Sole Propreitorship, Partnerships, Limited Partnership and Limited Liability Partnership

Question 1

Sole Propreitorship

Answer 1

SOLE PROPREITORSHIP: Sole proprietorship exists when a person beings an enterprise and is the only investor (“equity owner”) and does not organize as any other enterprise.
Employees of the proprietorship are often agents of the sole proprietor/principal. Agency is the fiduciary relationship that results when two persons consent that one (the agent) will act on behalf of and under the control of the other (the principal).

Question 2

Partnership

Answer 2

PARTNERSHIP: an association of two of more persons to carry on as co-owners a business for profit (sharing of profits and losses is prima facie evidence of a partnership); controlled by INTENT- intent of the partners to do that which under the law constitutes a partnership
A partnership is the statutory default when no other business organization has been entered into. Each partner is a principal, and each is an agent within the scope of the partnership. Partners owe each other a fiduciary duty including a high duty of loyalty.

Question 3

Elements of Partnership

Answer 3

I. ELEMENTS: each partner
A. has the apparent authority to bind the partnership within the
B. scope of the partnership,
C. is jointly and severally liable for all partnership obligations (in tort, k and trust)
D. has a statutory right of participation in the governance of the partnership
E. . owes the partnership and each partner a high level of fiduciary duty

Question 4

Actions Within the Ordinary Court of Partnership Business

Answer 4

II. Actions are within the Ordinary Course of Business of a Partnership based on:
A. agreement of the partners among themselves
1. does NOT have to be in writing- that is the best practice; if not in writing look to:
a) things the partners actually agreed on
b) things the partners seemed to agree on implied from the way they run their business
c) all default rules from the statute that are uncontradicted
B. the course of business of the particular partnership
C. the course of business of similar partnerships in the locality

Question 5

Default Rules: Uniform Partnership Act

Answer 5

III. Default Rules: Uniform Partnership Act: can be changed by amending the p’ship agreement
A. Voting & sharing in profits is Per capita (1 partner, 1 vote/per person)
B. Majority rules for decision makers
C. sharing in losses the same way as sharing in profits
D. ACTIONS REQUIRING UNANIMOUS CONSENT:
1. adding a new partner
2. amending the partnership agreement
3. taking action in contravention of the partnership agreement
E. Partners have unlimited access to books & records
F. owe each other a duty of notification as to matters material to the partnership
G. partners are not compensated for working for partnership

Question 6

Ownership Interests in Partnership

Answer 6

IV. Ownership interests in partnership
A. Three Categories
1. right to vote/participation in management
2. right to use partnership property in course of business
3. partnership interest: right to get their share of profits & surplus→ this is personal property and the only category that can be soled, executed against, used as security
a) p’ship interest can be attached by a charging order: unexecuted lien against the p’ship interest, holder can execute and become interest holder with rights like an assignee (so can cause dissolution, so courts allow p’ship to buy out the lien)
B. to sell all three, the buyer must become a partner
1. if all three categories are sold, but partner not a new partner: only has the partnership interest in getting share of profits and surpluses

Question 7

Dissolution of Partnership

Answer 7

V. Dissolution: the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business
A. doesn’t terminate the partnership, or the partners liability
B. the partnership continues solely for the purpose of winding up, or partners can continue on with a new partnership
C. If a partner retires or dies, and is not paid right away, the partner gets to choose
1. can be a creditor of the p’ship and get interest or
2. can be an equity member of the p’ship and get a share of the profits, if ever dissolved gets the residue unless paid off before then

Question 8

Wrongful Dissolution

Answer 8

D. dissolution is wrongful when it is in violation of the partnership agreement
1. wrongfully dissolving partner still gets CASHED OUT (the fair value of their interest in the p’ship) BUT p’ship can set off against payment nay injury caused to the p’ship by the wrongful dissolution

Question 9

Winding Up and Proceeds Priority

Answer 9

VI. Winding up: selling all the stock and liquidating it- turning it into cash
A. proceeds are divided:
1. outside creditors
2. inside creditors (partners other than for capital or profits)
3. partners in respect to the capital (dollar-for-dollar w/o interest)
4. partners in respect to profits

Question 10

Apparent Authority

Answer 10

VII. General Partnership: Contract Liability past exam question
A. Each partnership has the apparent authority to bind the partnership within the ordinary scope of its business. (Therefore a partner has the power to enter into binding contracts on behalf of the partnership.) However, if the contract is not within the ordinary scope of the partnership’s business, then the partners must vote to approve the contract. If a partner enters into a K that is not in the ordinary business of the partnership, and the partners do not approve the contract, then the partner who entered into the contract is personally liable. If the contract is in the ordinary course of business, or is not but the partners approve it, then the partnership is liable, and every partner is jointly and severally personally liable for all obligations of the partnership.

Question 11

Partnership: Tort Liability

Answer 11

VIII. General Partnership: Tort Liability past exam question
A. A tort committed by a partner or by an employee of the partnership acting within the scope of the partnership business, renders the (1) tortfeasor personally liable, (2) the partnership itself vicariously liable and (3) the other partners each jointly and severally vicariously liable. \

B. Whether a partner is acting within the scope of employment depends on four factors: (1) whether the act is of the kind the agent is employed to perform; (2) whether it occurs substantially within the authorized time and space limits; (3) whether it is actuated, at least in part, by a purpose to serve the master, and (4) if force is intentionally used by the servant against another, the use of force is not unexpectable by the master. The key inquiry in South Carolina is whether a servant is doing some act in furtherance of the master’s business, in which case the act will be regarded as acting within the scope of employment. Is a question of fact for the jury.

Question 12

Limited Liability Partnership

Answer 12

IX. LIMITED LIABILITY PARTNERSHIP: is similar to a general partnership except an LLP can be formed only by filing articles with the Secretary of State and payment of a filing fee, and carrying at least $100,000 of liability insurance. The result is that partners are NOT personally liable for the TORT obligations of the partnership unless the partner (1) committed the tort, (2) participated in the tort, or (3) supervised the tortfeasor.
A. Contract Liability past exam question
1. LLP contract liability is the same as liability of a general partnership. Each partner has the apparent authority to bind the partnership within the ordinary course of business. If the contract is within the ordinary course of business of ratified by the partners, then the partnership is liable and every partner is jointly and severally personally liable for all obligations of the partnership. If the K is not within the ordinary course of business, and the partners do not ratify the contract, the partner who entered into the contract is personally liable
B. Tort Liability past exam question
1. The partners of an LLP are not personally liable for the torts of the partnership unless: the partner committed the tort themselves, the partner participated in the tort, or the partner supervised the tortfeasor.

Question 13

Limited Partnership

Answer 13

X. LIMITED PARTNERSHIP: has both general partners (manage and are liable just like a regular partnership) and limited partners (who remain passive and are protected from liability). LP formed by filing with Sec. of State, must designate as LP, have names and addresses of each general partner, and appoint a registered agent for service of process. There is only one level of tax, must have at least on general partner. past exam question
A. Contract Liability
1. General partners are liable as in a general partnership, so are jointly and severally liable with other GP’s and the p’ship. Limited partners aren’t personally liable unless they are the partner that entered into the K
B. Tort Liability
1. General partners are liable as in a general partnership, so are jointly and severally liable with other GP’s and the p’ship. Limited partners aren’t personally liable UNLESS they were the tortfeasor

Question 14

Limited Partner v. General Partner

Answer 14

C. Limited partners owe no duty to one another or to the LP unless they undertake duties of some nature.
D. General partners owe a fiduciary duty to the limited partnership and to limited partners.

Question 15

Withdrawal of General Partner

Answer 15

E. Withdrawal of a general partner

1. can continue business→ amend certificate of LP within 30 days of withdrawal
2. limited partners can vote/substitute additional general partners

Question 16

Limited Partner Participation

Answer 16

F. If the limited partner participates in the management of the enterprise then they may lose their limitation of liability & be liable beyond their contribution only to those who do business with the limited partner reasonably believing, based on the limited partners conduct, that the limited partner is a general partner. However, there are safe harbor acts that limited partners can do without losing their liability:

1. being contractor for or an agent or employee of the partnership or of the general partner
2. consulting with the general partner regarding the business
3. acting as a surety
4. voting on amendments to the agreement, dissolution, sale of assets not in the ordinary course, assumption of debt, change in nature of business, or removal of the general partner
5. bringing a derivative action
6. participating in the winding up of the business

Question 17

Liability on Contract and Tort in GP, LP and LLP

Answer 17

XI. Liablility for a contract that one of the partners entered into that is within the scope of the express authority of the partner:
A. GP: the partnership & the 3 partners
B. LP: the partnership and the general partners, and the partner who entered into the K if not a GP
C. LLP: the partnership and the partners
XII. Liability for the tort of one of the partners (Ann):
A. GP: partnership, tortfeasor (Ann), and all the partners
B. LP: the partnership, the tortfeasor and the general partners
C. LLP: the partnership and the tortfeasor

Question 18

Filing Requirements for GP, LP and LLP

Answer 18

XIII. Under a general partnership, there is no statutory filing and all the partners are jointly and severally liable for partnership obligations. Under a limited partnership, there are general partners who remain liable as if it were a general partnership, and limited partners who are passive investors and thus shielded from partnership liability. A limited partnership requires a special filing. Under a limited liability partnership, partners are shielded from the tort liability of the partnership. Both the limited partnership and the limited liability partnership require filings with the Secretary of State.

Question 19

New Partnership after Dissolution

Answer 19

When a partnership is ended and a new partnership is formed leaving out a partner, the left out partner may have a cause of action for breach of the duty of loyalty. Partners owe each other a high level of fiduciary duty, “punctillo of honor” is owed to partners.

The left-out partner (OR director in a corp. OR member in an LLC) may have a COA for usurping a corporate opportunity which is a breach of the duty of loyalty
line of business test: A business opportunity is a “corporate opportunity” if:
(1) it is within the “line of business” of the enterprise
(2) the enterprise has an “interest” in the opportunity- it came to the attention of the director/officer/whatever in the course of their duties for the enterprise
(3) and the corporation has the financial ability to take advantage of the opportunity

If a business opportunity passes this test, but the director/officer/whoever takes advantage of the opportunity for herself without first making full disclosure to the enterprise (e.g., board of directors) and getting permission to take the opportunity for herself, then the opportunity belongs to the enterprise and any profit she makes must be handed over to the enterprise (an “accounting”).