Partnerships Flashcards
BUSINESS – Partnerships
Creation of a General Partnership
BUSINESS – Partnerships
Creation of a General Partnership
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A general partnership is formed when:
- two or more persons
- associate to carry on as
- co-owners a
- business for profit.
- The key is the association to carry on a business as co-owners, for profit.
- A written agreement is not required.
- The partnership can be formed by an oral agreement or implied from the parties’ conduct.
- Subjective intent to form a partnership is not required.
- If the elements are met, a partnership is formed by operation of law.
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- A general partnership is the association of two or more persons to carry on as co-owners a business for profit
- whether or not the persons intend to form a partnership
- can be formed by operation of law if their conduct meets the statutory definition
- even if the parties don’t realize it
Key Elements and Factors:
- Two or More Persons: “Persons“ can be individuals, corporations, or other entities.
- Association: An agreement to associate in a business – express or implied
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Co-ownership: This is the most important factor. Co-ownership implies:
- Sharing of Profits: Sharing profits is prima facie evidence of a partnership, unless the profits are received as payment of a debt, wages, rent, an annuity, interest on a loan, or for the sale of goodwill.
- Sharing of Control: Partners have the right to participate in the management and control of the business.
- Business for Profit: The purpose must be to carry on a business for profit.
No Formalities Required: No written agreement, filing, or registration is required to form a general partnership in California. This is a major difference from limited partnerships, limited liability partnerships, and corporations.
Factors Indicating Partnership (Even Without Explicit Agreement):
- Sharing profits and losses.
- Joint control over the business.
- Joint ownership of business assets.
- Holding themselves out to the public as partners.
- Contributing capital or services to the business.
Policy: The ease of formation reflects the law’s recognition that people often engage in business together without formalizing their relationship. However, this ease of formation also carries significant risks, as partners are jointly and severally liable for partnership debts.
Comparison to Other Entities: It’s important to distinguish a general partnership from other business entities, such as sole proprietorships (one owner), corporations (separate legal entity, limited liability), limited partnerships (general and limited partners), and limited liability companies (limited liability, flexible management). The choice of entity has significant implications for liability, taxation, and management.
BUSINESS – Partnerships
Formation of a Limited Liability Partnership (LLP)
BUSINESS – Partnerships
Formation of a Limited Liability Partnership (LLP)
In California, a Limited Liability Partnership (LLP) is a partnership in which all partners have limited liability for the debts and obligations of the partnership, similar to shareholders in a corporation. Formation of a California LLP is restricted to partnerships engaged in the practice of law, architecture, or accountancy. Formation requires filing a registration with the California Secretary of State, and security for claims.
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A California Limited Liability Partnership (LLP) is a specialized form of partnership designed for licensed professionals (lawyers, architects, and accountants). It offers a key advantage over a general partnership: limited liability for the partners.
Formation (California Corporations Code):
- Eligible Professions: Only partnerships engaged in the practice of law, architecture, or accountancy may register as LLPs in California.
- Registration with Secretary of State: The partners must file a registration with the California Secretary of State. This registration must include:
- The name of the partnership (which must include “Registered Limited Liability Partnership” or “LLP”).
- The address of the principal office.
- The name and address of the agent for service of process.
- A brief statement that the partnership is registering as an LLP.
- A statement that the partnership is complying with the security requirements.
- Other information the partners may choose.
- Security for Claims: California LLPs are required to maintain security (insurance, trust account, etc.) for potential claims against the partnership, with specific requirements depending on the profession. This is a key difference from general partnerships.
Effect of Limited Liability:
- General Rule: LLP partners are not personally liable for the debts and obligations of the partnership, whether arising in contract, tort, or otherwise, solely by reason of being partners.
- Exceptions: Partners remain liable for:
- Their own wrongful conduct (e.g., professional malpractice).
- The wrongful conduct of someone under their direct supervision and control.
- Any contractual obligations they personally guarantee.
Comparison to General Partnerships: In a general partnership, partners are jointly and severally liable for all partnership obligations. In an LLP, partners have limited liability, similar to corporate shareholders.
Out-of-State LLPs: California recognizes LLPs formed in other states, but they are generally subject to California’s rules regarding security for claims.
Policy: LLPs are designed to encourage professional practice by providing some protection from vicarious liability for the malpractice of other partners, while still holding individual partners accountable for their own conduct.
BUSINESS – Partnerships
Personal Liability of General Partners
BUSINESS – Partnerships
Personal Liability of General Partners
Under California’s Uniform Partnership Act (UPA), partners in a general partnership are jointly and severally liable for all partnership obligations (Cal. Corp. Code § 16306(a)). This means that each partner is personally and individually liable for the entire amount of all partnership debts, whether arising from contract, tort, or other liabilities.
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California Corporations Code § 16306(a) codifies the fundamental principle of personal liability for general partners: all partners are jointly and severally liable for all obligations of the partnership, unless otherwise agreed by the claimant or provided by law.
“Joint and Several Liability”:
- Joint: All partners are liable together for the entire debt.
- Several: Each partner is individually liable for the full amount of the debt. A creditor can sue any one or more partners and collect the entire judgment from any partner who has sufficient assets, regardless of that partner’s share of ownership in the partnership.
- Exhaustion Requirement (California): There is generally an exhaustion rule.
Types of Obligations: This broad liability applies to all partnership obligations, including contract debts, tort liabilities (even if the partner was not personally involved in the tort), and other statutory liabilities.
Indemnification and Contribution: While each partner is liable to creditors for the full amount, partners do have rights of indemnification and contribution among themselves. If one partner pays more than their proportionate share of a partnership debt, they can seek reimbursement from the other partners, typically based on their agreed-upon profit/loss sharing ratio.
Policy: This unlimited personal liability is a major disadvantage of the general partnership form. It’s a key reason why many businesses choose other forms of organization, such as corporations, limited liability companies (LLCs), or limited liability partnerships (LLPs), which offer limited liability protection to their owners.
Comparison to Other Entities:
- Corporations/LLCs: Shareholders/members generally have limited liability – they are not personally liable for the debts of the entity beyond their investment.
- Limited Partnerships: Have both general partners (with unlimited liability) and limited partners (with limited liability).
- LLPs: Offer limited liability to all partners (in California, only for specific professions).
The unlimited personal liability of general partners is a critical consideration when choosing a business entity.
BUSINESS – Partnerships
Personal Liability of Limited Liability Partners
BUSINESS – Partnerships
Personal Liability of Limited Liability Partners
California Limited Liability Partnerships (LLPs) are restricted to partnerships engaged in the practice of law, architecture, or accountancy. A key feature of an LLP is that partners are not personally liable for the debts and obligations of the partnership solely by reason of being partners, whether those obligations arise in contract, tort, or otherwise. However, partners remain personally liable for their own tortious conduct.
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California law provides for the formation of Limited Liability Partnerships (LLPs), a specialized form of partnership designed to provide limited liability to its partners. This contrasts sharply with the unlimited personal liability of general partners.
Formation (California Corporations Code):
- Eligible Professions: Only partnerships engaged in the practice of law, architecture, or accountancy may register as LLPs in California.
- Registration with Secretary of State: The partners must file a registration with the California Secretary of State, including specific information about the partnership.
- Security for Claims: California LLPs must maintain security (insurance, trust account, etc.) for potential claims against the partnership, with specific amounts required depending on the profession.
General Rule of Limited Liability: Partners in a duly formed and compliant California LLP are not personally liable for the debts and obligations of the partnership, solely by reason of being partners. This protection extends to contract debts, tort liabilities (other than their own – see below), and other obligations.
Exceptions (When Partners Are Personally Liable):
- Own Wrongful Conduct: Partners remain personally liable for their own tortious conduct, including professional negligence (malpractice). The LLP structure does not shield a partner from liability for their own mistakes.
- Direct Supervision and Control: Partners may be liable for the wrongful conduct of others within the LLP if those others were under the partner’s direct supervision and control.
- Contractual Guarantees: If a partner personally guarantees a partnership obligation (e.g., signs a personal guarantee for a loan), they are liable according to the terms of that guarantee.
- Failure to Maintain Security: Failure to comply with the security requirements might expose partners to liability, although the statutory language is complex.
- Participation:
Out-of-State LLPs: California recognizes LLPs formed in other states, but they are generally subject to California’s rules regarding security for claims.
Policy: The LLP structure encourages professional practice by providing some protection from vicarious liability for the malpractice of other partners, while still holding individual partners accountable for their own actions.
BUSINESS – Partnerships
Partnership vs. Separate Businesses
BUSINESS – Partnerships
Partnership vs. Separate Businesses
Under California’s Uniform Partnership Act, property acquired in the name of the partnership is partnership property, not the separate property of the individual partners (Cal. Corp. Code § 16203, 16204). Property acquired in the name of one or more partners, without an indication in the instrument transferring title of their capacity as partners or the existence of a partnership, is presumed to be separate property, even if used for partnership purposes, absent an agreement otherwise.
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Distinguishing between partnership property and the separate property of individual partners is crucial for determining the rights of partners, creditors, and spouses in a community property state like California. California Corporations Code sections 16203 and 16204 establish the framework:
Partnership Property (Owned by the Entity):
- Property acquired by the partnership is partnership property.
- Property acquired in the name of the partnership is partnership property.
- Property acquired in the name of one or more partners with an indication in the title document of their capacity as partners or the existence of a partnership is partnership property.
- Property purchased with partnership funds is presumed to be partnership property, regardless of how title is held. This is a strong presumption.
Separate Property (Owned by Individual Partners):
- Property acquired in the name of one or more partners without an indication of their capacity as partners or the existence of a partnership, and without the use of partnership funds, is presumed to be separate property, even if used for partnership purposes. This presumption is rebuttable.
Factors Indicating Intent (Overcoming Presumptions): The partners’ intent is the ultimate determinant. Courts consider:
- Title Documents: How is title held?
- Source of Funds: Were partnership funds or separate funds used for the purchase? Tracing may be necessary.
- Use of Property: Is the property used exclusively for partnership business, or for personal purposes?
- Payment of Expenses: Who pays taxes, insurance, maintenance, and other expenses?
- Partnership Books and Records: How is the property treated on the partnership’s financial statements?
- Agreements: Are there any written or oral agreements between the partners regarding the property’s character?
Burden of Proof:
- The party claiming that property is partnership property has the burden of proving that it was acquired with partnership funds or otherwise intended to be partnership property.
- The party claiming that property is separate property, despite being used by the partnership, has the burden of rebutting the presumption that arises if partnership funds were used or if the title indicates a partnership connection.
Policy: These rules are designed to provide clarity and predictability in determining property ownership within partnerships, protecting both the partnership’s assets and the individual partners’ separate property rights.
Examples:
- A building purchased with partnership funds and titled in the name of “ABC Partnership” is clearly partnership property.
- A car purchased with partnership funds but titled in the name of one partner, without any mention of the partnership, is presumed to be partnership property, but this presumption could be rebutted.
- A car purchased with a partner’s separate funds and titled in that partner’s name alone is presumed to be separate property, even if used occasionally for partnership business. This presumption could be rebutted by strong evidence of a contrary agreement.
BUSINESS – Partnerships
Authority to Bind the Partnership
BUSINESS – Partnerships
Authority to Bind the Partnership
Under California Corporations Code § 16301, each partner is an agent of the partnership for the purpose of its business. A partner can bind the partnership by acts that are:
- Within the Partner’s Actual Authority: Express or implied authority granted by the partnership agreement or by the consent of the partners.
- Within the Partner’s Apparent Authority: Acts that are for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership, unless the partner had no actual authority and the third party knew or had received notification that the partner lacked authority.
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California Corporations Code § 16301 establishes the authority of partners to bind the partnership, reflecting the fundamental principle that each partner is an agent of the partnership for the purpose of its business.
*actual authority. This can be:
* Express Actual Authority: Authority specifically granted in the partnership agreement or by a vote of the partners.
* Implied Actual Authority: Authority reasonably necessary to carry out express authority, or authority implied from the customs of the partnership or the conduct of the partners.
2. Apparent Authority: A partner can bind the partnership by acts that are for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership, even if the partner lacks actual authority, unless both of the following are true:
* The partner, in fact, had no actual authority to act in that matter.
* The third party with whom the partner was dealing knew or had received a notification that the partner lacked authority. This is a crucial limitation – the third party’s knowledge defeats apparent authority.
Limitations:
- Extraordinary Transactions: Certain actions (e.g., confessing a judgment, disposing of all partnership assets, making it impossible to carry on the ordinary business) typically require unanimous consent of the partners.
- Statement of Partnership Authority (§ 16303): A partnership may file a Statement of Partnership Authority with the Secretary of State. This statement can grant or limit a partner’s authority, particularly regarding real property transfers. It can provide constructive notice of limitations on authority in certain circumstances.
Examples:
- A partner in a law firm signing a standard client engagement letter likely has actual authority (express or implied) to bind the firm.
- A partner in a retail business ordering inventory from a regular supplier likely has apparent authority, even if they lack express authority to make purchases over a certain amount, unless the supplier knows of the limitation.
- A partner attempting to sell the partnership’s only office building without the consent of the other partners likely lacks both actual and apparent authority, as this is not an ordinary course transaction.
Policy: These rules balance the need for partnerships to act efficiently through their partners with the need to protect third parties who deal with partners in good faith. The emphasis on apparent authority in the ordinary course of business facilitates commerce.
Comparison to Corporations: In a corporation, authority to bind the corporation is generally vested in the board of directors and officers, not in individual shareholders. Partners, in contrast, have inherent agency authority by virtue of their status as partners.”
A partnership is liable for a partner’s wrongful act or omission, or other actionable conduct, that occurs in the ordinary course of business, or with authority from the partnership.
An act of a partner which is not apparently for carrying on in the ordinary course of the partnership business or business of the kind carried on by the partnership binds the partnership only if the act was authorized.
BUSINESS – Partnerships
Fiduciary Duties Owed by Partners
BUSINESS – Partnerships
Fiduciary Duties Owed by Partners
Under California Corporations Code § 16404, partners in a general partnership owe fiduciary duties of loyalty and care to each other and to the partnership. These duties require partners to act in good faith and with the best interests of the partnership in mind.
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California, like most states, recognizes that partners in a general partnership are fiduciaries to each other and to the partnership. California Corporations Code § 16404 codifies the two primary fiduciary duties: loyalty and care.
- Duty of Loyalty (§ 16404(b)): This duty requires a partner to act solely in the best interests of the partnership and to avoid any self-dealing, conflicts of interest, or usurpation of partnership opportunities. Specifically, a partner must:
- Account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;
- Refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and
- Refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.
- Duty of Care (§ 16404(c)): This duty requires a partner to act with the care that an ordinarily prudent person would exercise in similar circumstances. However, California, following the UPA, limits this duty by stating that a partner’s duty of care is ‘limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.’ Ordinary negligence is not a breach of the duty of care in the partnership context.
Examples of Breaches:
- Loyalty: Usurping a business opportunity that should have gone to the partnership, competing with the partnership, self-dealing (e.g., selling property to the partnership at an inflated price), using partnership property for personal gain without consent.
- Care: Making a grossly negligent decision that causes significant financial loss to the partnership (ordinary negligence is not enough).
Remedies for Breach: A partner who breaches their fiduciary duties may be liable to the partnership and the other partners for:
- Damages (to compensate for losses caused by the breach).
- Disgorgement of profits (returning any profits made through the breach).
- Injunctive relief (to prevent further breaches).
- Dissolution of the partnership (in some cases).
Policy: These fiduciary duties are essential to the functioning of a partnership, which relies on trust and cooperation among the partners. They ensure that partners act in the best interests of the partnership as a whole, rather than pursuing their own self-interest to the detriment of the partnership.
