Partnerships

Question 1

What is a partnership?

Answer 1

A partnership is the association of two or more “persons” to carry on a for-profit business as co-owners.

Question 2

What sort of liability do partners have to the partnership?

Answer 2

All partners are personally liable for partnership obligations. (No limited liability)

Question 3

Does a partnership have entity-level taxation?

Answer 3

No. Unlike with a corporation, there is no entity-level taxation for a partnership.

Question 4

What is a partnership agreement?

Answer 4

The partnership agreement is the understanding of the partners about the nature of their relationship. (“The law of partnerships is the partnership agreement.”)

Question 5

What happens if there is no partnership agreement?

Answer 5

If there is no partnership agreement, then state law will govern the partnership with default rules.

Question 6

When can a partnership agreement NOT contract around state law?

Answer 6

The following state laws are mandatory for partnerships:

1. Liability to third parties;
2. Can’t deny partners access to books and records;
3. Fiduciary duties cannot be eliminated

Question 7

What are the requirements of a duty of loyalty to the partnership?

Answer 7

Partners must not:

1. Compete with a partnership business;
2. Advance an interest that is adverse to the partnership; and
3. Usurp a partnership opportunity

Question 8

If a partner is worried something they’re doing may be considered disloyal, what is their safe-harbor option?

Answer 8

1. If a partners makes full disclosure of all material facts; and
2. a certain percentage of the other partners agree with the conduct;
3. the partnership can authorize or ratify the transaction

Question 9

What are the requirements of a duty of care to the partnership?

Answer 9

Partners must not:

1. Engage in grossly negligent or reckless conduct;
2. Engage in intentional misconduct; and
3. Engage in a knowing violation of the law

Question 10

To whom does a partner owe a duty of care and loyalty?

Answer 10

Duties of care and loyalty apply only to partners, not to former partners or prospective partners.

Question 11

Must a partnership divide the profits and losses the same?

Answer 11

No. Division of profits and losses need not be the same.

Question 12

What is the default rule for dividing profits and losses?

Answer 12

Where there is no partnership agreement regarding division of profits and losses:

1. Profits are divided equally; and
2. Losses will follow profits.

Question 13

Does a partner have the right to demand a distribution?

Answer 13

No. Partners do not by default have a right to demand a distribution, but they can agree in advance according to the partnership agreement.

Question 14

Does a partner have the right to transfer their partnership interests?

Answer 14

Yes. By default, a partner does have the right to transfer partnership interests to a third party. (Partners may still agree to restrict the transferability to require a majority decision of the partners.)

Question 15

What is the default rule for introducing a new partner?

Answer 15

When a new partner is introduced, all the existing partners must consent.

Question 16

What is the default rule regarding managing and governing the partnership?

Answer 16

Every partner has equal rights to the management and conduct of the partnership.

Question 17

What is the default rule for approving ordinary business matters by a partnership?

Answer 17

Ordinary business (e.g., declaring a distribution) requires a vote of majority.

Question 18

What is the default rule for approving extraordinary business matters by a partnership?

Answer 18

Extraordinary business (e.g., amending the partnership agreement) requires a vote of all of the partners.

Question 19

What must a partner do if she wants to voluntarily dissociate with the partnership?

Answer 19

The partner must give notice to the partnership that the partner wants to withdraw. (You can’t prevent a partner from withdrawing, but you can require certain restrictions on withdrawal.)

Question 20

What things can cause the involuntary dissociation of a partner?

Answer 20

1. There may be an event triggered in the partnership agreement;
2. The partner can be expelled pursuant to the partnership agreement;
3. It becomes unlawful for the partnership to carry on business with the partner;
4. A court order that a partner must be dissociated;
5. A partner goes bankrupt;
6. A partner dies;
7. A partner becomes incapacitated;
8. One of the entities of the partnership dissolves.

Question 21

What happens to someone after they are dissociated from the partnership?

Answer 21

Once dissociated, a former partner has no right to participate in management business, and the partner no longer has any duties to the partnership.

Question 22

What does a partnership owe a dissociated partner?

Answer 22

If the partnership continues, it must buy out the dissociated partner’s interest.

Question 23

What is the scope of a partnerships liability for a partner’s torts?

Answer 23

A partnership is liable in tort for torts that are committed by partners acting within the scope of their partnership. E.g., malpractice.

Question 24

What are the two steps toward terminating a partnership?

Answer 24

Termination involves:

1. Dissolution; and
2. Winding up

Question 25

How is a partnership at will dissolved?

Answer 25

An open-ended partnership with no fixed term tied to time or undertaking is dissolved when any partner chooses to dissociate.

Question 26

How is a partnership for a term or undertaking dissolved?

Answer 26

A partnership for a term or undertaking may be dissolved when the term expires or when the undertaking is completed (or when the parties agree).

Question 27

How many any type of partnership be dissolved?

Answer 27

1. Any dissolving event set forth in the partnership agreement; 2. Any event that makes it unlawful to continued, if not cured within 90 days; and 3. Judicial determination.

Question 28

Who may wind up a partnership?

Answer 28

1. Any partner that has not been wrongfully dissociated; | 2. A legal representative of the last surviving partner

Question 29

What power does the person who is winding up have?

Answer 29

The person winding up a partnership may dispose of and transfer partnership property, discharge partnership liabilities, and preserve partnership business to maximize value as a going concern.

Question 30

What is a statement of dissolution? Why file it?

Answer 30

A statement of dissolution is a filing that gives third parties notice that the partnership has been dissolved after 90 days. It limits the partners' liability.

Question 31

Who gets priority of distributions in a winding up?

Answer 31

Creditors first, then partners (maybe)

Question 32

What is a limited liability partnership (LLP)?

Answer 32

A partnership in which personal liability for obligations to the partnership is eliminated. (Must file with the state.)

Question 33

How does one form an LLP?

Answer 33

To transform a partnership into an LLP, you must have authorization equal to the same vote as any amendment to the partnership agreement. Also must file with the state.

Question 34

What must an LLP's name contain?

Answer 34

It must always end with either: 1. Registered Limited Liability Partnership (RLLP); or 2. Limited Liability Partnership (LLP)

Question 35

What is a limited partnership (LP)?

Answer 35

A partnership formed by two or more persons that has at least one general partner and one limited partner.

Question 36

What is the difference between general partners and limited partners in an LP?

Answer 36

The limited partners have limited liability; the general partner does not.

Question 37

How does one form an LP? What must the formation document contain?

Answer 37

An LP is formed by filing a certification of limited partnership, which contains: 1. Name of limited partnership; 2. In-state address; 3. Name of agent for service of process; 4. Name and addresses of general partners; 5. Statement of duration of the partnership; 6. Signed by the general partner(s)

Question 38

When might a limited partner in an LP lose their limited liability?

Answer 38

When they participate in the control of the partnership.

Question 39

What can a limited partner do without running the partnership (LP) and thus creating personal liability?

Answer 39

1. Be an officer, a director, or a shareholder of the general partner; 2. Consult or advise the general partner on partnership affairs; 3. Act as a surety of the partnership; 4. Request to attend meetings of the partnership; 5. Help wind up the partnership; and 6. Propose or approve of partnership matters

Question 40

How can a limited partner withdraw from the partnership (LP)?

Answer 40

The limited partner must give 6 months' written notice.