Partnerships MEE Flashcards
General Partnership
association of two or more persons to carry on as co-owners of a business for profit
General Partnership Formation Timing
formed as soon as it happens, regardless of whether the parties subjectively intended to form a partnership
General Partnership Determination
courts generally look to the intent of the parties
General Partnership Determination Question
“did the parties intend to carry on as co-owners a business for profit is just another way of asking whether their association meets the definition
Factors for Deciding Whether Partnership Exists
(1) sharing of profits raises presumption of partnership
(2) Right to Participate in Control
Sharing of Profits Raises Presumption of Partnership
sharing of profits raises a presumption of partnership unless the share was received as payment of a debt, as wages or compensation, for services rendered, as rent payment, as an anunity or other retirement benefit, as interest on a loan, or for the sale of goodwill of a business
Profit Sharing - Rebuttable Presumption
if there is profit sharing, and therefore a presumption of partnership status, one can try to rebut that presumption with evidence suggesting the lack of co-ownership relationship
Additional Evidence of Partnership
these do not raise a rebuttable presumption:
(A) title to property is held in joint tenancy or tenancy in common
(B) parties designate their relationship as a partnership
(C) venture undertaken by the parties requires extensive activity
(D) sharing of gross returns
Writing if More Than One Year
if partners wish to have an enforceable agreement to remain partners for more than one year, they generally must execute a writing reflecting their agreement
Partnership by Estoppel
if no partnership was formed in fact, parties may still be liable as if they were partners to protect reasonable reliance by third parties
Liability of Person Held out as Partner
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
No Presumption of Partnership When “Holding Out”
a person held out by another as a partner is not liable as a partner unless they actually consent to the holding out - mere failure to deny a representation of the partnership does not give rise to liability as a purported partner
Partnership Agreement Form
partnership agreements may be written, oral, or implied
Partnership’s Entity Status
partnership is a legal entity distinct from its partners - may sue or be sued in the partnerships name
Additional Formation Considerations
(a) capacity - anyone who is capable of entering into a binding contract may be a partner
(b) legality of purpose - must have legal purpose or its void
(c) consent - no one can become a partner without the express or implied consent of all partners
(d) Statement of partnership authority
Statement of Partnership Authority
may choose to file a statement of partnership authority with the secretary of state, which can give constructive knowledge of the extent of the partner’s authority with regard to the partnership
Governing Law of Partnership - No Agreement or Silent Agreement
the Revised Uniform Paternship Act provides a default set of rules - if agreement RUPA will provide for issues not in the agreement
Governing Law - Partnership Agreement
partners are free to agree through a partnership agreement - to abide by different rules for governing the relationships among themseleves
Partner’s Equal Rights
all partners have equal rights in the management decisions of the business and equal votes (one vote - one partner)
Decisions within Ordinary Course of Business
decisions regarding matters within the ordinary course of partnership business requires a majority vote of the partners
Decisions outside the Ordinary Course of Business
matters outside the ordinary course of partnership business require the unanimous consent of all partners
No Right to Salary/Compensation
unless otherwise agreed, a partner has no right to compensation for services rendered to the partnership
Partner Who Fails to Follow Through Promise
if a partner has impliedly or expressly promised to devote time to the partnership, and fails to do so, they may be charged in accounting for damages caused to the partnership
Partners’ Accounts
each partner is deemed to have an account that is credited with an amount equal to the partner’s contribution plus his share of any profits and debited with the partner’s share of any losses and partnership liabilities
Partner Profits at Partnership’s Expense
where a partner personally profits at the expense of the partnership, the partner must account to the partnership for those profits
Partner’s Entitlement at Dissolution
upon dissolution, a partner is entitled to settlement of their account
Indemnification of Partners
a partnership must indemnify every partner with regard to payments made and obligations reasonably incurred in carrying on the partnership business
Partner’s Advance
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
Rights to Books and Information
each partner has a right to inspect and copy the partnership books stored at the cheif executive office
Demand Full Information
upon demand, each partner must render true and full information of all things affecting the partnership
Legal Actions Against Partner by Partnership
a partnership may sue a partner for breach of the partnership agreement or of a duty owed to the partneship
Legal Actions Against Partnership by Partner
a partner may sue the partnership or other partners to enforce a right created by partnership act or agreement, or a right otherwise belonging to the partner
R.U.P.A. Agency Presumption
generally provides that each partner is an agent of the partnership for the purposes of its business
Partnership Liability in Tort
a partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting in the ordinary course of business of the partnership or with authority of the partnership
Partnership Liability in Contract
a partnership is liable for all contracts entered into by a partner in the scope of the partnership business or with actual or apparent authority of the partnership
Partnership Liability in Contract - Actual Authority
actual authority is the authority a partner reasonably believes they have based on communications between the partnership and the partner
Partnership Liability in Contract - Actual Authority Sources
(a) partnership agreement
(b) vote of the partners
(c) statement of partnership authority
Partnership Liability in Contract - Actual Authority - Statement of Partnership Authority
actual authority can also be created by the partnership’s filing of a statement of partnership authority with the secretary of state
Partnership Liability in Contract - Transactions Involving Reall Property - Third Parties
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
Partnership Liability in Contract - Apparent Authority
RUPA provides that a partner is an agent of the partnership, and that 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 (unless the third party is knew or was notified that the partner lacks actual authority to do so)
Partnership Liability in Contract - Knowledge under R.U.P.A.
knowledge means subjective knowledge - what the person actually knew - not what they should have known based on the circumstances
Partnership Liability in Contract - Notification under R.U.P.A.
a notification is effective either when it comes to the persons attention or when it is duly delivered
Partnership Liability in Contract - Transfers of Partnership Property Lacking Authority
if the transferring partner lack authority, the partnership may recover the porperty from the initial transferee but not from the a subsequent bona fide purchaser
Liability of Partnerships - Joint and Several
a defining characteristic of a partnership is that each partner is jointly and severally liable for all obligations of the partnership wither arising in tort or contract
Plaintiff’s Recovery Against Partners and Partnerships
a plaintiff must first try to recover from the partnership’s assets before seeking to recover from personal assets - a judgment is not personally binding on a partner unless they have been served and the creditor has exhausted partnership assets, or exhaustion is excused by agreement or court order because the partnership is bankrupt
Extent of Partnership Liability
each partner is personally liable and individually liable for the entire amount of partnership obligations
Liabilities of Newly Admitted Partners
a newly admitted partner is not personally liable for partnership obligations that arose before their admission - they can only lose the amount of their investment in the partnership
Liabilities of Disassociating Partners
an outgoing or disassociating partner remains liable for obligations arising while they were a partner unless there has been payment, release, or novation - an outgoing partner can also be liable for acts done after dissociation
Criminal Liability of Partners
partner is generally not liable for partners crimes unless the other partners participated in the commission of the crime either as principals or accessories
Notice Under R.U.P.A.
a partner has notice of a fact when the partner:
(1) has actual knowledge of the fact
(2) is notified of the fact
(3) has reason to know of the fact based on the surrounding circumstances
When is Notice Effective?
notification is effective not only if and when it comes to a partner’s attention, but also when it is delivered to a place of business held out by the partner as a place for receiving communications
Impute of Notice
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
Four Fiduciary Duties Owed to the Partnership/Partners
(i) duty of loyalty
(ii) duty of care
(iii) duty of disclosure
(iv) duty of obedience
Fiduciary Duty - Duty of Loyalty
requires each partner:
(1) to account to the partnership for any benefit derived by the partner in conducting the partnership business, using the partnerships property, or appropriating a partnerships opportunity
(2) to refrain from dealing with the partnership in the conduct of its business as a party having an interest adverse to the partnership and
(3) to refrain from competing with the partnership in the conduct of its business
Fiduciary Duty - Duty of Care
requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law
Fiduciary Duty (Statutory) - Duty of Disclosure
a partner also has a duty to provide complete and accurate information concerning the partnership
Fiduciary Duty (Statutory) Duty of Disclosure under R.U.P.A.
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 information concerning the partnership’s business and affairs (except to the extent demand or the information demanded is unreasonable or otherwise improper under the circumstances)
Fiduciary Duty - Duty of Obedience
duty of obedience requires the partner to obey all reasonable directions of the partnership and not act outside the scope of his or her authority
Partnership Agreement - Elimination of Duties
May eliminate: duty of disclosure
May Not eliminate: duty of loyalty or care
Partnership Capital
property or money contributed by each partner for the purpose of carrying on the partnership’s business
Partnership Property
everything the partnership owns, including both capital and property subsequently acquired in the partnership transactions
Common Law on Partnership Property Determination - Property Deemed to Be Partnership Property
titled property is 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
Partnership Property Determination - Property Presumed to be a Partnership Property (R.U.P.A.)
property is rebuttably presumed to be partnership property if it was purchased with partnership funds, regardless of in whose name it is titled
Partnership Property Determination - Property Presumed to be Separate (R.U.P.A.)
property is rebuttably presumed to be a partner’s property if:
(1) its held in the name of one or more partners, (2) the instrument transferring title gives no sign that theyre acting for the partnership, and (3) partnership funds were not used to acquire the property
Common Law Determination of Untitled Property (RUPA Inapplicable)
(1) acquisition of the property with partnership funds
(2) Use of the property by the partnership in conducting the partnership’s business
(3) entry of the property in the partnership’s books a an asset
(4) a close relationship between the property and the business operations of the partnership
(5) improvement of the property with partnership funds
(6) maintenance of the property with partnership funds
Partnership’s Rights in Partnership Property
totally unrestricted
Partner’s Rights in the Partnership Property
not a co-owner of partnership property and the partner has no interest in the property which can be transferred - can simply use property for partnership purposes
Partnership Interest
partner’s ownership interest in a partnership - personal property of the partner
Partnership Interest Rights
(1) management rights
(2) financial rights
Partnership Interest Rights - Management Rights
partner’s right to participate in the management of the business, to obtain information about it, and to be recognized as a partner
Partnership Interest Rights - Financial Rights
partner’s right to receive his share of any profit distributions made by the patnership)
Unilateral Transfers of Management Rights Prohibited
unless otherwise agreed, a partner cannot unilaterally transfer his management rights and thereby make the transferee a partner
Default Rule for Partnership Admission
requires a unanimous vote of the existing partners
Unilateral Transfer of Financial Rights Permitted
a partner can unilaterally transfer his financial rights - transferee merely has the right to the profit distributions from the partnership that would have otherwise gone to the partner
Dissociation
change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business - partner withdraws or bows out
Events of Dissociation
(1) oral or written notice of the partner’s express will to withdraw
(2) happening of an agreed event
(3) valid expulsion of the partner
(4) the partner’s bankruptcy or the appointment of a receiver for a partner
(5) the partner’s death or incapacity to perform the partnership’s 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
Notice of A Partner’s Dissociation
notice of a partner’s express will to withdraw from a partnership will automatically trigger dissolution of the partnership
Notice of A Partner’s Dissociation
notice of a partner’s express will to withdraw from a partnership will automatically trigger dissolution of the partnership
When Does Wrongful Dissociation Occur?
(1) dissociation is in breach of an express term in the partnership agreement
(2) withdraws, is expelled, or becomes bankrupt before the end of the term
Wrongful Dissociation Liability
a partner who wrongfully dissociates is liable to the partnership for any damages caused by the dissociation
At-Will Partnership (Default)
an at will partnership is one where the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking
Term Partnership
it is a partnership where the partners have agreed, explicitly or implicitly, to remain partners for a definite term or until the completion of a particular undertaking
Consequences of Dissociation - For Partnership
one of two statutory avenues is implicated:
(i) the partnership is dissolved and that its business must be wound up - partnership business will be liquidated OR
(ii) partnership continues in existence with the dissociated partner becoming entitled to a buy out of their interest
Consequences of Dissociation - For Partner
partnership must purchase their interest at either liquidation or going concern value, and must indemnify them against known pre-dissociation liabilities as well as against post dissociation liabilities not incurred by the dissociating partners acts
Consequences of Dissociation - For Wrongdoing Partner
partner who wrongfully dissociates before the expiration of a partnership term or completion of a particular undertaking is not entitled to payment of the buyout price until the term expires or the undertaking is completed unless, they can establish that earlier payment will not cause undue hardship to the partnership business
Two Main Dissolution Circumstances
(I) when a partner dissociates by express will in an at-will partnership, the partnership is dissolved and its business must be wound up and
(II) in a term partnership, if one partner dissociates wrongfully, or if dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up of the partnership are required only if, within 90 days after the dissociation, at least one half of the remaining partners agree to wind up the partnership
Buyout and Continuation
if a partner’s dissociation does not result in dissolution and winding up, the partner is entitled to receive a buyout of his partnership interest - remaining partners continue on
Liability of Dissociated Partner - Pre Dissociation
a dissociated partner remains liable for pre-dissociation partnership obligations
Liability of Dissociated Partner - Post Dissociation
can be liable for post-dissociation partnership liabilities incurred within two years after the dissociation (presuming no dissolution) if:
(i) when entering the transaction the other party reasonably believed the dissociated partner was still a partner and (ii) did not have notice of the partners dissociation
Protection of Dissociating Partner After Dissociation
a dissociated partner (or the partnership) can protect themselves by notifying creditors directly (effective immediately) or by filing a public notice of dissociation (effective 90 days after filing)
Dissociated Partners Power to Bind Partnership (Through Apparent Authority)
a partnership can be bound by an act of a dissociating partner undertaken within two years after dissociation if:
(i) the act would have bound the partnership before dissociation and (ii) the other party to the transaction (a) reasonably believe the dissociated partner was still a partner and (b) did not have notice of the dissociation
Dissolution
if the assets of the partnership are insufficient, individual partners are required to contribute in accordance with their loss shares
R.U.P.A. Dissolution Cases
pg 27
Priority of Distribution After Dissolution
(1) the partnership must pay all outside and inside creditors (trader creditors, suppliers, partners who loaned money)
(2) the partnership must repay all capital contributions paid into the partnership by partners
(3) profits and losses, if any
Partnership After Dissolution - But Before Winding Up
partnership continues to exist after dissolution until the partnership is wound up
Who May Wind Up
all living partners have a right to participate in the winding up of a partnership’s business except partners who have wrongfully dissolved the partnership and bankrupt partners
Partner’s Ability to Bind to Third Party on New Business
partners retain apparent authority to bind the partnership to a third party on a new business even after an event requiring winding up
Partner’s May Waive Dissolution and Continue
anytime before the winding up of the partnership business complete, the partners may decide to waive the dissolution and continue the partnership by unanimous vote of the partners who have not wrongfully dissolved
Limited Partnership
limited partnership is a partnership with at least one general partner and at least one limited partner
Limited Partnership Liabilities
general partner is personally liable for partnership obligations, while the limited partner generally does not have any liability beyond the liability to make agreed upon contributions
Difference between Limited and General Partnership
a limited partnership can be created only by filing a certificate of information with the state
Certificate of Limited Partnership
must be fled with the secretary of state
Certificate of Limited Partnership Requirements
signed by all general partners - information required:
(1) name of the partnership
(2) the names and addresses of the agent for service of process and
(3) the names and addresses of each general partner
should also include whether limited liability partnership
Agent for Service of Process
a limited partnership must maintain in the state an agent for the service of process
Name
limited partnership name must contain the phrase limited partnership or the abbreviation LP or LLLP
Limited Partnership Agreement
can be written, oral, or implied
General Partners
has equal rights to the management and conduct of the LPs activities - any matter relating to the partnership’s ordinary business activities may be exclusively decided by the general partner or majority of general partners
Vote of All Partners When:
unless otherwise agreed, the vote of all partners is necessary for certain extraordinary activities including:
(1) amend the agreement
(2) convert the partnership to a limited liability limited partnership
(3) dispose of all or substantially all of the partnership’s property outside the usual and regular course of the partnership’s business
(4) admit a new partner
(5) compromise a partner’s obligation to make a contribution or to return an improper distribution
Limited Partnership Financial Rights
unless otherwise agreed, distributions from an LP are made on the basis of a partner’s contribution
When a Limited Partnership May Not Make a Distribution
if after making the distribution the limited partnership would be unable to pay its debts as they become due or the total assets would be less than the sum of its total liabilities, including sums needed to satisfy superior preferential rights upon dissolution
Partners Rights to Distributions
a partner has no rights to distributions unless the partner makes a contribution to the partnership - a contribution may be in the form of any benefit to the partnership
Partner’s Contribution Obligation
not excused by death or other disability and may be compromised only on the consent of all partners
Improper Distribution Liability of General Partner
a general partner who consents to an improper distribution is personally liable to the limited partnership for the amount that the distribution exceeds what could properly have been distributed
Improper Distribution Liability of Partner Receiving Distribution
any partner who receives an improper distribution knowing that it is improper may be forced to return the improper amount
Expulsion Grounds
transfer of a partners entire transferable interest in the partnership is grounds for expulsion
General Partner Liability
jointly and severally liable for all obligations of the LP, just as they are in a general partnership
Incoming Partner Liability
a person who becomes a general partner of an existing limited partnership is not personally liable for an obligation that the limited partnership incurred before he become a general partner
Torts of Limited and General Partners
the limited liability shield of any business organization does not protect a person from liability for their own torts
Fiduciary Duties of General Partner
a general partner owes the LP and the other partners the same fiduciary duties of loyalty and care that general partners owe in a general partnership - does not automatically violate the duty of loyalty merely because the general partner’s conduct furthers his own interests
Fiduciary Duties of Limited Partner
limited partner owes no fiduciary duty to the partnership or another partner solely by reason of being a limited partner - they are free to compete with the partnership and have interests adverse to those of the partnership unless the partnership agreement provides otherwise
Limited Partner’s Liability to Third Parties
if the partnership is formed as per the limited partnership statute and the partner is not a general partner, liability is limited to their contribution
Right to Dissolve
any partner may apply for a decree of dissolution of the limited partnership whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement
Direct Action Against Limited Partnership by Partner
a partner ay maintain a direct action against the limited partnership or another partner for legal or equitable relief to enforce their rights or interests
Derivative Action
a partner may maintain a derivative action to enforce a right of a limited partnership if the partner makes a demand on the general partners to bring an action to enforce the right and the general partners do not bring the action within a reasonable time or demand would be futile
Who May Bring a Derivative Action
only by a person who is a partner at the time the action is commence and (1) who was a partner when the conduct giving rise to the action occurred; or (2) whose status as a partner developed upon him by operation of law or pursuant to the terms of the partnership agreement from a person who was a partner at the time of the conduct
Right to Information by limited partner
each limited partner has the right to inspect and copy any partnership records required to be maintained
Indemnification of General Partners
the limited partnership must indemnify a general partner for liabilities that they incur in the ordinary course of the activities of the partnership
Admission of Additional General and Limited Partners
a person may be admitted to the limited partnership as a general or limited partner as provided in the partnership agreement, as a result of a merger or conversion, or on the consent of all partners
Conversion and Merger
a limited partnership may convert to or merge with another form of business entity upon the consent of all partners and filing of a certificate (of conversion or merger) with the secretary of state
Events Causing Dissociation
events that will cause dissociation of a partner in a general partnership will also cause dissociation of a partner in a limited partnership
Limited Partners Right to Dissociate
a limited partner has no right to dissociate before termination of the limited partnership
Effect of Dissociation on a Limited Partner
a limited partner is treated as a transferee of the limited partner’s transferable interest
Effect of Dissociation on a General Partner
similar to the effects of dissociation of a partner in a general partnership
Dissolution of Limited Partnership Common Methods
(a) may be judicially dissolved upon application of a partner if it is no longer reasonably practicable to carry on the limited partnership in conformity with the agreement
(b) administratively dissolved by the secretary of sate for failure to pay fees or file an annual report but the partnership may apply for reinstatement by curing the defect within two years of the dissolution
Dissolution of Limited Partnership Other Methodologies
(i) happening of an event specified in the agreement
(ii) consent of all general partners and limited partners hold a majority of the right to receive distributions
(iii) after dissociation of a general partner, upon consent of partners owning a majority in interest if another general partner remains; if no general partner remains, after 90 days unless the partners admit a new general partner
(iv) ninety days after dissociation of the last limited partner, unless a new limited partner is admissed within 90 days
Other Methodologies for Dissolution
(i) happening of an event specified in the agreement
(ii) consent of all general partners and limited partners holding a majority of the right to receive distributions
(iii) after dissociation of a general partner, upon consent of all partners owning a majority of the in interest if another general partner remains; if no general partner remains, after 90 days unless the partners admit a new general partner
(iv) ninety days after dissociation of the last limited partner, unless a new limited partner is admitted within 90 days
Winding Up
a limited partnership continues after dissolution only for the purpose of winding up - partners must discharge liabilities, settle and close partnership activities, and marshal and distribute its assets
Power to Bind Partnership after Dissolution
a partnership will be bound by any acts of a general partner that are appropriate for winding up the partnership - also bound by acts of a general partner that are not appropriate for winding up the partnership if the acts would have bound the partnership before dissolution and the party with whom the general partner dealt did not have notice of dissolution
Distribution of Assets upon Winding Up
(1) first to creditors (including partners who made loans to the limited partnership)
(2) second, any surplus must be paid in cash as a distribution
Distributions Where Assets are Insufficient to Satisfy Debts
each person who was a general partner when the obligation was incurred must contribute to the partnership to satisfy the obligation - contribution is in proportion to the right to receive distributions in effect when the obligation was incurred
Partner Who Pays Additional
a person who pays additional contribution may recover from any person whose failure to contribute necessitated the additional contribution, but may not recover more than the amount additionally contributed
Limited Liability Partnerships (LLP)
an LLP all partners have limited liability (that is, no partner is personally liable for a partnership obligation beyond their contribution to the partnership) - apply general partnership rules
Limited Liability Limited Partnership (LLLP)
the general partners and the limited partners have limited liability for the obligations of the business - apply limited partnership rules
Formation of a Limited Liability Partnership
must file a statement of qualification with the secretary of state - executed by two partners
Required Information of Statement of Qualification
(1) the name and address of the partnership
(2) a statement that the partnership elects to be an LLP
(3) a deferred effective date, if any
Time for Becoming an LLP
becomes LLP when statement is filed or the date specified within - whichever is later
Name of an LLP
must end with the words “registered limited liability partnership” or “limited liability partnership” or LLP, LLP, RLLP or R.L.L.P.
LLP Voting
terms and conditions on which a partnership becomes an LLP must be approved by whatever vote is necessary to amend the agreement or, if specified, the vote necessary to amend the contribution obligations of the partners
LLP Voting if Partnership Agreement is Silent
if the agreement is silent as to how it may be amended, all partners must approve the terms and conditions of the partnership becoming an LLP
Liability in LLP
a partner is an LLP is not personally liable for the obligations of the LLP, whether arising in tort, contract, or otherwise - just personally liable for their own wrongful acts
Partnership Assets Insufficient to Indemnify
if partnership assets are insufficient to indemnify them for an obligation they incurred on behalf of the LLP, they forfeit the right to receive contributions from other partners in exchange for being relieved of the obligation to contribute for their personal liability
