Partnerships (MEE) Flashcards
1
Q
Partnership Formation: Requirements
A
Requires an association of two or more persons to carry on a for-profit business as co-owners
* Requires sharing of profits
* Persons: Must have legal capacity to contract
* Intent: No need to have specific intent to form a partnership, merely to (i) carry on as co-owners, (ii) for profit
* No formal agreement or writing required: Except, if contract cannot be performed in one year must be in writing per Statute of Frauds
2
Q
Partnership Formation: Profit Sharing Test
A
If there is profit sharing, it is presumed to be a partnership, unless falls under one of following statutorily enumerated circumstances:
* Debt payments;
* Interest or loan charges;
* Rent;
* Wages;
* Goodwill payments from sale of business; and
* Annuities or other retirement or health benefits
3
Q
Partner by Estoppel: Elements
A
Person may be treated as a purported partner if:
* There is a representation that a person is a partner in a partnership;
* The person makes or consents to the representation;
* Third party reasonably relied on the representation; and
* Third party suffered damages as a result of reliance
4
Q
Partner by Estoppel: Liability
A
- P is liable: Purported partner liable as if she were a partner
- P is not liable: Purported partner jointly & severally liable with those who consented to representation.
Note: It is not a defense that purported partner was unaware that he had been held out as a partner to specific third party if representation was made in a public manner
5
Q
Partnership Liability
A
- Partners are personally liable for partnership’s obligations
- No limited liability
6
Q
Partnership Agreement
A
- Need not be a written partnership agreement
- No written partnership agreement: state law will govern the partnership with default rules
- Partnership agreement conflicting with default rule: Partnership agreement will govern unless state law is mandatory (e.g., waiving personal liability)
7
Q
Fiduciary Duties: Duty of Loyalty
A
Partner cannot **compete **with P’s business, advance an interest adverse to the P, or usurp a P opportunity.
8
Q
Duty of Loyalty: Exceptions
A
- PA can designate certain activities as not violating duty (cannot eliminate duty altogether)
- PA may provide a safe harbor allowing other partners to authorize/ratify a transaction between a partner and the P after full disclosure of material facts
9
Q
Duty of Care
A
- Duty to refrain from engaging in grossly negligent or reckless conduct, intentional conduct, or a knowing violation of the law
- PA may not unreasonably reduce this duty
10
Q
Fiduciary Duties: Timing
A
- Duties of loyalty apply only to current partners, not to prospective or former partners
- Upon a partner’s dissociation or P’s dissolution, duties do not apply unless partner is engaged in winding up P’s business
11
Q
Duty of Good Faith and Fair Dealing
A
- Must act fairly and in good faith
- PA cannot eliminate this obligation but can prescribe reasonable standards
12
Q
Profits and Losses
A
- Division of profits and losses need not be the same or be affected by financial or capital contributions
- If there is no PA or PA is silent: Each partner is entitled to an equal share of profits and losses
- If PA only specifies division of profits: Losses are shared in same manner as profits
13
Q
Distributions
A
- Default Rule: Partners do not have right to demand a distribution but is entitled to have her account credited with share of profits
- Partners can agree in advance to allow distributions to be made according to PA
14
Q
Transfer of Partnership Interest
A
Partners can transfer all of part of P interest to a third party, absent a restriction in the PA (could require majority vote of partners)
15
Q
Transfer of Partnership Interest: Effects on Transferor Partner
A
- Transferor partner retains all rights and duties of a partner, except for an interest in the distributions
- Transfer does not cause dissolution or dissociation
- Creditor of partner can enforce a judgment against partner’s financial interest
16
Q
Transfer of Partnership Interest: Transferee Rights
A
- Right to: Receive distributions, seek judicial order for dissolution of partnership, and an accounting upon dissolution.
- No right to: Participate in management or conduct of P business, access P’s records, or demand other information
17
Q
Property Ownership
A
- All property acquired by P belongs to P and not to individual partners
- Intent of partners controls:
- Property presumed to be P property if it was purchased with P assets or if P credit is used to get financing
- If ownership is unclear, consider other factors (e.g., property’s use, tax treatment of property, source of funds to maintain or improve property)
18
Q
Property: Use by Partners
A
- Property acquired by partnership must be used for benefit of partnership, not for personal benefit
- If partner uses for personal benefit, must compensate P for such use or possession
19
Q
New Partner
A
Incoming partner must secure consent of all existing partners
20
Q
Management Rights
A
- Every partner has equal rights in management and control of partnership
- Can be changed by agreement
21
Q
Management Rights: Ordinary vs. Extraordinary Business Decisions
A
- Ordinary Business Decisions (ex. declaring distribution): Requires majority vote of partners
- Extraordinary Business Decisions (ex. dissolving partnership): Requires vote of all partners
Note: This is a default rule; can be changed in PA.
22
Q
Renumeration
A
No right to renumeration, except for reasonable compensation for winding up P’s business or when all partners agree
23
Q
Reimbursement
A
P must reimburse a partner for loans made in furtherance of P business
24
Q
Indemnification
A
P is required to indemnify partners for personal liability incurred in ordinary course of P business
25
Access to Books and Records
* P must permit its partners and agents to access all P records
* Mandatory: Cannot be waived by PA
26
Dissociation
* Occurs when a when a partner ceases to be associated with the partnership
* Can be either voluntary or involuntary
27
Voluntary Dissociation
Partner must give notice of withdrawal to partnership
28
Involuntary Dissociation
Events causing dissociation:
* Partner's expulsion due to PA, unanimous vote of other partners, or partner's bankruptcy
* Partner's death
* Appointment of guardian for partner or judicial determination of partner's incapacity
* Termination of an entity partner
29
Wrongful Dissociation
Partner is liable to P and other partners for damage caused by wrongful dissociation
30
Wrongful Dissociation: P unlimited by time/undertaking vs. P definite term/undertaking
* **P unlimited by time or undertaking**: Partner's dissociation is wrongful only when it is in breach of express provision of PA
* **P for definite term/undertaking**: Partner's dissociation is wrongful if partner withdraws before expiration of term or completion of undertaking; is expelled by court order; is a debtor in bankruptcy; or is not an individual, trust, or estate, and the partner willfully dissolved or terminated
31
Effects of Dissociation: Dissociated Partner
* Dissociated partner is not permitted to participate in management or conduct of P business
* Partner’s duty not to compete terminates upon dissociation
* Partner’s other duties of loyalty and care terminate with respect to post-dissociation events
32
Effect of Dissociation: P's Duties to Dissociated Partner
* **Buy out** : If P continues, it must buy out dissociated partner's P interest
* **Indemnification**: P must indemnify dissociated partner against all P liabilities, whether incurred before or after dissociation
Note: P may not have to buy out dissociated partner if partner's liability for wrongful dissociation exceeds buy out value.
33
Effect of Dissociation: Dissociated Partner's Liability
Dissociated partner is generally liable for P obligations
incurred **before** dissociation
34
Dissociated Partner's Ability to Bind P
Dissociated partner can bind himself and P to a transaction if other party:
* (i) **reasonably believes** dissociated partner is a partner,
* (ii) does not have **notice** of dissociation, and
* (iii) is not deemed to have knowledge of dissociated partner’s lack of authority
**Note**: Liability limited to transactions within two years of partner’s dissociation
35
Partner as Agent of P
Partner can contractually bind P when partner acts with **actual **or **apparent authority**
36
Actual Authority
**Express Authority**: Can arise from PA, authorization of partners, or statement of authority filed with state
**Implied Authority**: Based on partner's reasonable belief that an action is necessary to carry out his express authority
37
Apparent Authority
* Exists when a partner acts in **ordinary course of partnership business** and third party **reasonably believes** partner has authority to act
* Third party cannot hold P liable if third party knew or was notified that partner lacked authority
38
Transfer of Titled Property: P prperty held in P's name
Partner has authority to execute an instrument of transfer in P’s name
39
Transfer of Titled P Property: P Property Held in Partner's Name
Partner has authority to execute an instrument of transfer in one or more partners’ names
40
Transfer of Titled P Property: Recovery of P Property From Unauthorized Transferee
Recoverable if:
* P interest was indicated in transfer instrument through which P acquired property, or
* If transferee was aware that property belonged to P and that partner executed transfer without authority
41
P's Knowledge and Notice of Facts
Absent fraud, partner’s knowledge or notice of a fact relating to P is generally immediately imputed to P
42
Partnership Tort Liability
P is liable for a partner’s tortious acts committed in the **ordinary course of partnership** or with P authority
43
Parnership Liability to Third Parties
* As a separate entity, P is suject to lawsuits for obligations
* Partners are **jointly and severally liable** for all P obligations
* Creditors must generally exhaust P's assets before taking partner's individual assets
44
Partnership Liability to Third Parties: Criminal Liability
P can be convicted of a crime and a penalty levied on P assets
45
Merger
All partners of a general P must approve as required by law or as specified in PA for LPs
46
Termination of Partnership: Dissolution
* Triggered by occurrence of an event
* Not the end of partnership; it is the beginning of the end
* Can be brought about by a partner or by operation of law
47
Events Causing Dissolution: P at Will
Dissolved when a dissociating partner gives notice of withdrawal
48
Events Causing Dissolution: P for a Term/Undertaking
Dissolved when:
(i) term expires or undertaking is completed;
(ii) all partners agree to dissolve P; or
(iii) partner is dissociated due to death, bankruptcy, or other event and at least half of remaining partners agree to dissolve P within 90 days
49
Events Causing Dissolution: Any P
Any P is dissolved upon:
* Occurrence of an event agreed to in PA;
* Event that makes it unlawful for P business to be continued unless cured within 90 days; or
* Judicial determination
50
Termination: Winding Up
* Person winding up P business may dispose of and transfer P property and may discharge P’s liabilities
* **Obligations**: P assets are first applied to pay off obligations to creditors (creditors may include partners who made loans to P) before being distributed to partners.
* **Statement of dissolution**: Filing that gives notice to third parties that P has been dissolved after 90 days
* Person can also preserve partnership business to **maximize value** as a going concern
51
Limited Liability Partnership
* P in which a partner's **personal liability is eliminated**; partner only personally liable for his own personal misconduct
* **Conversion to LLP**: Must file with the state and partners must vote authorizing transformatoin
* **Name**: Must always end with LLP or RLLP
52
Limited Partnerships: General Rule
* Must be formed by **at least one general partner and one limited partner**;
* **Limited partner’s liability**: Limited to her capital contribution to P;
* **General partner's liability**: Personally liable to third parties for obligations of LP
* **Formation**: Must file certificate of limited partnership
53
Conversion from P to LP
* Conversion must be **approved** by **all** partners and P must **file** **articles of conversion** with the state
* Former GPs remain liable from pre-conversion obligations
54
Conversion from LP to P
* Conversion must be approved by all partners, and LP must cancel its LP certificate
* Partners remain liable as LP for pre-conversion LP obligations and are liable as GPs for post-conversion P obligations
55
Limited Partners
* Can only be admitted by written consent of **all partners** after creation
* Not personally liable for LP obligations unless LP is also a GP or **participates in control of business**
* LP may do the following without participating in control of the business: vote, lend money, transact business like a non-partner with the LP, inspect business and financial records
* **Withdrawal**: Can withdraw from LP by giving six months written notice.
56
General Partners
* Can only be admitted by written consent of **all partners** after creation
* **Rights and powers**: Same as in a general partnership without LPs, or as specified in PA.
* **Liability to Third Parties**: Personally liable to third parties for obligations of LP
* **Withdrawal**: Can withdraw from LP by giving written notice to other partners
57
Limited Partnerships: Profits and Losses
Allocated based on each partner’s P **contributions**, unless allocated differently in writing
58
Limited Partnerships: Distributions
Allocated based on how profits/losses are shared unless allocated differently in writing
