Partnerships Flashcards
Formation of Partnership: Elements
- Association (must agree, but can be inferred)
- Two or more persons
- To carry on a business
- For profit
Key element: l_ook at intent of parties to enter into relationship_: evidenced by express agreement, but also profit sharing, management practices, services rendered by parties, record title to assets
Partner’s ability to bind partnership: tort
Partnership liable for partner’s acts that were either authorized or committed in ordinary course of partnership business.
Partner’s ability to bind partnership: contract
Partner must have
- acted on behalf of the partnership, and
- partner must have bound partnership.
Act on behalf: did partner dislose to 3rd party, and did third party know?
Bind partnership: did partner have:
- actual authority from partnership agreement?
- even if no authority, may still bind if ordinary course of business AND 3rd party didn’t know that partner lacked authority
- Is this ordinary course of busienss (if yes, partners presumed to have authority, unless majority decision of partners to contrary; if not, need unanimous consent of partners)
What assets may be used to satisfy partnership liability (in tort or contract)?
- Partnership assets: as distinct legal entity, all partnership assets are subject to creditors
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Personal assets or partners: partners are jointly & severally liable for partnership debts
- Exception: excuses debts that predate joining partnership
Rights of Partners in partnership
Right to indemnity: partnership must indemnify partner for payments made in ordinary course of partnership business
Right to interest: payments in excess of contributed capital constitutes a loan that accures interest
Right to compensation: for services rendered to partnership (except in windup)
Right to accounting: re pship’s profits/losses, and partner’s share thereof
Management and Control: unless otherwise modified by pship agreement, all partners have right in management and conduct of business; may not contravene partnership agreement without unanimous partner consent
Property Rights: economic rights of partnership ownership and right to participate in management
Partnership governance:
Fiduciary duties of partners to partnership/other partners
Duty of care: only conduct rising to gross negligence, recklessness, or knowing violation of law
Duty of loyalty:
- Good faith: discharge duties consistent with good faith and fair dealing
- Account for partnership property, keep books with right of inspection
- Refrain from self-dealing
- No competing with partnership
- Businss opportunity doctine: no taking opportunities properly belonging to partnership
Partnership governance:
Admission of new partners
Only with unanimous consent of other partners.
New partner’s personal liability limited with respect to existing tort and contract liability of partnership.
Dissolution of partnership:
Stages of partnership dissolution
- Dissolving event
- Wind up of partnership affairs
- Termination of partnership
Dissolution of partnership:
Dissolving events
Mandatory dissolution events:
- notice of withdrawal by partner in partnership at will
- in a partnership for term or undertaking, at completion of objective
- 1/2 remaining partners agree to wind up after another’s dissociation by death, insolvency/bankruptcy/incapacity
- illegality of partnership (but n/a if illegality is cured within 90 days)
Permissive dissolution events:
- By unanimous consent of partners
- Judicial determination if dissolution is equitable
Dissolution of partnership:
Partner’s ability to bind partnership to 3rd party during wind up phase
A partnership is bound if:
- The partner’s act is appropriate for winding up partnership business; OR
- Would have bound the partnership before dissolution, if other party did not have notice of dissolution
Dissolution of partnership:
Activities of windup phase
Any partner (who has not wrongfully disassociated) may particpate in wind up of partnership affairs.
- Preserve partnership business or property as going concern for reasonable time;
- Prosecute and defend actions and proceedings;
- Settle and close partnership business
- Dispose and transfer partnership property
- Discharge partnership liabilities
- Distribute assets of partnership
- Settle disputes by mediation/arbitration
- Perform other necessary acts
Dissolution of partnership:
Distribution of assets
Creditors are paid first
Then distribute to partners:
- Governed by partners’ capital accounts: capital account deficit means may have to contribute (but no contribution is req’d if a preexisting debt)
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Dissociation of partner:
Dissociating events
- Partner’s express will to leave partnership
- Predetermined event under partnership agreement
- Predetermined expulsion under partnership agreement
- Unanimous vote of other partners if a) unlawful to engage in partnership business OR partner transferred interest to 3rd party
- Judicial determination of wrongful conduct, material breach of agreement or fiduciary duties
- Bankruptcy of partner
- Death or incapacity of partner (or for entities, termination of entity status)
- If trust/entity, the distribution of partnership interest to beneficiary/owner
Dissociation of partner:
Wrongful dissociation & liability
Parnter who wrongfully dissociates is liabile to partnership/other parnters for damages caused by dissociation.
Dissociation is wrongful if:
- breaches express provision of agreement
- occurs before definite term or specific undertaking
- n/a if withdraws within 90 days of another’s dissociation by death/bankruptcy/entity’s distribution of interest
- n/a if dissociate b/c of that’s partner’s bankruptcy/expulsion by judicial determination
Dissociation of partner:
Partnership’s obligation to purchase dissocaited interest
- Partnership is obligated to cash out the dissociating partner
- Price is determined at greater of liquidation value or going concern value
- Damages for wrongful dissociation are offset against amount owed
