Partnerships (Essay Only) Flashcards
Finished Lecture Handouts
formation
what is the definition of a partnership?
association of 2+ legal persons who carry on for a for-profit business as co-owners
formation
who is a legal person?
individual or company
anyone/anything that has legal capacity to contract
not humans who are incapacitated
formation
what intent is required to form a partnership?
- carry on as co-owners
- for profit
do NOT need a specific intent to form a partnership
what are some major differences b/t partnership and corporation?
- intent requirement is higher for corporation (don’t need specific intent with partnership)
- must file with Secretary of State
- pay fees
- write a charter or bylaws
- prepare a law packet of info
- corporation has entity-level taxation (not for partnership)
formation
if 2+ people share profits, does this create a partnership?
presumption of a partnership
formation
what type of co-ownership is required / not required?
division of profits + sharing of control
presumption does not apply to
- payment of a debt
- interest payment
- rent
- wages
- goodwill
consequences
what is the relationship between the partnership and the partners?
distinct from each of the partners inside the partnership
separate legal entity
consequences
who has liability for a partnership?
partners are personally liable for partnership’s obligations
no limited liability
consequences
how are partnerships taxed?
do not have entity-level taxation
consequences
what laws govern the Partnership Agreement?
doesn’t need to be written
if no partnership agreement –> state law provides default rules
if there is one, it governs EXCEPT when state law is mandatory
tip
what is key for the Partnership Agreement?
Partnership agreement is the law of the partnerships
include this in the essays
consequences
what is an example where state law is mandatory and partnership can’t contract around this in the partnership agreement?
can’t waive personal liability
consequences
which state laws are mandatory?
- liability to 3p
- can’t deny partners access to books and records
- fiduciary duties
internal affairs
who owes a fiduciary duty?
every partner is a fiduciary of the partnership + owes fiduciary duties of loyalty and care to the partnership
internal affairs / duty of loyalty
what must partners NOT do under duty of loyalty?
- compete with partnership business
- advance an interest that is adverse to the partnership
- usurp a partnership oppy
internal affairs / duty of loyalty
what are the limitations on the duty of loyalty?
- can’t eliminate it under state law
- can limit the DOL but can’t be manifestly unreasonable
internal affairs / duty of loyalty
what is the safe harbor for the duty of loyalty?
if partner makes full disclosure of all material facts, then a certain % of other partners may authorize or ratify the transaction
internal affairs / duty of care
what must partners NOT do under the duty of care?
- engage in grossly negligent or reckless conduct
- engage in intentional misconduct
- engage in a knowing violation of law
partnership agreement may not unreasonably reduce the duty of care
internal affairs
what is the timing of the duty of loyalty and duty of care?
applies only to current partners
NOT prospective or former partners
internal affairs / profits and losses
how are profits and losses divided?
no partnership agreement or doesn’t mention losses –> profits divided evenly + losses follow profits
financial and capital contributions don’t need to effect the division
internal affairs / profits and losses
what is the default rule for distributions?
partners do NOT have the right to demand a distribution
partners can agree in advance to allow distributions to be made according to partnership agreement
internal affairs / profits and losses
what is the default rule for the transfer of partnership interests?
partner DOES have the right to transfer their partnership interest
internal affairs / profits and losses
what is the historical rule (no longer valid) for the transfer of partnership interests?
if partner attempted to convey their interest to someone else, it would dissolve the entire partnership
internal affairs / profits and losses
how can a partnership change the default rule about transfer of partnership interests?
majority vote of partners
internal affairs / profits and losses
what is the default rule for adding new partners?
ALL existing partners must consent to the new partner
internal affairs / dividing control
what is the default rule for managing/governing relationships?
every partner has equal rights in the management and control of the partnership
can change by agreement
normally divided by capital contributions
internal affairs / dividing control
what vote is required for ordinary business matters? (default rule)
vote of majority of partners
internal affairs / dividing control
what vote is required for extraordinary business matters? (default rule)
ALL partners
internal affairs / dividing control
what is the default rule for quorum?
no requirement
internal affairs / dividing control
what is the rule for access to records?
must be provided to partners and their agents
mandatory, can’t be abridged
internal affairs / dissociation
what is dissociation?
when a partner ceases to be associated with the partnership
voluntary or involuntary
internal affairs / dividing control
what is voluntary dissociation?
partner may give notice to the partnership that they want to withdraw
internal affairs / dividing control
give examples of situations of involuntary dissociation
- event triggered in partnership agreement
- expelled pursuant to partnership agreement
- unlawful to continue to do business with that partner
- court may order that they disassociate
- partner goes bankrupt
- partner dies
- partner becomes incapacitated
- one of the entities dissolves (if entity not human)
internal affairs / dividing control
can a partnership prevent a partner from withdrawing?
nope but can create restrictions (written notice, liability for wrongful dissociation, etc.)
internal affairs / dividing control
what are the consequences of dissociation?
if partnership dissociates –> former parter has no right to participate in management of the partnership + partner no longer has any duties
if partnership continues –> must buy out the dissociated partner’s interest
all partners (including any properly dissociated partners) must agree to waive the right to terminate the partnership (Essay 4982)
external affairs
are partners agents?
every partner is an agent of the partnership
SO the partnership may be liable for a partner’s contract and tort liabilities
external affairs
are partners liable for debts and obligations of the partnership?
yes, personally liable
jointly and severely liable
generally must exhaust partnership’s funds before going after personal assets
external affairs
is an incoming partner personally liable?
not liable for contract or tort obligations incurred before they became a partner
external affairs
is an outgoing partner personally liable?
may be personally liable for a partnership obligation that occurred after the dissociation
termination
what are the steps to terminate a partnership?
- dissolution
- winding up
what is a partnership at will?
open-ended partnership with no fixed term
dissolved when any partner chooses to dissociate
what is a partnership for a term or undertaking?
partnership may be dissolve when the term expires or when the undertaking is complete
termination
when does a partnership dissolve?
either type of partnership can be dissolved one of these ways
- any dissolving event set forth in partnership agreement
- any event that makes it unlawful to continue if not cured within 90 days
- judicial determination
termination
who may wind up?
- a partner that has not wrongfully dissociated
- legal representative of the last surviving partner
- any partner, legal representative, or transferee may seek judicial supervision of winding up
termination
what power does the person who is winding up have?
may dispose of and transfer partnership property, discharge partnership liabilities
can preserve partnership business to maximize value as a going concern
termination
what is the statement of dissolution? (part of winding up)
filing that gives notice to 3p that partnership has been dissolved after 90 days
limits partners’ apparent authority and liability
termination
what is the priority of distributions in a partnership?
creditors first then partners
LLP
what is an LLP (Limited Liability Partnership)?
partnership in which partner’s personal liability is eliminated
must file with the state
LLP
how do you form an LLP?
to transform GP into LLP, must vote authorizing transformation
LLP
what is required for the name of an LLP?
must end with LLP or RLLP (Registered)
LLP
what is the liability under an LLP?
limited partners are not personally liable for obligations of the LLP
ARE personally responsible for their own personal misconduct or negligence
LLP
how do you terminate LLP status?
- partners can voluntarily transform and cancel LLP status
- state can revoke it
LP
what is the definition of a LP?
partnership formed by 2+ persons that has at least one general partner and one limited partner
limited partners have limited liability
general partners have personal liability
LP
how do you form a LP?
file certificate of limited partnership that MUST contain
- name of LP (including LP at end)
- in state address
- name of agent in that state
- names and addresses of all GPs
- statement of duration
- signature of GP
LP
when does a LP come into existence?
when filed or the effective date of certificate
substantial compliance is sufficient to be effective
limited partner (the role)
how does a limited partner join?
creation of the partnership OR with agreement of all partners
limited partner (the role)
can a limited partner vote? (default rule)
does NOT vote
limited partner (the role)
does a limited parter have liability to 3p?
not personally liable for obligation of partnership UNLESS they serve as general partner or start to participate in the partnership
limited partner (the role)
does the limited partner have access to records?
yes
limited partner (the role)
what can a limited partner do without being seen as running the business?
- be an officer, director, or SH of general partner
- consult the general partner on partnership affairs
- act as a surety of the parntership
- request to attend meetings of the partnership
- wind up teh partnership
- propose or approve partnership matters
limited partner (the role)
how does a limited partner withdraw?
must give 6 months written notice
general partner (the role)
how does a general partner join?
join at beginning or be admitted upon consent of ALL partners
general partner (the role)
what rights and powers does a GP have?
what the partnership agreement says
just like a general partnership without limited partners
general partner (the role)
is a GP liable to 3p?
yes, personally liable to 3p for obligations of the partnership
many GPs are corporations to protection from liability
general partner (the role)
how does a general partner terminate their status?
- voluntarily withdraw
- if they try to assign their partnership interest, GP may be removed
- bankrupt or becomes insolvent
- death or incapacitation
- termination if GP is a business entity
tip
what is the key test for determining whether a business arrangement is a partnership?
Essay 353
- whether there is sharing of the profits from the business
- if so, that arrangement is presumed to be a partnership; persons who share the profits are partners
- make sure to identify whether it’s a GP, LLP, LP
partnership does not exist when one person receives profits in payment of a debt (other exceptions too)
does the transfer of a partnership interest make the transferee a partner?
Essay 353
does not make a transferee a partner UNLESS the other partner(s) consent
transferee is not entitled to participate in the management or conduct of the business, or access partnership records
general partnership - can a creditor go after the partner’s individual assets
Essay 3575
Unless there is also a judgment against the partner, a judgment against a partnership cannot be satisfied from a partner’s assets, only from the partnership’s assets.
Even though a partner is personally liable (joint + several) for a partnership obligation, a partnership creditor generally must exhaust the partnership’s assets before levying on the partners’ personal assets.
