Lecture Flashcards
What are the formalities to create a partnership?
NONE
Define: Partnership
An association of two or more persons who are carrying on as co-owners of a business FOR PROFIT
Key: sharing of profits – this creates a presumption that a general partnership exists
Do agency principles apply to partnerships?
YES
- partners are agents of the partnership for carrying on the usual partnership business
- the general partnership is liable for each partner’s torts in the scope of the partnership business AND for each partner’s authorized contracts
T/F: Each general partner is personally liable for all debts of the partnership and for each co-partner’s torts.
True
Incoming partner’s liability for pre-existing debts
Brand new, incoming partners are generally not liable for prior debt; HOWEVER any money paid into the partnership by an incoming partner can be used to satisfy those prior debts.
Dissociating (withdrawing) partner’s liability for subsequent debts
Dissociating partners RETAIN liability on future debts until:
- actual notice of their dissociation is given to creditors OR
- 90 days after filing a notice (statement) of dissociation with the state
general partnership liability by estoppel
one who represents to a third party that a general partnership exists will be liable as if a general partnership exists
T/F: General partners are fiduciaries of each other and the partnership.
True!
Duty of Loyalty
General partners owe to each other and the partnership the duty of loyalty, which means that general partners may never engage in self-dealing; may never usurp partnership opportunities; and may never make a secret profit at the partnership’s expense
Action for Accounting
the partnership may recover losses that were caused by the breach and disgorge profits made by the breaching partner
Hypo: A, B, and C agree to contribute money and share profits 60-30-10. How do they vote?
Without an agreement on control, control is equal, which means one partner, one vote. Moreover, majority vote governs ordinary affairs, but unanimous consent is required for fundamental matters.
Hypo: A and B are partners. A works 96 hours a week. B sleeps all day. Does A get any salary?
No, absent an agreement otherwise, partners do not get a salary.
What is the EXCEPTION to the no salary rule?
For helping to wind up the partnership business.
If an agreement is silent on profits and losses, how are they shared?
Without an agreement on profits, they are shared equally. Secondly, without an agreement on losses, they are shared just like profits. Thus, losses would be shared equally as well.
Hypo: If an agreement states that “profits are shared 60/40” but is silent on losses, how are the losses shared?
Absent an agreement otherwise, losses are shared just like profits. Therefore, losses would be shared 60-40 as well.
Hypo: If agreement states “losses are shared 60-40” but is silent on profits, how are the profits shared?
Without an agreement on profits, profits are shared equally.
Hypo: Partner A puts up all of the money. Partner B does all of the work. Partner C gives the partnership its fine name. Partner D does nothing. How are profits shared.
Absent an agreement otherwise, profits are shared EQUALLY.
What is the “real end” of the partnership called?
Termination
Define: Winding Up
The period between dissolution and termination in which the remaining partners liquidate the partnership assets to satisfy the partnership creditors
T/F: The partnership is liable to its own partners for the full repayment of their capital contributions.
TRUE
Hypo: A + B dissolve the AyeBee Partnership. In winding up, they liquidate the partnership assets and have a total of $1mil to distribute. How should that amount be distributed if (1) the partnership owes $600k to trade creditors; (2) Partner A loaned the p’ship $100k; and (3) Partner B made capital contributions of $200k?
First, p’ship must repay all outside creditors (600k) and partner A (100k) for his loan to the p’ship/
Second, the p’ship is liable to Partner B for its 200k contribution
Third, the remaining 100k profit amount is shared equally among A + B, absent an agreement otherwise. Therefore, each would receive $50k.
Hypo: A + B dissolve the AyeBee Partnership. In winding up, they liquidate the partnership assets and have a total of $700k to distribute. How should that amount be distributed if (1) the partnership owes $600k to trade creditors; (2) Partner A loaned the p’ship $100k; and (3) Partner B made capital contributions of $200k?
First, the p’ship still owes $600k to creditors and $100k to Partner A for his loan.
Second, the p’ship is STILL LIABLE to Partner B for his $200k capital contribution.
Thus, thirdly, partners A + B must pay-in their share of the $200k loss.
Therefore, absent an agreement otherwise, each must pay in equal share of the loss ($100k each)
Do joint or common tenancies of any type establish, by themselves, the existence of a partnership?
No. Under the RUPA, joint or common tenancies of any type do not establish by themselves the existence of a partnership, even if the co-owners share profits from the use of the property.
