Flashcards in partnerships Deck (14)
Alfred inherited an apartment building. He had no experience as a landlord, so he asked Burt, who had experience managing rental buildings, to manage his new building. Alfred and Burt decided that Alfred would not pay Burt a salary initially, but that they would split the profits of the rental building for six months, at which point they would reassess. Alfred and Burt agreed to this arrangement orally, but did not sign a contract. Three months later, one of the tenants filed a suit against Alfred and Burt related to the conditions of the tenant’s apartment. Should a court presume that Alfred and Burt created a partnership?
No, because the sharing of rent profits does not create a presumption of a partnership.
No, because they did not sign a written agreement.
Yes, because a partnership may be established by an oral agreement.
Yes, because a partnership is presumed when there is a sharing of profits.
Answer choice A is correct. A business arrangement is generally presumed to be a partnership when individuals agree to share the profits of a business. There are some statutorily enumerated exceptions to this rule, however, including an exception for profits in payment of wages or other compensation to an employee or independent contractor. Because Alfred and Burt agreed to share profits as a form of compensation to Burt as an employee, a court would not presume they created a partnership. Answer choice B is incorrect because a partnership agreement may be oral, although it is subject to the Statute of Frauds. Because the agreement in this case is for less than a one year period, the Statute of Frauds would not apply. Answer choice C is incorrect because, although a partnership may be formed by an oral agreement, a partnership was not formed in this case because Alfred and Burt agreed to share profits in payment of compensation to Burt as an employee. Answer choice D is incorrect because there is an exception for wages and other compensation to the general rule that a partnership is presumed when individuals agree to share profits.
Mary and Susan started a business selling vitamin supplements. They agreed that Susan would be a “silent partner” and would provide funds to the business, while Mary would do the day-to-day work of the business. They signed a partnership agreement establishing this arrangement. The agreement also provided that Susan would not owe a duty of loyalty to the partnership. One year after they signed the partnership agreement, Susan invested in a business selling a different brand of vitamin supplements. Did Susan violate a fiduciary duty to the partnership?
No, because Susan was a “silent partner,” and thus could compete with the partnership.
No, because the partnership agreement eliminated Susan’s duty of loyalty to the partnership.
Yes, because Susan violated the duty of loyalty, which may not be eliminated by agreement.
Yes, because Susan violated the duty of care, which was not waived by the partnership agreement.
Answer choice C is correct. A partner owes the partnership and the other partners two fiduciary duties—the duty of loyalty and the duty of care. The duty of loyalty prohibits competing with partnership business, and may not be eliminated by agreement. Accordingly, Susan violated the duty of loyalty. Answer choice A is incorrect because all partners owe fiduciary duties to the other partners and the partnership. Answer choice B is incorrect because the duty of loyalty may not be eliminated by agreement. Answer choice D is incorrect because the duty of loyalty, and not the duty of care, prohibits a partner from competing with the partnership.
A wealthy businessman began taking flight lessons. He befriended his instructor, and they decided to start a flight chartering business. The businessman agreed to provide all the funding, and the instructor agreed to pilot the chartered flights. The businessman provided $5 million in capital, which was used to purchase a small plane and fund other start-up costs. The plane was used exclusively for chartered flights. A year into the venture, the businessman hit hard economic times, and he told the instructor that he planned to sell the plane to pay his personal creditors. What are the businessman’s rights with respect to the plane?
Answer choice A is correct. All property acquired by a partnership is partnership property and belongs to the partnership, and not the individual partners. Property is presumed to be partnership property when it is purchased with partnership assets. In this case, the plane was purchased with partnership assets, or the capital contributions to the partnership, and thus it is partnership property. Answer choice B is incorrect because a partner does not have an interest in specific partnership property that can be transferred. Accordingly, the businessman could not sell his interest in the plane. Answer choice C is incorrect because each partner has equal management rights in the partnership, regardless of capital contributions. Answer choice D is incorrect because the plane was purchased with the businessman’s capital contributions to the partnership, and thus would be considered partnership property.
Janet and Jessica are veterinarians who share a practice and are passionate about animal welfare. They orally agreed to each contribute ten hours per month performing procedures on pets whose owners cannot pay for the care in a program they call “Pet Partners.” They perform these surgeries outside of business hours and do not accept payment for the procedures. Janet and Jessica equally divide administrative responsibilities associated with scheduling the surgeries. Would “Pet Partners” constitute a partnership?
Answer choice C is correct. The key test applied to ascertain whether a business arrangement is a partnership is whether there is a sharing of the profits from the business. Here, the arrangement functions as a nonprofit entity, so Janet and Jessica do not share profits and thus have not formed a partnership. Answer choice A is incorrect because although they orally agree to an arrangement, the arrangement is not a for-profit venture. Answer choice B is incorrect because a name does not establish a partnership: the primary considerations are the intent of the parties and the sharing of profits. Answer choice D is incorrect because there is no limitation that two parties cannot engage in multiple business ventures.
Sally is a partner in a profitable partnership with her three sisters. Sally’s position frequently puts her in the public eye, so she entered a written agreement with Sarah, a publicist and marketing consultant, to share 3% of the partnership’s profits with her in exchange for recurring publicity and marketing advice. At the end of the year, when all partnership tax documents were provided to Sarah, she realized that she only received 1% of the partnership’s profits. What is the basis for Sarah’s right to the remaining 2% of the profits?
Answer choice B is correct. A subpartnership is established when a partner and a third party agree to share in the partnership’s profits. The third party does not become a member of the partnership and has only a contractual claim against the partner with whom the third party contracted for a share of the partnership’s profits. Answer choice A is incorrect because a subpartnership is not a true partnership, and the grieved party has only a contractual claim against the partner as a remedy but does not become a member. Answer choice C is incorrect because the third party’s contractual claim is against the partner with whom the third party contracted rather than the entire partnership. Answer choice D is incorrect because a joint venture is typically used to describe a partnership for a specific, limited purpose, but no partnership was established here at all.
All partners in an accounting firm agreed to convert their partnership to a limited liability partnership on January 1. According to the original partnership agreement, each individual partner has the authority to enter into contracts and incur obligations on behalf of the partnership. On January 15, Partner A signed a five-year lease contract to extend the partnership’s lease despite knowledge that he and the other partners had recently signed a lease for a smaller and cheaper facility. On February 1, the partners filed a statement of conversion with the state. Based on the filing of the conversion paperwork, who is liable for the debt associated with the signing of the lease by Partner A?
Answer choice D is correct. A general partner who becomes a limited partner as a consequence of a conversion remains liable for any obligation incurred by the partnership before the conversion. The conversion does not occur until the filing of the conversion paperwork with the state, so the conversion here did not take place until February 1. Because the obligation occurred on January 15 (before the conversion), all general partners would be liable for the obligation incurred on behalf of the partnership prior to conversion. The partnership would also remain liable itself.
Zachary and Allison establish a dating consulting limited liability partnership during their marriage. After their divorce, they decided to dissolve the limited liability partnership but forgot to file any paperwork to do so. They also forgot to file their annual report. They separately continued to serve as dating consultants following their decision to dissolve the partnership. One day, on his way to meet with a prospective client, Zachary causes a car accident resulting in severe damage to another vehicle. Allison comes to you for advice. What should you tell her about the status of the partnership?
Answer choice D is correct. The cancellation of a statement of qualification transforms the LLP into a simple partnership but does not trigger dissolution of the partnership. The state may revoke the statement of qualification of an LLP for the failure to file an annual report; this revocation has the same effect as cancellation. Therefore, because Zachary and Allison did not file an annual report, the state may revoke the statement of qualification, which would have the same effect as cancellation and would thereby turn the partnership into a simple partnership without dissolving it. However, such a revocation is not automatic. Answer choice A is incorrect because failure to file an annual report might be cause for the state to revoke the statement of qualification, but such revocation would not be automatic and would not dissolve the partnership. Answer choice B is incorrect because while the state may revoke the statement of qualification based on failure to file an annual report, such revocation would convert the partnership to a simple partnership but would not dissolve it. Answer choice C is incorrect because transformation to a simple partnership (the effect of cancellation) would not automatically occur. The state may do so but is not required to.
Alice, Betty, and Carol filed the necessary paperwork to establish their automobile dealership as a limited partnership. After a few stressful months during which Alice and Betty, the limited partners, were on vacation, Carol, the general partner, suddenly amended the partnership agreement and added her friend Debbie as a limited partner. She gave thirty days’ notice to Alice and Betty before amending the agreement and adding Debbie as a limited partner, but neither Alice nor Betty responded to her notice either orally or in writing. Alice and Betty come to you after Carol’s actions asking about the effects of these actions. What should you tell them?
Carol can neither amend the partnership agreement nor add Debbie as a limited partner without approval by Alice and Betty.
Carol had the right to add Debbie as a limited partner without approval by Alice and Betty.
Carol’s amendment to the partnership agreement is valid even without approval by Alice and Betty.
Carol can amend the partnership agreement and add Debbie as a limited partner without approval by Alice and Betty.
Answer choice A is correct. Certain actions require the approval of limited partners, including amending a partnership agreement or admitting a partner. Therefore Carol can neither amend the agreement nor add Debbie as a partner without the approval of Alice and Betty. Simply providing notice to Alice and Betty was insufficient to allow Carol to amend the agreement and add Debbie as a partner. Answer choice B is incorrect because Carol needed the approval of the limited partners before adding a new partner. Answer choice C is incorrect because the amendment is not valid without the approval of the limited partners prior to the amendment. Answer choice D is incorrect because Carol needs approval from Alice and Betty prior to either amending the agreement or adding Debbie as a partner.
In the absence of an agreement between the partners, profit and loss are divided by partners
Bill and Bridget have had a general partnership for ten years and now seek to convert it to a Florida limited liability partnership. To achieve the conversion they must
file a statement of qualifications with the department of state
Oscar, Omar, and Oliver have operated a bakery as a general partnership for five years. Oliver recently sought to admit Olivia as a new partner in the bakery. To admit Olivia as a new partner
To become a partner, a person must secure the consent of all of the existing partners. Here, Oliver, Oscar, and Omar must all agree to her admission as a new partner.
Michael and Manuel have operated a general partnership for two years. On March 1st, they properly convert the partnership to a limited partnership, with Michael as the general partner and Manuel as a limited partner. One month later, on April 1st, the partnership enters into a contract with Thomas, who reasonably believes at the time of the transaction that Manuel is a general partner. If Thomas ultimately brings suit for breach of the contract, he may recover against
Both. When you become a limited partner through conversion, there is a 90 day window.
In the absence of a contrary agreement of the partners, which of the following events will, if nothing else happens, dissolve a limited partnership?
A majority vote in favor of dissolution by the partners.
A two-thirds vote in favor of dissolution by the partners.
The withdrawal of a majority of the limited partners.
The withdrawal of the only general partner.
If the general partner withdraws, they must get a new general partner within 90 days. There must be at least one general partner.