Partnerships and LLCs

Question 1

Partnership: Formation

Answer 1

• Definition: association of two or more persons who carry on for the purpose of profits. Contribution of money or services in exchange for a share of the profits is prima facie evidence of a partnership (not return for wages, etc.).
• Capacity: anyone capable of entering into a binding K may be a partner. A would-be partner but for incapacity liable only to the extent of capital contribution.
• Formalities: generally none (except if partnership agreement cannot be performed in 1 year, writing required; if no writing, then partnership at will arises).
• **Legality: **a partnership will be void if the purpose of the existence is illegal.
• **Agreement: **unless otherwise agreed, no one can become a partner without express or implied consent of all partners.

Question 2

Proof of Partnership Existence

Answer 2

• Express intent of the parties governs. If none, look at:
• Title to property;
• Designation of entity by parties;
• Amount of activity involve in the enterprise undertaken by the parties (more –> more likely to be p’ship)
• Sharing of gross returns;
• Sharing of profits (rebuttable prima facie evidence unless repayment of debt, payment of wages, annuity, etc.)
• Sharing of losses (absence of agreement is rebuttable evience of no p’ship).

Question 3

Liabilities of General Partners to Third Parties

Answer 3

• Partners are agents of the p’ship for purpose of carrying on ordinary p’ship business. Act of every Partner will bind partners. Liability for an act of partner may be in contract, tort, breach of trust.
• Each general partner is liable for all debts of p’ship and for each co-partner’s torts
  
  • Incoming partners are generally not liable for pre-existing p’ship ebts but any money paid in by new partner can be used to satisfy prior debts;
  • Withdrawing partners are liable on future/subsequent debts until actual notice of dissasociation is given to all current creditors and publication notice is given to potential creditors.

Question 4

General Partnership Liability by Estoppel

Answer 4

• When person holds himself out as a partner,
• or permits another to represent him as a partner, he will be estopped from denying partnership arrangement (and thus joint liability) to those who relied on the representation about the partnership.
  *

Question 5

Liablities of partners as between each other

Answer 5

• **Fiduciaries to each other and to partnership. **This means there is a duty of loyalty (no self-dealing, no usurpation of partnership opps, no secret profits at p’ship’s expense). A partnership may recover losses caused by breach and require partner to disgorge profits.
• **Rights in partnership property and liquidity. **Land, leases, equipment, etc., owned only by the p’ship, may not be transferred by individual partners without p’ship authorization. Anything can be included in p’ship property (look at source, use, relation, title, treatment in books, maintenance payments, etc., to determine). Partners have tenancy in property (right of survivorship; possession; not assignable/mortgageable by any individual partner).
  
  • Share of profits is individually owned by partner
  • Share in management is owned by partnership and cannot be sold/transferred by individual partners.
• **Management. **Absent express agreement otherwise, each partner entitled to equal control (vote), notwithstanding inequal contributions/profit shares. For ordinary affairs, majority vote governs; for fundamental affairs, unanimous consent required.
• **Salary. **No salary absent agreement, except that partners who help wind up business entitled to compensation.
• **Distributions/share of profits. **Absent express other agreement, profits shared equally. Absent agreement, losses are shared like profits (e.g., same way as profits, unless agreed otherwise).
• **Indemnification/contribution rights as between partners. **

Question 6

Legal Actions Between Partners

Answer 6

• As a general rule a partner cannot sue or be sued by partnership in action by law, nor may one partner sue another on matters related to p’ship business. An exception occurs when no complex accounting is required.
• An action for an accounting is an equitable proceeding whereby the liabilities between each partner and the p’ship are converted into liabilities between partners individually. An action lies to recover the balance due to any partner. Actions for an accounting generally arise upon final settlement of p’ship affairs, but may also occur in actons for wrongful exclusion or to recover secret profits, in accord with the p’ship agreement or in any other circumstance a court feels is just and reasonable.
• Partners are not employees so cannot recover under worker’s compensation acts.

Question 7

Dissolution and Termination of Partnership

Answer 7

• Dissolution: upon any material change, such as:
  
  • Act of partners (mutual assent / withdrawal of any single partner / expulsion of one partner);
  • Operation of law (illegality, if partner dies, express will of any one partner);
  • Decree of equity court (breach of p’ship agreement; unprofitability; misconduct; incompetence; incapability of partner; other circumstances).
• Winding up: period between dissolution and termination in which remaining P’s liquidate assets to satisfy p’ship creditors.
  
  • Old business: p’ship and individual partners retain liability on all transactions entered into to wind up old business by satisfying creditors who existed when winding up began.
  • New business: p’ship and therefore individual general p’s retain liability on all brand new transactions during winding up until actual notice of dissolution is given to all know creditors & publication notice given to all potential creditors.
• Priority of distribution:
  
  • Outside creditors
  • Insie creditors
  • Capital contributions must be paid (so all partners share in any deficiencies as losses)
• Termination: official end

Question 8

Alternative Unincorporated Business Organizations

Answer 8

• Limited Partnership = at least 1 GP + 1 LP. Must formally file limited partnership certification, including names of all GPs, with the state. General partners are liable for all ltd partnership obs (but get control); limited partners have limited liable, and cannot manage/control the business without forfeiting limited liability status.
• Registered limited liability partnerships (RLLP): a general or limited partnership engaged in professional services; must file cert of registration with state; no partner is liable for debts and obs of partners, not even the general partners.
• LLCs: hybrid between p’ship and corp; owners have some rights nad limited liability of shareholders but taxation benefits of partnership. File articles of org with state and publish summary of arts in at least 2 papers for 6 weeks in a row; may adopt an operating agreement. Owners may control or may delegate to team of managers (just like BoD).
  
  • Limited liquidity: full membership interest may not be transferred without consent of majority of members agreeing, unless provided for in operating agreement. Company will dissolve upon majority vote of membership, or if provided for in operating agreement.
  • Limited liability + limited liquidity + limited life + limited tax.