Partnership

Question 1

What is a partnership and how do you prove one exists?

Answer 1

A partnership is the association of two or more persons to operate as co-owners a business for profit. No express agreement is required to create a partnership. Sharing profits triggers a presumption of partnership, and other indicia of partnership include sharing control and sharing losses.

Question 2

What are the requirements for creating a general partnership?

Answer 2

1. Two or more persons—defined as a natural person or any legal entity
2. Intent to carry on business for profit as co-owners. No need to intend to form a partnership specifically. Subjective intent does not matter
3. No written agreement is necessary; it can be oral or implied.
4. No need to actually be profitable

Question 3

Does there need to be an agreement to share loses?

Answer 3

No, if you share profits, you share loses

Question 4

When will profit sharing not create a presumption? 6 statutory circumstances where profit is used to:

Answer 4

1. Pay debt
2. Pay interest
3. Pay rent
4. Pay wages or compensation to an employee or independent contractor
5. Make goodwill payments stemming form the sale of a business; or
6. Pay a retirement or healthcare benefit to the beneficiary or designee of a deceased or retired partner

Question 5

Are revenues profits?

Answer 5

No, it is all the money the business takes in. Profits are residual amount after subtracting expenses

Question 6

What type of liability do partners in a partnership have to creditors for partnership debt?

Answer 6

Jointly and severally liable

Question 7

What is a purported partnership theory?

Answer 7

Under purported partnership, or partnership by estoppel, a person who represents herself as a partner, or consents to being represented by another as a partner, is liable to third parties who extend credit to the apparent partnership in reliance on the representation

Then the other partner may also be liable if they hold themselves out as being in a partnership (like sharing a storefront with a single business name)

Question 8

The duty of loyalty requires that general partners serve the best interests of the partnership, what can partner not do (4):

Answer 8

1. Compete with the partnership business;
2. Pursue an interest adverse to the partnership;
3. Take an opportunity that belongs to the partnership without notifying the partnership;
4. Use the assets of the partnership for personal benefit without notifying the partnership.

Basically, no usurping partnership business and no self-dealing at the expense of the partnership.

Question 9

May partners eliminate the duty of loyalty by agreement?

Answer 9

No, not even by unanimous agreement. But, you can carve out activities and make them non-violative of the duty of loyalty

Question 10

What is the safe harbor for CoI transactions between partnership and partner?

Answer 10

A certain number of partners can authorize or ratify a transaction between the partnership and a partner

Question 11

What does the duty of care require?

Answer 11

A partner cannot engage in grossly negligent, reckless, or intentional misconduct.

Question 12

Can Partners reduce the duty of care?

Answer 12

Yes by agreement, but not to an unreasonable extent

Question 13

Regarding the obligation of good faith and fair dealing, can the partners eliminate this duty by agreement?

Answer 13

No, but you can define “good faith” so long as reasonable. It would be unreasonable to define good faith such that it permits the violation of the duty of loyalty.

Question 14

In the absence of an agreement to the contrary, what is the presumption regarding proportion of profit/losses per partner?

Answer 14

The presumption is that they will share equally.

Question 15

How can a new partner be admitted?

Answer 15

All existing partner must approve

Question 16

How are management rights distributed?

Answer 16

By default, each partner has equal rights in management.

Question 17

Proportion of votes required for the ordinary course of business versus special or extraordinary partnership business?

Answer 17

Ordinary business can be done by a majority vote but special or extraordinary requires unanimous support.

Question 18

May a general partner guarantee payment of a loan made to the Partnership?

Answer 18

Yes, as a general matter. Maybe that changes if like the partnership agreement bars it.

Question 19

Is a guarantor primarily liable on the loan?

Answer 19

No they are secondarily liable.

Question 20

Explain general partner liability for the partnership’s obligations

Answer 20

General partners are personally liable for legal claim against the partnership

Question 21

Timing of liability on obligations for prospective, new, and dissociated partners?

Answer 21

No liability as a prospective partner. Newly admitted partners are not liable for prior partnership obligations (but any capital contributions remain at risk). Dissociated partners are generally liable for partnership obligations incurred before the dissociation. In some cases he will be liable for obligations incurred within one year of dissociation.

Question 22

Can a plaintiff just sue the partners?

Answer 22

They need to be named in the judgment for their personal assets to be reached but generally plaintiffs must exhaust the partnership assets first.

Question 23

Must a partnership indemnify partners for legal obligations?

Answer 23

Yes if incurred in the ordinary course of conducting partnership business.

Question 24

Who is liable for the torts committed by a partner in a general partnership?

Answer 24

If committed in the ordinary course of business, then the tortfeasor, the partnership, and the other partners.

A tortfeasor is always personally liable for his own negligence.

Partners are jointly and severally liable for the debts of the partnership, although creditors must recover from the partnership first before going after the partners individually.

this includes intentional torts committed in the ordinary scope of business (e.g., fraud but prob. not battery)

Question 25

When will a limited partner lose their limited liability for the obligations of the partnership?

Answer 25

When they participate in the control of the business but only to third parties that transact with the LP reasonably believing the that limited partner is a general partner

Question 26

A limited partner who lets the LP use her name is liable to a creditor who extends credit to the LP, unless:

Answer 26

The creditor has actual knowledge that the limited partner is not a GP.

Question 27

Can limited partners pursue derivative actions?

Answer 27

Yes, think of the proceeding as compelling the LP to pursue legal claim

Question 28

Requirements for a limited partner derivative action?

Answer 28

1. Demand: LP must show the that GPs have refused to bring the claim or argue (in detail in the complaint) that any attempt to cause the GP to bring the claim is likely to fail
2. Continuing status: the LP must generally be a partner at the time the action is filed and at the time of the wrongful transaction.
3. Recovery: if the action is successful, recovery of the judgment will go to the limited partnership. The limited partner may recover reasonable expenses, including attorney fees.

Question 29

Compare dissociation and dissolution:

Answer 29

Dissociation is where an individual partner voluntarily or involuntarily has their relationship with the partnership terminated. Dissolution is the termination of the partnership entity

Question 30

Does a partner always have the power to dissociate from a partnership?

Answer 30

Yes, but the dissociation may be rightful or wrongful depending on the circumstances.

Question 31

What does the rightfulness or wrongfulness of a dissociation depend on?

Answer 31

Whether the partnership is at-will or for a term

Question 32

When is dissociation wrongful in an at-will partnership?

Answer 32

Only where the dissociation breaches a provision in the partnership agreement

Question 33

When is dissociation wrongful in a partnership for a term?

Answer 33

It is wrongful if:
1. The partner withdraws, unless it follows within 90 days of a wrongful dissociation by another partner or dissociation by another partner for bankruptcy, death, or guardianship)
2. The partner is expelled by court order; or
3. The partner is debtor in bankruptcy

Question 34

What is the liability effect upon a partner that wrongfully dissociates?

Answer 34

The dissociation is effective but the partner is liable to the partnership and other partners for damages cause by the dissociation.

Question 35

What is the legal effect on the partnership upon the death of a partner?

Answer 35

Dissociation, it does not lead to dissolution and winding up. Why? Because rightful

Question 36

What are the consequences of dissociation?

Answer 36

1. Loss of management rights
2. Elimination of fiduciary duties of that partner to the partnership (especially the duty not to compete);
3. The partnership must buy out the dissociated partner’s interest

Question 37

How is the dissociated partner’s interest valued?

Answer 37

The interest is valued as if the partnership was wound up on the day of dissociation and it is the greater of either (1) the liquidation value or (2) the going concern value of the partnership. This will be a cash payment based on the proportion of assets the partner would be entitled do if liquidated (or going concern value)

Question 38

Does a dissociated partner (even if dead) have any entitlement to income of the partnership after dissociation?

Answer 38

No, unless perhaps business was generated before the dissociation and the partner did like a portion of the work but in this specific question the right answer was, “Presumably the value of the partnership would not be affected by fees collected after Burton’s death if those fees were based on cases initiated after his death.”

Question 39

When must payment be made to the dissociated partner?

Answer 39

Within 120 days of the dissociated partner’s written demand.

Question 40

What else must the partnership provide the dissociated partner with payment?

Answer 40

Financial information and an explanation of how payment was calculated. If the DP disagrees, they can bring a judicial action

Question 41

Is a dissociated partner liable for partnership obligation incurred before dissociation? Exceptions?

Answer 41

Yes, But two exceptions:
1. A partnership creditor, without notice of the dissociation and without the dissociated partner’s consent, agrees to a material change in terms; or
2. A partnership creditor, and the remaining partners grant the dissociated partner a release

Question 42

When is a dissociated partner liable for partnership obligations incurred after dissociation?

Answer 42

1. The partnership does not dissolve and finish winding up;
2. The obligation take place within one year of the dissociation;
3. the obligation is one for which she would have been liable if she were a partner; AND
4. the other party reasonably believed the dissociated partner was a partner at the time of the transaction (and no notice of the dissociation).

Question 43

Rule regarding indemnifying dissociated partners?

Answer 43

When purchasing the partner’s interest, a partnership must generally indemnify the dissociated partner against all partnership liabilities that were incurred before dissociation.

Question 44

May a dissociated partner ever bind the partnership after dissociation?

Answer 44

Yes, when:
1. the third party does not have knowledge of the dissociation
2. the third party reasonably believes that the dissociated partner is still a partner
3. the third party is not deemed to have knowledge of the dissociated partner’s lack of authority to bind the partnership; AND
4. the transaction is conducted within a year of the dissociation.

Question 45

Does a dissociated partner’s name on the partnership keep them liable for the debts of the continuing business?

Answer 45

No

Question 46

Is implied authority a thing in VA?

Answer 46

Make the argument for it if relevant, specifically that the agent was given actual authority and reasonably believed that the action was authorized. E.g., sales manager given operations authority for a short time and a loan is required to keep the business afloat

Question 47

Ratification explain

Answer 47

An unauthorized action can be ratified after the fact if the principal knows the material terms of the contract or is aware of their lack of knowledge of the specific terms, AND fails to object.

Question 48

How is a LLP different from a general partnership?

Answer 48

The only different is that the partner’s liability for obligations of the LLP as a partner is eliminated.

Question 49

What is the two-step process for terminating a partnership?

Answer 49

1. Dissolution
2. Winding up (the process of liquidating the assets to creditors and the individual partners)

Question 50

What does the triggering of dissolution depend on?

Answer 50

Where the partnership is an at-will or term partnership?

Question 51

Triggering dissolution of an at-will partnership:

Answer 51

Dissolved when a partner chooses to dissociate by giving notice of withdrawal. Other methods of dissociation will not automatically cause dissolution.

Question 52

Triggering dissolution of a term partnership:

Answer 52

1. The term expires or the undertaking is completed;
2. All partners agree to dissolve; OR
3. A partner is dissociated by death, bankruptcy, or other circumstances and at least ½ of the remaining partners agree to dissolve within 90 days

Question 53

What happens when a partnership for a defined term continues conducting business after the expiration of the term?

Answer 53

The partnership survives as an at-will partnership

Question 54

Universal triggering events for dissolution (doesn’t matter if term or at-will):

Answer 54

1. A dissolving event described in the partnership agreement
2. An event occurs making it unlawful for all or substantially all of the partnership business to continue (if not cured within 90 days of notice)
3. Judicial determination is made that the purpose of the partnership is frustrated or that a partner has engaged in conduct that makes it not reasonably practicable to carry on the business with that partner; or
4. The transferee of a partnership interest obtains judicial determination that it is equitable to wind up

Question 55

Is the partnership bound by a partner’s act that is appropriate for dissolution?

Answer 55

Yes

Question 56

During winding up, is the partnership bound by a partner’s act that relates the partnership business but not dissolution?

Answer 56

Yes, if the act would have bound the partnership before the dissolution and the third party does not have notice of the dissolution. BUT…

The acting partner will be liable to the other partner for the post-dissolution acts; and

If the partner undertakes an inappropriate act for the winding up, that partner is liable for any damages.

Question 57

Rules for winding up partnership assets (priority)?

Answer 57

1. Assets are first applied to pay off creditors; includes partners that make loan to the partnership
2. Next, each partner’s account will be settled. Accounts are adjusted to reflect any gains or losses from the liquidation. If account is negative, partner must make a contribution to make the account balance zero. Partner receives positive balance.

Question 58

How do you form a limited partnership

Answer 58

The partners must file a certificate of limited partnership with Virginia.

Question 59

Does a limited partner have the authority to bind a partnership?

Answer 59

generally no

Question 60

what issues should you address when faced with a limited partner in a partnership ordering essential supplies for a business with no express authority over the course of many months?

Answer 60

Is the partnership liable:
1. actual authority
2. apparent authority
3. ratification

Who is personally liable?

Question 61

How does a general partner in a limited partnership withdraw as general partner and become a limited partner?

Answer 61

The Virginia Code requires that a limited partnership amend its certificate of limited partnership within 30 days of a general partner withdrawing.

Question 62

Are limited partners liable to the partnership for unpaid capital contributions? Even if they withdraw and are replaced? Can a creditor reach that unpaid amount?

Answer 62

Yes, even if they withdraw and are replaced. Additionally, a creditor of the limited partnership may enforce a limited partner’s obligation to make a contribution to the partnership.

an assignee limited partner is not liable for the assignor’s unpaid contribution to the partnership if such unpaid contributions were unknown to the assignee at the time he became a limited partner.