Partnerships Flashcards
How are partnerships formed? What governs them?
Partnerships and other unincorporated business organizations formed in Texas are governed by the Texas Business Organizations Code. As of January 1, 2010, the TBOC governs all partnerships and other unincorporated business organizations formed in Texas, regardless of when they were formed (before that, it only applied to those formed on or after January 1, 2006.
CREATED BY MEETING ALL OF THESE ELEMENTS:
1) The association (voluntarily or consensual);
2) Of two or more persons (individuals and business organizations);
3) To carry on as co-owners (must have SHARED CONTROL of the business);
4) In a business (the activity that the persons agree to carry on must be a business);
5) FOR PROFIT (must have a profit motive).
Do parties have to intend to form a partnership in order to form one?
No.
Must parties comply with any formalities to form a partnership?
No.
T/F - The intent to share profits is not necessary in order for a relationship to be a partnership.
False.
Must have an intent to share profits.
Does the sharing of profits always indicate that a partnership has been formed?
No, because sometimes parties share profits as a way of making a payment, such as for services or the use of property.
Example: giving a store clerk an added incentive of .01% of the stores profits.
What about sharing of losses?
Sharing of losses is a factor indicating that a partnership has been formed, but an agreement to share losses is NOT REQUIRED in order to form a partnership.
Must there be a written partnership agreement to form a partnership?
Generally, no.
However, an oral partnership agreement can fall within the Statute of Frauds, and thus be unenforceable if either:
1) It cannot be performed within one year; OR
2) It involves the transfer of real estate to the partnership.
What are at-will partnerships?
A partnership for an indefinite term is referred to as an at-will partnership. A partnership agreement for a partnership at-will generally is NOT within the Statute of Frauds because it IS capable for being performed within one year.
What are the general rules with regard to governance of a partnership?
Generally, the TBOC sets forth DEFAULT RULES that govern the relationship among partners. By entering into a partnership agreement, the parties generally CAN WAIVE OR MODIFY the default rules of the TBOC.
What can a partnership agreement NOT do?
1) Alter the rights of a third party;
2) Alter a partner’s power to withdraw from the partnership; OR
3) Eliminate the partners’ duties of loyalty, care, and good faith.
Are joint ventures the same as partnerships? What is Partnership by Estoppel?
Joint ventures generally are treated as and are subject to the same rules as partnerships.
Under the doctrine of Partnership by Estoppel, a third party can hold a person personally liable for an obligation as if they were a partner in a partnership if:
1) The person represents himself, or consents to someone else representing him, as a partner in an actual or purported partnership; AND
2) The third party gives credit in reliance on the representation.
What duties does a partner owe the partnership and other partners? What about during winding up the partnership?
1) Duty of loyalty; AND
2) Duty of care.
A partner must discharge her duties and exercise any rights and powers in the conduct or winding up of the partnership:
1) In good faith, AND
2) In a manner the partner reasonably believes to be in the BEST INTERESTS of the partnership
What does a partner’s duty of loyalty include? What if there is a breach?
1) ACCOUNTING to and holding for the partnership any property, profit, or benefit derived by the partner in the conduct or winding up of the partnership business or from the use of partnership property;
2) REFRAINING from dealing with the partnership ON BEHALF of a person who has an interest ADVERSE to the partnership; AND
3) REFRAINING from COMPETING OR DEALING with the partnership in a manner ADVERSE to the partnership.
IF ANY OF THESE THREE ARE FAILED, the partner breaches his duty of loyalty, UNLESS the other partners consent to what the partner is doing.
What steps must a partner take to avoid breaching a duty of loyalty?
The partner must DISCLOSE ALL DETAILS concerning the transaction that is adverse to the partnership AND OBTAIN THE CONSENT of the other partners to the transaction.
What is a partner’s duty of care? What is the presumption?
To act in the conduct and winding up of the partnership business with the care an ORDINARY AND PRUDENT PERSON would exercise in similar circumstances.
A partner is PRESUMED to satisfy this duty if she acts on an INFORMED BASIS, IN GOOD FAITH, AND IN A MANNER the partner REASONABLY BELIEVES to be in the BEST INTERESTS OF THE PARTNERSHIP.
How are profits and losses shared?
Unless the partners have a contrary agreement, partners share profits EQUALLY.
Unless the partners have a contrary agreement, partners share losses IN THE SAME MANNER THAT THEY SHARE PROFITS.
How are management rights shared?
Unless the partners have a contrary agreement, each partner has EQUAL RIGHTS in the management and conduct of the partnership’s business.
How are differences between partners decided?
Unless the partnership agreement provides to the contrary, differences concerning matters within the ordinary course of the partnership’s business are decided BY A MAJORITY INTEREST OF THE PARTNERS.
Majority Interest - means partners owning more than 50% of the partnership profits. So if there are three partners sharing equally, however 2 partners vote will outvote the 1 partner (67% profit ownership to 33%). CAN BE DIFFERENT OUTCOME IF PARTNERS AGREE TO SHARE PROFITS UNEQUALLY.
What acts require the consent of all partners (absent partnership agreement providing to the contrary)?
1) Decisions regarding matters outside the ordinary course of business;
2) Amendments of the partnership agreement; AND
3) Admission of a new partner.
Can partners receive compensation?
A partner is NOT entitled to receive compensation for services performed for a partnership, OTHER THAN REASONABLE compensation for services RENDERED IN WINDING UP THE BUSINESS of the partnership, UNLESS THE PARTNERSHIP AGREEMENT PROVIDES FOR COMPENSATION.
T/F - A partner who makes a payment or who reasonably incurs liability in the proper conduct of the partnership’s business is entitled to be repaid by the partnership WITH INTEREST.
True
What access to the partnership’s books does a partner have?
Unless partnership agreement provides to the contrary, a partnership must provide access to its BOOKS AND RECORDS to a partner or an agent or attorney of a partner.
A partnership agreement CANNOT UNREASONABLY RESTRICT a partner’s right of access to partnership books and records.
When a partner requests it, each partner and the partnership must furnish COMPLETE AND ACCURATE information concerning the partnership to the requesting partner (or an assignee or legal representative of the partner) to the extent the request is JUST AND REASONABLE.
When is property considered “partnership property?”
Property is deemed partnership property if it is acquired in the name of either:
1) The partnership; OR
2) One or more partners, if the instrument transferring title to the property indicates either the person’s CAPACITY AS A PARTNER OR THE EXISTENCE OF A PARTNERSHIP.
Property is PRESUMED to be partnership property if it is acquired with partnership CASH, CREDIT, OR PROPERTY.
NOTE: Property acquired in the name of one or more partners is presumed to be the partner’s property if the property is not acquired with partnership property and the instrument transferring title to the property does not indicate the person’s capacity as a partner or the existence of the partnership.
What is the partner’s right to partnership property?
Unless the partnership agreement provides otherwise, a partner’s ONLY RIGHT with respect to partnership property is to use it for PARTNERSHIP PURPOSES.
What are partner’s creditor’s rights to partnership property?
A creditor with a claim against a partner that is UNRELATED to the partnership business CANNOT seek to satisfy the debt out of partnership property.
Can a partner, without the power to do so, transfer real property of the partnership?
Partnership is bound if real property is transferred on its behalf when the grantor has conveyed the property to a HOLDER FOR VALUE who acquired the property WITHOUT KNOWLEDGE THAT THE PARTNER EXCEEDED THAT PARTNER’S AUTHORITY in making the conveyance.
T/F - A partner’s “partnership interest” includes the partner’s right to participate in management.
False.
It includes the partner’s share of profits/losses or similar items and the right to receive distributions.
What are the rights of a transferee of a partnership interest?
The transferee of a partnership interest does NOT become a partner in the partnership, and does NOT have the right to participate in management or administration of the partnership.
ONLY THE FOLLOWING RIGHTS ARE ACQUIRED:
1) To receive distributions of partnership profits that the transferor would have received;
2) If the partnership is wound up, to receive the net amount the transferor would have received; AND
3) For a proper purpose, to receive REASONABLE INFORMATION or an account of a partnership transaction and make REASONABLE INSPECTION of the partnership books.
What rights, if any, does a transferor of a partnership interest have?
Transferor of a partnership interest REMAINS A PARTNER in the partnership and continues to have the RIGHTS OF A PARTNER, including the right to participate in MANAGEMENT.
Does a transferee of a partnership interest have any liability?
Unless and until a transferee is admitted as a partner, the transferee has NO PERSONAL LIABILITY as a partner for partnership obligations.
What is a Charging Order?
A JUDGMENT CREDITOR of a party can obtain a charging order against the partner’s PARTNERSHIP INTEREST.
A charging order is a LIEN against the partnership interest and gives the judgment creditor ONLY THE RIGHT TO RECEIVE ANY DISTRIBUTIONS the partnership otherwise would pay to the partner who owes the debt.
A CHARGING ORDER IS THE EXCLUSIVE REMEDY BY WHICH A JUDGMENT CREDITOR OF A PARTNER CAN SATISFY A JUDGMENT OUT OF THE DEBTOR’S PARTNERSHIP INTEREST.
The charging order DOES NOT give the judgment creditor the right to foreclose on or otherwise become the owner of the judgment debtor’s partnership interest.
When can a partner bind a partnership to an agreement?
As an agent of the partnership, a partner can bind the partnership to a contract when:
1) The partner has express or implied actual authority;
2) The partner has apparent authority;
3) The partnership is estopped from denying the partner’s authority; OR
4) The partnership ratifies the contract.
When does a partner have express actual authority?
When the partnership agreement authorizes the partner to do so, or when the partners vote on a matter and authorize the partner to implement the partners’ actions.
When does a partner have implied actual authority?
By virtue of being a partner, a partner has implied actual authority to enter into contracts on the partnership’s behalf in the ORDINARY COURSE OF THE PARTNERSHIP’S BUSINESS.
A partner does NOT have implied actual authority to enter into transactions on the partnership’s behalf that are extraordinary or outside the ordinary course of the partnership’s business.
When does a partner bind the partnership with apparent authority?
An act of a partner binds the partnership if the act is APPARENTLY for carrying on in the ordinary course of the partnership’s business or business of the kind carried on by the partnership, UNLESS:
1) A partner does NOT have authority to act for the partnership in the particular matter; AND
2) The person with whom the partner is dealing KNOWS that the partner lacks authority.
Is the partnership liable for its partners torts against third parties? Other partners?
A partnership is liable for a loss or injury to a person, INCLUDING A PARTNER, cause by a WRONGFUL ACT OR OMISSION of a partner who acts:
1) In the ORDINARY COURSE of the partnership’s business, OR
2) With the authority of the partnership.
T/F - A partnership can have agents that are not partners and will be liable through respondeat superior for their negligence or other misconduct.
True
T/F - A partner’s KNOWLEDGE of a fact related to partnership matters is ATTRIBUTED to the partnership.
True.
T/F - A partner’s receipt of notice of a fact relating to the partnership is effective IMMEDIATELY as notice to the partnership.
True
UNLESS the partner receiving the notice is committing fraud against the partnership.
HYPO - Partner A gets a letter saying that the partnership’s premises are in violation of a local city ordinance. She throws it away without reading it with no knowledge of its contents. Does the partnership have notice?
Yes, this notice is effective IMMEDIATELY as notice to the partnership. Thus, the partnership cannot claim in any later proceedings that it had not received notice of the violation.
Are partners vicariously liable for contracts and torts of the partnership?
Yes
What form of partner liability is present for partnership obligations?
JOINT AND SEVERAL LIABILITY.
