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Flashcards in General Partnerships Deck (42)
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1

What is the general definition of partnership?

  • “an association of two or more persons to carry on as co-owners a business for profit.” 
  • all partners are agencys

2

What is the rule for partnerships in New york?

  • cannot be formed by only one person
  • Person includes:
    • human beings
    • other business entities
  • Cannot be formed for non-profit purposes
    • profit motive
  • Must be formed voluntarily by all partners

3

What are joint venture?

  • particular kind of association formed for a single transaction
  • NY partnership law applies to these

4

How may the partnership agreement be expressed?

  • orally
  • in writing
  • by conduct
  • If SILENT
    • NY partnership law is the default

5

What are the fundamental principals of partnerships?

  • All partners have the right to control the business
    • unless specified otherwise is in agreement
    • one partner per vote
  • All partners have unlimited personal liability for all partnership debts
  • All partners are jointly & severally liable for debts & obligations of the partnership
    • whether incurred by tort or K
    • incoming & exiting partners may have different liability
  • Any partner can exit the partnership BUT may not have the contract right

6

What are the tax benefits of a partnership?

  • No tax at the entity level
    • pass through

7

How is a partnership formed?

  • No formalities
    • does not have to be in writing
    • no filing required
  • CREATION requires:
    • intent of 2 or more ptys to create a profit
      • true sharing of profits is prima facie evidence of intent to form a partnership
        • be caringful not salary, etc
  • Must be in writing if SOF requires it to be
    • EXCEPTION - NY says it can be oral
  • After agreement, need unanimous of  all existing partners to become a member or to amend partnership agreement

8

How is property of the partnership treated?

  1. If belonging ot the partnership = subject to reach of creditors
  2. Property can bebrought in dring formation as partner contribution
  3. Property acquired with partnership funds is partnership property unless there is a contrary intent
  4. Real property may be acquired in the partnership name
    • thus only can be conveyed in the partnership name
    • Conveyed by:
      • any partner w/authority unless otherwise stated in the partnership agreement
  5. All partners are co-owners of any property held by the partnership
    • not a specific interest
  6. Partner has equal right to possession the property for partnership purposes but no right for personal purposes unless consent of all
  7. Partner right in specific property is not assignable except in connection of the assignment of the rights of all the partners in that property
    • Partner right is not subject to attachment/execution personal creditors except on a claim against the partnership

9

HYPO

Patsy and Paul jointly operate the P&P Deli as a general partnership on the Upper East Side together. When the deli runs into credit problems with their main meat supplier, Patsy agrees to pledge 1,000 shares of a corporation she owns as collateral for their meat bill. The supplier agrees to use the shares as collateral, but only if they are put in the name of the partnership. Patsy agrees and has the shares reissued in the name of the partnership. Several years later, and well after the liquidity crisis, Patsy wants to withdraw from the partnership and wants to take back and sell those stock shares so that she can open a restaurant on Staten Island. Paul objects, claiming that the stock belongs to the partnership. Who owns the shares?

  • The partnership owns the shares absent some specific agreement
  • she can claim for the value but cannot get the shares back

10

What are the rights of a partner?

  • Property rights:
    • right as a co-owner with partners as a tenant in partnership in specific partnership property
    • economic interest in the partnership
      • his share of profit or losses
        • NOTE - this is transferrable; can transfer income
    • right to participate in management
      • NOT transferrable w/o the unanimous consent of all of the other partners

11

HYPO

Parker and Pike agreed to jointly lease and manage the Hotel Bentley for the term of 20 years. During that period of time, Pike entered into separate dealings for real estate contiguous to the hotel. Although the hotel was modestly profitable, Pike was able to generate huge profits on the other properties because of the significant traffic the hotel generated. Parker subsequently filed an action against Pike, saying his other businesses were improper. How would a court rule?

  • Seems like it is a joint venture
  • Partner has a duty to present opptys to the partnership before taking them first for himself
  • Assume, he did not present the oppty
  • Look to see if this was a partnership oppty
  • Will be liable to other ,partner

12

What is the relationship between partners?

  • Partners have a fiduciary duty to each other
    • trust & confidence
  • Each partner owes a duty of loyalty to each other

EXAMPLE:

The court held that the defendant breached his fiduciary obligations to his business partner by engaging in self-dealing that placed his personal interests in conflict with those of the partnership. Thus, the partner was entitled to recover his share of funds acquired by the defendant [Reiff v. Shifrel, 702 N.Y.S.2d 362 (2d Dept. 2000)].

13

What is the duty of accounting between partners?

  • partners have a duty to account for any benefit & hold in trust any transaction connected w/the formation, conduct or liquidation of the partnership
  • Any partner shall have the right to a formal accting to partnership affairs:
    • if partner is wrongfully excluded from the partnership business or possession of its property by the co-partners
    • the right exist under the terms of any agreement
    • have the right whenever other circumstances render it just & reasonable

14

HYPO

Pauline became suspicious of how Patrick was handling the finances of their lace curtain distribution business, which was a general partnership. When Pauline asked to know if they were making money and where all the revenues went, Patrick handed Pauline a copy of the most recent bank statement. Was that an adequate accounting?

  • No, a partnership have to keep accurate and thorough books and she is entitled to see all the money coming in and out

15

What is the relationship of non-competition between partners?

  • a partner may not compete with the partnership w/o consent of all the partners
    • in essesnce waiveing duty of loyalty
  • If so, must acct for all profits he derives
    • means the partnership does not have to suffer a lost

EXAMPLE:

Think back to the law firm teaching example where the associate was working at the law firm by day and teaching law at night. This is also a duty of loyalty problem, broadly construed. Provided that the firm has hired the exclusive right to the associate’s legal services, the associate would be competing here and must account to them for all profits derived.

16

What is the relationship of management between partners?

  • all partners have equal management right & conduct of the partnership
    • one partner = one vote; can contract  around it
  • If partners in disagreement, must be determined whether
    • the matter is in the ordinary course of the partnership business
      • IF YES = need majority to approve
    • matter contradicts the partnership agreement, outside the ordinary course of the partnership business
      • IF YES = need unanimous consent of all partners

EXAMPLE:

A two-person partnership is operating a small bakery. The daily purchase of bread is within the ordinary course of business. If the bakery’s real estate rises in value, the partnership could sell off part of the real estate to a developer, keeping just enough for the bakery. This is not within the ordinary course of business. This decision would require the unanimous consent of the partners (note in a two person partnership, a majority of the partners is two).

17

What happens when there is a deadlock?

  • creates problems

EXAMPLE:

The bakery has been ordering bread from the same source for a long time. Partner A wants to keep the same supplier, but Partner B wants to change. Since the purchase of bread is within the ordinary course of business, the decision to change suppliers requires a simple majority of the partners. But since this is a two person partnership, a majority requires both partners.

We would need a majority of partners [both A and B] to vote for the change- without that, the change can’t happen and the bakery stays the course with the existing supplier.

18

What are partners entitled to access & inspet?

  • the partnership records &/or make copies

19

Whar is required for indemnification between partners

  • partnership must indemnify every partners in respect to:
    • payments made & personal liabilities reasonable incurred by him in the ordinary & proper conduct of his  business

20

Are partners entitled to compensation?

  • No, unless otherwise agreed
  • EXCEPTION
    • reasonable compensation for his services for ending & shutting down the partnership affairs

21

How are payments or advances beyond the amount of capital agreed to contribute treated?

  • Partner is entitled to interest from the date of the payment/advance
    • in essence a loan
  • Capital contribution cases
    • receive interest from the date when repayment should have been made b/c it is a contirubtion until it should of been repaid, then it is a loan

22

What is the relationship between Partners & 3rd Pty?

  • every partner is an agent of the partnership for carrying out the business
    • look to see if the agreement limited authority 
  • act of a partner in carrying out the partnership will bind the partnership
    • UNLESS:
      • The partner has no actual authority AND
      • The person with who the partner is dealing has actual knowledge of this lack of authority
  • If a partner acts outside of those acts apparently related to carrying out the partnership business, the partnership will be bound only if the other partners authorized the partner by giving him actual authority
  • Cannot dispose of the goodwill of the business w/o the unanimous agreement of all the partners

23

HYPO

Petus was an equal partner in the Runny Faucet Bar and Grill, a general partnership located about two hours away from his home in Dutchess County. When the cost of driving to the business began to outstrip his share of profits, Petus decided to sell the business to the hotel from which the partnership rented the space. The other partners, who lived nearby, objected. Is Petus’s action binding?

  • No b/c it is outside the ordinary course of business and requires unanimous consent
  • reasonable that the hotel would know that 

24

How are new partners treated for a partnership?

  • new partner only liable for the extent of his capital contribution for debts that arised before he joined
  • Any debts that arise after he joined, the new partner will be jointly & severally liable
    • and has unlimited personal liablity

EXAMPLE:

A new partner makes a $100,000 capital contribution to join a law firm. The partner could lose that $100,000, but won’t be personally liable for obligations of the firm incurred prior to when he became a partner beyond that $100,000.

25

What is the liability of partners who leave a business?

  • protected from new liabilities incurred by the partnership after the partner leaves
  • Retain liability for obligations they had @ time they left the partnership

26

How does the knowledge or notice to one partner effect the partnership

  • Knowledge or notice toone partner = knowledge or notice to the partnership

27

Is the partnership bound by the wrongful acts of a partner?

  • Yes, b/c the partners are jointly & severally liable for wrongful acts/omission of any partner acting in:
    • the ordinary course of the partnership business
    • withthe authority of his partners

EXAMPLE:

Paul is a partner in a law firm. Paul commits malpractice. As the tortfeasor, Paul is personally liable for that tort. And since he was acting in the scope of the partnership business, the partnership also has liability for his bad act.

28

Is there respondeat superior in partnerships?

  • Generally no, b/c partners are not considered employees but co-owners of the business
    • will pick up liability for the torts done in the ordinary course of the partnership business or with the consent of the partners

Example:

In Guild v. Herrick [51 N.Y.S.2d (1944)], the court held that where some members of a stockbrokerage firm knew or should have known that customers’ securities were being improperly manipulated in the course of the partnership business, the other partners could not escape liability.

29

How are profits and losses treated in a partnership?

  • DEFAULT - all partners split profits equally
    • split losses like profits
  • Can contract around this

Example:

A, B, and C are partners in a general partnership and have no agreement as to profits and losses. Since they have no other agreement in place, A, B, and C will split profits equally and losses like profits, and so each will take 1/3 of the profits and 1/3 of the losses.

Example:

A, B, and C are partners in a general partnership and have no agreement as to profits and but agree to split losses 25% for A, 25% for B and 50% for C. This loss provision is binding, but A, B, and C will each still take 1/3 of the profits.

30

How do you assign partnership interest?

  • MAY transfer economic interest in the partnership
  • MAY NOT transfer status as a partner w/o the unanimous consent of all the partners

EXAMPLE:

In ABC partnership, partner C cannot sell his interest to a total stranger and walk away, and as a result force A and B to work with and have unlimited personal liability for the acts of a total stranger.