Partnerships

Question 1

What is the definition of a partnership?

Answer 1

An association of two or more legal persons who carry on a for profit business a co-owners. Can be formed by an individual or a corporation

Question 2

Who may enter into partnership agreements?

Answer 2

Anyone or anything that has legal capacity to contract but, not humans who are incapacitated (minors, drunks) and includes legal entities such as corporations, LLCs in addition to humans

Question 3

What is the presumption of partnerships?

Answer 3

When two or more persons share profits, there is a presumption of a partnership relationship. The presumption does not apply when there is a payment of a debt, interest payments, rent, wages, or goodwill

Question 4

Is a partnership a separate legal entity?

Answer 4

Yes. The partnership is distinct from each of the partners inside of the partnership. The partnership can hold property and sue and be sued in its own name

Question 5

What is the liability of a partnership?

Answer 5

Partners are personally liable for the partnership’s actions, acts, and obligations. There is NO limited liablity

Question 6

Do partnerships have entry-level taxation?

Answer 6

No, unless the entity is a corporation

Question 7

What are the attributes of a partnership agreement?

Answer 7

There need not be a written partnership agreement. If there is no partnership agreement, then state law will govern the partnership with default rules.
When there is a partnership agreement, it will govern unless state law is mandatory

Question 8

What state laws are mandatory?

Answer 8

Liability to third parties and you cannot deny partners access to the books and records, as well as fiduciary duties

Question 9

What are the fiduciary duties of a partnership?

Answer 9

Every partner is a fiduciary of the partnership, and owes the fiduciary duties of loyalty and care to the partnership

Duty of loyalty, but it can be limited by describing it differently as long as its not unreasonable
Duty of care – partners must not engage in grossly negligent or reckless conduct, intentional misconduct or in a known violation of the law

Question 10

What is the process to ascertain if there is disloyal conduct?

Answer 10

If a partner makes a full disclosure of all material facts, then a certain percentage of the other partners may authorize or condone/ratify the transaction

Question 11

What are the default rules for the division of profits in a partnership?

Answer 11

The division of profits and losses need not be the same and financial contribution/capital distributions need not have an effect on the division of profits and losses. When there is no partnership agreement regarding division of profits and losses, profits are divided evenly and losses follow profits.

Question 12

What is the default rule for distributions in a partnership?

Answer 12

Partners do not have the right to demand a distribution. Partners can agree in advance to allow distributions to be made according to the partnership agreement

Question 13

What ae the default rules for transfers of partnership interests?

Answer 13

A partner does not have the right to transfer their partnership interest. Partners may still agree to change the default rule to require a majority vote of the partners

When a new partner is introduced, all existing partners must consent to the new partner

Question 14

What is the default rule about managing/governing relationships in a partnership?

Answer 14

Every partner has equal rights in the management and control of the partnership but this can be changed by an agreement. A common division is to reflect the partners’ capital contributions rather than an even share.

Question 15

What are the rules governing ordinary and extraordinary business matters?

Answer 15

Ordinary business requires a vote of the majority of the partners and extraordinary business requires a vote of all the partners

Question 16

What is disassociation?

Answer 16

When a partner ceases to be associated with the partnership; can be voluntary or not

Voluntary – partner may give notice to the partnership that the partner wants to withdraw

Involuntary – Event triggered in the partnership agreement, can be expelled, illegal to carry on business with the removed partner, court ma order a partnership be disassociated, bankruptcy, death, incapacitation, or one of the entities of the partnership dissolves

Question 17

What are the consequences of disassociation?

Answer 17

If a partner is disassociated, the partnership does not necessarily dissolve. Once disassociated, a former partner has no right to participate in management of the partnership, and the partner no longer has an fiduciary duties to the partnership. If the partnership continues, it must buy out the disassociated partner’s interest

Question 18

What are the three authorities with a partnership?

Answer 18

Express Authority – authority can come from the partnership agreement or a statement of authority filing, or an ad hoc authorization by the partners at a meeting
Implied - Exists based on the partner’s reasonable belief that an action is necessary t carry out express authority
Apparent - The partnership ma be bound based on the partner acting in the ordinary course of dealings and based on interactions between the partnership and third-parties

Question 19

Is there liability in tort for partnerships?

Answer 19

Yes. A partner is liable in tort for torts that are committed by partners acting within the scope of their partnership. Partners are personally liable for the debts or obligations of the partnership.

Question 20

What are the consequences of the flow of liability in a partnership?

Answer 20

A partner is jointly and severally liable for all partnership obligations. you can go after any partner for the entire sum owed by the partnership. The partnership creditor must exhaust the partnership’s funds before going after the partners’ personal interests.

An incoming partner is not personally liable for contract or tortious obligations incurred prior to becoming a partner and an outgoing partner may be personally liable for a partnership obligation that occurred after dissociation

Question 21

Name and describe the two ways a partnership may be terminated

Answer 21

Dissolution – triggered by the occurrence of an event, not the end of the partnership, can be brought about by a partner or by action of the law

Winding Up – any partner that has not been wrongfully dissociated may wind up a partner, the legal representative of the last surviving partner, and any partner, legal representative, or transferee may seek judicial supervision of winding up

Question 22

What power does the person who is winding up have?

Answer 22

The person winding up a partnership may dispose of and transfer partnership property , and discharge partnership liabilities. the person can also preserve partnership business to maximize value as a growing concern

Question 23

What is included in the statement of dissolution?

Answer 23

A filing that gives notice to third-parties that the partnership has been dissolved after 90 days to limit the partnership’s apparent authority and liability

Question 24

What is the priority of distributions?

Answer 24

Creditors first, then partners

Question 25

What is a limited liability partnership?

Answer 25

A partnership in which a partner’s personal liability is eliminated and this must be filed with the state.
To transfer a general partnership into an LLP, you must vote authorizing transformation
The name must end with RLLP or LLP

Question 26

What are the liabilities in an LLP?

Answer 26

Limited partners are NOT personally liable for the obligations of the LLP. Limited partners are personally responsible for their own personal misconduct or negligence

Question 27

What is the process to terminate an LLP?

Answer 27

Partners can voluntarily transform and cancel LLP status and the government can revoke an LLP’s status

Question 28

What is a limited partnership?

Answer 28

A partnership formed by two or more persons that has at least one general partner and one limited partner.
The limited partner has limited liability, and the general partners have personal liability

Question 29

How is a LP formed?

Answer 29

File a certification of LP that contains the name of the LP, in state address, name of an agent in that state, names and addresses of all general partners, statement of duration and signed by the general partner. It is final when filed, or the effective date.

Question 30

What are the attributes of a LP?

Answer 30

May join at the creation of the partnership or with an agreement, voting is allowed only under the partnership agreement (typically does not vote), right to access records, and a LP is not personally liable for the obligations of the partnership unless she serves as a general partner or states to participate in the partnership.

Question 31

What are 6 things LP’s can do without running the business?

Answer 31

Be an officer, director, or shareholder, consult the general partner on partnership affairs, act as a surety of the partnership, request to attend meetings of the partnership, wind up the partnership, and propose or approve of partnership matters

Question 32

What are the attributes of a GP?

Answer 32

Must join at the beginning or be admitted upon consent of all partners. The partnership agreement will lay out all the responsibilities and duties. Personally liable to third parties for obligations of the partnership but to protect them from liability, most GP’s are corporations

Question 33

How does a GP terminate?

Answer 33

May voluntarily withdraw, can be removed if the GP tries to assign his partnership interest to another, bankruptcy, death or incapacitation, and a business-entity partner is terminated