Partnerships

Question 1

General Partnership Formation

Answer 1

No filing requirements.

Each partner has managerial control, and is subject to unlimited personal liability.

It is a factual inquiry.

Elements of partnership:

J.C.

1. Joint Intent

Intent of each person to form a partnership, needs to be verbalized OR reduced to writing.
intend to carry on as co-owners of a business for-profit.

2. Co-ownership

Sharing of profits and losses as well as power of control in management of the business.

(note if the profit was just payment for debt or like service, it doesn’t count.)

Question 2

General Partnership Profit and Losses

Answer 2

Profits and losses are shared equally among partners, regardless of capital contribution.

However, dissolution is when things are not necessarily equal.

A person who receives a share of the profits, is presumed to be a partner.

Question 3

Partnership Assets

Answer 3

Property acquired by the partnership is property of the partnership.

Question 4

Power of Partners in Partnerships

Answer 4

Each partner is an agent of the partnership. In terms of binding power, need to apply agency law principles. Each partner has apparent authority.

Question 5

Within the scope of partnership business meaning

Answer 5

G.A.S.

Elements:

1. Conduct is of General nature he is employed to perform;
2. At least in part, by a purpose to serve the employer.
3. within Spacial and temporal limits of employment (frolic and detour)

Question 6

Disagreement between partners

Answer 6

When a disagreement arises between partners as to a matter within the ordinary course of business, the issue may be decided by a majority of the partners.

Note: when deciding fundamental matters such as amending the partnership agreement, need unanimous consent from the partners. (this unanimity requirement may changed, however).

(Also need unanimity for taking on new partners.)

Question 7

Partnership agreements.

Answer 7

Partnerships are governed by a set of default rules. When a partnership agreement exists, the agreement supersedes the default rules, except those that are immutable.

CANNOT modify the duty of good faith and fair dealing, if modification is manifestly unreasonable. See RUPA 105(c) 17/6/5 for the rest.

Question 8

Partner’s Duty of Loyalty

Answer 8

A partner may not compete with the partnership and/or adversely deal with the partnership.

Also should inform fellow partners of material facts.

can’t take away opportunities from other partners or the partnership.

Question 9

Partner’s Duty of Care

Answer 9

Partner should not engage in grossly negligent or reckless conduct.

Question 10

Partnership Dissolution

Answer 10

Occurs when the partnership is dissolved and business is terminated.

Dissolution can occur when:

1. a partner informs the other partner(s) that the partnership is over;
2. upon the happening of an agreed upon event; OR
3. by judicial decree (RUPA 801)

See RUPA 801.

Question 11

Partnership dissociation

Answer 11

Occurs when a partner ceases to be a co-owner.

May result in either:

1. mandatory buy-out; or
2. mandatory dissolution

Note: it is smarter for the partnership to get a life-insurance policy on a partner incase of death.

Question 12

Dissociation Causes

Answer 12

1. Partner can dissociate rightfully or wrongfully at ANY TIME.
2. Upon happening of event stated in agreement.
3. Partner expelled.
4. Partner bankrupt.
5. Partner Dead.

See (601.)

Question 13

Wrongful Dissociation

Answer 13

Occurs when:

RUPA 602

dissociation is:

• in breach of provision of partnership;
• before end/completion of a term partnership.

Question 14

Partnership dissolution vs. dissociation

Answer 14

Dissociation occurs when a partner withdraws, but the partnership continues.

Wrongful dissociation: When this happens the dissociated partner is liable for damages and may not participate in the winding up of the partnership.

Dissociation may result in:

mandatory buy-out OR mandatory dissolution.

Note: you cannot modify someone’s right to withdraw

Note: the partner may be liable for costs the partnership incurs after disassociation if the third party reasonable believes they are a partner. RUPA 703(b)(2)(b)

Dissolution is when the partnership end. See RUPA 801.

Question 15

What happens when a partnership dissolution occurs. I.e., what is the order of debt payment?

Answer 15

Upon dissolution, partnership debts will be paid in the following order:

1. Creditors are paid first;
2. Surplus will than go to reimburse partners for any capital contributions;
3. Remainder, which indicates the partnership was profitable, will then be split amongst partners equally.

Note: new partners are not personally liable for any preexisting debts, unless partnership agreements requires this of the partner.

Note: Services are not considered capital contributions, upon dissolution.

Question 16

Partner Buyouts?

Answer 16

Occurs when a partner (disassociates) from a law firm in a way that that does not cause dissolution.

According to default rule, the partnership must make a buyout price according to disassociating price.

Question 17

Personal Liability of a Partner

Answer 17

In a general partnership, each partner is subject to “unlimited” joint and several personal liability for all debts and obligations incurred by the partnership.

Additionally, the partnership is personally liable.

RUPA 306

Question 18

Partner vicarious liability

Answer 18

Partnership is liable for torts committed by partner or employee acting in “ordinary course” of partnership business. in General partnership.

Note: In a LLP, a partner cannot be personally liable for acts of other partners even if they were in the course of ordinary business.

Question 19

Order of judgment preference in partnerships.

Answer 19

The partnership is first primarily liable.

If partnership ran out of assets, then judgement may be enforced against a partner personally. In other words, a creditor must exhaust the assets of the partnership before going after the partners personally.

RUPA 307

Note: If an “innocent” partner ends up paying for the wrongdoing of another partner, that partner may seek indemnification from either the partnership or the partner who is primarily responsible for the harm.

Question 20

Limited Liability Partnerships (LLPs)

Answer 20

Consists of:

a General Partner – has complete control over the business, manages the enterprise, and is subject to full liability. GPs owe partnership fiduciary duties.

a Limited Partner – has limited liability and usually very little managerial control.

Question 21

Limited Liability Partnerships (LLPs) filing Requirements?

Answer 21

Need a statement of qualification with the secretary of state.

Question 22

Qualities of Limited Liability Partnerships (LLPs)?

Answer 22

LLPs enable LPs to invest and share in the profits, without taking on personal liability for the partnership debts.

The partnership is still liable.

Question 23

Limited Partner Qualities

Answer 23

1. Interests are freely transferrable.
2. Limited partners have no management rights.
3. Limited partners’ liability is limited to the amount of their investment.
4. No agent partnerships

No personal liability.

However, the personal liability shield may be pierced if there are facts to show that the LP started controlling the business like a GP.

Question 24

Main differences between GPs and LLPs

Answer 24

LLPs must be filed with the secretary of state.

and there is a shield of limited liability in LLPs

Question 25

Joint Venture?

Answer 25

A joint venture is formed to carry out a particular venture, which dissolves upon completion. No formal requirements for formation.

Question 26

Limited Liability Companies? (LLCs)

Answer 26

All members in LLCs have a shield limited liability. Benefits: Has protection of corporation and the tax advantage of a partnership. Requires formal filing with the secretary of state.

Question 27

Partnership taxes rule

Answer 27

The partnership doesn't pay taxes, only the partners.

Question 28

Sole Proprietorship?

Answer 28

Business that has 1 owner. Owner gets all the profit and is liable for all debts of business.

Question 29

Partner allocation v. distribution

Answer 29

Allocation: profits are allocated to each partner equally, unless agreement says otherwise. allocations must be reported as income, therefore, parters pay taxes for allocations even if they don't receive it as a distribution. Distribution: each partner is entitled to equal share of partnership. This is the portion that a partner actually receives in cash.

Question 30

Transferring / Selling your partnership interest?

Answer 30

You can transfer your financial interest (share of profits/losses AND right to receive dist.), but not your managerial interest. I.e., the transferee (the new partner) will get a right to the profit/loss but cant make business decisions. Note: By default, adding a new partner requires unanimity.

Question 31

Partnership Agreements -- Duty of Good Faith and Fair Dealing?

Answer 31

You may not modify the duty of good faith and fair dealing if the modification is manifestly unreasonable. RUPA 105(c)

Question 32

Types of Partnerships

Answer 32

At will Partnership -- Partnership term is indefinite. Term Partnership -- Partnership limited to certain amount of time.

Question 33

Exhaustion Rule

Answer 33

Partnership creditor may not levy on assets of partners until: 1. assets of Partnership are exhausted; AND 2. creditor obtains a judgment against the PARTNER.