Intro Through General Partnerships Flashcards
Chief Concerns of Entrepreneurs:
- Raising Operating funds
- Limiting personal liability for the business debts
- Minimizing tax burden for earnings generated by business
3 ways to obtain money for business to operate
- Borrow- creating debt liability
- Generating profits
- Equity investors- give cash with the right to future profits. (Incl. sole proprietors). Have rights to “residual” after creditors paid
What is double taxation?
shareholders paying personal taxes on dividends after the business has paid taxes already on earnings.
What business types get “pass through taxation” by default?
Sole proprietors, partnerships, and LLCs are subject to “pass through” taxes and only get taxed once.
What are Agency Costs?
costs lost by actions that do not serve the shareholder’s aims through negligence, incompetence, sloth, etc.
Under UPA 6, what are the elements of a partnership?
- 2 or more “persons”
- to carry on
- as co-owners
- a business for profit
What are the main factors in determining if a person is a Co-Owner under the UPA?
Main factors of ownership are the RIGHT to control the business and whether or not someone shares in profits.
Sharing profit is prima facie evidence of a partner under UPA.
Right to control can be dispositive of being a partner, even if the control is never exercised.
T/F: All partners have equal rights in management and conduct of a general partnership.
False! They can have an agreement otherwise. If the question was “by default under the UPA”, then it would be true.
In order to be true, the exam answer must ALWAYS be true.
UNDER UPA, how is each piece of evidence usually weighed in determining if a partnership or partner exists?
- Statement that partnership is intended
- Proof of shared profits
- The exchange of securities
Martin v. Peyton N.Y. 1927
- Statement that partnership is intended is not conclusive.
- Proof of shared profits is not decisive proof of partnership, must be viewed on the whole.
- The exchange of securities can qualify toward repayment of a loan, which would rebut the evidence of profit sharing.
Martin v. Peyton N.Y. 1927
In Martin v. Peyton N.Y. 1927, Martin wanted Peyton to be liable for the partnership’s losses. Why was Peyton not liable despite the jointly handled securities transaction, profit splitting, the option to join the agreement, splitting interest upon retirement, and ability to control via veto power?
Peyton’s returns/ splitting and veto power were considered a safeguard/ collateral against the loan he provided. It was an ordinary precaution and did not imply an association in the business. He acted as a reasonable creditor, not a partner. He never exercised the partnership option that existed in their contract.
Lupien v. Malsbenden- When $85k was loaned, and even though they said their relationship was as creditor and borrower, why did a partnership exist?
Investor was a partner because he gave the loan with no interest and had right of control over the business. Defendant was involved in the business on a day to day basis. Does not look in any way like a mere creditor relationship.
Who can be partners in a partnership?
Partners need not be individuals, they may be corporations, partnerships, or other associations. UPA SS 2, 6. RUPA 101(6), 102(10-14)
T/F: the UPA/RUPA default statutes govern partnership agreements.
False: The statutes are only the defaults, the partnership agreement may state alternative rules.(with the exception of some unwaivable conditions) RUPA S103
T/F: Under UPA partnership agreement may be in writing, oral, or implied.
False: Under RUPA partnership agreement may be in writing, oral, or implied. UPA has no such provision.
How does the statute of frauds apply to partnership agreements that aren’t in writing?
Statue of frauds may harm partnerships not in writing. SoF requires real estate transaction be in writing so if real estate if offered in a partnership, it must be written down.
Why should a partnership agreement be written down?
Writing down partnership agreement helps client look forward, helps specify whether property is being loaned or contributed to the partnership as a capital contribution, helps map out the “end game” when somebody wants out.
T/F: UPA takes an aggregate view rather than an entity view of partnerships?
True: UPA takes an aggregate view. Ex: UPA S29: if one partner leaves the entire partnership dissolves. If the partnership was an entity, one departure would not dissolve it.
How was dissolution of partnership relevant in Fairway Development co. v. Title Insurance Co. of Minnesota?
Title company guaranteed a policy but then refused to pay on the grounds that the partnership that originally took out the policy had dissolved after the partnership was bought out by one of the partners. Therefore Title Co. was not in privity with the new Fairway development co.
What provisions of the UPA imply a new partnership is made as partners join and leave?
UPA S 29 and S 41(1) imply a new partnership is made when partners come and go.
§ 29. Dissolution Defined-
The dissolution of a partnership is the change in the relation of
the partners caused by any partner ceasing to be associated in the
carrying on as distinguished from the winding up of the business. THIS IS NOT TERMINATION
Can you sue a partnership and get access to all of the partners?
Bet your ass you can
UPA § 15. Nature of Partner’s Liability
All partners are liable
(a) Jointly and severally for everything chargeable to the partnership
under sections 13 and 14.
(b) Jointly for all other debts and obligations of the partnership; but
any partner may enter into a separate obligation to perform a partnership
contract.
Does RUPA use the aggregate or entity view of partnerships?
RUPA explicitly adopts an entity view of partnerships.
(a) A partnership is an entity distinct from its partners.
(b) A limited liability partnership continues to be the same entity that
existed before the filing of a statement of qualification under Section 1001
What was evidence there was no partnerhsip in Smith V. Kelley?
Smith bore no losses from the firm and no partnership was intended by the firm.
why did Smith want the court to find that he was a partner in Smith V. Kelley?
Smith wanted to be considered a partner so he could get a larger and continuing share of the partnership’s profits. He only got 20% and would stand to get 33% as a partner under UPA S18(a)- (a) “Each partner shall be repaid his contributions, whether by way of
capital or advances to the partnership property and SHARE EQUALLY
in the profits and surplus remaining after all liabilities,
including those to partners, are satisfied; and
must contribute towards the losses, whether of capital or otherwise, sustained by the partnership
according to his share in the profits.
Is intent dispositive in determining if a partnership exists?
No. The court looks at all of the fact to determine if there may be an “inadvertent partnership.” absence of intent won’t be dispositive, particularly where there’s a 3rd party plaintiff
Who can enforce a partnership by estoppel?
Only: 3rd parties and
only those 3rd parties in contract with the partnership.
Reliance on a representation to cause estoppel is only statutorily required in a K setting, but Sokolow argues that similar reliance should be extended to tort liability.
What is Estoppel?
It is an equitable doctrine, not available as a way of formation. It is intended to protect 3rd party reliance on the doctrine. In Smith v. Kelley, 3rd parties who thought Smith was a partner could use estoppel to make the partnership liable. Both parties have to consent in some way to representation as partners to a 3rd party.
Estoppel is more of a fallback position.
What has SCOTX ruled on Estoppel?
Freedom of contract makes it so a partnership is not formed by estoppel if parties went to great lengths to set precedent conditions to the partnership forming. Ex: requiring consent of a certain % of the board of directors
How are individual partners taxed and what disclosures must they make?
Partners are generally considered self employed for income tax purposes.
Partners are required in TX to disclose fellow partner’s substance abuse problems affecting their work.
Under the UPA, is the partnership liable for a partner’s wrongful act?
UPA S13- Partnership is vicariously liable for a partner’s wrongful act. Inquiry does not include master/ servant analysis.
Only ask if the tort was committed:
1. By a partner
2. In the ordinary course of business.
Under the UPA, are partners liable for another partner’s tort?
If the partnership is liable in the tort, then the individual partners are liable as well.
Partner commits tort, → partnership is vicariously liable → individual partners are vicariously liable via the partnership.
What are the Facts of Summers v. Dooley?
2 Partners here: By agreement, if either was unable to work then that partner was responsible for paying a third party to work on his behalf. Plaintiff was unable to perform his duties and suggested that the business hire an employee. Defendant objected but plaintiff hired another person anyway, personally costing plaintiff $11,000. Plaintiff wanted to be reimbursed for half of the costs.
Do a majority of partners need to assent to a change within the ordinary course of business?
NO. Changes in the ordinary course of business can be made without requiring all partners to assent, but not when one 50% votes no explicitly.
Exclusive control by one partner of business activities may exist implicitly, giving that partner actual authority to perform.
In Smith v. Kelley, Was Smith liable as a partner despite not having an interest in the partnership?
UNDER UPA S16, Smith is potentially liable as a partner if sued by a 3rd party because the firm represented him to the public as a partner. Probably not liable under RUPA S308(e)
Why did the “no” vote win in Summers v. Dooley despite them having 50/50 voting power in the partnership?
Under UPA S18(h) A decision to change the status quo would also require a majority approval, and THE 1920s TREATISE SAYS THAT IF A PARTNERSHIP IS SPLIT 50/50, THOSE WHO VOTE TO FORBID A CHANGE SHALL HAVE THEIR WAY.
RUPA 401j requires a majority vote to settle differences ARISING OUTSIDE THE COURSE OF ORDINARY BUSINESS.
One of the 2 partners voted no to the hiring so the status quo prevailed.
Why did the 50% “no” voting partner lose in National Biscuit Co. (Nabisco) v. Stroud?
- State used RUPA. so “activities within the scope of ordinary business of the partnership could not be LIMITED except by majority vote, and that half of the members were not a majority.
- the conflict involved an innocent 3rd party rather than just partners.
What is a statement of partnership authority?
under RUPA 303, something you may file with the secreatary of state. Filing gives the partnership some deniability of each partner’s authority. If the SPA is recorded with the county, you have constructive notice about who has partnership authority. works similar to property recording.
In a 50/50 voting split in a partneship, who wins the dispute?
Under the UPA, Likely he who is preserving the status quo of the business.
if A contributes 60%, B contributes 20%, and C contributes 20% of capital, does A have managing power over B and C unde the default rule?
Not under the default rule. Each has 33.3%. They should agree to alter managing power if desired.
if A contributes 60%, B contributes 20%, and C contributes 20% of capital, what will each get back upon dissolution of the partnership?
Each will get 33% profit under the default rule, and also each will get their capital contributions back upon dissolution.
What are common examples of Agents in BA?
employees are agents of their employers and officers are agents of corporations
Artificial persons like companies or trusts can be agents or principals
3 general elements of agency:
- Consent by the principal and the agent- consent by both to act on behalf of the principal… can be written, oral, or implied by conduct
- Action by the agent on behalf of the principal- must have been acting PRIMARILY for the benefit of the principal e.g. not for personal pay.
- Control by the principal of the details of performance - the principal need not control minutia or physically control, but must have control over the result or ultimate objectives of the agency relationship, even including prescribing duty/s obligations after the agent has acted.
Is intent to form required to form an agency relationship?
Creating an agency relationship does not require intent.
In a tort setting:
For vicarious liability of employer to a 3rd party
Employee must be:
- A servant
2. Acting within the scope of employment
How do you determine if an employee was a servant (implicating respondeat superior)?
Servant- Main Factor: If an employer controls the means of a result, WHETHER THE EMPLOYER EXERCISED THE CONTROL OR NOT, they are a master to a servant agent
Secondary Factors: was the action part of the employers regular business
Were the tools or or location provided by the employer
Was the worker paid in intervals or a lump sum?
Was the employment long term?
How do you determine if the employee was acting within the scope of employment?
Was it part of the employees regular tasks?
Was it part of the employment action?
If outside, employee may have been on a detour or frolic
Detour- minor deviation from employee’s expected task. Ex: smoke break. Employer still liable because only minor detour from usual tasks.
Frolic- Major deviation from employee’s regular task. Ex: amazon driver on his lunch hour going across town off their route
When is an agent an independent contractor?
if a principal has control over a result only, the agent is an independent contractor.
Why are masters liable for torts committed by his servant within the scope of his employment through respondeat superior? (policy reason)
employer is in best position to bear the cost of harm and benefits most from doing the business
Why is a principal generally not liable for the torts of an independent contractor?
employer does not have the know-how to best perform or keep safe the actions of independent contractors. (does not control their methods)
Are employers liable for an employee attacking someone while working?
No.
Respondeat superior applies to Negligence; Employers generally not liable for employee’s intentional torts
Can employer protect themself from paying for employee’s negligent torts?
Employer can indemnify themselves (get paid back) by the employee/ agent., but if they have no assets, the employer is left holding the bag.
Can Agents hire a sub-agent with the principal’s explicit or implicit consent?
Yes.
What are the 3 types of agency authority in Contracts?
A principal will be liable on a contract b/w an agent and a third party when the agent acts with
1. actual authority,
2. apparent authority, or
3. inherent authority of the principal.
Even if the agent lacks this authority, the principal may be liable through estoppel.
What is actual authority?
Express authority from P so that Agent would reasonably believe they have the power to deal with others as a representative of the Principal.
Can actual authority be implied?
Yes!
Can be express or implied from reasonable inference based on the CONDUCT of the principal.
Implied actual authority is common with Incidental authority, where actual authority exists to do things necessary that are incidental to the principal’s goal. Ex: hiring someone if it is required by statute to accomplish the principal’s goal/ An RA buys books and charges them to a professor twice, and the professor pays without saying anything.
What is apparent authority?
When the Principal tells a 3RD PARTY explicity or implicity that the agent has authority.
P is selling his car for $100 through his agent A to buyer Z. P tells Z that A is his agent. A has actual authority to sell at the $100 price P requested. A has apparent authority to sell at whatever price P has represented to Z who is informed that A is his agent. IF P represents the same price to A and Z then the actual and apparent authority of A are equivalent. This is based on what the PRINCIPAL did to create the appearance of authority to the reasonable impression of a 3rd party. This is an equitable doctrine based around fairness for the 3rd parties.
If the agent sells for less that $100, the agent is liable to the Principal for the remainder.
What can create apparent authority?
Apparent authority can be created by a principal’s
- Words to a 3rd party
- Actions toward a 3rd party
- a title given to an agent by the principal
- Prior action involving the 3rd party
How do partnerships limit the powers of actual authority?
Statutory actual authority can be limited by the partnership agreement.
Partners usually appoint a “managing partner” to limit their own authority
How does estoppel apply in the context of actual/ apparent authority?
Even when the principal has not made any manifestations of authority to the third person at all, the principal is held responsible
1. If it contributed to the third party’s belief or failed to dispel it. Usually a failure to correct the 3rd party’s misunderstanding or failure to use reasonable care.
2. If the 3rd party acts to its own detriment as a result,
then the principal is liable through estoppel.
Is ratification of an agent’s actions retroactive?
Yes. Principal can expressly ratify the agent’s actions even if the agent originally had no authority when taking the action.
Can ratification occur if P is not aware of the material facts of the original transaction?
No. ratification only occurs if the principal is aware of the material facts in the original transaction.
Can a Principal ratify an agent’s act through implication?
Yes!
Implied ratification- if the principal treats the agent’s act as authorized- usually by accepting benefit of the transaction.
