Partnerships Flashcards
General Partnerships (GPs): Formation
An association of 2 or more persons to carry on as co-owners a business for profit (whether they intend to form partnership or not)
Who is a P?
- right to CONTROL may be enough, even if it’s never exercised
- CAPITAL contribution is NOT required to be a P
- SHARING PROFITS is just 1 factor; NO PRESUMPTION
No writing required for PS; but maybe for SOF
Joint Venture (JV) = treated like GP, but requires express agreement on how LOSSES will be shared
Estoppel = if no GP was formed, parties may still be liable as if they are partners to protect reasonable reliance by a TP (fallback if no GP was formed)
GP: Property Interests
Is it partnership property?
- YES if acquired in PS’s name or in a O’s name where it’s apparent from document that he’s acting for a PS
- PRESUMED YES if partnership funds are used
- PRESUMED to be P’s individual property if acquired in his name without PS funds and there’s no sign he’s acting for PS
Rights in PS Property
- Partnership = unrestricted rights
- P = can use ONLY for PS purposes; NOT transferable
P’s economic interest in the partnership = share of the profits (e.g., 25% stake)
- IS transferable (transfers right to just receive $)
- CP if acquired during life of CE
GP: Sharing Profits and Losses
- UOA, profits are split EQUALLY (and NOT in proportion to contributions)
- UOA, losses follow profits (shared the same)
Ps CANNOT limit TP’s rights without that TP’s consent
- but Ps can agree among themselves re: their liability
General Rule = NO right to compensation! (exception = winding up PS affairs)
UOA, Ps have EQUAL management rights (but matters of ORDINARY BUSINESS are decided by majority in INTEREST–not majority # of Ps)
If P pays off PS debt, she has right to be paid back by other Ps with interest
Duties = Ps owe duties of CARE, LOYALTY, and GOOD FAITH
- MAY limit or even eliminate in PS agreement
- but NOT duty of loyalty!
Admission of new Ps
- UOA, new P requires UNANIMOUS consent
- liable for debts incurred before his admission but ONLY to extent of his economic interest in the PS (no personal liability)
Partners and TPs: AGENCY LAW APPLIES
K claim = Partnership is principal, partner is agent
- Actual authority: created by PS agreement, maj. vote of partners or the statute, which makes every partner an A for carrying on business in the usual way (BUT can be negated by partners)
- Apparent authority: look at partner’s title and prior conduct (from TP’s POV)
- Ratification/Adoption if there’s no authority at time of K
Partner’s Tort = committed in ordinary course of partnership’s business?
Conveying Real Property w/out Authority = PS can get property back from initial transferee (should’ve checked out the authority) but NOT from a subsequent BFP
Partners’ Liability for PS Obligation
- J&S liability BUT plaintiff must first exhaust PS resources
- WORST ASPECT OF GP!!!
- Exception for (P)LLP = no liability on Ks or for torts of others (“broad shield” statute)
Forming LLP/PLLP
FILE a certificate of formation with Sec. of State and PAY a fee (renew annually)
NAME must include “limited liability partnership” or “LLP”
Withdrawal of a Partner
Events:
- Notice of express will to withdraw (“I’m out!”)
- An agreed-on event
- A Partner’s expulsion, death, bankruptcy or incapacity
- Appointment of a trustee, receiver or liquidator for a partner
- Redemption of a transferee’s interest
- AT-WILL P CAN ALWAYS WITHDRAW w/out penalty!
Withdrawing P may have apparent authority to bind PS to an innocent TP for up to 1 YEAR (but can protect herself by notifying creditors)
Withdrawing P’s Liability
- YES to existing creditors unless released by individual creditor, expressly or impliedly
- YES to subsequent creditors who were unaware of the withdrawal (but can protected herself by notifying them)
- YES to other Ps if she withdraws wrongfully before term is up or before specific task is completed (breach of K)
Winding Up
Rarely required
Triggering events:
- business becomes illegal
- all assets are sold outside the usual course of business
- entry of judicial decree
- term is up/task is completed
- all Ps consent
- majority-in-interest consent in a partnership at-will
May have apparent authority to bind PS to innocent TP on NEW business even after triggering event (but PS can protect itself by notifying potential creditors)
Distribution of PS Assets:
(1) Creditors get paid (including Ps who are creditors) *if not enough assets, assets are split pro rata
(2) Ps get paid amount in their CAPITAL ACCOUNT (contributions + profits - losses)
PS creditors have PRIORITY over a P’s creditors on PS property, and EQUAL claims on P’s SP
Limited Partnerships (LPs)
A PS with 1 or more GPs (generally liable) and 1 or more LPs (liability limited to their investment)
Formation
- Must file certification of formation with SoS, pay fee, and must have written LP agreement
- Name include “Limited Partnership,” “Limited” or abbreviation
LP: Liability of LPs
General Rule = can only lose their capital contribution
Exceptions = where a LP takes part in CONTROL… But statute creates “SAFE HARBORS”–things that are NOT control (LP will not be held liable)
- in addition to being LP, being employed as employee by the L.P.
- if LP guaranteed a note for the L.P.
- if LP is also an officer or director of the corporate GP
Reliance test for liability to TPs (creditor-by-creditor basis)
If L.P. failed to file, default = GP!
- but LP can avoid future liability by filing a certificate or withdrawing from the L.P. within a reasonable time after discovering the failure to file
LPs’ Rights and Obligations
Promise to contribute MUST be in a signed writing to be enforceable
May withdraw ONLY IF agreement permits
General Partners (GPs)
Jointly and severally liable
Exception = LLLP which shields GPs from personal liability like an LLP does
Limited Liability Companies (LLCs)
Formation
- Must file certification of formation with SoS and pay fee
- Name must include “Limited Liability Company” or “Limited Company” or abbreviation
- Professionals (PLLC) = members and managers must be licensed to render professional services SOMEWHERE (and no mixing of professions)
- Profits/Losses are split in portion to capital contributions UOA
Management
- Flexible
- TX default = manager run (but can structure to be member-run)
- Series LLC = can partition assets/liabilities among separate (independent) series (designed for asset protection)
NO LIABILITY for MEMBERS!
Comparison
LLP and LLC = BEST
Limited Liability
- GP = J&S liability
- LP = GPs are J&S liable (unless LLLP); NO liability for LPs
- LLP = NO LIABILITY
- LLC = NO LIABILITY
Management
- LLP and LLC = most flexible b/c all owners may exercise control (unlike LP)
LESS TAXES: income is passed through to owners, unlike a corp. (which is subject to double taxation)
Conversion/Merger = if you choose wrong form, you can convert to another or merge one into another by getting owners’ approval and filing docs
