Partnership Flashcards
(35 cards)
Partnership
A partnership is an association of two or more persons to carry on as co-owners of a business for profit.
ExamTip: Parties’ subjective intent is NOT relevant with regard to “intent to form a partnership”. Parties MUST intend to be co-owners of a business for profit.
Factors for Finding a Partnership
- Most importantly, sharing of PROFITS raises a presumption of partnership.
- Sharing of losses
- Right to participate in control of the business. (Even if no control is ever exercised)
ExamTip: Presumption of a partnership is rebuttable with proper evidence that there is no sharing of losses, or control over the business.
Partnership by Estoppel
When a person by words or conduct represents himself as a partner or consents to being represented by another as a partner, he will be liable to third parties who extend credit to the actual or apparent partnership in reliance on the representation.
Law Governing Partnerships
Generally, partnerships are permitted to contract around default rules. However, if a partnership agreement fails to address an issue, the Revised Uniform Partnership Act (“RUPA”) default rules will apply.
Voting by Partners
“One partner, one vote” unless otherwise is agreed upon. All partners have EQUAL RIGHTS in the management of the business.
Majority vote is required for matters within the ordinary course of the partnership business.
Unanimous vote is required for matters outside of the ordinary course of business.
Partners’ Right to Compensation
Partners have no right to a salary or other compensation based on the understanding that they will receive a share of the profits.
However, partners must be indemnified with regard to payments made and obligations reasonably incurred in carrying on the partnership business.
Sharing Profits and Losses
Unless otherwise agreed, profits are shared EQUALLY among all partners. Losses are shared in the same manner as profits unless specified otherwise.
ExamTip: Losses follow profits. Profits do NOT follow losses.
Tort Liability of the Partnership
A partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner acting in the ordinary course of the partnership’s business or with authority of the partnership.
Contracts Liability of the Partnership
A partnership is liable for all contracts entered into by a partner in the scope of partnership business or with actual or apparent authority of the partnership.
Actual & Apparent Authority of Partners
Actual Authority is the authority a partner reasonably believes they have based on the communications between the partnership and the partner.
A partner is an agent of the partnership and has apparent authority to bind the partnership to transactions within the ordinary course of the partnership’s business or business of the kind carried out by the partnership.
ExamTip: If the third-party knows the partner lacks actual authority, there is no apparent authority either.
Statement of Partnership Authority
Partnerships can create actual authority by filing a statement of partnership authority with the secretary of state. A statement of this kind grants or limits a partner’s authority to enter into transactions on the Partnership’s behalf.
ExamTip: If a statement is filed with SoS and County Recorder, third-parties are deemed to have notice w/r/t transactions involving partnership’s real property.
Liability of the Partners
Each partner is jointly and severally liable for ALL obligations of the partnership.
Plaintiffs MUST first exhaust partnership resources, then seek to collect from individual partners’ assets.
ExamTip: An individual partner may require that the partnership indemnify his payments to Plaintiff or ask for a pro rata contribution from other partners.
Liability of Newly Admitted Partners
A newly admitted partner is NOT personally liable for partnership obligations that arose before their admission.
Liability of Dissociating Partners
An outgoing or dissociated partner REMAINS liable for obligations arising while they were a partner unless there has been payment, release, or novation.
Post-dissociation, a partner can be liable for liabilities incurred within two-years IF (1) the other party reasonably believed the dissociated partner was still a partner; and (2) did not have notice of dissociation.
ExamTip: Partner must either give one-by-one notice or file as notice of dissociation, which becomes effective in 90-days.
Four Fiduciary Duties of Partners
Partners owe the following 4 duties to each other and the partnership:
- Duty of Loyalty
- Duty of Care
- Duty of Disclosure
- Duty of Obedience
Duty of Loyalty
Duty of loyalty requires that each partner
(1) account to the P for any benefit derived by the partner in conducting the partnership business, using the partnership’s property, or appropriating a partnership opportunity;
(2) to refrain from dealing with the partnership as an adversary.
(3) to refrain from competing with the partnership in the conduct of its business.
Duty of Care
Under the RUPA, a partner is only in breach of the duty of care when he engages in: (a) grossly negligent or reckless conduct; (b) intentional misconduct; OR (c) a knowing violation
ExamTip: Ordinary Negligence is excused
Duty of Disclosure
NOT a fiduciary duty.
A partner has a duty to provide complete and accurate information concerning the partnership. Each partner must furnish (1) without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties; AND (2) on demand, any other information concerning the partnership’s business and affairs.
ExamTip: The duty of disclosure MAY be eliminated. Only duty that can be K’ed away.
Duty of Obedience
The duty of obedience requires the partner to obey all reasonable directions by the partnership and not act outside of the scope of his authority.
Partnership Property
- Titled property is partnership property if acquired in the partnership’s name or in a partner’s name but there are indications that the partner is acting for a partnership.
- Property purchased with partnership funds is rebuttably presumed to be partnership property.
ExamTip: A partner is NOT a co-owner of partnership property and has no interest in partnership property that can be transferred.
ExamTip 2: A partner may only use partnership property for benefit of partnership.
Partners’ Separate Property
Property
(1) held in the name of one or more partners;
(2) the instrument transferring title gives no sign that they are acting for a partnership; AND
(3) partnership funds were not used to acquire the property.
Partnership Interest
A partner’s ownership interest in a partnership is called the “partnership interest”. This interest consists of (1) management rights and (2) financial rights.
- Management rights can NOT be transferred unilaterally. Only an admitted partner (approved by unanimous vote) will become “partner” with managerial rights.
- Financial rights are personal property and CAN be transferred unilaterally. Upon transfer, the transferee’s only right is to receive profit distributions.
Dissociation
Dissociation occurs when any partner ceases to be associated with the partnership in carrying on its business.
A partner becomes dissociated from the partnership by
(1) Oral or written notice of partner’s EXPRESS WILL to withdraw
(2) Happening of an agreed event
(3) Valid expulsion of the partner
(4) Partner’s bankruptcy or the appointment of a receiver for a partner
(5) Partner’s death or incapacity to perform partnership duties
(6) Decision by a court that the partner is incapable
(7) Termination of a business entity that is a partner
Wrongful Dissociation
A partner will be deemed to have wrongfully dissociated if the dissociation is in breach of an express term in the partnership agreement.
Withdrawal from a term partnership; Expulsion; or Bankruptcy are also wrongful dissociations.
Wrongfuly dissociated partner is liable for any damages to the partnership.
