Partnerships & LLCs Flashcards
Partnership Formation + Remember Intent and Writing
A partnership is formed as soon as two or more persons associate to carry on as co-owners a business FOR PROFIT
Remember: Subjective intent and a writing declaring the partnership is IRRELEVANT
When is someone presumed to be a partner?
If someone shares in the profits, but not because of a debt, wages, rent, etc.
Partnership Estoppel - Being Held Out as a Partner to Creditors
Parties may be liable if they a creditor REASONABLY RELIED on the holding-out of a partnership (e.g. apparent authority)
Management and Operation: Voting Rights - Decisions Requiring Ordinary Court of Business v. Matters Outside of the Business
Decisions regarding matter within the ordinary course of partnership business require a MAJORITY vote of partners, unless otherwise agreed
Matters outside of the ordinary course of business require the consent of ALL partners
Management and Operation: Right to Salary or Other Compensation + Exception
Unless otherwise agreed, partners get NO compensation, with the exception of reasonable compensation for services rendered in winding up the business
Financial Rights and Obligations: Sharing Profits and Losses + What if an agreement sets out the losses shared by partners but not profits?
Unless otherwise agreed, profits are shared EQUALLY among partners, despite contribution to partnership.
Losses are shared in the SAME MANNER as profits
If certain losses are agreed to but not profits, the profits are shared EQUALLY (not same rule as losses following profits)
Management and Operation: Liability of the Partnership - Tort
Liable for loss or injury caused to a person as a result of the tortious conduct of a partner/employee acting in the ORDINARY COURSE of business of the partnership or with authority of the partnership
Management and Operation: Liability of the Partnership - Contract
Liable for contracts entered into on its behalf as partners with ACTUAL (i.e. from partnership agreement) or APPARENT authority (i.e. agent of authority acting in ordinary course of business)
Management and Operation: Liability of the Individual Partners - Type of Liability + Remember Who Plaintiffs Will Receive Resources from First
Each partner is jointly and severally liable for all of the obligations of the partnership
Remember: P must exhaust partnership resources before seeking to collect from an individual partner’s assets
Management and Operation: Limited Liability to Third Parties Rule
Partners CANNOT limit 3rd party’s rights without the consent of the 3rd party (the agreement is effective, however, among the partners themselves)
Management and Operation: Liabilities of Admitted Partners for Obligations Before Admission
A newly admitted partner is NOT personally liable for partnership obligations that arose BEFORE his admission
Fiduciary Duties: Three Types of Duties Owed by Partners
1) Duty of Loyalty
2) Duty of Care
3) Duty of Disclosure
Fiduciary Duties: Three Duty of Loyalty Requirements for Each Partner
1) Account to the partnership any BENEFIT derived by conducting partnership business
2) REFRAIN from dealing in ADVERSE business with the partnership
3) REFRAIN from COMPETING with the partnership
Fiduciary Duties: Duty of Care Definition
Each partner must REFRAIN from engaging in grossly NEGLIGENT or RECKLESS conduct, INTENTIONAL MISCONDUCT, or KNOWING VIOLATION of LAW
Fiduciary Duties: Can parties contractually eliminate these duties?
Not completely, it may be altered if not “manifestly unreasonable”
Fiduciary Duties: Duty of Disclosure Requirements
1) Without demand, the PARTNERSHIP MUST FURNISH ANY INFORMATION concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties,
2) On reasonable notice, each partner has a RIGHT TO INSPECT AND COPY any partnership records concerning business and affairs
Property Issues: Rule for Determining Partnership Property + Remember Presumption with Funds Used
It is partnership property if it is acquired in the partnership’s name, or in a partner’s name where he or she uses partnership title
Remember: If partnership funds are used, the property is PRESUMED to be partnership property, but if individual funds are used without title of partnership position, it is PRESUMED to be individual property
Property Issues: Rights in Partnership Property + Remember Partner’s Individual Use in Partnership Property
Rights are UNRESTRICTED in partnership property (i.e. can be collateralized for a loan)
Remember: A partner cannot use or pledge partnership property individually (unless consented by other partners)
Property Issues: Types of Partnership Rights + Transferring of Partnership Rights to Nonpartners
Partnership rights: 1) Management Rights (i.e. voting, participation in business); 2) Financial Rights
Unless otherwise agreed, a partner CANNOT unilaterally transfer management rights without UNANIMOUS VOTE of existing partners
A partner CAN transfer financial rights, but transferor remains a partner for managerial purposes
Dissociation of Partners: Events of Dissociation
1) Partner gives notice of withdraw, 2) partner’s expulsion, death or bankruptcy, 3) an agreed-upon event, or 4) appointment of guardian for partner
Dissociation of Partners: Wrongful Dissociation + Liability to Partnership
A person wrongfully dissociates if they breach an express term in the partnership agreement, or withdraws, judicially ordered, or becomes bankrupt
A partner who wrongfully dissociates is liable to the partnership for any damages caused by the dissociation
Dissociation of Partners: Consequences of Dissociation
When a partner dissociates, either the partnership is DISSOLVED and the business is WOUND UP; or partnership continues and BUYS-OUT dissociated partner
Dissolution: At Will Partnerships v. Term Partnerships + Remember If Partnership Falls Under 2 Partners
At Will partnerships (where partners have not agreed to the expiration of a definite term) will dissolve if a partner compels it
Term partnerships (partners have agreed to an explicit or implicit end) will dissolve if within 90 days after dissociation (by withdrawing before end of term, expulsion, or bankruptcy) at least 1/2 of the partners agree to wind-up
Remember: A partnership is dissolved after the passage of 90 consecutive days during which the partnership does not have at least TWO PARTNERS
Dissociation: Buyout and Continuation - Dissociating Partner’s Rights
If a partner’s dissociation does not dissolve the partnership, the dissociating partner is entitled to a buyout interest and indemnification against partnership liabilities
Dissociation: Liability of Dissociated Partner (Pre v. Post- Dissociation)
Pre: Remains liable for pre-dissociation partnership obligations
Post: Can be liable for partnership liabilities incurred UP TO TWO YEARS after dissociating, UNLESS he notifies creditors directly or files a public certificate of dissociation
Dissociation: Apparent Authority of Dissociated Partners + Remember How Partnership Can Protect Themselves
A dissociated partner may have apparent authority to bind partnership UNTIL TWO YEARS after dissociation
Remember: A partnership can protect themselves by notifying creditors of filing a public certificate of dissolution
Dissolution: Prioriority of Distribution
1) All creditors (outside or inside)
2) All capital accounts
3) Profits or losses shared by partners
Dissolution: Apparent Authority During Windup
Partners RETAIN APPARENT authority to bind the partnership to a third party on new business even after requiring wind up (but partnership can protect itself by notifying creditors or filing a certificate of dissolution - which becomes effective 90 days after it is filed)
Limited Partnerships Definition + Formation
A partnership with at least one GENERAL PARTNER (manages partnership operations) and one LIMITED PARTNER (no management rights, financial managers)
Formation: A certificate of limited partnership must be filed with the state (including name of LP, name and address of office, and name and address of each general partner)
Limited Partnerships: What requires the vote of all partners?
1) An amendment of the partnership agreement, or 2) the admission of a new general or limited partner
Limited Partnerships: Financial Rights of Partners
Distributions are made on the basis of partner’s contributions (as opposed to general partnerships where they share equally)
Limited Partnerships: Liability for General Partners v. Limited Partners + Remember Either Partner’s Liability for Their Own Torts
General: Unlimited liability, can be personally attacked
Limited: Limited liability, creditors can only recover amount limited partner’s invest into the company
Remember: A either partner is ALWAYS LIABLE for her own torts, the limited liability shield NEVER protects a partner to this extent
Limited Partnerships: Fiduciary Duties Owed (General v. Limited Partners)
General: Owes the LP the same duties of loyalty and care of a GP
Limited: NO fiduciary duties owed (may actually compete with LP unless contracted otherwise)
Limited Partnerships: Dissociation by Limited Partners
Limited partners DO NOT HAVE THE RIGHT to dissociate from LP, and would be WRONGFUL if they do
Limited Liability Partnerships (LLP) Definition (Rules Associated with LLP) + Limited Liability Limited Partnerships (LLLP) (Rules Associated with LLLP)
A general partnership where ALL partners have limited liability for obligations of the business (apply GP rules)
A LLLP is similar to a limited partnership, but ALL PARTNERS have limited liability (apply LP rules)
Limited Liability Companies Definition + Remember Minimum Amount of Members + Remember Only Business Not Allowed to Be an LLC
Hybrid between a corporation and a partnership where the owners (called “members”) have limited liability as well as the benefits of partnership tax treatment
Remember: An LLC can be formed with ONLY ONE member
Remember: An LLC can be formed for any lawful purpose, other than acting as AN INSURER
LLC: Management of Operations - Who makes decisions?
All members (or managers if manager-managed LLC) govern LLC decisions
LLC: Financial Rights
Profits and losses are shared EQUALLY unless otherwise agreed in the Operating Agreement
LLC: Liability for LLC’s Obligations
Members ARE NOT personally liable for LLC’s obligations, they have limited liability and can only lose the amount of their investments
LLC: Fiduciary Duties Owed
Duty of care and duty of loyalty
LLC: Transferability of Ownership + Dissociation
Same as GP, you CANNOT transfer management rights (unless consent of all members), but can transfer financial rights
Dissociation: Generally, events that will cause dissociation of a partnership will also cause dissociation of an LLC
LLC: Ways for Dissolution + Remember Judicial Dissolution
1) By way of operating agreement, 2) consent of all members, or 3) passage of 180 days without ANY members in LLC
Remember: Judicial dissolution may occur if the operation of an LLC is ILLEGAL, NOT REASONABLE to carry on company’s activities, or managers have ACTED IN AN ILLEGAL OR FRAUDULENT MANNER
LLC: Taxation (LLC v. Members)
LLC’s have “pass-through” taxation, meaning no taxation of the LLC itself. Rather, only members pay taxes on their INDIVIDUAL tax returns
