Partnerships

Question 1

What is a partnership?

Answer 1

An association of 2 or more persons to carry on as
co-owners a business for profit.

Question 2

Do you need a formal agreement to form a partnership?

Answer 2

No formalities or formal agreement are required to form a partnership; the parties’ intent may be implied from their conduct.

Question 3

Is a writing required to form a partnership?

Answer 3

No writing is required to form a partnership. However, because of the Statute of Frauds, if partners wish to have an enforceable agreement to remain partners for more than 1 year, they generally must execute a writing reflecting their agreement.

Question 4

What is the profit sharing test?

Answer 4

Profit sharing = presumed to be a partnership. Sharing profits does not create a rebuttable presumption of a P in six statutorily enumerated circumstances: debt payments; interest or loan charges; rent; wages; goodwill payments from the sale of a business; and annuities or other retirement or health benefits

Question 5

Partner by estoppel

Answer 5

Rule—when no P exists, a person may be treated as a purported partner if there is an oral, written, or implied by conduct representation that a person is a partner in a P, the person makes or consents to the representation, a third party reasonably relied on the representation, and the third party suffered damages as a result of that
reliance
* No duty to deny the representation; merely being named as a partner by another is not enough to create liability as a partner
* It is not a defense that the purported partner was unaware that he had been held out as a partner to the specific third party when he has been held out as a purported partner in a public manner
* Purported partners are agents of the person making the representation

Question 6

Is the partnership a separate legal entity?

Answer 6

Yes. a P may hold property and can sue and be sued
* Partners are not protected from personal liability for P’s obligations
* If there is a formal agreement, it governs when there is a conflict between the agreement and a VA statute

Question 7

Partner as agent to Partnership

Answer 7

a partner can commit P to contracts with third parties

Question 8

Duty of loyalty

Answer 8

Rule—no competing with P business, advancing an interest adverse to the P, or usurping a P opportunity
o Exception—a PA can designate certain activities as not violating the duty (but cannot eliminate the duty altogether) and may provide a safe harbor allowing the
other partners to authorize or ratify a transaction between a partner and the P after full disclosure of the material facts

Question 9

Duty of care

Answer 9

Duty to refrain from engaging in grossly negligent or reckless conduct, intentional conduct, or a knowing violation of the law
o PA may not unreasonably reduce this duty

Question 10

Duties during Dissociation/dissolution

Answer 10

duties do not apply unless the partner is engaged in
winding up P business

Question 11

Good faith and fair dealing

Answer 11

the PA cannot eliminate this obligation but can
prescribe reasonable standards

Question 12

How are profits and losses shared?

Answer 12

if there is no PA or the PA is silent, each partner gets an equal share of profits and losses; if the PA only specifies a division of profits, losses are shared in same percentage as profits are shared

Question 13

Partner’s account

Answer 13

contains a partner’s contributions to P and share of the profits (less distributions, losses, and liabilities)

Question 14

Distributions

Answer 14

a partner cannot demand a profit distribution but is entitled to have her account credited with her share of the profits

Question 15

P’ship interest - transfer to third party

Answer 15

Rule—a partner can transfer all or part of the P interest (absent a restriction in the PA); the transferor partner retains all rights/duties of a partner (except for an
interest in the distributions); and the transfer does not cause dissolution or dissociation
o Transferee rights
 Right to receive distributions, to seek a judicial order for dissolution, and to an accounting upon dissolution
 No right to participate in the management or conduct of P business, access P records, or demand other information from P

Question 16

Property ownership

Answer 16

Rule—all property acquired by P belongs to the P and not the individual partners; property may be acquired/titled in the name of the P or in the name of a partner in her
capacity as partner or indicating the existence of P
* Intent of partners controls—property is presumed to be P property if it was purchased with P assets or P credit was used to get financing; but if ownership is
unclear, consider other factors such as the property’s use, the tax treatment of the property, and the source of funds used to maintain or improve the property

Question 17

Management rights

Answer 17

each partner has equal management rights in general; a majority of partners is needed to make ordinary P business decisions; the consent of all partners is
required for matters outside the ordinary course of a P’s business and for amendments to the PA

Question 18

Remuneration

Answer 18

none except for reasonable compensation for winding up the P business

Question 19

Reimbursement/indemnification

Answer 19

a P must reimburse a partner for loans in
furtherance of P business; and P is required to indemnify partners for personal liability incurred in the ordinary course of P business

Question 20

Use of P property

Answer 20

a partner cannot derive personal benefit from the use of P property; must compensate P

Question 21

Access to records

Answer 21

P must permit its partners and agents to access all P records

Question 22

Lawsuits

Answer 22

a P can sue a partner for breach of the PA or a P duty; a partner may sue P or another partner to enforce his rights under the PA or the VA Code; a partner may sue
another partner for breach of fiduciary duty (loyalty, care, good faith and fair dealing)

Question 23

What is a dissociation?

Answer 23

A change in the relationship of the partners caused
by any partner ceasing to be associated in the carrying on of the business. Dissociation of a partner doesn’t necessarily cause a dissolution and winding up of the partnership business.

Question 24

Events triggering a partner’s dissociation

Answer 24

(1) notice of the partner’s express will to withdraw; (2) happening of an event the partners agreed would cause dissociation; (3) expulsion of the partner pursuant to agreement, by unanimous vote if unlawful to continue business with the partner, or by judicial decree; (4) the
partner’s bankruptcy; (5) the partner’s death or incapacity to perform partnership duties; (6) appointment of a receiver; or (7) termination of a business entity that is a partner.

Question 25

Is a dissociated partner is permitted to participate in the management or conduct of P business?

Answer 25

No

Question 26

What are the duties of a dissociated partner?

Answer 26

a partner’s duty not to compete terminates upon dissociation; the duties of care and loyalty terminate with respect to post-dissociation events unless the partner participates in winding up P’s business

Question 27

When a P purchases a partner’s P interest, must the P indemnify a dissociated partner against all P liabilities?

Answer 27

Yes

Question 28

Does the P need to buy out the dissociated partner's interest?

Answer 28

Yes, The partnership must purchase (buy out) their interest at either liquidation or going-concern value

Question 29

Dissociated partner’s liability

Answer 29

a dissociated partner is generally liable for P obligations incurred before dissociation

Question 30

Can a dissociated partner bind himself and P to a transaction?

Answer 30

Yes, a dissociated partner can bind himself and P to a transaction if the other party reasonably believes the dissociated partner is a partner, does not have notice of dissociation, and is not deemed to have knowledge of the dissociated partner’s lack of authority; liability is limited to transactions within one year of dissociation

Question 31

Actual Authority

Answer 31

Actual authority—a partner can contractually bind P when he acts with express authority (which can arise from the PA or partner authorization) or implied authority (based on the partner’s reasonable belief that an action is necessary to carry out his express authority)

Question 32

Apparent Authority

Answer 32

the partner must perform the unauthorized act in the ordinary course of P business; the third party with whom the partner was dealing cannot hold the P liable if the third party knew or was notified that the partner lacked authority

Question 33

Priority of distribution

Answer 33

Partnership assets are reduced to cash and partnership liabilities are paid in the following order: First, the partnership must pay all creditors (creditors may include trade creditors or suppliers as well as partners who loaned money to the partnership) Second, the partnership must repay all capital contributions paid into the partnership by partners (so, money paid in by partners— not loans) AND Third, with respect to profits and losses, any money remaining must be shared equally in the absence of an agreement

Question 34

Authority to transfer titled P property when

Answer 34

P property held in P’s name—execute an instrument of transfer in P’s name  P property held in partner’s name—execute an instrument of transfer in one or more partners’ names  Recovery of P property from transferee (P property transferred without authority)—recoverable if P interest was indicated in the transfer instrument or if the transferee was aware that the property belonged to the P and the partner executed the transfer without authority

Question 35

Partner Who Pays More than Their Share Entitled to Contribution

Answer 35

Where a partner is forced to pay more than their share of the partnership’s debts, they’re entitled to contribution from the other partners to equalize the shares.

Question 36

P’s knowledge and notice

Answer 36

absent fraud, a partner’s knowledge/notice of a fact relating to the P is immediately imputed to the P

Question 37

Effect of partner’s tortious acts on partnership

Answer 37

a P is liable for a partner’s tortious acts committed in the ordinary course of the P business or with P authority (actual or apparent)

Question 38

Are partners liable for P obligations?

Answer 38

Yes, partners are jointly and severally liable for all P obligations

Question 39

What is dissolution?

Answer 39

the closing phase of a partnership.

Question 40

Winding up

Answer 40

the period in which the remaining partners liquidate the assets to satisfy creditors. Power of person winding up business—may dispose of and transfer P property and discharge the P’s liabilities * After dissolution, P is bound by a partner’s act that is appropriate for winding up the P as well as any act undertaken by a partner that would have bound P before dissolution absent notice to other party (and each partner is liable to other partners for his share of P liability) * Creditors have priority over partners to P’s assets

Question 41

Events causing dissolution

Answer 41

P at will (open-ended with no fixed termination)—dissolved when a dissociating partner gives notice * P for term/undertaking—dissolved when the term expires or the undertaking is completed; all partners agree to dissolve P; or a partner is dissociated due to death, bankruptcy, or other event and at least half of the other partners agree to dissolve within 90 days * Any P—dissolved upon the occurrence of agreed-upon event, illegal P business activities, or judicial determination

Question 42

Continuation of P after dissolution

Answer 42

before winding up is complete, P may resume carrying on its business as if dissolution had never occurred

Question 43

Limited liability partnerships (LLP)

Answer 43

an LLP partner is not personally liable as a partner for an LLP obligation, only personally liable for his own personal misconduct; revocation of the state’s qualification of LLP status will have the same effect as cancellation

Question 44

Limited partnerships

Answer 44

must be formed by at least one general partner and one limited partner; the limited partner’s liability for P debts is generally limited to her capital contribution to the P; and limited P is not formed if certificate of limited P is not filed

Question 45

Limited partner in LP

Answer 45

can only be admitted by written consent of all partners after creation; has right to vote as permitted under the PA and right to inspect business/financial records; can lend money and transact business like non-partner with LP; and is generally not personally liable for LP obligation unless limited partner is also a general partner or participates in control of the business; may only withdraw at time specified or upon the happening of events specified in writing in the PA

Question 46

General partner in LP

Answer 46

Rule—can only be admitted by the written consent of all partners after creation; has the rights/powers of a normal partner; may contribute to LP, share in its losses and profits, and receive distributions * Liability to third parties—personally liable to third parties for obligations of LP * Termination of status—can withdraw from LP by giving written notice to other partners, or other events causing termination

Question 47

Contributions in LP

Answer 47

partners can contribute cash, property, or services, and are obligated to the LP with respect to any written, enforceable promise of a future contribution

Question 48

Profits/losses in LP

Answer 48

may be allocated on any basis if in writing; otherwise based on each partner’s P contributions

Question 49

Distributions in LP

Answer 49

may be allocated on any basis if in writing; otherwise based on how profits/losses are shared

Question 50

Assignment of P interest in LP

Answer 50

a P interest in an LP is personal property that can be assigned in whole or in part; the assignee generally has the right only to receive the distribution to which the assignor partner would otherwise be entitled

Question 51

Termination of LP

Answer 51

occurs after dissolution and winding up * P dissolved upon occurrence of a specified event, written consent of all partners, withdrawal of general partner, or judicial determination * Winding up—general partners wind up, but if none, then the limited partners may; distribution of assets first to creditors and then to partners

Question 52

Liabilities of LP

Answer 52

if general partner’s tortious act (e.g., fraud) is committed in the ordinary course of the partnership business, the LP may incur contractual obligation when general partner acts with actual or apparent authority

Question 53

LP derivative action

Answer 53

a limited partner has the right to bring a derivative action on behalf of the LP