Business Structures Flashcards
What are Partnership Basics?
o Two or more people
o Intend to engage in business for profit
Profit is the key element in determining whether a partnership exists
o Agency/Fiduciary relationship created
o Limited duration in most cases
o Corporations and other partnerships can become partners of a partnership
o Partnership interest is always considered personal property
Partnership formation can:
- Can be ORAL
- Can be IMPLIED
Intent is to make a profit
When must partnership formation be written?
If partnership activity falls within Statute of Frauds
Can’t be completed in 1 year
Even if partners reside in different states, the partnership agreement need not be in writing unless if falls within the Statute of Frauds
Dollar amount of transactions has no bearing on whether the partnership agreement needs to be in writing * Purchasing Real Estate has no bearing on the partnership agreement
Profit sharing is equal by default
Unless partnership agreements says otherwise
Unless specified, sharing of losses follows same pattern as sharing of profits
What are Partner Rights, Authority, & Liability?
o 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
o Silent Partners
Do not make management decisions
Have same liability as a general partner
o Partner has the authority to assign their interest to another party, which merely means that the other party gets that partner’s share of the profits and/or capital contribution
Assigning of interest does not grant assignee authority to vote on partnership business
Assignee does NOT have right to inspect partnership books either
Assignor still maintains liability
Partner does NOT have the right to assign their interest in partnership property or allow partner creditors to attach a lien
What is a partner’s Actual Authority?
Has actual authority to bind the partners to a contract
What is a partner’s Apparent Authority?
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
What is a General Partner’s Joint & Several Liability?
Partners collectively liable for debts/torts
Partners individually liable for debts/torts
Creditors must go after partnership assets first before suing partners individually
What happens when a Partner Withdraws?
o Liability on subsequent debts 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 o Liability on preceding debts Jointly and Severally Liable Unless creditors grant novation What is the treatment for New Partners? o Liability on preceding debts Capital account at risk only o Liability on subsequent debts Jointly and Severally liable
What happens in light of a Partner Death?
o Partner’s estate gets share of partnership profits and capital account
o Estate does NOT get any partnership assets
Remainder of partners own partnership assets
o Heirs of decedent are not added as partners unless remaining partners unanimously agree
What is a Winding up Partnership?
o Creditors get paid
Partners can also be creditors
o Distributions in arrears get paid
o Partners get return of Capital accounts
o Any remaining distributions
o No documents need to be filed with state to dissolve general partnership
One of the few arrangements that don’t require this
What are Limited Partnership Basics?
o 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
o Unlike G.P., L.P. profits/losses are split according to capital contributions by default
o A General Partner can also be a Limited Partner at the same time
* A LP, however, cannot also be a General Partner and maintain limited liability
o LP do not have a fiduciary responsibility to the limited partnership
What is Limited Partner Authority?
o Limited Partner has no authority as an agent to bind the partnership
o Limited Partner has the right to inspect records of the business
o Disadvantage: Limited Partners cannot participate in management decisions and maintain their limited liability
o L.P. can still vote on partnership business without losing their limited liability
o L.P. can still consult and advise partnership without losing limited liability (assuming they don’t actually make the decisions)
o New Limited Partner requires all partners (General and Limited) to agree by writing
o New General Partner in a Limited Partnership also requires all partners to agree
What is Limited Partner Liability?
o Advantage: 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
What is Limited Partnership Dissolution?
o Automatically happens
- Once final General Partner leaves
- Time specified in certificate lapses
- Event specified in certificate happens
- Unanimous consent by partners
- Illegal activity
What is LIMITED LIABILITY PARTNERSHIP (LLP)?
Majority vote required to form LLP
Articles of LLP filed with Secretary of State
Governed by laws of that State
Limited Liability Partnership must be in name
No General Partners – each LLP partner has limited liability
o Exception: Negligence of partner or those under partner’s supervision
What is a LIMITED LIABILITY COMPANY?
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 is a JOINT VENTURES (JV)?
- Similar to a General Partnership, except:
o Generally, a JV is for a single business activity
* Example: two companies promote a concert
o Ability to bind other JV partners is limited - JV partners still have a fiduciary responsibility to JV
- No state filings or paperwork necessary
