnership has dissolved; OR
• If the act is appropriate to winding up the partnership.