Agency & Partnerships Flashcards

Question

Employer-Employee by Estoppel | Liability in Tort: Respondeat Superior

Answer 1

Where a principal creates the appearance of an employer-employee relationship upon which a third party relies, that principal will be estopped from denying the relationship and will be liable under the doctrine of respondeat superior.

Answer 2

A principal will incur liability for the acts of an independent contractor where: 1. inherently dangerous activities (such as blasting) are involved, 2. nondelegable duties have been delegated, or 3. the principal knowingly selected an incompetent independent contractor (if the principal was merely negligent in selecting the independent contractor, the principal is liable only for their own negligence in selection, not for the contractor’s negligence).

Answer 3

If respondeat superior does not apply, the principal may still be vicariously liable in certain circumstances if the agent acted with apparent authority. (See above for discussion of apparent authority.) This theory of liability is not commonly tested on the bar exam; most vicarious tort liability questions will focus on whether a principal is liable under respondeat superior. Still, it is wise to consider apparent authority as an alternate theory if respondeat superior does not apply.

Answer 4

A principal is vicariously liable where an agent appears to deal or communicate on behalf of the principal and the agent’s apparent authority enables the agent to 1. commit a tort or 2. conceal its commission. This means that for the principal to be liable, there must be a close link between the agent’s tortious conduct and the agent’s apparent authority.

Answer 5

In Georgia, a partnership is an association of two or more competent persons to carry on as co-owners a business for profit. This is the case whether or not they intend to form a partnership. Partnership law is based on the law of contract and agency. Note, then, that there must be at least two persons involved in forming a partnership. A partnership may not exist with only one partner. But also remember that a “person” may be an individual, partnership, corporation, or other association. Thus, Partnership A and Corporation B can agree to form Partnership C.

Answer 6

The debts of the partnership are the debts of the individual partners. However, title to land may be in the partnership name, and a partnership may sue or be sued in the partnership name.

Answer 7

In the absence of a statement of partnership (discussed below), in determining the existence of a partnership, the express intent of the parties governs. If the parties’ intent is uncertain, courts consider the following rules: **Evidence Indicative of Partnership** * The parties’ right to control the business may be enough to prove partnership even if control is never exercised (because owners usually have the right to control operations) * Title to property is held in joint tenancy or in common * The parties designate their relationship as a partnership * The amount of activity involved in the enterprise undertaken by the parties (the more activity, the more likely it is a partnership) * Sharing of gross returns Note that a capital contribution is not required. Note also that the absence of an agreement to share losses is evidence that the parties did not intend to form a partnership. **Sharing of Profits Is Prima Facie Evidence of Partnership** In contrast to the factors above (which raise no presumption), a person receiving a share of profits is presumed to be a partner. In other words, the sharing of profits is prima facie evidence of a partnership unless the sharing is actually repayment of debt; payment of wages or other compensation to an employee; rent; an annuity to a surviving spouse or deceased partner; interest on a loan; or consideration for the sale of goodwill of a business or other property.

Answer 8

**Capacity** Anyone who is capable of entering into a binding contract may be a partner. A would-be partner who lacks capacity is liable only to the extent of their capital contribution. **Formalities** * **General Rule—No Formalities**: No formalities are required to form a partnership unless the contract falls within the Statute of Frauds (see below). The partnership agreement can be express or implied (that is, established solely through the conduct of the parties). * **When Writing Necessary**: A writing is required only if the partnership agreement cannot be performed within a year. **Legality of Purpose** A partnership will be void if the purpose of its existence is illegal. **Consent** Unless otherwise agreed, no one can become a partner without the express or implied consent of all partners. **Statement of Partnership** In Georgia, a partnership may file a statement of partnership that limits or expands the authority of the partners. The filing of a statement of partnership conclusively establishes the existence of a partnership, so if one has been filed, there’s no need to address the factors above. This statement is filed with the superior court clerk of any county and discloses what the partnership wants to make a matter of public record.

Answer 9

If no partnership is formed, parties may still be liable as if they are partners to protect reasonable reliance by third parties. **Liability of Person Held Out as Partner** When a person by words or conduct represents themselves or permits another to represent them as a partner, they will be liable to third parties who extend credit to the actual or apparent partnership in reliance on the representation. **Liability of Person Who Holds Another Out as Partner** When a person holds another out as a partner, they thereby make that person their agent to bind them to third parties. (If there is a partnership, only those partners who know of or consent to this holding out will be bound.)

Answer 10

**Partnership Capital** Partnership capital is the property or money contributed by each partner for the purpose of carrying on the partnership’s business. **Partnership Property** Partnership property, in its broadest sense, is everything the partnership owns, including both capital and property subsequently acquired in partnership transactions.

Answer 11

There is no restriction as to what may be included in partnership property. In determining what comprises partnership property, the controlling factor is the partners’ intent to devote the property to partnership purposes. Georgia partnership law contains specific rebuttable presumptions regarding whether property is partnership property or the separate property of a partner. **Partnership** Property is presumed to be partnership property if it is: * Described as such in the partnership agreement or any recorded statement of partnership; * Acquired in the partnership’s name; or * Purchased with partnership funds. **Partner** Property is presumed to belong to a partner if it’s acquired in their name without partnership funds (even if it is used for partnership purposes). **Title** If real property is held other than in the partnership’s name, it will not be deemed partnership property to the prejudice of an innocent person (that is, if a third party detrimentally relies on the appearance that the real property is property of an individual partner, the property may be treated as that of the partner under an estoppel theory).

Answer 12

**Partnership’s Rights** The partnership’s rights are totally unrestricted, since it owns the property. **Partner’s Rights** In contrast to the above, a partner’s rights in partnership property are very limited. A partner’s ownership interest in any specific item of partnership property is that of a tenant in partnership. The incidents of this tenancy are: * Right of possession for partnership purposes only * Not assignable, mortgageable, subject to allowances to a surviving spouse or children or homestead laws, attachable, or subject to any individual claims on a partner * Right of ownership vests in surviving partners after death of partner

Answer 13

A partner also has an interest in the partnership, which is their share of profits and surplus (for example, a 25% stake). This interest is: 1. Treated as personal property 2. Assignable without dissolving the partnership (so, transferable just like any other financial asset, such as stock) AND 3. Attachable Note that assignment of this interest gives the assignee no rights with regard to the operation of the partnership. It merely entitles the assignee to receive profits to which the assigning partner would otherwise be entitled. A partner may not sell their partner status (that is, may not make another a partner) without the unanimous consent of the other partners.

Answer 14

Georgia statutes supply default rules for relations among partners. But remember that partners can contract around these rules; thus, the partnership agreement usually governs in this area.

Answer 15

Absent an agreement to the contrary, each partner shares equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied. Each partner must contribute to the partnership losses according to their share of the profits. When one partner has been required to pay or satisfy more than their share of a partnership debt, they may require the other partners to contribute their pro rata shares.

Answer 16

All partners have equal rights in the management of the partnership business absent an agreement to the contrary.

Answer 17

**General Rule** There is no right to remuneration/compensation for services rendered to the partnership absent an express or implied agreement to the contrary. However, a surviving partner is entitled to remuneration for services performed in winding up the partnership business. **Breach of Agreement to Work for Partnership** When a partner has impliedly or expressly promised to devote time to the partnership business and fails to do so, they may be charged in an accounting for damages caused to the partnership.

Answer 18

A partnership must indemnify every partner with regard to payments made and personal liabilities reasonably incurred in the ordinary and proper conduct of business, or for the preservation of business or property.

Answer 19

Each partner owes fiduciary duties to the partnership: a duty of care, a duty of loyalty, and a duty to render full information of all things affecting the partnership, whether or not a demand is made. Profits made in the course of the partnership belong to the partnership, and one partner will not be permitted to gain for themselves at the expense of the partnership.

Answer 20

Books and information must be kept at the principal place of business. Each partner has a right to inspect and copy the partnership books and can get a full accounting if it is just (that is, an equitable right to bring suit against the partnership to settle claims and liabilities arising out of the partnership; discussed further below).

Answer 21

Admission of a new partner requires unanimous consent. An incoming partner is liable for prior obligations only to the extent of their capital contribution (that is, an incoming partner cannot be held personally liable for debts incurred by the partnership before they became a partner except to the extent of their agreed contribution, if any).

Answer 22

A retiring partner remains liable for obligations arising while they were a partner unless there has been payment, release, or novation. A retiring partner also is liable for acts done after retirement until they have given notice of their withdrawal (personal notice to creditors of the partnership and publication notice—for example, in a newspaper that publishes legal notices in the area—for others).

Answer 23

**General Rule** As a general rule, a partner cannot sue or be sued by their partnership in an action at law; nor may one partner sue another partner on matters related to the partnership business. An exception to the general rule occurs when no complex accounting is required or when the subject of the litigation is independent of the partnership. **Separate Actions at Law** Despite the general rule, separate actions at law may be brought with respect to segregated transactions (that is, where the partnership has dealt with one partner as if they were a third person and it is clear that the transaction is not to be reflected in the general partnership account); tort actions against a negligent partner; and possibly tort actions where any employee of the partnership is a tortfeasor. **Actions for an Accounting** An action for an accounting is an equitable proceeding whereby the liabilities between each partner and the partnership are converted into liabilities between the partners individually. An action lies to recover the balance due any partner. Actions for an accounting generally arise upon final settlement of partnership affairs, but may also occur in actions for wrongful exclusion or to recover secret profits, in accord with the partnership agreement, or in any other circumstance a court feels is just and reasonable.

Answer 24

Every partner is an agent of the partnership for the purpose of its business. The act of every partner “for apparently carrying on in the usual way the business of the partnership” will bind the partnership and thereby bind the other partners. The partnership’s liability for the act of a partner may be in contract, in tort, or for breach of trust.

Answer 25

In applying agency law, remember that the partnership is the principal and the partner is the agent. **Actual Authority** A partnership will be bound by an act of a partner if the partner has actual authority. Actual authority is the authority a partner reasonably believes they have based on the communications between the partnership and the partner. Actual authority may be created by the partnership agreement, a majority vote of the partners, or a unanimous vote of the partners. * **When Unanimous Vote Required**: Unless the agreement provides otherwise, unanimous consent of the partners is required to authorize a submission to arbitration, make an assignment for the benefit of creditors, confess judgment, or dispose of the partnership’s goodwill. Generally, unanimous consent is also required to engage in business other than that contemplated by the partnership agreement. **Apparent Authority** Even without actual authority a partner can bind the partnership because of their apparent authority. Apparent authority arises when a principal leads a third party to believe that an agent has authority to bind the principal even though the agent has no actual authority. Statute provides that every partner has apparent authority to bind the partnership by any act apparently carrying on business of the partnership in the usual way (unless, of course, the partner had no authority to act for the partnership in that particular matter and the person with whom the partner was dealing knew or had received notification that the partner lacked authority). **Ratification or Adoption** Remember also that a partnership may be able to adopt or ratify a contract made by a partner even if the partner lacked authority to enter the contract.

Answer 26

Georgia law sets out the following rules regarding a partner’s apparent authority to convey real property. **Conveyance of Real Property** * **Title of Real Property in Partnership Name**: If title is held in the partnership name, title may be conveyed in the partnership name by any one partner. However, if the partner lacked actual or apparent authority to convey title, the partnership may recover the property from the transferee (because the transferee should’ve checked on authority) unless the transferee has conveyed the property to a bona fide purchaser (because the purchaser would’ve had no reason to check). * **Title of Real Property in Name of Fewer than All Partners**: If title is held in the name of some (but not all) of the partners, conveyance by the titleholders in their own names is effective. However, if the titleholders lacked actual or apparent authority to convey title, the partnership may recover the property from the transferee unless the transferee or his assignee is a bona fide purchaser. Conveyance in the name of the partnership or the names of fewer than all the titleholders passes the equitable interest in the property if the conveyance was authorized. * **Title in Name of All Partners**: If title is held in the name of all the partners, only a conveyance by all of the partners passes the equitable interest in the property as well as legal title. **Other Transfers** * **Mortgages**: Mortgages are governed by the transfer of title rules above. * **Leases**: Leaseholds are governed by contract rules. If the lease is within the scope of the business, one partner has apparent authority to execute it for the partnership. **Personal Property** Contract rules govern the sale and pledge of personal property. **Expanding and Limiting Authority** The statement of partnership may expand or curtail a partner’s authority to enter into transactions on behalf of the partnership. Partners are conclusively presumed to have the authority set forth in the statement. A properly filed limitation on a partner’s authority to transfer real property gives purchasers constructive knowledge of that lack of authority (but the same is not true for transfers of personal property).

Answer 27

The partnership is liable for any partner’s tort committed within the ordinary course of the partnership’s business. You should apply the regular tort analysis for a tort committed by a partnership employee (that is, look at whether the person was an employee and whether the tort was committed within the scope of their employment).

Answer 28

The partnership is, of course, liable for partnership obligations. But what liability do the partners have for partnership obligations? **Types of Liability** A partner’s liability includes: 1. contract liability, if the contract is within the scope of the partnership business or expressly authorized, and 2. tort liability for partners’ and employees’ torts committed within the ordinary course of business. **General Rule: Joint and Several Liability** All partners are jointly and severally liable for all partnership obligations, whether arising in contract or tort. This means an action may be brought against any one or more of the partners for the entire amount of any obligation; however, a judgment is not personally binding on a partner unless they have been served. Note that there is no exhaustion requirement in Georgia (in contrast to other states). **Extent of Liability** Each partner is personally and individually liable for the entire amount of partnership obligations. A partner who pays more than their fair share of an obligation is entitled to contribution from the other partners, and a partner who pays the whole obligation of the partnership is entitled to indemnification. **Exception—Limited Liability Partnership** A limited liability partnership (“LLP”) is just like a general partnership, but there is no vicarious liability. **Criminal Liability** Partners will not be criminally liable for the crimes of other partners committed within the scope of the partnership business, unless the other partners participated in the commission of the crime either as principals or accessories.

Answer 29

**When Notice Effective** “Notice” is an oral or written communication by a third person transmitted to one or more partners (or other proper person) with the intent that the partnership be informed of the message communicated. **When Knowledge Imputed** “Knowledge” is information that is or reasonably should be known by an individual partner. * **Participant**: If a partner is a participant in a transaction, knowledge will be imputed to the partnership if the partner acquired the information while a partner or, if acquired before becoming a partner, the information was “present to their mind” at the time they were acting for the partnership. * **Nonparticipant**: If the partner who has the information is not a participant in the transaction, knowledge will be imputed to the partnership if, under the circumstances, the partner reasonably could and should have communicated it to the participating partner. Fraud is an exception to this rule (see below).

Answer 30

The partnership is liable if a partner misapplies the money or property of a third person received by them within the scope of their apparent authority. The partnership is also liable if the money or property was received in the ordinary course of business and misapplied while in the custody of the partnership.

Answer 31

**Fraud on Third Party** * **Within the Scope of Partnership Business**: If one partner, acting within the scope of partnership business, defrauds a third party, the partnership will be held liable. * **Outside the Scope of Partnership Business**: Generally, if the fraudulent act involves a transaction outside the scope of partnership business, the partnership will not be held liable. **Fraud on Partnership** If a partner seeks to defraud the partnership as part of a transaction with a third party and that party is aware of the fraud, the partnership is not liable to the third party.

Answer 32

Dissolution is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business. Dissolution leads to a “winding up” period which then results in termination of the partnership.

Answer 33

Dissolution may occur pursuant to the partnership agreement, by mutual assent of all partners, by the proper expulsion of a partner, or by the express will of any one partner. **Partnership Agreement—End of a Definite Term** **Partner’s Express Will or Withdrawal**

Answer 34

The partnership will be dissolved by operation of law in the event the partnership business becomes illegal or a partner dies.

Answer 35

The partnership may be dissolved by decree of an equity court on request of a partner in cases of: 1. Breach of the partnership agreement so that it is not reasonably practicable to carry on the business with the breaching partner 2. Unprofitability 3. Misconduct of a partner that prejudicially affects the carrying on of the business 4. Incompetence of a partner 5. Incapability of a partner OR 6. Other circumstances that render a dissolution equitable

Answer 36

Absent an agreement to the contrary, dissolution terminates the authority of any partner to act as an agent for either the partnership or any other partner.

Answer 37

After dissolution, a partner who has not wrongfully dissolved has authority to wind up the partnership’s affairs. This includes only transactions designed to terminate business, that is, only “old business,” not “new business.” * The following are old business: (1) assigning claims; (2) selling partnership assets; (3) performing contracts made prior to dissolution; (4) collecting debts due; (5) compromising claims; (6) paying off creditors; and (7) distributing the remainder of the business. * The following are new business for which the partner will be individually liable: (1) extending time on a debt; (2) entering into new contracts; and (3) increasing any obligation of the partnership, even by one cent—except necessary contracts.

Answer 38

A partner who wrongfully dissolves the partnership may not wind up the affairs of the partnership.

Answer 39

Apparent authority may continue after dissolution, even if the partner is not winding up. To terminate the apparent authority of partners to bind the partnership after dissolution, proper notice of dissolution to creditors is required. **Proper Notice** Personal notice is required to prior creditors, meaning those who are creditors at the time of the dissolution and to those who have extended credit to the partnership in the past. (Why personal notice? These are prior creditors, so the partnership has their contact information.) Publication notice will suffice for other third parties dealing with the partnership or those who knew of the partnership before dissolution. Those who didn’t know of the partnership before dissolution aren’t entitled to any notice. (Why? There’s no reason to protect them since they aren’t likely to do business with a partner thinking the partnership is in existence, unlike the other mentioned groups.) **Failure of Notice** Failure to give notice binds partners personally to third parties who, while unaware of the dissolution, extended credit to the partnership. Invisible partners (those so inactive in partnership affairs that partnership credit was not based on the partner’s credit) may escape this liability; their liability will be limited to partnership assets.

Answer 40

Partners have joint and several liability for the partnership’s post-dissolution debts. **No Right to Contribution** Except where dissolution is by a partner’s express will, death, or bankruptcy (when it may be hard to learn of dissolution), partners have no right to contribution for post-dissolution debts.

Answer 41

Partnership assets are reduced to cash and partnership liabilities are paid in the following order: **Outside creditors** **Partners’ advances** **Partners’ contributions to capital AND** **Surplus or profits** Note that if the partnership assets are insufficient to pay partnership liabilities, the shortfall is a loss that must be divided among the partners.

Answer 42

Partnership creditors have priority on partnership assets. A partner’s separate creditors have priority on separate assets. That is, a partnership creditor has a right to be paid out of partnership assets ahead of any creditor of an individual partner, and a creditor of an individual partner has a right to be paid out of the partner’s personal assets ahead of any partnership creditor.

Answer 43

If a partner is forced to pay more than their share of the partnership’s debts, they are entitled to contribution from the other partners to equalize the shares.

Answer 44

The remaining partners have a right to continue the partnership business after dissolution if: 1. The partners agree to continue the partnership (meaning all those who have not wrongfully dissolved must consent) 2. A partner dissolves the partnership in contravention of the partnership agreement OR 3. A partner is expelled according to the terms of the partnership agreement

Answer 45

If partnership business continues, any creditors of the partnership automatically become creditors of the continuing partnership.

Answer 46

If there is a continuation without a settlement of a withdrawing partner’s share, they may receive either the value of their share, plus interest from the date of dissolution, or a share of the profits attributable to the use of their property by the partnership for that period. However, a partner who wrongfully dissolved is liable for breach.

Answer 47

When a partnership continues beyond the agreed termination point without any express agreement, the rights and duties of the partners remain the same, as far as is consistent with a partnership at will.

Answer 48

When a partnership is dissolved by a change in personnel or property is transferred nonfraudulently to others, and the business continues, creditors of the existing partnership retain their rights as creditors of the partnership continuing the business.

Answer 49

**Definition** A limited partnership is composed of one or more general partners and one or more limited partners. It can be created only by filing the certificate of partnership discussed below. In a limited partnership, general partners are personally liable for partnership obligations like partners in a general partnership. However, limited partners usually are not liable for partnership debts beyond the capital that they agree to contribute. Georgia’s Revised Uniform Limited Partnership Act governs all domestic limited partnerships. .**Filing** * **Certificate of Limited Partnership**: A certificate of limited partnership signed by all general partners and setting forth the name of the partnership, the names and addresses of the agent for service of process and of each general partner, and any other matters the general partners determine to include must be filed with the Secretary of State. * **Records Office**: A Georgia limited partnership must maintain an office in Georgia with records of the certificate, any partnership agreements, the partnership’s tax returns for the 3 most current years, and similar information. The partnership agreement or some other record must contain the amount and description of each partner’s contribution and special rights of partners regarding distributions, if any. * **Agent for Service of Process**: A limited partnership must maintain in the state an agent for the service of process. * **One Who Erroneously Believes Herself to Be a Limited Partner**: A person who erroneously believes that they are a limited partner can avoid general partner liability if, upon discovering the mistake, they file with the Secretary of State an appropriate certificate of limited partnership or certificate of amendment or withdraws from future equity participation by filing with the Secretary of State a certificate of withdrawal. However, they will be liable as a general partner to any third party who actually and in good faith believed they were a general partner if the transaction occurred prior to their filing an appropriate certificate or withdrawing from equity participation. **Name** The partnership name may not contain the name of a limited partner unless it is also the name of a general partner or the partnership business had been carried on under that name before the admission of that limited partner. The name must contain the words “Limited Partnership” or the abbreviation “L.P.” and may not be the same as, or deceptively similar to, the name of another limited partnership or corporation organized in the same state.

Answer 50

A person may be admitted to the limited partnership as a general or limited partner as provided in the partnership agreement, or if the partnership agreement does not so provide, on the written consent of all partners.

Answer 51

**General Rule** Limited partners generally are not liable for partnership obligations beyond their contributions. Exceptions are where the limited partner: 1. is also a general partner or 2. knowingly permits their name to be used improperly in the name of the partnership. Note that Georgia law does not specifically impose liability on a limited partner for participating in the control of the business. However, a limited partner may be liable on estoppel grounds to third parties who are misled into believing, based on the limited partner’s participation in the business, that she is a general partner **Failure to File Certificate** If no certificate of limited partnership is filed, limited partners are jointly and severally liable (because then they have formed a general partnership). But a limited partner can avoid future liability by filing a certificate or by withdrawing from the limited partnership within a reasonable time after learning of the failure to file, and letting the Secretary of State know of their withdrawal. (Note that the partners cannot avoid liability that has already arisen.)

Answer 52

The contribution of a partner may be in cash, property, or services rendered, or a promise to contribute such in the future. (A limited partner’s promise to contribute is not enforceable unless in a writing signed by the limited partner.) If a partner fails to make a noncash contribution, the partnership may require them to contribute its equivalent in cash. Note that a partner’s obligation to make a contribution may be compromised only by the consent of all of the partners. If all of the other partners consent to a compromise regarding contribution, even a previous creditor (that is, one who extends credit before the compromise) may not enforce the original obligation.

Answer 53

**Rights Specific to Limited Partners** A limited partner has the following rights: * To withdraw from the partnership (if the limited partnership agreement permits) * To vote on specific matters, but not to participate in control of the business * To obtain partnership information (including inspection of books and so on) * To bring a derivative action if the general partners refuse to do so or an attempt to cause them to do so would be futile A derivative action may be maintained only by a person who is a partner at the time the action is commenced and: 1. who was a partner when the conduct giving rise to the action occurred; or 2. whose status as a partner devolved upon them 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. **Rights Specific to General Partners** A general partner of a limited partnership has all of the rights of a partner in a regular partnership, including the right to manage the partnership. **Rights of Both General and Limited Partners** General and limited partners have the following rights: * To share in profits and losses in proportions stated in the partnership agreement or, absent such provision, in proportion to the value of the partners’ contributions * To assign their interest in the partnership (but as in a general partnership, the assignee gains only the partner’s rights to distributions and is not entitled to exercise the rights of a partner) * To transact business with the partnership (for example, lend money to it) * To withdraw from the partnership (a general partner may withdraw at any time by providing written notice to the other partners, and, as noted above, a limited partner may withdraw in accordance with the partnership agreement) * To apply for dissolution when it is not reasonably practicable to carry on business

Answer 54

**General Rule: Joint and Several Liability** A general partner of a limited partnership is subject to all of the liabilities of a partner in a general partnership, meaning joint and several liability for partnership obligations. **Exception: Limited Liability Limited Partnership** A limited partnership that makes an election to become a limited liability partnership is known as a limited liability limited partnership (“LLLP”). An LLLP is just like a limited partnership, except there is no vicarious liability for general partners. Remember: LP (shields limited partners) + LLP (shields general partners) = LLLP (shields both limited and general partners).

Answer 55

**Dissolution** A limited partnership may be dissolved by: 1. the occurrence of the time or event provided for in the partnership agreement; 2. written consent of all partners; 3. withdrawal of a general partner (unless otherwise provided for in the agreement or by consent of all partners); or 4. judicial dissolution. **Distribution of Assets on Winding Up** Assets are distributed in the following order: * To creditors, including partners who are ordinary creditors of the partnership * To general, limited, and former partners in satisfaction of liabilities for interim distributions and distributions due on withdrawal * To general and limited partners first for return of their contributions, and then for partnership profits and property in the proportions in which the partners share in distributions

Answer 56

Georgia has adopted legislation that allows for the formation of limited liability partnerships (“LLPs”). In all respects other than formation, name, and liability, a Georgia LLP is treated like a general partnership and is governed by the same law.

Answer 57

To form an LLP in Georgia, a partnership must file an election to operate as an LLP with the superior court clerk of any county where the partnership has an office. Subject to an agreement to the contrary, the election must be executed by a majority of the partners or by one or more partners authorized to execute an election. The election must state: 1. The name of the partnership (which must include the words “limited liability partnership” or the abbreviation “L.L.P.” or “LLP” as the last words or letters of its name); 2. The nature of the partnership’s business (note that some states limit LLPs to professional partnerships, but Georgia has no such limitation); 3. That the partnership has duly elected to become an LLP; and 4. Any other matters the partnership decides to include. Note that while insurance is an additional requirement in some states, a Georgia LLP is not required to carry insurance against acts protected by the LLP statute.

Answer 58

As noted earlier, in Georgia, a partner in an LLP is not personally liable (directly, indirectly, or by way of contribution) for the partnership’s obligations, whether arising in contract, tort, or otherwise. However, a partner remains personally liable for their own wrongful acts.

Answer 59

Georgia’s Limited Liability Company Act provides for the creation of limited liability companies (“LLCs”). An LLC is a hybrid business organization that (1) is taxed like a partnership (except for a single-member LLC), (2) offers its owners (called members) the limited liability of shareholders of a corporation, and (3) can be run like either a corporation or a partnership. There is no limit on the number of owners (members) as there would be in a Subchapter S corporation (a corporation that is taxed like a partnership under the tax code), and no one has to accept full personal liability for the organization’s debts, as would be required in a limited partnership. Although LLCs are governed by statute, LLC members may adopt operating agreements to control most aspects of the LLC’s business and management.

Answer 60

**Filing** In Georgia, an LLC is formed by filing articles of organization with the Secretary of State (along with required fees). **Name** The name of the LLC must contain the words “limited liability company” or the initials “LLC.” **Contents of Articles** The articles of organization of a Georgia LLC must include the name of the LLC. The articles may include: 1. that management is vested in one or more managers; and 2. any other provisions not inconsistent with law. **Annual Registration** An LLC must register annually with the Secretary of State to maintain its status. The annual registration must include: 1. the name of the LLC and where it was organized; 2. the address of its registered office in Georgia and the name of its registered agent at that office; and 3. the address of its principal place of business. **Management** Management of the LLC is presumed to be by all members, but the operating agreement may provide for some other type of management (for example, by outside managers). Each member (or manager, if the LLC is manager-managed) has equal rights in the LLC’s management, and a majority vote of the members (or managers) is required to approve most decisions. Thus, consistent with general agency law principles, each member of a member-managed LLC has authority to bind the company to contracts apparently carrying on the ordinary business of the company, unless the member lacks actual authority to do so and the other party to the contract has notice that the member lacks such authority. In a manager-managed LLC, only the manager(s) has (have) such authority. * **Member-Managed LLC**: In a member-managed LLC, members owe to each other and the LLC duties of care and loyalty. They must also discharge their duties and exercise any rights consistently with the contractual obligation of good faith and fair dealing. * **Members’ Duty of Loyalty**: Under the duty of loyalty, a member must: (1) account to the LLC for any benefit they derive in connection with LLC business; (2) refrain from dealing adversely with the LLC (unless the transaction is fair to the LLC); and (3) refrain from competing in the LLC’s business. In Georgia, managers and managing members of LLCs are subject to rules regarding conflicting interest transactions similar to those for directors of corporations. (See Corporations outline.) * **M****embers’ Duty of Care**: Under the duty of care, members 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 LLC’s best interests. Members who meet this standard will not be held liable for decisions that in hindsight turn out to be poor or erroneous. This is known as the business judgment rule. * **Manager-Managed LLC**: The duties of loyalty and care are different for managers and members in a manager-managed LLC. Although both members and managers must discharge their duties and exercise their rights in accordance with the contractual obligation of good faith and fair dealing, (1) only the managers are subject to the duties of loyalty and care discussed in e., above; and (2) only the members may authorize or ratify an act by a manager that would otherwise violate the duty of loyalty. **Operating Agreement May Alter Duties** The operating agreement may eliminate the duty of loyalty and alter the duty of care if doing so is not manifestly unreasonable. However, the articles of organization or operating agreement cannot eliminate or limit the liability of any member or manager for: 1. intentional misconduct or a knowing violation of law; or 2. any transaction for which the member or manager received a personal benefit in violation or breach of any provision of the operating agreement. Similarly, the operating agreement may not eliminate the contractual obligation of good faith and fair dealing, but it may prescribe standards for measuring the performance of the obligation if doing so is not manifestly unreasonable. **Professional LLC (PLLC/PLC)** If a professional LLC is formed, members and managers must be licensed somewhere, but professional service providers must be licensed in Georgia. **Profits and Losses** Absent a provision in the articles or an operating agreement, distributions and profits and losses of an LLC are allocated equally among the members. Except as provided for in the articles of organization or a written operating agreement, a member or transferee does not have a right to demand or receive a distribution from the LLC in any form other than cash.

Answer 61

As noted above, members in an LLC have limited liability (except for their own torts). The bottom line is that in Georgia, in terms of personal liability, an LLP and an LLC provide equivalent protection.

Answer 62

A member may, at their own expense, inspect and copy any LLC record upon reasonable request during ordinary business hours. Upon reasonable demand, a member may also obtain: 1. Information regarding the state of the business and financial condition of the LLC 2. A copy of the LLC’s tax returns for each year 3. Other information regarding the affairs of the LLC as is just and reasonable

Answer 63

An assignment of a member’s interest in an LLC transfers only the member’s right to receive distributions. Management rights are not transferred. One can become a member (that is, management rights can be transferred) only with the consent of all members or as provided in the operating agreement.

Answer 64

A judgment creditor of a member or transferee of a member may charge (attach) the transferable interest of the judgment debtor to satisfy the judgment.

Answer 65

A member who has been injured personally by his LLC can bring a direct action against the LLC to recover. A member may also bring a derivative action on behalf of the LLC if the following requirements are met: 1. If the LLC is manager-managed, the managers have sole authority to cause the LLC to sue in its name 2. The member made a written demand on the managers or members with authority that they take action 3. Ninety days have passed since demand was made unless demand was earlier rejected or irreparable injury to the LLC would result from waiting 90 days 4. The member is a member of the LLC at the time the action is commenced and was a member at the time of the transaction of which he complains, or their status as a member devolved upon them by operation of law by a person who was a member at the time of the transaction AND 5. The member fairly and adequately represents the interests of the LLC

Answer 66

Members and managers are not personally liable for the LLC’s obligations. However, courts may pierce the LLC veil of limited liability to reach the members’ and managers’ personal assets to satisfy LLC obligations under circumstances similar to those under which courts would pierce the veil of a corporation.

Answer 67

In Georgia, an LLC may (but is not required to) indemnify members and managers against claims and demands arising in connection with the LLC. The LLC may not indemnify those liabilities that cannot be limited or eliminated by the articles of organization or a written operating agreement (such as intentional misconduct, knowing violation of law, or prohibited personal benefit transactions).

Answer 68

A member may withdraw from an LLC formed in Georgia only as provided in the articles of organization or an operating agreement. Generally, the events that will cause dissociation of a partner in a general or limited partnership (see above) will also cause dissociation of a member of an LLC.

Answer 69

**Events Causing Dissolution** An LLC will be dissolved when any of the following events occurs: 1. an event or circumstance that the articles of organization or operating agreement state causes dissolution; 2. the consent of all the members; or 3. the passage of 90 consecutive days during which the LLC has no members. **Judicial Dissolution** A court may grant an application for judicial dissolution if it is not reasonably practicable to carry on the company’s activities in conformity with the articles of organization or operating agreement. **Administrative Dissolution** The Secretary of State may dissolve an LLC administratively when the LLC fails to deliver its annual registration with required fees. The LLC may apply for a reinstatement after correcting the problem. If reinstated, the LLC may resume its activities as if the administrative dissolution had never taken place. **Effect of Dissolution** An LLC that has been dissolved continues its existence but is not allowed to carry on any business except that which is appropriate to winding up its activities. * **Barring Claims Against the LLC**: A claim can be asserted against a dissolved LLC, even if the claim doesn’t arise until after dissolution, to the extent of the LLC’s undistributed assets. If the assets have been distributed to the members, a claim can be enforced against each member to the extent of the member’s proportionate share of the claim or to the extent of the assets distributed to them, whichever is less. Note that a member’s total liability for creditor claims may not exceed the total amount of assets distributed to them after dissolution. An LLC can cut short the time for bringing known claims by notifying claimants in writing of the dissolution and giving them a deadline of not less than six months from the date the claimants receive the notice in which to file their claim. The time for filing unknown claims can be limited by publishing and stating in the notice of the dissolution that a claim will be barred unless a proceeding to enforce it is commenced within two years after notice is published.

Agency & Partnerships Flashcards

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