Partnerships & LLCs [Highly Tested Rules]

Question 1

General Partnerships

What factors are considered in determining the parties’ intent to form a partnership?

Answer 1

Courts consider the following factors in determining whether the parties intended to carry on a business as co-owners:
1. Sharing of profits (raises a rebuttable presumption of partnership);
2. Right to participate in control;
3. Property held in joint title;
4. Parties’ designation of relationship as partnership
5. Venture undertaken requires extensive activity (active management)
6. Sharing of gross returns

Question 2

General Partnerships

What is a partnership by estoppel?

Answer 2

When a person by words or conduct represents himself as a partner or consents to being represented by another as a partner, he will be liable to third parties who extend credit to the actual or apparent partnership in reliance on the representation
* Similarly, a person who holds another out as a partner makes such person his agent to bind him to third parties (but, if there is a partnership, only those partners who know of or consent to this holding out will be bound)

Question 3

General Partnerships

Other partnership formation considerations

Answer 3

1. Contract Capacity: Anyone capable of entering into a binding contract may be a partner
2. Legal Purpose: A partnership formed to achieve an illegal purpose is void
3. Unanimous Consent: Unless otherwise agreed, no one can become a partner without the express or implied consent of all partners
4. Statement of Partnership Authority: A partnership may choose to file a statement of partnership authority with the Secretary of State, which can give constructive notice of the extent of the partners’ authority with respect to the partnership

Question 4

General Partnerships

Law governing partnerships

Answer 4

The Revised Uniform Partnership Act (“RUPA”), adopted by California (along with a majority of states), sets out default rules for partnerships
* Partners may agree to follow different rules, which must be outlined in a partnership agreement
* There are certain provisions that cannot be waived, such as the duty of loyalty and the right of a court to expel a partner
* Any rules that are not covered in the agreement will be governed by the RUPA

Question 5

General Partnerships

Partner management and voting rights

Answer 5

Unless otherwise agreed, all partners have equal rights in the management of the business and equal votes (i.e., one partner, one vote)
* Matters within the ordinary course of partnership business –> majority vote
* Matters outside the ordinary course of partnership business –> unanimous consent

Question 6

General Partnerships

Partner compensation rights

Answer 6

Unless otherwise agreed, a partner has no right to compensation for services rendered to the partnership
* Exception: A partner has a right to reasonable compensation for services rendered in winding up the partnership business

Question 7

General Partnerships

Partner indemnification and repayment rights

Answer 7

A partnership must indemnify every partner with regard to payments made and obligations reasonably incurred in carrying on partnership business
* If a partner makes a payment or advance on behalf of the partnership beyond the contribution the partner agreed to make, the payment or advance constitutes a loan that must be repaid with interest

Question 8

General Partnerships

Partner information rights and obligations

Answer 8

Books and information must be kept at the partnership’s chief executive office
* Each partner has a right to inspect and copy the partnership books
* Upon demand, each partner must render true and complete information of all things affecting the partnership

Question 9

General Partnerships

Legal actions by and against the partnership and its partners

Answer 9

A partnership may sue or be sued in its own name; however, to reach a partner’s personal assets, there must be a judgment against the individual partner
* A partnership may sue a partner for breach of the partnership agreement or of a duty owed to the partnership
* A partner may sue the partnership or other partners to enforce a right created by statute or agreement, or a right otherwise belonging to the partner

Question 10

General Partnerships

Sharing profits and losses

Answer 10

Unless otherwise agreed, profits are shared equally among the partners (by number), and losses are shared in the same manner as profits

Question 11

General Partnerships

Partnership tort liability

Answer 11

A partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner or employee acting in the ordinary course of partnership business or with authority of the partnership

Question 12

General Partnerships

Partnership contract liability

Answer 12

A partnership is liable for all contracts entered into by a partner in the scope of partnership business or with actual or apparent authority of the partnership

Question 13

General Partnerships

What is actual authority?

Answer 13

Actual authority is the authority a partner reasonably believes they have based on the communications between the partnership and the partner

Question 14

General Partnerships

What are common sources of actual authority?

Answer 14

Actual authority may be created by:
1. the partnership agreement;
2. a vote of the partners; or
3. the partnership’s filing of a statement of partnership authority with the Secretary of State

Question 15

General Partnerships

What is a statement of partnership authority?

Answer 15

A statement of authority grants or limits a partner’s authority to enter into transactions on behalf of the partnership:
* REAL PROPERTY: Grants of and restrictions on partner authority to transfer partnership real property in the statement are binding on third parties if the statement is also recorded in the county where the property is located
* PERSONAL PROPERTY: Grants of partner authority to transfer partnership personal property in the statement are binding on the partnership, but restrictions on partner authority are NOT binding on third parties

Question 16

General Partnerships

When does a partner have apparent authority?

Answer 16

The RUPA provides that a partner is an agent of the partnership, and a partner has apparent authority to bind the partnership to transactions within the ordinary course of the partnership’s business or business of the kind carried out by the partnership

EXCEPTION
The partnership will NOT be bound by a partner’s act if:
1. the partner lacked actual authority; AND
2. the third party with whom the partner dealt either knew or received notification of such fact

Question 17

General Partnerships

When is notification limiting a partner’s authority effective?

Answer 17

Under the RUPA, a notification is effective when either (1) it comes to the person’s attention or (2) it is duly delivered

Question 18

General Partnerships

Partner liability for partnership obligations

Answer 18

In a general partnership, all partners are jointly and severally liable for all obligations of the partnership, whether arising in tort or contract
* Each partner is personally and individually liable for the entire amount of all partnership obligations, but a partner compelled to pay more than his share of the obligations may seek indemnification from the partnership or contribution from the other partners if the partnership is unable to indemnify

Question 19

General Partnerships

What must be done to recover from a partner’s personal assets?

Answer 19

1. A judgment will not personally bind a partner who has not been served, so a plaintiff must bring an action against, and serve, the partners individually and the partnership
2. A judgment creditor must first seek satisfaction of any judgment from the partnership
3. If the judgment is not satisfied after exhausting partnership assets, the judgment creditor can then seek recovery against the partners personally

Question 20

General Partnerships

Liability of newly admitted partners

Answer 20

A newly admitted partner is NOT personally liable for partnership obligations that arose before their admission

Question 21

When is a partner deemed to have notice of a fact?

Answer 21

Under the RUPA, a partner is deemed to have notice of a fact when the partner:
1. has actual knowledge of the fact;
2. is notified of the fact (effective when it comes to the partner’s attention or when it is delivered to a place of business held out by the partner as a place for receiving communications); OR
3. has reason to know of the fact based on the surrounding circumstances

NOTE: A partner’s notice of a fact relating to the partnership is imputed to the partnership immediately unless the partner having notice is participating in a fraud against the partnership

Question 22

General Partnerships

What fiduciary duties does a partner owe?

Answer 22

Each partner owes the partnership the fiduciary duties of
1. Care
2. Loyalty
3. Obedience
4. Disclosure (technically a statutory duty, but some courts treat it as fiduciary in nature)

Remember: “CLOD”

Question 23

General Partnerships

What does the duty of care require?

Answer 23

The duty of care requires each partner to REFRAIN from engaging in (1) grossly negligent or reckless conduct, (2) intentional misconduct or (3) a knowing violation of the law

Question 24

General Partnerships

What does the duty of loyalty require?

Answer 24

The duty of loyalty requires each partner to (1) account to the partnership for any benefit derived by the partner in conducting the partnership’s business, using the partnership’s property, or appropriating a partnership opportunity, (2) refrain from dealing with the partnership in the conduct of its business as (or on behalf of) an adverse party and (3) refrain from competing with the partnership in the conduct of its business

Question 25

General Partnerships

What does the duty of obedience require?

Answer 25

The duty of obedience requires each partner to (1) obey all reasonable directions of the partnership and (2) not act outside the scope of his authority

Question 26

General Partnerships

What does the duty of disclosure require?

Answer 26

The duty of disclosure requires each partner to provide complete and accurate information concerning the partnership
* The duty of disclosure is a statutory duty (although some courts treat it as fiduciary in nature), which may be eliminated in a partnership agreement

The RUPA provides that each partner and the partnership shall furnish to a partner:
1. without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties; and
2. on demand, any other information concerning the partnership’s business and affairs (except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances)

Question 27

General Partnerships

When is property deemed to be partnership property under the RUPA?

Answer 27

Under the RUPA, titled property is deemed to be partnership property if it is acquired in the partnership’s name or in a partner’s name where it is apparent from the document that they are acting for a partnership

Question 28

General Partnerships

When is property presumed to be partnership property under the RUPA?

Answer 28

Under the RUPA, property is presumed (rebuttable) to be partnership property if it was purchased with partnership funds or credit, regardless in whose name title is held

Question 29

General Partnerships

When is property presumed to be a partner’s separate property under the RUPA?

Answer 29

Under the RUPA, property is presumed (rebuttable) to be a partner’s separate property if:
1. it is held in the name of one or more partners;
2. the instrument transferring title gives no indication they are acting for a partnership; AND
3. partnership funds were not used to acquire the property

Question 30

General Partnerships

What are the common law criteria for determining whether untitled property is partnership property or a partner’s separate property?

Answer 30

In cases not governed by the RUPA (e.g., where property is not titled), courts will likely look to the following common law criteria, which tend to indicate that property was intended to be partnership property:
1. partnership funds used to acquire, improve and/or maintain the property
2. use of the property by the partnership in conducting the partnership’s business
3. recorded as a partnership asset in the partnership books and records
4. a close relationship between the property and the business operations of the partnership

Question 31

General Partnerships

What is dissociation?

Answer 31

Dissociation refers to the withdrawal of a partner from the partnership
* Dissociation of a partner does NOT necessarily cause a dissolution and winding up of the partnership business
* Dissolution and winding up are required only in limited circumstances, including when:
* In an at-will partnership, a partner dissociates by express will; or
* In a term partnership, (1) a partner dissociates by withdrawing, being expelled or becoming bankrupt before the end of the term, and (2) within 90 days after the dissociation, at least 50% of the remaining partners agree to wind up the partnership
* If a partner’s dissociation does not result in a dissolution and winding up, the partner is entitled to receive a buyout of his partnership interest

Question 32

General Partnerships

What events trigger dissociation of a partner?

Answer 32

A partner becomes dissociated from the partnership by:
1. oral or written notice of the partner’s express will to withdraw
2. occurrence of an agreed event triggering dissociation
3. valid expulsion of the partner
4. the partner’s bankruptcy or the appointment of a receiver for the partner
5. the partner’s death or incapacity to perform partnership duties
6. the decision of a court that the partner is incapable of performing a partner’s duties
7. termination of a business entity that is a partner

Question 33

General Partnerships

What are a dissociated partner’s liabilities?

Answer 33

Pre-Dissociation
Generally, a dissociated partner remains liable for pre-dissociation partnership obligations, but a creditor can agree to release the withdrawing partner from specific obligations

Post-Dissociation
A dissociated partner can be liable for post-dissociation partnership liabilities incurred within 2 years after the dissociation if, when entering into the transaction, the other party:
1. reasonably believed the dissociated partner was still a partner; AND
2. did not have notice of the partner’s dissociation

NOTE: A dissociated partner can protect themselves from post-dissociation liability by directly notifying creditors of their dissociation (effective immediately) or by filing a public notice of dissociation (effective 90 days after filing)

Question 34

General Partnerships

Dissociated partner’s power to bind partnership

Answer 34

A partnership can be bound by an act of a dissociated partner undertaken within 2 years after dissociation if:
1. the act would have bound the partnership before dissociation; AND
2. the other party to the transaction (a) reasonably believed the dissociated partner was still a partner and (b) did not have notice of the dissociation

NOTE: The partnership can protect itself by directly notifying creditors of the dissociation (effective immediately) or by filing a public notice of dissociation (effective 90 days after filing)

Question 35

General Partners

Winding up priority of distribution

Answer 35

During the winding up process, distributions must be made in the following order of priority:
1. Outside creditors
2. Inside creditors
3. Partner capital contributions
4. Partner profits

Question 36

General Partners

What events trigger dissolution under the RUPA?

Answer 36

Events triggering dissolution under the RUPA include:
1. in an at-will partnership, notification by any partner of an express will to withdraw as a partner
2. in a term partnership, (a) expiration of the term or completion of the undertaking, (b) consent of all partners to dissolve, or (c) within 90 days after a partner’s death, bankruptcy or wrongful dissociation, at least 50% of the remaining partners wish to dissolve
3. the occurrence of a specified event triggering dissolution in the partnership agreement
4. the occurrence of an event that makes it unlawful for the partnership to continue
5. issuance of a judicial decree on application by a partner that (a) the economic purpose of the partnership is likely to be frustrated, (b) a partner has engaged in conduct making it not reasonably practicable to carry on the business, or (c) the business cannot practicably be carried on in conformity with the partnership agreement
6. the passage of 90 consecutive days during which the partnership does not have at least 2 partners

Question 37

Limited Partnerships

What is a limited partnership?

Answer 37

A limited partnership is a partnership with at least one general partner and at least one limited partner
* The general partner(s) is personally liable for partnership obligations
* The limited partner(s) generally does NOT have any liability beyond their agreed-upon contributions

Question 38

Limited Partnerships

What is required to create a limited partnership?

Answer 38

A limited partnership can be created ONLY by filing a certificate of formation with the Secretary of State that:
1. is signed by all general partners
2. includes the name of the partnership, which must contain the phrase “limited partnership” or the abbreviations “L.P.” or “LP” to alert the public to the limited liability nature of the business
3. includes the name and address of the agent for service of process
4. includes the names and addresses of all general partners

Question 39

Limited Liability Partnerships

What is a limited liability partnership (LLP)?

Answer 39

A limited liability partnership (LLP) is a partnership that differs from a general partnership and a limited partnership in that every partner in an LLP is NOT personally liable for the obligations of the LLP beyond his or her contribution
* However, a partner remains personally liable for their own wrongful acts

Question 40

Limited Liability Partnerships

What is required to create an LLP?

Answer 40

An LLP can be created ONLY by filing a statement of qualification with the Secretary of State that:
1. is signed by at least 2 partners
2. includes the name of the partnership, which must contain the phrase “limited liability partnership” or the abbreviations “L.L.P.” or “LLP” to alert the public to the limited liability nature of the business
3. includes the address of the partnership;
4. includes a statement that the partnership elects to be an LLP; and
5. includes a deferred effective date (if any)

Question 41

Limited Liability Companies

What is a limited liability company (LLC)?

Answer 41

A limited liability company (LLC) is a hybrid business organization between a corporation and a partnership that:
1. is taxed like a partnership (except for a single-member LLC);
2. offers its owners (i.e., “members”) the limited liability of shareholders of a corporation; and
3. can be managed like either a corporation or a partnership

Question 42

Limited Liability Companies

What is required to create an LLC?

Answer 42

An LLC can be created ONLY by filing articles of organization with the Secretary of State that includes:
1. the name of the LLC, which must indicate that it is an LLC by containing the phrase “limited liability company” or the abbreviations “LLC” or “L.L.C.”
2. the address of the LLC’s registered office; AND
3. the name and address of the LLC’s registered agent