Agency and Partnership Flashcards

Question

Creditors Claims

Answer 1

If a creditor has a claim against a partner, the creditor can obtain an interest in the partnership. This includes profits but not management or voting rights. If a creditor has a claim against the partnership, the creditor can try to collect from the individual partners. Partners are jointly and severally liable for the obligations of the partnership. Even if a partner enters a contract without actual authority to do so, the partnership and partners are bound (so long as the partner had apparent authority). The creditor must obtain a judgment against the partners personally to go after each partner’s personal assets.

Answer 2

Dissociation: A change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business . Simply means partners withdrawal from partnership Wrongful Dissociation: A parter will be deemed to have wrongfully dissociated in two ways: 1. If the dissociation is in breach of an express term in the partnership agreement. 2. A dissociation is also wrongful in a term partnership if the partner withdraws, is expelled, or becomes bankrupt before the end of the term Term Partnership: Agreement to remain partners for amount of time or until completion of project At-Will Partnership: No agreement to remain partners. This is the default form of partnerships an most common Consequences of Dissociation For Partnership: When partner dissociated from a partnership one of two statuary avenues is implicated: 1. The partnership is dissolved and that its business must be wound up. This means that the partnership business will be liquidated(sold off) 2. The partnership continues in existence with the dissociated partner becoming entitled to buyout of their partnership interest. Consequences Of Dissociation For Partner: Upon a partner’s dissociation, their right to participate in management ceases. The partnership must purchase(buy out) 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. Exception: However, a partner who wrongfully dissociates before the expiration of a partnership term or completion of a particular undertaking is not entitled too 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

Answer 3

Dissolution: Dissolution are required only in limited circumstance, but two are of particular importance: 1. Dissociation By Express will: When a partner dissociates by express will(voluntarily) in an at-will partnership, the partnership is dissolved and its business must be wound up - Dissociating partner can force partnership to dissolve 2. Dissociation By Term Partnership: If one partner dissociates wrongfully, or if dissociation occurs because of a partners death or bankruptcy, dissolution and winding up are only required if, within 90 days after the dissociation, at least one-half of the remaining partners agree to wind up the partnership Buyout: Dissociation partners right to be paid value of partnership interest by continuing partners Pre-Dissociation Liability: Generally, a dissociated partner remains liable for pre-dissociated partnership obligations (a creditor can agree to relate the withdrawing partner, however, from specific obligations) Post-Dissociation Liability: A dissociated partner can be liable for post-dissociation liabilities incurred within two years after the dissociate(assuming that dissolution has not occurred) if: 1. When they entered the transaction the other party reasonably believed the dissociated partner was still a partner; and 2. Did not have notice of the partners dissociation Exception: A dissociated partner can protect themselves by notifying creators directly of their dissociation(effective immediately) or by filing a public notice of dissociation(becomes effective after 90 days of filing). When dissolution and winding up occur, partnership assets must be applied to the discharge of partnership liabilities If the assets are insufficient, individual partners are required to contribute(pay in) in accordance with their loss shares. If there are excess assets, they are distributable to the partners in gas in accordance with their profit shares Priority of Distribution: Each level of priority must be fully satisfied before beginning the next level: 1. First, the partnership must pay all creditors Creditors include “outside creditors”(for example, trade creditors, lenders, suppliers) and “inside creditors”(for example, partners who loaned money) 2. Second, the partnership must repay all capital contribution paid into the partnership by partners 3. Third, profits or losses, if any Partnership Continues After Dissolution: The partnership continues to exist after dissolution until the partnership is wound up Who May Wind Up: As a general rule, all living partners have a right to participate in the winding up of the partnerships business except partners who have wrongfully dissolved the partnership and bankrupt partners If all partners have died, the legal representative of the last surviving partner may wind up, Apparent Authority after Dissolution: Partners retain apparent authority to bind the partnership to a third party on new business even after an event required winding up, Waiving Dissolution: At any time before winding up of the partnership business is complete, the partners may decide to waive the dissolution and continue the partnership by unanimous votes of the partners who have not wrongfully dissolved.

Answer 4

Limited Partnership: A partnership with at least one general partner and at least one limited partner Formation: Certificate of Limited Partnership: A certificate of limited partnership must be filed with the secretary of state. The certificate must be signed by all members. The information required in the certificate is minimal and includes: 1. The 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 If you fall to file this, remember, you are just a general partnership Management and Operation: The LP is managed by the general partners. Each general partner has equal rights In the management and conduct of the LP’s activities. A majority vote of the general partners is required for ordinary business activities Limited Partners: Limited Partners generally have no management rights unless the partnership agreement grants them rights. Participation in management rights does not cause a limited parter to become personally liable for an obligation of the limited partnership. Exception: That said, unless otherwise agreed, the vote of all partners(general and limited) is necessary for certain extraordinary activities including: 1. Amend the partnership agreement; 2. Convert the partnership to a limited liability limited partnership; 3. Dispose of all or substantially all of the limited partnerships property outside the usual and regular course of the partnerships activities 4. Admit a new partner; or 5. Compromise a partners obligation to make a contribution or to return an improper distribution Financial Rights: Limited Partnership profit distribution are made on the basis of the partners contribution(in proportion to the value of each partners contribution) Liability General Partners: Jointly and severally liable of all obligations if the LP, just as they are in a general partnership Limited Partners: A limited partner is not personally liable for an obligation of the LP solely by reason of being a limited partner Limited partners have limited liability, meaning they can only lose the value of their investments Exam Tip: A limited partner(As well as a general partner) is always liable for their own torts. The limited liability shield of any business organization does not protect a person from liability for her own torts Fiduciary Duties General partners owes the LP and the other partners the same fiduciary duties of loyalty and care that general partners owe in a general partnership. However, a general partner does not automatically violate the duty of loyalty merely because the general partners conduct furthers his own interests Limited Partner: Generally a limited partner owes no fiduciary duties to the partnership or any other partner solely by reason of being a limited partner Limited Liability Partnerships Limited Liability Partnerships: General partnership where all of the members have limited liability Limited Liability Limited Partnership: Limited partnership rules, but everyone has limited liability Formation of LLP: To become a LLP, a partnership must file a statement of qualification with the secretary of state. The statement must be executed by at least two partners Liability A partner is not personally liable for the obligation of the LLP, whether arising in tort, contract or otherwise. As always, a partner remains liable for their own wrongful acts. Exam Tip: Remember that limited liability only limits vicarious liability, not liability for a partners own wrongful acts.

Answer 5

Limited Liability Company: A hybrid business organization between a corporation and and a partnership that: 1. Is taxed like a partnership(except for a single member LLC) 2. Offers its members the limited liability of shareholders of a corporation; and 3. Can be run like either a corporation or a partnership An LLC is treated as a separate entity from its members Members: Owners of an LLC Formation Formation: An LLC is formed by filing a certificate of origination with the secretary of state. The LLC must have at least one members. Contents: The information required in the certificate is minimal and must include: 1. The name of the LLC 2. The address of the LLC’s registered office; and 3. The name and address of its registered agent Name: The LLC’s name must uncle LLC or L.L.C Operating Agreement: The real detail on the operation and governance of an LLC is typically found in an operating agreement Management and Operation: Management of the LLC is presumed to be by all members. Each member has equal rights in the LLC’s management. A majority vote of the members is required to approve most ordinary business decisions Member-Managed LLC: LLC where members handle management of LLC themselves Manager-Managed LLC: LLC where managers, who may or may not be members, handle management Financial Rights General Rule: Unless otherwise agreed, profits and losses and distributions are allocated on the basis of contributions General Rule: Members and managers generally are not personally liable for the LLC’s obligations. They have limited liability and can lose only the amount of their investments Piercing the LLC Veil: However, courts may pierce the LLC veil of limited liability to reach members and managers personal assets to satisfy LLC obligations under circumstances similar to those under which courts would piece the veil of a corporation. The fiduciary duties owed by a member(if member-managed) or a manager (if manager-managed) to the LLC and to its other members are the fiduciary duties of care and loyalty Duty of Care: Members or managers must act with the care that a person in a like position would exercise under similar circumstances, in a manner reasonably believed to be in the best interest of the LLC. Business Judgement Rule Protection is Provided: This mean that despite the prior sentence, members or managers cannot be held liable for negligent decision but can be held liable for decision tainted by gross negligence or worse Dissociation A person has the power to dissociate as a member of an LLC at any time, rightfully, or wrongfully, by expressly withdrawing as a member. Generally, the events that cause dissociation of a partner in a partnership will also cause dissociation of a member of an LLC. Dissolution Events Causing Dissolution A LLC will be dissolved when any of the following events occur: 1. An event or circumstance that the operating agreement states causes dissolution; 2. The consent of all members; or 3. The passage of 90 consecutive day during which the LLCs has no members Judicial Dissolution: A member may also apply for judicial dissolution. A court may grant an application for judicial dissolution if: 1. The conduct of all or substantially all of the LLCs activity is unlawful 2. It is not reasonably practicable to carry on the companies activities in conformity with the certificate of organization and operating agreement 3. The controlling members have acted, are acting, or will act in a manner that is illegal or fraudulent 4. The controlling members have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the member applying for dissolution Taxation Partnerships and LLC’s are taxed on a “pass-through” basis. There is no entity-level tax instead business incomes is passed through to the owners and reported on the owners individual tax returns. Pass-Through Taxation: Business entity does not pay taxes as an entity- instead owners pay tax By contrast a corporations is subject to double taxation. It pays taxes on its income, and the shareholders pay taxes on the income agent when and if it is distributed to them, In today tax-climate, pass through treatment usually results in less taxes paid

Agency and Partnership Flashcards

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