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Partnerships Flashcards

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1
Q

What are the characteristics of a Partnership?

A

Partnership = association of two or more persons to carry on as co-owners a business for profit.

(1) Distinct from its owners
(2) Capable of owning property
(3) Capable of suing and being sued

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2
Q

What is the applicable statute governing General Partnerships?

A

RUPA
Revised Uniform Partnership Act
Contains DEFAULT rules, alterable by partners

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3
Q

What are the three key elements of a Partnership?

A

(1) Association
(2) Of two or more persons
(3) To carry on as co-owners of a business for profit

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4
Q

Does a partnership association have to be in writing?

A

NO, not for General Partnerships, and oral partnership agreements are VERY COMMON on the bar exam.

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5
Q

Who counts as a “person” within the key elements of a partnership?

A

Human, corporations, LLCs, etc.

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6
Q

What different ways are there to show that the association is being “carried on by co-owners of a business for profit?”

A

(1) Sharing profits (raises presumption of partnership)
(2) Sharing losses (nearly conclusively a partnership)
(3) Contributions (not just co-ownership of asset though)
(4) Extensive activity
(5) Agreement regarding Responsibilities/Rights (oral or written)
(6) Adopting a business NAME

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7
Q

How long does a partnership last?

A

“At will” = partner can quit any time.

Definite Term or Particular Undertaking:
early exit = wrongful; but, think about SOF, some service contracts for more than 1 year

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8
Q

What are the two types of property in a partnership?

A

(1) Capital - money/property contributed by partners
(2) Partnership Property:
- all property subsequently acquired w/ the capital
- all assets titled in the partnership’s name

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9
Q

Who gets to use partnership property, and for what purpose?

A

(1) Each partner is entitled to use ALL partnership property

(2) But only for BUSINESS

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10
Q

If someone owns a partnership interest, is he entitled to a salary?

A

No, unless specified in agreement.

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11
Q

Can new partners be admitted to the partnership?

A

Yes, by unanimous vote of the current partners.

But, the unanimity requirement can be adjusted by partnership agreement.

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12
Q

What if A sells his partnership interests to B? What is B entitled to? What does A have?

A

(1) B gets profits/distributions, but
(2) B is NOT a partner (this requires unanimous vote)

(1) A retains all rights/duties other than profits/distributions

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13
Q

What if a creditor attaches A’s partnership interests?

A

Creditor is a TRANSFEREE, not a partner.

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14
Q

If the partnership does not specify, what are the rights and powers of partners?

A

Equality in Rights and Powers, including:

(1) Management
(2) Profits
(3) Distribution on liquidation (post debt and capital contributions)
(4) Access to books/information
(5) Losses are split just as profits

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15
Q

What if the partnership agreement stipulates unequal split of profits but is silent on losses?

A

The same unequal split of losses will be presumed.

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16
Q

What four duties do partners owe to the partnership?

A

(1) Good Faith (honesty)
(2) Fair dealing (Commercial reasonableness)
(3) LOYALTY
(4) CARE

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17
Q

What is incorporated in a partner’s duty of loyalty, and what is the remedy for breach?

A

Loyalty =

(1) acting in best interests of partnership
(2) no secret profits
(3) Disclose business opportunities

Remedy = hand over profits to partnership

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18
Q

What is incorporated in a partner’s duty of care owed to the partnership?

A

Care =

(1) Avoid intentional misconduct and knowing violation of the law, AND
(2) Avoid grossly negligent or reckless conduct

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19
Q

What is the relationship between partners?

A

A partner is BOTH agent and co-principal of the other partners.

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20
Q

Is the partnership entity liable for the torts of the partners?

A

Yes IF:

(1) in the ordinary course of partnership business, OR
(2) Acting with actual/apparent authority of co-partners, even if acting outside ordinary course of business

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21
Q

Are new members liable for the debts or torts that were incurred prior to their entrance into the partnership?

A

No.

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22
Q

Are partners liable for the partnership’s debts?

A

Yes.

Each partner is liable PERSONALLY, but SECONDARILY for all partnership debts.

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23
Q

What type of liability do partners have for the partnership’s debts?

A

Joint and Several, but

A partner that pays more than his fair share is entitled to contribution from the other partners.

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24
Q

What does it mean that partners are “secondarily” liable for partnership debts?

A

(1) Creditor must FIRST exhaust the partnership assets before collecting from partners individually
(2) Creditor must also name the partners in the cause of action

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25
Q

What are the four steps to ending a partnership relationship?

A

(1) Dissociation
(2) Dissolution
(3) Winding Up
(4) Termination

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26
Q

What is “dissociation?”

A

Dissociation =

change in legal relationship of partners.

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27
Q

What are the events that could trigger dissociation?

A

(1) Withdrawal of any partner
(2) Death, bankruptcy, or incompetence of a partner
(3) Expulsion of a partner, by partners or by judicial decree

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28
Q

When may a partner be expelled from the partnership?

A

Direct Expulsion:

(1) Partnership agreement provides for it,
(2) Other partners vote UNANIMOUSLY, or
(3) it would be unlawful to continue doing business with the expelled partner.

Judicial Expulsion @ Partners’ Request:

(1) If partner harmed the partnership through willful or repeated breach of duty
(2) If it is no longer reasonably practicable to do business with that partner (ex: stopped showing up)

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29
Q

Does the sale or transfer of a partnership interest cause dissociation?

A

No. Transferee gets rights to distributions and Transferor continues on as a partner.

BUT, partners can unanimously expel the transferee.

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30
Q

What counts as a wrongful dissociation?

A

A partner quitting prior to a definite term or a particular undertaking outlined in the partnership agreement.

31
Q

What are the consequences of dissociation on the dissociated partner?

A

(1) Dissociated partner loses management rights
(2) Dissociated Partner is no longer an agent
(3) Dissociated partner still liable for pre-dissociation obligations unless the obligations were altered by creditor
(4) Dissociated partner liable for obgliations for TWO YEARS if 3rd party reasonably believed person was still a partner, unless:
- (a) dissociated partner files notice w/ Secretary of State, valid 90 days post-filing

32
Q

If other partners continue business after one partner has dissociated, what rights does the dissociated partner have?

A

(1) Entitled to payment of fair value of interests
(2) entitled to indemnification against all current and future KNOWN liability, except those caused by the dissociated partner

33
Q

How does dissolution occur for “at will” partnerships?

A

(1) Withdrawal results in dissolution UNLESS:
- (a) all partners (including dissociated partner) agree to waive dissolution and continue business
(2) All other dissociating events (besides withdrawal) do NOT trigger dissolution IF:
- (a) all REMAINING partners agree to continue

34
Q

How is a definite term partnership dissolved?

A

(1) IF death, bankruptcy, or wrongful dissociation:
- (a) Majority may elect dissolution, otherwise partnership continues
(2) At the expiration of the term or completion of undertaking:
- (a) automatic dissolution
(3) Partners may also unanimously agree to end the partnership

35
Q

When can a Court order dissolution of the partnership?

A

Court can order dissolution IF:

(1) Economic purpose of the partnership is likely to be unreasonably frustrated, OR
(2) It is no longer reasonably practicable to carry on business
(3) Fairness requires liquidation so a creditor can get to partner’s interest (if partners have avoided distributions to avoid creditors)

36
Q

What is “winding up?”

A

Process of finishing up all remaining business before termination.

37
Q

Who can do the process “winding up,” and do they get anything for their work?

A

Any partner other than a wrongfully dissolving partner may wind up.

He is entitled to renumeration for services (the one time a partner is automatically entitled to payment for services.)

38
Q

Upon termination, what is the process for distributing assets?

A

(1) Debts, including debts to partners, must be paid.
(2) Capital must be returned to contributing partners
- (a) if assets are insufficient to give back capital, partners must contribute funds to pay
(3) Leftover profits are then distributed equally to partners (absent agreement otherwise)

39
Q

How is a Limited Liability Partnership (LLP) formed?

A

(1) File STATEMENT OF QUALIFICATION w/ Secretary o State
(2) Pay fees to Secretary of State
(3) Have “LLP” in name

40
Q

What if an LLP fails to file a statement of qualification with the secretary of state?

A

It is not, in fact, an LLP. It remains a general partnership.

41
Q

What are the filing requirements of an LLP?

A

(1) Formation filing - Statement of Qualifications
(2) Annual reports, including:
- (a) name
- (b) address
- (c) list of agents

42
Q

What liability do LLP partners have?

A

(1) LLP partners liable for OWN TORTS, and torts committed under their NEGLIGENT SUPERVISION
(2) Not personally liable for partnership debts under contracts, UNLESS:
Partnership veil is pierced for some reason

43
Q

What is the applicable governing statute for Limited Partnerships?

A

RULPA
Revised Uniform Limited Partnership Act
Sets forth DEFAULT rules; alterable by agreement

44
Q

What are the two classes of partners in a Limited Partnership, and what are their respective rights/duties?

A

(1) General Partners
- (a) Manage the partnership
- (b) personally liable for partnership debts
- (c) actual and apparent authority to bind the partnership

(2) Limited Partners
-(a) not personally liable for partnership debts, unless:
Partnership veil is pierced

45
Q

What if a “limited partner” in an LLP starts managing the partnership?

A

Traditional Rule:
Likely to lose “limited” status and open himself up to personal liability for partnership’s debts.

Modern Trend:
This is okay w/o losing “limited” status.

46
Q

How is a Limited Partnership formed?

A

(1) Filing CERTIFICATE OF LIMITED PARTNERSHIP w/ Secretary of State
(2) Pay fees
(3) Must have “LP” in name

47
Q

What if a Limited Partnership fails to file a Certificate of Limited Partnership with the Secretary of State?

A

It is not, in fact, an LP. It remains a General Partnership.

48
Q

Can a limited partner’s name be included in the name of a Limited Partnership?

A

Traditional Rule:
No, this would be misleading

Modern Trend:
Sure.

49
Q

What are the economic rights of partners in an LP?

A

Profit/Loss allocation distributed:

IN PROPORTION TO THE RELATIVE VALUES OF MEMBERS’ CONTRIBUTIONS TO LP

50
Q

What fiduciary duties do General Partners owe to a Limited Partnership?

A

Same as General Partnerships:

(1) Good Faith
(2) Fair Dealing
(3) Loyalty
(4) Care

51
Q

What fiduciary duties do limited partners owe to a Limited Partnership?

A

(1) Good Faith
(2) Fair Dealing

NO DUTY OF LOYALTY/CARE; Limited Partners may outright compete w/ the Limited Partnership if they want to

52
Q

If a General Partner is in breach of a duty owed to a Limited Partnership, is there anything that a limited partner can do?

A

Yes, bring a derivative action IF:
(1) necessary demands have been made first

Recovery is for the benefit of the LP

53
Q

What if a General Partner dissocates from an “at will” Limited Partnership?

A

Withdrawing partner is entitled to receive fair value of his interest

54
Q

What is the result of a General Partner withdrawing from a Limited Partnership?

A

Will cause dissolution of the partnership, UNLESS:

(1) More than one general partner AND agreement calls for continuation, OR
(2) All other partners (general and limited) vote to continue

55
Q

May a limited partner dissociate from a Limited Partnership?

A

Dissociation by a Limited Partner id wrongful in any kind of LP, but it is not void.

The dissociation effectively downgrades the limited partner to a transferee w/ economic rights only

56
Q

What are the characteristics of a Limited Liability Limited Partnership (LLLP)?

A

Basically the same as LP, except general partners are not personally liable for the partnership’s obligations

57
Q

What are the owners of an LLC called?

A

“Members”

58
Q

How is an LLC formed?

A

(1) Certificate of Formation filed w/ Secretary of State
(2) Pay fees
(3) “LLC” must be in name

59
Q

What filing requirements does an LLC have?

A

Must file annual reports w/ Secretary of State

60
Q

What is an “Operating Agreement” or “LLC Agreement?”

A

It contains internal operational rules of the LLC.

61
Q

In what general ways is an LLC more like a corporation, and what ways is it like a partnership?

A

Liability: more like corporation
Membership: more like a partnership

62
Q

Are LLC members liable for the LLC’s obligations?

A

LLC member is not liable for LLC’s obligations, except for torts which they are personally involved.

Piercing the veil may also occur though.

63
Q

How are new members of an LLC admitted?

A

Unanimous vote by current members.

64
Q

Can an LLC member sell his interests in the LLC?

A

Yes, but like a partnership interest this only transfers the rights of PROFITS. The transferee is not an actual member of the LLC.

65
Q

How is an LLC managed?

A

Default Rule: Member-managed
Each member can participate and is an agent.

Alternative: Manager-managed
Designated managers (member or not) are agents of the business;  Managers must be named in the Certificate of Formation
66
Q

What are the functions of voting in an LLC?

A

Split: Two Rules

(1) Equal voting power for each member, OR
(2) Proportion of ownership voting power

NOTE: in manager-managed LLC, nonmanaging members’ right to vote can be restricted to only major events

67
Q

How are profits/losses allocated in an LLC?

A

Default Rule:

Allocated based on relative values of members’ contributions to the LLC

68
Q

What are the fiduciary duties of LLC members?

A

Managing Members:

  • Same 4 duties as General Partners
  • Protected by Business Judgment Rule, generally

Non-Managing Members:
Good faith and Fair dealing ONLY

69
Q

What is the Business Judgment Rule?

A

A rebuttable presumption that business managers act in conformity with their duties.

70
Q

If a managing member of an LLC is breaching a fiduciary duty, is there anything that a non-managing member can do?

A

Yes, file a derivative action:

  • must make demand on Manager first
  • recovery is for the benefit of the LLC
71
Q

What are the results of an LLC member dissociating?

A

(1) LLC does NOT automatically dissolve
(2) In some states, withdrawing at any time is wrongful
(3) Minority Rule: dissociated member not entitled to value of interests unless the LLC dissolves

72
Q

If a member dissociates from an LLC, does he have any continuing liability?

A

Some states:

2 year period where dissociating member can still be liable based on 3rd party reliance

73
Q

What are the four ways an LLC can dissolve?

A

(1) Stated term expires
(2) Stated undertaking has been achieved
(3) Court order to dissolve
- (a) no longer practicable, or
- (b) purpose has been frustrated
(4) Agreement by members:
- (a) % specificed in agreement, or, if silent
- (b) majority or 2/3, or unanimous, depending on state

74
Q

Upon dissolution, how are LLC assets distributed?

A

(1) Same as partners (debt, capital, profits), but

(2) Members’ liabilities to 3rd parties are limited to their contributions to the LLC

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