Partnerships & Limited Liability Entities Flashcards
What is a general partnership?
An association of 2 or more persons who are carrying on as co-owners of a business for profit
What is necessary to establish a general partnership?
NO FORMAL REQUIREMENTS!
NOTE: sharing profits is KEY→
** Contribution of money or services in return for a share of PROFITS is prima facie evidence of a general partnership
What is the liability of a general partner to third parties?
Each partner is liable for a co-partner’s torts in the scope of the partnership business AND for a co-partner’s authorized contracts
Incoming partners are generally NOT liable for prior debts, BUT any money paid into the partnership can be used to satisfy those prior debts
Dissociating/withdrawing partners RETAIN liability on future debts UNTIL actual notice of their dissociation is going to known creditors AND until publication notice is given to potential creditors
**General partnership liability by estoppel: one who represents to a 3rd party that a general partnership exists WILL BE liable as if the general parntership exists
What duties do partners owe each other?
General partners are fiduciaries of EACH OTHER and the Partnership so they owe duty of loyalty
- No self-dealing - No usurping partnership opporunities - No secret profits at the partnership's expense
** Partnership may bring an action for accounting to cover losses that are caused by a breach of duty of loyalty and to discorge profits made by breaching partner
What’s the difference betweenpartnership property and personal property?
he test is: whose money is being used to buy the property?
1) If partnership money is being used→ specific partnership asset, which requires partnership authority to transfer (e.g. land, leases, equipment)
** A share in management (he right to vote): cannot be transfered outside the partnership to 3rd parties
2) If personal money is being used→ personal property (e.g. share in profits and surplus)
How are partnerships managed?
Absent an agreement, EACH partner is entitled to EQUAL control (1 partner, 1 vote)
Ordinary matters = majority vote
Fundamental matters = unanimous consent
How do partners share profits and losses?
Absent an agreement…
1) Profits are shared equally
2) Losses are shared JUST LIKE PROFITS
** NOTE: if there is a specific agreement on losses, but profits are silent, profits are still shared equally
** NOTE: partners do not get salaries; butthey do receive a commission to help close down the business
How does a partnership dissolve and liquidate?
STEP 1: Dissolution
** A general partnership dissolves automatically upon any material change in partnership caused by the death or withdrawal of ANY single general partner
STEP 2: Winding up phase
** The period between dissolution and termination in which the remaining partners liquidate the partnership’s assets to satisfy the partnership’s creditors
STEP 3:Termination
What is the liability of the partnership during the “wind up” phase?
Old business
The partners are liable forall transactions entered into in orderwind up old business
New Business
Individual general partners still retain liability on brand new business transactions unless notice of dissolution given to all creditors (actual and potential)
What is the priority of distribution when “winding up” a partnership?
FIRST: outside creditors MUST be paid
SECOND: inside creditors MUST be paid
THIRD: partner capital contributions MUST be paid
FOUTH: net profits (profits – losses), IF ANY
What is a limited partnership AND how is it formed?
Defined: Partnership with at least one general partner and at least one limited partner
General Partners = personally liable but get to manage
Limited Partners = limited liability so cannot manage
Formation: file limited partnership certificate that includes names of all general partners with Dept. of State
How is a registered limited liability company (RLLC) formed AND what’s the liability scheme?
Formation: file a certificate of registration with Dept. of State that includes the profession you are practicing
Liabilities: no partner is liable for the debts and obligations of the RLLP but partners are always liable for their own personal TORTS
What is a limited liability company (LLC) and how is it formed?
A hybrid between a corporation (limited liability) and a partnership (limited tax)
Members (owners)
- not liable for debts and obligations of company itself - control but may delegate to managers - Membership interest is NOT freely transferable - LLC will dissolve upon majority vote of the membership interest OR as provided in the operating agreement (limited life)
Formation:
- File articles of organization; AND - Publish a summary of the articlesin at least 2 newspapers
