Partnerships

Question 1

How are partnerships formed? What governs them?

Answer 1

Partnerships and other unincorporated business organizations formed in Texas are governed by the Texas Business Organizations Code. As of January 1, 2010, the TBOC governs all partnerships and other unincorporated business organizations formed in Texas, regardless of when they were formed (before that, it only applied to those formed on or after January 1, 2006.

CREATED BY MEETING ALL OF THESE ELEMENTS:

1) The association (voluntarily or consensual);
2) Of two or more persons (individuals and business organizations);
3) To carry on as co-owners (must have SHARED CONTROL of the business);
4) In a business (the activity that the persons agree to carry on must be a business);
5) FOR PROFIT (must have a profit motive).

Question 2

Do parties have to intend to form a partnership in order to form one?

Answer 2

No.

Question 3

Must parties comply with any formalities to form a partnership?

Answer 3

No.

Question 4

T/F - The intent to share profits is not necessary in order for a relationship to be a partnership.

Answer 4

False.

Must have an intent to share profits.

Question 5

Does the sharing of profits always indicate that a partnership has been formed?

Answer 5

No, because sometimes parties share profits as a way of making a payment, such as for services or the use of property.

Example: giving a store clerk an added incentive of .01% of the stores profits.

Question 6

What about sharing of losses?

Answer 6

Sharing of losses is a factor indicating that a partnership has been formed, but an agreement to share losses is NOT REQUIRED in order to form a partnership.

Question 7

Must there be a written partnership agreement to form a partnership?

Answer 7

Generally, no.

However, an oral partnership agreement can fall within the Statute of Frauds, and thus be unenforceable if either:

1) It cannot be performed within one year; OR
2) It involves the transfer of real estate to the partnership.

Question 8

What are at-will partnerships?

Answer 8

A partnership for an indefinite term is referred to as an at-will partnership. A partnership agreement for a partnership at-will generally is NOT within the Statute of Frauds because it IS capable for being performed within one year.

Question 9

What are the general rules with regard to governance of a partnership?

Answer 9

Generally, the TBOC sets forth DEFAULT RULES that govern the relationship among partners. By entering into a partnership agreement, the parties generally CAN WAIVE OR MODIFY the default rules of the TBOC.

Question 10

What can a partnership agreement NOT do?

Answer 10

1) Alter the rights of a third party;
2) Alter a partner’s power to withdraw from the partnership; OR
3) Eliminate the partners’ duties of loyalty, care, and good faith.

Question 11

Are joint ventures the same as partnerships? What is Partnership by Estoppel?

Answer 11

Joint ventures generally are treated as and are subject to the same rules as partnerships.

Under the doctrine of Partnership by Estoppel, a third party can hold a person personally liable for an obligation as if they were a partner in a partnership if:

1) The person represents himself, or consents to someone else representing him, as a partner in an actual or purported partnership; AND
2) The third party gives credit in reliance on the representation.

Question 12

What duties does a partner owe the partnership and other partners? What about during winding up the partnership?

Answer 12

1) Duty of loyalty; AND
2) Duty of care.

A partner must discharge her duties and exercise any rights and powers in the conduct or winding up of the partnership:

1) In good faith, AND
2) In a manner the partner reasonably believes to be in the BEST INTERESTS of the partnership

Question 13

What does a partner’s duty of loyalty include? What if there is a breach?

Answer 13

1) ACCOUNTING to and holding for the partnership any property, profit, or benefit derived by the partner in the conduct or winding up of the partnership business or from the use of partnership property;
2) REFRAINING from dealing with the partnership ON BEHALF of a person who has an interest ADVERSE to the partnership; AND
3) REFRAINING from COMPETING OR DEALING with the partnership in a manner ADVERSE to the partnership.

IF ANY OF THESE THREE ARE FAILED, the partner breaches his duty of loyalty, UNLESS the other partners consent to what the partner is doing.

Question 14

What steps must a partner take to avoid breaching a duty of loyalty?

Answer 14

The partner must DISCLOSE ALL DETAILS concerning the transaction that is adverse to the partnership AND OBTAIN THE CONSENT of the other partners to the transaction.

Question 15

What is a partner’s duty of care? What is the presumption?

Answer 15

To act in the conduct and winding up of the partnership business with the care an ORDINARY AND PRUDENT PERSON would exercise in similar circumstances.

A partner is PRESUMED to satisfy this duty if she acts on an INFORMED BASIS, IN GOOD FAITH, AND IN A MANNER the partner REASONABLY BELIEVES to be in the BEST INTERESTS OF THE PARTNERSHIP.

Question 16

How are profits and losses shared?

Answer 16

Unless the partners have a contrary agreement, partners share profits EQUALLY.

Unless the partners have a contrary agreement, partners share losses IN THE SAME MANNER THAT THEY SHARE PROFITS.

Question 17

How are management rights shared?

Answer 17

Unless the partners have a contrary agreement, each partner has EQUAL RIGHTS in the management and conduct of the partnership’s business.

Question 18

How are differences between partners decided?

Answer 18

Unless the partnership agreement provides to the contrary, differences concerning matters within the ordinary course of the partnership’s business are decided BY A MAJORITY INTEREST OF THE PARTNERS.

Majority Interest - means partners owning more than 50% of the partnership profits. So if there are three partners sharing equally, however 2 partners vote will outvote the 1 partner (67% profit ownership to 33%). CAN BE DIFFERENT OUTCOME IF PARTNERS AGREE TO SHARE PROFITS UNEQUALLY.

Question 19

What acts require the consent of all partners (absent partnership agreement providing to the contrary)?

Answer 19

1) Decisions regarding matters outside the ordinary course of business;
2) Amendments of the partnership agreement; AND
3) Admission of a new partner.

Question 20

Can partners receive compensation?

Answer 20

A partner is NOT entitled to receive compensation for services performed for a partnership, OTHER THAN REASONABLE compensation for services RENDERED IN WINDING UP THE BUSINESS of the partnership, UNLESS THE PARTNERSHIP AGREEMENT PROVIDES FOR COMPENSATION.

Question 21

T/F - A partner who makes a payment or who reasonably incurs liability in the proper conduct of the partnership’s business is entitled to be repaid by the partnership WITH INTEREST.

Answer 21

True

Question 22

What access to the partnership’s books does a partner have?

Answer 22

Unless partnership agreement provides to the contrary, a partnership must provide access to its BOOKS AND RECORDS to a partner or an agent or attorney of a partner.

A partnership agreement CANNOT UNREASONABLY RESTRICT a partner’s right of access to partnership books and records.

When a partner requests it, each partner and the partnership must furnish COMPLETE AND ACCURATE information concerning the partnership to the requesting partner (or an assignee or legal representative of the partner) to the extent the request is JUST AND REASONABLE.

Question 23

When is property considered “partnership property?”

Answer 23

Property is deemed partnership property if it is acquired in the name of either:

1) The partnership; OR
2) One or more partners, if the instrument transferring title to the property indicates either the person’s CAPACITY AS A PARTNER OR THE EXISTENCE OF A PARTNERSHIP.

Property is PRESUMED to be partnership property if it is acquired with partnership CASH, CREDIT, OR PROPERTY.

NOTE: Property acquired in the name of one or more partners is presumed to be the partner’s property if the property is not acquired with partnership property and the instrument transferring title to the property does not indicate the person’s capacity as a partner or the existence of the partnership.

Question 24

What is the partner’s right to partnership property?

Answer 24

Unless the partnership agreement provides otherwise, a partner’s ONLY RIGHT with respect to partnership property is to use it for PARTNERSHIP PURPOSES.

Question 25

What are partner’s creditor’s rights to partnership property?

Answer 25

A creditor with a claim against a partner that is UNRELATED to the partnership business CANNOT seek to satisfy the debt out of partnership property.

Question 26

Can a partner, without the power to do so, transfer real property of the partnership?

Answer 26

Partnership is bound if real property is transferred on its behalf when the grantor has conveyed the property to a HOLDER FOR VALUE who acquired the property WITHOUT KNOWLEDGE THAT THE PARTNER EXCEEDED THAT PARTNER’S AUTHORITY in making the conveyance.

Question 27

T/F - A partner’s “partnership interest” includes the partner’s right to participate in management.

Answer 27

False.

It includes the partner’s share of profits/losses or similar items and the right to receive distributions.

Question 28

What are the rights of a transferee of a partnership interest?

Answer 28

The transferee of a partnership interest does NOT become a partner in the partnership, and does NOT have the right to participate in management or administration of the partnership.

ONLY THE FOLLOWING RIGHTS ARE ACQUIRED:

1) To receive distributions of partnership profits that the transferor would have received;
2) If the partnership is wound up, to receive the net amount the transferor would have received; AND
3) For a proper purpose, to receive REASONABLE INFORMATION or an account of a partnership transaction and make REASONABLE INSPECTION of the partnership books.

Question 29

What rights, if any, does a transferor of a partnership interest have?

Answer 29

Transferor of a partnership interest REMAINS A PARTNER in the partnership and continues to have the RIGHTS OF A PARTNER, including the right to participate in MANAGEMENT.

Question 30

Does a transferee of a partnership interest have any liability?

Answer 30

Unless and until a transferee is admitted as a partner, the transferee has NO PERSONAL LIABILITY as a partner for partnership obligations.

Question 31

What is a Charging Order?

Answer 31

A JUDGMENT CREDITOR of a party can obtain a charging order against the partner’s PARTNERSHIP INTEREST.

A charging order is a LIEN against the partnership interest and gives the judgment creditor ONLY THE RIGHT TO RECEIVE ANY DISTRIBUTIONS the partnership otherwise would pay to the partner who owes the debt.

A CHARGING ORDER IS THE EXCLUSIVE REMEDY BY WHICH A JUDGMENT CREDITOR OF A PARTNER CAN SATISFY A JUDGMENT OUT OF THE DEBTOR’S PARTNERSHIP INTEREST.

The charging order DOES NOT give the judgment creditor the right to foreclose on or otherwise become the owner of the judgment debtor’s partnership interest.

Question 32

When can a partner bind a partnership to an agreement?

Answer 32

As an agent of the partnership, a partner can bind the partnership to a contract when:

1) The partner has express or implied actual authority;
2) The partner has apparent authority;
3) The partnership is estopped from denying the partner’s authority; OR
4) The partnership ratifies the contract.

Question 33

When does a partner have express actual authority?

Answer 33

When the partnership agreement authorizes the partner to do so, or when the partners vote on a matter and authorize the partner to implement the partners’ actions.

Question 34

When does a partner have implied actual authority?

Answer 34

By virtue of being a partner, a partner has implied actual authority to enter into contracts on the partnership’s behalf in the ORDINARY COURSE OF THE PARTNERSHIP’S BUSINESS.

A partner does NOT have implied actual authority to enter into transactions on the partnership’s behalf that are extraordinary or outside the ordinary course of the partnership’s business.

Question 35

When does a partner bind the partnership with apparent authority?

Answer 35

An act of a partner binds the partnership if the act is APPARENTLY for carrying on in the ordinary course of the partnership’s business or business of the kind carried on by the partnership, UNLESS:

1) A partner does NOT have authority to act for the partnership in the particular matter; AND
2) The person with whom the partner is dealing KNOWS that the partner lacks authority.

Question 36

Is the partnership liable for its partners torts against third parties? Other partners?

Answer 36

A partnership is liable for a loss or injury to a person, INCLUDING A PARTNER, cause by a WRONGFUL ACT OR OMISSION of a partner who acts:

1) In the ORDINARY COURSE of the partnership’s business, OR
2) With the authority of the partnership.

Question 37

T/F - A partnership can have agents that are not partners and will be liable through respondeat superior for their negligence or other misconduct.

Answer 37

True

Question 38

T/F - A partner’s KNOWLEDGE of a fact related to partnership matters is ATTRIBUTED to the partnership.

Answer 38

True.

Question 39

T/F - A partner’s receipt of notice of a fact relating to the partnership is effective IMMEDIATELY as notice to the partnership.

Answer 39

True

UNLESS the partner receiving the notice is committing fraud against the partnership.

Question 40

HYPO - Partner A gets a letter saying that the partnership’s premises are in violation of a local city ordinance. She throws it away without reading it with no knowledge of its contents. Does the partnership have notice?

Answer 40

Yes, this notice is effective IMMEDIATELY as notice to the partnership. Thus, the partnership cannot claim in any later proceedings that it had not received notice of the violation.

Question 41

Are partners vicariously liable for contracts and torts of the partnership?

Answer 41

Yes

Question 42

What form of partner liability is present for partnership obligations?

Answer 42

JOINT AND SEVERAL LIABILITY.

Question 43

Is a new partner liable for old partnership obligations?

Answer 43

A person admitted as a partner to an existing partnership is NOT personally liable for a partnership obligation that arises:

1) Before the partner’s admission to the partnership;
2) From an action or omission that occurred before the partner’s admission to the partnership; OR
3) Under a contract or commitment entered into before the partner’s admission to the partnership.

Question 44

What are the liabilities of a withdrawn partner?

Answer 44

A person who withdraws as a partner remains liable as a partner for partnership obligations incurred WHILE SHE WAS A PARTNER UNLESS the partnership creditor AGREES to discharge the partner from liability.

Question 45

What procedure must a creditor follow to reach a partner’s assets to collect on a partnership debt?

Answer 45

MUST obtain a judgment against BOTH the partnership and the partner (in the same or separate actions), AND the judgment against the partnership MUST REMAIN UNSATISFIED FOR 90 DAYS AFTER the date it is entered or its execution is stayed.

Thus, the creditor must generally look to the partnership first. A partnership creditor need NOT obtain a judgment against the partnership and wait 90 days before proceeding against a partner IF:

1) The partnership is a debtor in bankruptcy;
2) The partnership and the creditor agree that the creditor can proceed directly against the partner; OR
3) A court orders that the creditor can proceed directly against the partner because partnership assets are INSUFFICIENT to satisfy the debt OR proceeding against the partnership first would be EXCESSIVELY BURDENSOME.

Question 46

When does a partner withdrawal occur?

Answer 46

RED BREW:

1) Request by a partner that a partnership at will be wound up if the other partners decline the request and continue the partnership;
2) Events specified in the partnership agreement as an event of withdrawal;
3) Death or termination of the partner;
4) Bankruptcy of a partner;
5) Redemption of a partnership interest following its transfer;
6) Expulsion of a partner by a court or the other partners; OR
7) Written notice of a partner’s desire to withdraw.

Question 47

What is the effect of a withdrawal of a partner?

Answer 47

The partner CEASES TO BE A PARTNER but the partnership CONTINUES to exist. An event of withdrawal does not require a winding up of the partnership.

The partner is entitled to have his partnership interest REDEEMED by the partnership as of the date of withdrawal, provided that an event requiring a winding up of the partnership business does NOT OCCUR WITHIN 60 DAYS AFTER THE DATE OF WITHDRAWAL.

Question 48

What is the redemption price of a withdrawn partner’s interest?

Answer 48

Fair value of the interest on the DATE OF WITHDRAWAL.

HOWEVER, if the partner WRONGFULLY WITHDRAWS, the redemption price is the LESSER OF:

1) Fair value of the interest on the date of withdrawal; OR
2) Liquidation value, which is the amount the withdrawn partner would have received if an event requiring a winding up had occurred at the partner’s withdrawal. Liquidation deals with how fast the partnership can sell off its assets (within a year usually).

Question 49

T/F - A partner always has the power to withdraw.

Answer 49

True.

Question 50

When is a partner’s withdrawal wrongful?

Answer 50

IF IT:

1) Is in breach of an express provision in the partnership agreement;
2) Occurs by judicial expulsion of the partner for misconduct; OR
3) Occurs before the completion of a specified period or undertaking of the partnership and occurs by a partner’s express will; partner’s becoming a debtor in bankruptcy; or an entity partner’s willfully dissolving or terminating.

Question 51

Can a withdrawn partner bind a partnership?

Answer 51

Yes for a period of ONE YEAR AFTER WITHDRAWAL IF:

1) The other party to the transaction had NO NOTICE of the partner’s withdrawal;
2) That party has done business with the partnership WITHIN ONE YEAR BEFORE THE WITHDRAWAL; AND
3) The party REASONABLY BELIEVED that the withdrawn partner was still a partner at the time of the transaction.

Question 52

What is “winding up?”

Answer 52

The period during which the partnership prepares for the termination of the partnership. Once the winding up is complete, the partnership terminates.

Question 53

Who may wind up the partnership?

Answer 53

The partnership business may be wound up by:

1) The partners who have not withdrawn;
2) The legal representative of the last surviving partner; OR
3) A person appointed by a court.

Question 54

What business may a partnership partake in during winding up?

Answer 54

That only for the limited purpose of winding up partnership affairs. The partnership CANNOT begin engaging in any NEW business activities.

Question 55

What may the person winding up the partnership do?

Answer 55

Take actions that are appropriate for winding up such as:

1) Prosecuting or defending legal action on behalf of the partnership;
2) Selling off assets of the partnership to reduce them to cash; OR
3) Paying partnership creditors.

Question 56

During winding up, what actions of partners are the partnership liable for?

Answer 56

Those actions that:

1) Are appropriate for winding up; OR
2) Would have bound the partnership if the partnership were not in a period of winding up provided that the other party to the transaction does not have notice that an event requiring winding up has occurred.

NOTE: A partner who has notice of the winding up and creates a partnership liability by an act that is not appropriate for winding up is liable to the partnership for a loss caused to the partnership arising from that liability.

Question 57

T/F - The partnership does not have to file anything with the State of Texas to terminate.

Answer 57

True

Question 58

Can a partnership agree when to terminate?

Answer 58

Yes, a partnership agreement can decide the duration or a condition precedent that makes winding up mandatory. This is NOT the case if ALL of the partners AGREE to continue the partnership’s business.

NOTE: The partners can UNANIMOUSLY AGREE at any point to wind up.

Question 59

When is winding up required in an at-will partnership?

Answer 59

1) When a majority interest of the partners who have not assigned their interests agree to wind up the partnership. A majority-in-interest means partners owning more than 50% of the partnership profits; OR
2) When a partner requests that the partnership be wound up UNLESS, within 60 DAYS of the request, a majority-in-interest of the partners agree to continue the partnership.

NOTE: In the case of a partner request, the partner is withdrawn, and the partnership must purchase the withdrawn partner’s partnership interest.

Question 60

When is winding up required regardless of the type of partnership?

Answer 60

1) When an event occurs making it illegal for all or substantially all of the partnership business to be continued, UNLESS the illegality is cured within 90 DAYS after the date of notice to the partnership of the event;
2) Upon the sale of all or substantially all of the property of the partnership outside the ordinary course of business, UNLESS otherwise provided by the partnership agreement; OR
3) When a court grants a partner’s application for an order that the partnership be wound up and terminated on the grounds that: (a) the economic purpose of the partnership is likely to be unreasonably frustrated, OR (b) another partner has engaged in conduct relating to the partnership’s business that makes it NOT reasonably practicable to carry on the business in partnership with that partner.

Question 61

How are assets distributed in winding up a partnership?

Answer 61

Must be applied FIRST to pay CREDITORS of the partnership (including partners who are creditors). Any assets remaining after creditors are paid must be distributed to the partners.

If a partner’s capital account is positive, the partner is entitled to receive the positive balance in his capital account. If a partner’s capital account is NEGATIVE, the partner MUST PAY TO THE PARTNERSHIP THE AMOUNT OF THE NEGATIVE BALANCE.

Question 62

How is a Capital Account calculated?

Answer 62

INCREASED BY amounts the partner contributes to the partnership and by the partner’s share of the partnership’s profits.

DECREASED BY distributions the partner receives from the partnership and by the partner’s share of the partnership’s losses.

Question 63

What is an LLP?

Answer 63

Limited Liability Partnership - Partnership that REGISTERS with the State of Texas as a limited liability partnership.

If a partnership registers as an LLP, then its partners are NOT PERSONALLY LIABLE for any obligation of the partnership incurred while the partnership is an LLP. This applies to BOTH CONTRACTUAL AND TORT OBLIGATIONS of the partnership.

Question 64

T/F - AS OF September 1, 2011, partners in an LLP in Texas are no longer personally liable for partnership obligations arising from misconduct or negligent conduct of other partners or partnership employees by supervising, directing, being involved in, or negligently failing to prevent the conduct.

Answer 64

True.

This liability was repealed.

Question 65

How does one create an LLP?

Answer 65

To become an LLP and maintain its status as an LLP, a partnership must:

1) Register as an LLP by FILING an application with the Secretary of State AND RENEW THE REGISTRATION ANNUALLY; AND
2) Have a name that contains the phrase Limited Liability Partnership or an abbreviation of that phrase, such as LLP.

IF EITHER REQUIREMENT IS FAILED, PARTNERSHIP LOSES LLP STATUS, AND PARTNERS ARE PERSONALLY LIABLE FOR PARTNERSHIP OBLIGATIONS.

Question 66

T/F - AS OF September 1, 2011, an LLP no longer has to carry at least $100,000 of liability insurance to cover obligations for which the partners’ liability is limited, OR designate and segregate $100,000 for the same purpose.

Answer 66

True.

This requirement was repealed.

Question 67

What is a limited partnership?

Answer 67

A partnership that has AT LEAST ONE GENERAL PARTNER and AT LEAST ONE LIMITED PARTNER.

Question 68

How is an LP formed?

Answer 68

Filing a CoF with the Texas Secretary of State’s office. The LP begins its existence at the time the certificate is FILED.

THE NAME MUST INCLUDE THE WORD “LIMITED” OR THE PHRASE “LIMITED PARTNERSHIP” (or an abbreviation thereof).

Question 69

What governs an LP?

Answer 69

Partnership agreement.

If the agreement doesn’t address an issue, the TBOC contains the default rules.

Question 70

What are the rights and powers of a general partner in an LP? What duties do they owe?

Answer 70

Rights and powers of a partner in a general partnership, and ALSO has the liabilities of a partner in a general partnership.

A general partner in an LP owes to the partnership and the other partners:

1) Duty of Loyalty; AND
2) Duty of Care.

Question 71

Can a general partner withdraw?

Answer 71

Yes voluntarily at any time by giving WRITTEN NOTICE TO THE OTHER PARTNERS. In addition, certain circumstances, such as a general partner’s death or filing of petition in bankruptcy, are treated as events of withdrawal of a general partner.

Question 72

What if there are no general partners left?

Answer 72

A majority-in-interest of the limited partners can decide either to:

1) Convert the withdrawn general partner’s interest into a limited partnership interest; OR
2) Pay to the withdrawn general partner in cash the value of that partner’s partnership interest minus the damages caused if the withdrawal constituted a breach of the partnership agreement.

Question 73

Can Limited Partners vote?

Answer 73

Yes on partnership matters ONLY to the extent that the limited partnership agreement grants them the right to do so.

Question 74

Can limited partners withdraw?

Answer 74

Only to the extent permitted by a written limited partnership agreement. A withdrawing limited partner is entitled to receive, not later than a reasonable time after withdrawal, the FAIR VALUE of that partner’s interest as of the date of withdrawal.

Question 75

Can a limited partner ever be personally liable?

Answer 75

Yes if acting in control of the business, the limited partner will be liable ONLY to the person who transacts with the partner IF that party reasonably believes, based on the limited partner’s conduct, that the limited partner is a general partner.

Question 76

What liability does a general partner have if they believe they are a limited partner?

Answer 76

If the belief is in GOOD FAITH, that partner is not liable as a general partner IF, within a reasonable time after ascertaining the mistake, the person takes ONE OF THE FOLLOWING CORRECTIVE ACTIONS:

1) Causes an appropriate CoF (or amendment) to be signed and filed;
2) Withdraws from participation in future profits by filing with the Texas SOS an appropriate certificate; OR
3) Files with the Texas SOS a statement claiming status as a limited partner.

Question 77

T/F - Even if corrective actions are taken, a general partner (who believes his is a limited partner) is still liable for business transacted before any corrective action which resulted in an extension of credit to the partnership in reasonable reliance on the general partner.

Answer 77

True

Question 78

Does a transferee of a limited partnership interest become a partner? What happens to the transferor?

Answer 78

No

Only gets rights to distributions.

Transferor remains a partner absent contrary language in the partnership agreement.

Question 79

What if a general partner transfers his interest?

Answer 79

Then a majority in interest of the limited partners can TERMINATE the transferor’s status as a general partner.

Question 80

When is winding up of a limited partnership required?

Answer 80

1) When all partners give writing consent to wind up the partnership, unless agreement says otherwise;
2) When a court decrees that the limited partnership be wound up;
3) Upon the expiration of a duration period or the happening of an event specified in the partnership agreement, UNLESS WITHIN 90 DAYS ALL PARTNERS AGREE IN WRITING TO CONTINUE THE PARTNERSHIP;
4) When an event of withdrawal occurs with respect to a general partner, unless the partnership agreement provides to the contrary; OR
5) When there are NO LIMITED PARTNERS in the limited partnership.

Question 81

What order are a limited partnership’s assets applied in?

Answer 81

1) Pay creditors (including general or limited partners who are creditors);
2) Pay partners for any unpaid interim distributions owed to them and any amounts owed to limited partners who previously withdrew from the partnership;
3) To pay partners the agreed value of their contributions to the partnership; AND
4) Any assets remaining are paid to the partners in accordance with their shares of profits.

Question 82

What if the limited partnerships are insufficient to pay creditors upon winding up?

Answer 82

The creditors can seek to recover the amounts owed to them from the general partners.

Question 83

T/F - Once the winding up of the limited partnership is complete, a Certificate of Termination must be filed with the Texas Secretary of State.

Answer 83

True.

The LP’s existence terminates when the CoT is FILED.

Question 84

What is an LLC?

Answer 84

Neither a partnership nor a corporation.

Question 85

Who are the owners of an LLC?

Answer 85

Members.

Individuals as well as trusts and corporations can be members of an LLC.

An LLC can have as few as one member. However, there is NO MAXIMUM LIMIT to how many members there can be.

Question 86

Who is personally liable in an LLC?

Answer 86

Generally, members of an LLC are NOT PERSONALLY LIABLE for obligations of the LLC. They are obligated ONLY to make whatever contributions to the LLC they have promised to make in a signed writing.

Question 87

What is a PLLC?

Answer 87

LLC created by those who are licensed to provide certian professional services. Members must be licensed.

Question 88

How is an LLC formed?

Answer 88

Filing with the SOS office. Begins existence at the time the certificate is FILED. The name of an LLC must contain the phrase “Limited Liability Company,” “Limited Company,” or an abbreviation thereof.

Question 89

What governs the LLC?

Answer 89

The CoF or the company agreement. If any matters are not addressed, the TBOC governs.

Question 90

How is voting done in an LLC?

Answer 90

Unless the company agreement states otherwise, voting can take place on a matter related to the LLC’s BUSINESS ONLY AT A MEETING AT WHICH A QUORUM IS PRESENT, which is defined as a MAJORITY OF THE MEMBERS.

Question 91

T/F - TBOC allows for electronic presence at an LLC meeting as long as everyone can communicate.

Answer 91

True.

Question 92

How many votes does each member or manager of an LLC get? How are differences handled?

Answer 92

ONE VOTE, unless the company agreement provides otherwise.

Differences concerning matters WITHIN the ordinary course of an LLC’s business are decided by a MAJORITY of the members, managers, or committee members present at a meeting at which a QUORUM IS PRESENT, unless the company agreement provides otherwise.

Differences concerning matters OUTSIDE the ordinary course of an LLC’s business are decided by an ABSOLUTE MAJORITY OF THE MEMBERS OR MANAGERS (or committee members) OF THE LLC.

Question 93

What is an absolute majority?

Answer 93

More than half of the entire number of members (not just those present constituting a majority) allowed to vote.

Thus, if an LLC has seven members, and only 4 show up to the meeting, they must all vote in favor of a proposal because 4 votes is the “absolute majority” of all seven members (present or not present).

Question 94

T/F - An LLC is managed by either its members or by one or more managers.

Answer 94

True.

Question 95

What are the matters that require approval by an absolute majority? Does anything require unanimous approval?

Answer 95

Even if the LLC is managed by managers, the following instances require an absolute majority vote of all the members:

1) Any action that would make it impossible for the LLC to carry on its ordinary business; OR
2) Any fundamental business transaction, which is defined as a merger, interest exchange, conversion, or sale of all or substantially all of the LLC’s assets.

Unless the company agreement provides otherwise, the following require a unanimous approval of an LLC’s members, even if the LLC is managed by managers:

1) Amendment of the CoF or company agreement of the LLC;
2) Admitting a new person as a member of the LLC; OR
3) Changing the management structure of the LLC from its current status of being member-managed or manager-managed.

Question 96

T/F - Members or managers of an LLC can take action on any matter without a meeting if the matter is approved by unanimous written consent of all persons entitled to vote on the matter.

Answer 96

True.

Question 97

How are profits and losses shared in an LLC?

Answer 97

As defined by the company agreement. If the agreement doesn’t address the issue, then members share profits and losses and receive distributions on the basis of the agreed value of the contributions made by each member (percentage of ownership).

Question 98

Who are the agents of an LLC?

Answer 98

IF MANAGER-MANAGED - the MANAGERS, NOT THE MEMBERS, are agents of the LLC.

IF MEMBER-MANAGED - the MEMBERS are agents of the LLC.

Further, any person, such as an employee of the LLC, who is vested with actual or apparent authority is treated as an agent of the LLC.

Question 99

Are member interests transferable?

Answer 99

Yes, unless the company agreement provides otherwise, a member of an LLC can transfer his interest in the LLC to another person at any time freely.

Question 100

What does the transferee of a member interest in an LLC have?

Answer 100

ONLY THE FOLLOWING RIGHTS:

1) To receive distributions the transferor would have; AND
2) For a proper purpose, to receive REASONABLE INFORMATION of an account of transactions and make REASONABLE INSPECTION of the LLC’s books.

THEY DO NOT BECOME MEMBERS OR GAIN MANAGEMENT RIGHTS.

Question 101

T/F - A transferor of a member interest in an LLC remains a member and continues to have the rights of a member.

Answer 101

True

UNLESS the company agreement states otherwise.

Question 102

What power to withdraw does a member have?

Answer 102

Members of an LLC have NO POWER TO WITHDRAW FROM THE LLC UNLESS the company agreement provides otherwise.

Question 103

When is the winding up of an LLC required?

Answer 103

1) When a majority of all members vote to wind up the LLC, unless the company agreement provides to the contrary;
2) When a court decrees that the LLC be wound up;
3) Upon the expiration of a period of duration for the LLC or the happening of an event requiring winding up specified in the company agreement; AND
4) When the last remaining member’s membership interest is terminated.

Question 104

What is the final thing that must be done in winding up an LLC?

Answer 104

Once winding up is complete, a Certificate of Termination MUST BE FILED WITH THE TEXAS SECRETARY OF STATE’S OFFICE.

Question 105

How are LLC’s taxed?

Answer 105

For federal income tax purposes, they are treated as a partnership and taxed in a “flow-through” regime.

Question 106

Can members relieve themselves from their obligations to make promised contributions to the LLC? Can anyone enforce the obligation?

Answer 106

A member who signs a written promise to make contributions of cash or property to the LLC is obligated to make such contributions as they become due, unless otherwise provided for in the certificate of formation or company agreement.

Although this obligation may be relieved by the consent of all the members, any such release is not binding on a creditor of the LLC that extended credit or otherwise reasonably relied on the obligation. Such a creditor may enforce the member’s obligation.

Question 107

What are the four exceptions to the claim that LLC members are generally not liable for the obligations and claims against the LLC?

Answer 107

Subject to certain exceptions, members of a Texas LLC are not personally liable for the debts, obligations, or liabilities of the LLC. The four exceptions are:

(1) contribution obligations;
(2) improper distribution;
(3) if the certificate or company agreement provides otherwise; or
(4) fraud.