Partnerships (Mediums)

Question 1

Limited Partnership (LP)

Answer 1

• Is composed of limited partner(s) AND at least one general partner.
• Formation – An LP is formed upon filing a Certificate of Limited Partnership with the Secretary of State, which must include:
  
  1. name of Pship;
  2. address of Pship’s principal office;
  3. name & address of Pship’s registered agent;
  4. name & address of each general partner;
  5. whether the Pship is an LLLP; AND
  6. signed by all general partners.

Question 2

Limited Liability Partnership (LLP)

Answer 2

• In an LLP, all partners have limited personal liability.
• To Become an LLP:
  
  1. It must be approved by the same vote necessary to amend the Pship Agreement; AND
  2. A Statement of Qualification must be filed with the Secretary of State containing:
     
     1. name and address of Pship;
     2. statement that the Pship elects to become an LLP; and
     3. a deferred effective date (if any).
• Filing DOES NOT create a new partnership (if a GP or LP existed prior to filing).
  
  • The Pship remains liable for any obligations before it became an LLP.
• Amending the Pship Agreement – Unless agreed otherwise, the Pship agreement may be amended at any time with a unanimous vote.

Question 3

Authority to Bind the Partnership After Dissolution

Answer 3

• A partner’s authority is limited after dissolution.
• Actual Authority → limited only to acts appropriate for winding up the business.
• Apparent Authority → a partner has apparent authority to bind the Pship if the:
  
  1. Partner’s acts would have normally bound the Pship; AND
  2. Third-party did not have notice of dissolution.

Question 4

Liability of Limited Partners

Answer 4

• Limited partners are NOT personally liable for obligations of the LP.
• Exceptions:
  
  1. Liable for their own misconduct;
  2. At risk of losing their capital contribution to the Pship; OR
  3. May become personally liable if the partner participates in management (depends on the jurisdiction).
• Liability for Participating in Management:
  
  • ULPA (2001) → no personal liability created when a limited partner participates in the management or control of the business.
  • ULPA (earlier versions) → personal liability is created for participating in management (but removal of a director is not considered participation in management and control).
  • RULPA→personal liability created, BUT a partner is liable only to persons who transact business with the LP reasonably believing that the limited partner is a general partner.
    
    • RULPA has a safe harbor provision excluding certain acts from liability.

Question 5

Liability of Limited Liability Partners

Answer 5

• Under RUPA, a partner in an LLP is NOT liable for partnership obligations.
• But a partner in an LLP is liable:
  
  1. for their own misconduct;
  2. when the partner signs a personal guarantee for an obligation; OR
  3. for obligations incurred before the Pship became an LLP.

Question 6

Right to Management and Control

Answer 6

• Unless otherwise agreed, each partner has equal rights in the management and control of the business.
  
  • A disagreement for ordinary Pship business need only be approved by a majority of the partners.
  • Acts outside the ordinary course of business MUST be approved unanimously.

Question 7

Transfer of Partnership Ownership

Answer 7

• A partner can only transfer:
  
  1. his interest in the share of profits and losses; AND
  2. the right to receive distributions.
• Any other rights CANNOT be transferred, unless the partnership agreement provides otherwise.
  
  • ALL partners MUST CONSENT for an assignee of a partnership interest to become a partner.

Question 8

Right to Pasrtnership Property

Answer 8

All property acquired by a Pship (or with Pship assets) is owned by the Pship, not the partners individually.

• Partners have an equal right to use property for Pship purposes.
• Personal use of Pship property requires the consent of the other partners.
• Property acquired in the name of the partner is presumed to be separate property as long as:
  
  1. no Pship assets are used to acquire it; AND
  2. title to the property does not reference the Pship.
• Judgment Solely Against a Partner → CANNOT be satisfied with Pship property because the partner has no ownership interest in Pship property.
• However, a creditor may seize the partner’s financial interest in the Pship.

Question 9

Remuneration (Payment for Partner’s Service)

Answer 9

• A partner is NOT entitled to remuneration for services performed for the Pship UNLESS:
  
  1. There is an agreement to the contrary; OR
  2. It’s for reasonable compensation for services rendered in winding up the Pship business.

Question 10

Advance of Funds & Reimbursement

Answer 10

• Pship MUST reimburse a partner for an advance to the Pship beyond their capital contribution amount.
  
  • For Reimbursement→(1) payment must be in proper course of Pship business, AND (2) partner must comply with duty of care & loyalty.

Question 11

Management & Control in a LP

Answer 11

• General Partner→Has full management rights and control.
• Limited Partner→Has NO say or control as to how the LP is run, and DOES NOT have the right to manage or control day-to-day business.
  
  • Generally, they are passive and have voting rights only in extraordinary situations (i.e. sale of Pship or all its assets, amending Pship agreement, or admitting a new partner).

Question 12

Limited Partner’s Right to Inspect Records

Answer 12

• RULPA→Limited partners have the right to inspect and copy records the LP is legally required to keep.
• Upon reasonable demand, a limited partner may obtain:
  
  1. True and full info regarding the state of the business and financial condition;
  2. LP’s tax returns; and
  3. Any info that’s just and reasonable.

*These rights may be exercised for any purpose.

Question 13

Limited Partner’s Right to Inspect Records

Answer 13

• RULPA→Limited partners have the right to inspect and copy records the LP is legally required to keep.
• Upon reasonable demand, a limited partner may obtain:
  
  1. True and full info regarding the state of the business and financial condition;
  2. LP’s tax returns; and
  3. Any info that’s just and reasonable.

*These rights may be exercised for any purpose.

Question 14

Duty to Provide Full Information

Answer 14

• UPA → Partners shall render (on demand by any partner) true and full information of all things affecting the Pship.
• RUPA→Partners shall disclose (without demand) full information concerning the Pship’s business and affairs.
• If a partner breaches this duty, he may be held personally liable to the Pship for any losses.

Question 15

Winding Up & Termination of a Partnership

Answer 15

• Dissolution vs. Winding Up vs. Termination:
  
  • Dissolution→Occurs upon the occurrence of any specified statutory event (see above).
  • Winding Up→Is the period between dissolution and termination, in which assets are liquidated to satisfy creditors.
  • Termination→Occurs when the winding up process is complete. The real end of the Pship, in which the Pship ceases to exist.
• Distribution of Partnership Assets – During the winding up process, the Pship assets are converted to cash and distributed in the following order:
  
  1. Outside creditors.
  2. Inside creditors (partners who loaned money to the Pship).
  3. Partner’s capital contributions.
  4. Any remaining profits or surplus goes to the partners equally (unless agreed otherwise).

*If there are insufficient assets to satisfy creditors, the loss will be divided among the partners.