Flashcards in Business Structures Deck (50)
What are the key elements of a valid Partnership?
Must have two or more partners. Must intend to engage in business for profit. Life of partnership is of limited duration in most cases. Agency/fiduciary relationship is created. Partnership interest is always considered personal property.
Can corporations and other partnerships become partners in a partnership?
Yes; corporations and other partnerships can become partners of a partnership
Name the Basics of Partnership Formation - Form of agreement and intent
Agreement can be very informal - either ORAL; IMPLIED or WRITTEN
Intent is to make a profit
When must a partnership agreement be in writing?
Must be WRITTEN if partnership activity falls within Statute of Frauds:
A. Can't be completed in 1 year
B. Even if partners reside in different states; not necessary unless within Statute of Frauds
C. Neither dollar amount of transactions nor purchasing of real estate has bearing on whether partnership agreement must be in writing
How are profits shared in a partnership?
Profit sharing is equal by default
A. Unless partnership agreement says otherwise
B. Unless specified; sharing of losses follows same pattern as sharing of profits
What is the Liability of General Partners in a partnership?
Joint Liability - Partners are collectively liable for debts/torts
Several Liability - Partners are individually liable for debts/torts
Which assets may creditors of a partnership go after; and in which order?
Creditors must go after partnership assets first before suing partners individually
What are the rights of a General Partner in a partnership?
General Partners have joint control over the management of the partnership and its affairs
Unanimous vote needed to change the structure of the partnership
Each partner has full right to inspect partnership accounting and business
Partner has the authority to assign their interest to another partner
What does and does NOT happen when a General Partner assigns their partnership interest to someone else?
1. Other party gets that partner's share of the profits and/or capital contribution.
2. Does NOT give assignee authority to vote on partnership business
3. Assignee does NOT have right to inspect partnership books
4. Assignor still maintains liability
5. Partner does NOT have the right to assign their interest in partnership property or allow partner's creditors to attach a lien.
What is the actual authority of a partner in a partnership?
Has authority to bind the partners to a contract.
What is the APPARENT authority of a partner in a partnership?
A third party reasonably believes partner has authority to bind partnership to contract
Cannot use apparent authority to add a new partner
Cannot use apparent authority to sell or bind partnership assets
With respect to liability on subsequent debts; what happens when a partner withdraws from a partnership?
Partner not liable assuming notice given.
Notice must be given to nullify apparent authority
People who had knowledge of their role must be personally notified
Public must be notified
With respect to PRECEDING debts; what is the liability of a partner in a partnership?
Old partners: Jointly and severally liable unless creditors grant novation
New partners: Only capital account at risk on preceding debts. For subsequent debts; they are joint and severally liable.
What happens upon the death of a partner in a partnership?
Partner's estate gets share of partnership profits and capital account
Estate does NOT get any partnership assets
Remainder of partners own partnership assets
Heirs of decedent are not added as partners unless remaining partners unanimously agree
What happens during the winding up of a partnership and in what order?
1. Creditors get paid; Partners can also be creditors
2. Distributions in arrears get paid
3. Partners get return of Capital accounts
4. Any remaining distributions
Note: NO documents need to be filed with state to dissolve general partnership.
What are the requirements to form a Limited Partnership?
Governed by state L.P. laws
Must file L.P. certificate with Sec. of State
Only General Partners must be listed
Future additions or subtractions of G.P. require certificate to be updated with state
How are profits and losses split in a Limited Partnership?
Unlike G.P.; L.P. profits/losses are split according to capital contributions by default
True or False: In a Limited Partnership; a General Partner can also be a Limited Partner at
the same time.
A Limited Partner; however; cannot also be a General Partner and maintain limited liability.
Do limited partners have a fiduciary responsibility to a Limited Partnership?
No. Limited Partners are do not have a fiduciary responsibility to Limited Partnership
What authority does a limited partner have under a Limited Partnership?
1. Right to inspect records of the business.
2. Can still vote on partnership business without losing limited liability
3. Can consult and advise partnership without losing limited liability (assuming they don't actually make the decisions)
What limitations does a limited partner have in a Limited Partnership?
1. They have no authority as an agent to bind the partnership
2. They can't participate in management decisions and maintain limited liability.
What is the liability of a limited partner in a Limited Partnership?
Limited partners are liable to the extent of their capital contributions only
Exception - A Limited Partner (who cannot participate in management decisions) becomes involved with management decisions
Becomes liable to third parties *IF* they knew of their involvement
When does the dissolution of a Limited Partnership occur?
1. Once final General Partner leaves
2. Time specified in certificate lapses
3. Event specified in certificate happens
4. Unanimous consent by partners
5. Illegal activity
What is required to form a Limited Liability Partnership (LLP)?
1. Majority vote required to form LLP
2. Articles of LLP filed with Secretary of State
3. Governed by laws of that State
4.Limited Liability Partnership must be in name
5. No General Partners - each LLP partner has limited liability - Exception: Negligence of partner or those under partner's supervision
What are the key aspects of a Limited Liability Company (LLC)?
Members can participate in management and retain limited liability
Members don't own any interest in LLC property
Members can assign interest; but not transfer it
Members divide profits equally unless otherwise stated
What are the key aspects of Joint Ventures (JV)?
Similar to a General Partnership; except generally; a JV is for a single business activity
Example: two companies promote a concert
Ability to bind other JV partners is limited
JV partners still have a fiduciary responsibility to JV
No state filings or paperwork necessary
What are the key aspects of a corporation?
Shareholders have limited liability to the extent of their capital contribution
C Corporations have a perpetual life and continue even after shareholder death
Corporations are a separate legal entity from their owners and can own property; sue; be sued
Corporations must file Articles of Incorporation in state of governance
What are some of the advantages of a corporation?
Ability to raise capital
Limited liability - unless actions occur that pierce the veil
Ease of ownership transfer
What actions can pierce the veil of a corporation?
Commingling of assets