PARTNERSHIPS Flashcards
What is a general partnership?
A general partnership is an association of two or more persons who are carrying on as co-owners of a business for profit, whether or not the parties intent to form a partnership.
How do you form a General Partnership?
There are not formalities required to form a general partnership - instead, a partnership is found to be created based on the INTENT OF THE PARTIES TO CARRY ON AS BUSINESS CO-OWNERS.
How can the “INTENT OF THE PARTIES TO FORM A PARTNERSHIP” can be established?
- Contribution in exchange for profit: The contribution of money or services in exchange for a share of profits creates a presumption that a general partnership exists. The exchange for profit is the key factor here, so an exchange for payment of a debt, rent, etc., will not create the presumption.
- Common ownership: Other indications (but not presumptions) that a partnership exists include title to property held as joint tenants or tenants in common, the parties designate their relationship as a partnership, or the venture undertaken requires extensive activity by the partners.
- Sharing of gross revenue does not necessarily indicate the parties are partners.
- The absence of an agreement to share losses is evidence that the parties did not intend to form a partnership.
Do Partners have fiduciary duties?
Partners have a fiduciary, agency like relationship, as such, Partners are bound by contracts entered into with authority by their co-partners, and are liable for torts committed by their co-partners within the scope of the partnership.
When can property be deemed a partnership asset?
1) If the property is TITLED in the partnership name
2) It is titled in a partner’s name and the instrument transferring title identifies the person’s capacity as a partner, or the existence of the partnership.
3) Property is presumed (rebuttable) a partnership asset if purchased with partnership funds, cash or credit, regardless of how title is held.
4) Property is not a partnership asset and is presumed (rebuttable) separate property if: Property held in the name of a partner does not indicate the person’s capacity as a partner or mention the partnership and was not purchased with partnership funds, even if it is used for partnership purposes (e.g., car).
If the property is untitled, can the courts find it as partnership assets?
Property can be deemed as partnership property based on the parties’ intent. Courts are more likely to find that the parties intended the property to belong to the partnership if:
a) Partnership funds were used to acquire, improve, or maintain the property.
b) There is a close relationship between the property and the partnership business operations or property used by partnership business.
c) The partnership lists it as an asset in its books.
What rights do partners have in a partnership?
- Ownership: Property acquired by the partnership is property of the partnership itself and not of the partners individually.
- Transferability: A partner is not a co-owner of partnership property and has no transferable interest in it.
Except a partner’s own share of partnership
profits and surplus is transferable since they
are his own personal property. - Use of property: A partner can only use the partnership property for the benefit of the partnership.
- Control: Each partner is entitled to equal control (vote) and management of the partnership, and receives no salary for services performed (except compensation to wind up the partnership is allowed). Ordinary business decisions are controlled by majority vote; extraordinary decisions require consent of all partners.
- Profits and losses: The default rule is that profits are shared equally and losses are shared in the same proportion as profits. For example, if the partners agree to share profits 60/40, then both profits and losses are calculated at this rate; if the partners agree only to share losses 60/40 then profits are still shared equally.
- Indemnity: A partner may be indemnified for liabilities and expenses incurred on behalf of the partnership.
What fiduciary duties do partners have in a partnership?
Partners are fiduciaries of each other and the partnership. Partners have the following fiduciary duties:
- Duty of care to use reasonable care.The business judgment rule applies where the
partner’s duties are in a business setting (in most
jurisdictions). - Duty of loyalty to further the partnership interests over his own interests.No conflicts of interest:
No self-dealing,
No usurping a partnership business opportunity,
No making secret profits (implies a duty to account), and
No competing with the partnership. - Duty to disclose: Partners must disclose any material fact regarding partnership business (all partners can also inspect and copy the books).
- Duty to account: Partners can bring actions against other partners for losses caused by breach and may disgorge a breaching partner of profits.
- Duty of obedience: Partners are agents of the partnership and must act in accordance with their authority as a partner.
- Duty of good faith and fair dealing: implied (as in contracts).
Are partners liable for DEBTS incurred by the partnership?
Yes. General partners are personally liable for the debts of the partnership.
—> Incoming partners are not personally liable for debts incurred prior to joining the partnership, but any money paid into the partnership by an incoming partner can be used by the partnership to satisfy prior debts.
—> A dissociating (outgoing) partner remains liable for partnership debts incurred prior to dissociation unless there has been novation or release of liability.
Are partners liable for CONTRACTS incurred by the partnership?
Yes. The partners are liable for all contracts entered into by a partner that are within the scope of partnership business and/or are made with authority of the partnership.
— > Actual Authority: Where the partner reasonably believes she has authority to act based on the partnership agreement or a vote by the partners, the partnership will be bound.
— > Apparent Authority: Any partner may act to carry out ordinary partnership business and doing so will bind the partnership.
Except if the partner had no authority to act for the partnership in the matter and the third party actually knew or received proper notice that the partner lacked such authority.
— > Estoppel: If a person represents to a third party that a general partnership exists, she will be liable as if it does exist.
What is dissociation?
When a partner decides to leave a partnership (See RUPA §§ 601-602).
A partner has the power to dissociate at any time, rightfully or wrongfully, by express will. See RUPA § 602(a).
It is not wrongful to dissociate from a partnership without a term unless the partnership agreement prohibits it. RUPA § 602(b).
Are partners liable for TORTS incurred by the partnership?
Yes. The partnership members are joint and severally liable for torts committed by a partner in the scope of the partnership.
What is the effect of a partner’s dissociation?
Departing partner’s right to participate in management/ conduct business terminates. However, the partner’s fiduciary duties continue for any event before dissociation.
When can there be a wrongful dissociation?
There will be a wrongful dissociation if the partners breaches an express provision of the partnership agreement OR Leaves before the expiration of the partnership term.
What is dissolution and winding up?
Is the period between the dissolution and termination of the partnership in which the remaining partners liquidate the partnership’s assets to satisfy creditors, an accounting is made, and the remaining assets are distributed to the partners.
A rightfully dissociating partner can participate in the winding up - Rightfully dissociating partner is entitled to be bought out in cash within 120 days.
