Internal Affairs Of A Partnership

Question 1

Who is a fiduciary of the partnership?

Answer 1

Every partner is a fiduciary of the partnership

Question 2

What is the duty of loyalty in a partnership?

Answer 2

Partners must not:

1) Compete with partnership business
2) Advance an interest that is adverse to the partnership
3) Usurp a partnership opportunity

Question 3

What are the limitation on the duty of loyalty?

Answer 3

-A partnership agreement can’t eliminate this duty
-The agreement can specify certain activities that do not violate the duty of loyalty, as long as it is not manifestly unreasonable
-There is a safe-harbor
-If a partner makes full disclosure of all material facts a certain percentage of the other partners
May authorize or ratify the transaction

Question 4

What is the duty of care in a partnership?

Answer 4

Partners must not:

1) Engage in grossly negligent or reckless conduct
2) Engage in intentional misconduct
3) Engage in knowing violations of the law

Question 5

Can the duty of care be reduced?

Answer 5

The partnership agreement may not unreasonably reduce the duty of care

Question 6

What do the duties of loyalty and care apply to?

Answer 6

Duties of loyalty and care apply only to partners, not to prospective or former partners

Question 7

How are profits and losses divided in a partnership?

Answer 7

Division of profits and losses is dictated by the agreement

• Division of profits can be different from division of losses
• Not required to correspond with contributions
• If no agreement or the agreement does not address:
  
  • Default rule: profits are divided equally and losses follow profits

Question 8

How are distributions handled?

Answer 8

A distribution is when money is paid out of the partnership to the constituent partners

• Default rule: Partners do not have the right to demand a distribution
  
  • Can be changed by the partnership agreement