[PARTNERS] • 3 • Formation • Formation of a General Partnership
There are no formalities or filing required to create a general partnership. A general partnership is formed when two or more persons agree to carry on a business for profit . A partnership is presumed if there is an agreement to share profits equally . A persons subjective intent to form a partnership or act as general partners is irrelevant . Absent an agreement to the contrary: each partner has an equal vote ; profits are shared equally ; and losses are shared the same as profits are shared .
[PARTNERS] • 1 • Formation • Separate Businesses
To determine whether two businesses or people running businesses are separate entities rather than operating as a general partnership, a court will consider whether the business or person: (1) operates under a separate name ; (2) keeps the files of the business in a separate room ; (3) uses the same office staff ; (4) has contributed any money to the other person or entity; (5) intends to share profits with the other person or entity; OR (6) pays rent for a separate office.
[PARTNERS] • 1 • Powers of Partners to Bind the Partnership and Partnership Liability • Authority to Bind Partnership and Liability of Partnership
Under California Partnership Law, partners are agents of the partnership with regard to carrying out the general partnership business, and thus can bind the partnership by their actions when the partner has actual or apparent authority . An agent that enters into a contract or commits a tort that is in the scope of the partnership is imputed to the partnership, and all partners are jointly and severally liable for any resulting debt. However, unilateral acts by a partner outside the scope of the partnership business will not bind the partnership.
[PARTNERS] • 1 • Enforcement of Partnership Rights and Obligations • Transfer of Partnership Interests
Unless there is an agreement to the contrary, each partner has an equal right to manage the partnership and act as an agent for the partnership in the usual course of business. However, under California Partnership Law, a partner may transfer only his interest in the share of the profits of the partnership to a third-party . All other incidents of partnership ownership, such as the right to access partnership property and the right to participate in management of the partnership belong to the partnership, and CANNOT be transferred unless there is a unanimous agreement by all partners. For an assignee of a partnership interest to become a partner in the business all partners must consent, unless a written partnership agreement states otherwise.
[PARTNERS] • 1 • Relations Between Partners • Fiduciary Duties Owed to the Partnership and Partners
Partners owe the fiduciary duty of care and duty of loyalty to the partnership and to each other.
Under the duty of care a partner MUST NOT engage in intentional misconduct or conduct that is reckless , grossly negligent , or illegal .
Under the duty of loyalty , a partner MUST NOT engage in self-dealing , usurp business opportunities , or compete against the partnership . Where a partner breaches the duty of loyalty, profits can be disgorged and any contracts may be revoked or rescinded .
[PARTNERS] • 1 • Dissolution • Distribution of Partnership Assets
Upon dissolution, partnership assets are converted to cash and then distributed in the following order: (1) outside creditors ; (2) inside creditors (partners who made loans to the partnership); (3) partners capital contributions ; and (4) profits to be distributed among the partners . Each category must be fully satisfied before moving to the next category. If partnership assets are insufficient to pay the liabilities of the partnership, the loss will be divided among the partners.
[PARTNERS] • 3 • Personal Liability of Partners • In a General Partnership
In a general partnership, ALL partners are jointly and severally liable for the debts of the partnership, both in contract and in tort. Additionally, the general partners of a partnership are personally liable for the debts and obligations incurred by the partnership. The partnership assets must first be exhausted before an individual partners assets can be used to satisfy a partnership liability.
However, California Partnership Law places a limitation on the personal liability of incoming partners.
An incoming partner is liable only to the extent of his capital contribution for debts incurred by the partnership prior to his entry. An outgoing partner remains liable for pre-disassociation debts of the partnership. Additionally, an outgoing partner may be liable up to 2 years for post-disassociation debts UNLESS (a) creditors have been given notice of his departure OR (b) he files a public statement of disassociation which becomes effective 90 days after filing.
[PARTNERS] • 2 • Limited Liability Partnerships (LLPs) • Formation
A Limited Liability Partnership (LLP) is a form of ownership in which all the partners receive limited liability protection. To properly form an LLP, the entity MUST file a Statement of Qualification with the Secretary of State . The statement must contain: (1) the name of the partnership; (2) the address of the partnership; (3) a statement that the partnership elects to be a LLP; AND (4) a deferred effective date, if any. The effective date of formation of the LLP is either the date the Statement of Qualification is filed OR the deferred effective date if one is specified in the Statement of Qualification.
[PARTNERS] • 2 • Limited Liability Partnerships (LLPs) • Partner Liability