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Flashcards in Partnerships Deck (14):
1

[Def] Partnership

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

2

[Def] Persons

Anything that has legal capacity to contract (includes individuals and companies)

3

Partnership = Co-Ownership + Sharing Control

When 2 or more persons SHARE PROFITS, PRESUMPTION of partnership relationship

No specific intent to form partnership required

But there must also be sharing of control

4

Consequence of Partnership Formation

1. Separate Legal Entity
2. Partnership Liability - Partners are PERSONALLY liable!
3. No Entity-Level Taxation

5

Partnership Agreement

Understanding as to what nature of partners' relationship is

Where written, agreement terms will control. All else, state law default rules will govern
-- EXCEPTION: Where state law is mandatory
1) Cannot waive personal liability of partners
2) Liability to 3rd parties
3) Cannot deny partners access to books and records
4) Cannot eliminate fiduciary duties

6

Fiduciary Duties of Partners

1. Duty of Loyalty
- Must NOT: compete with a partnership business; advance an interest that is adverse to partnership; usurp a partnership opportunity
- CANNOT eliminate duty of loyalty but may limit so long as it is not MANIFESTLY UNREASONABLE
- SAFE-HARBOR Option: If a partner makes full DISCLOSURE of all material facts and a certain percentage of other partners agree, the other partners can RATIFY the transaction

2. Duty of Care
- Must NOT engage in: grossly negligent or reckless conduct, intentional misconduct, knowing violations of the law
- CANNOT eliminate duty of care

APPLIES only to CURRENT partners (not former or prospective partners)

7

Profits and Losses

DEFAULT: Profits divided equally; losses follow profits

8

Distributions

DEFAULT: Partners do not have the right to demand a distribution

9

Transfer of Partnership Interests

DEFAULT: Partner has right to transfer partnership interests to a 3rd party

10

New Partner

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

11

Management of Partnership

DEFAULT: Each partner has equal rights to the management of the partnership

12

Ordinary / Extraordinary Business Matters

DEFAULT: Ordinary = vote of majority of the partners; Extraordinary = vote of all the partners

13

Dissociation

Partner ceases to be associated with the partnership

Voluntary = Partner may give NOTICE to partnership that partner wants to withdraw

Involuntary =
1. Event triggered in partnership agreement
2. Expelled pursuant to partnership agreement
3. Unlawful for partnership to carry on business with partner
4. Court order
5. Partner goes bankrupt
6. Partner dies
7. Partner becomes incapacitated
8. One of the entities of the partnership dissolves

14

Consequences of Dissociation

Partnership is NOT dissolved but it must buy out the dissociated partner's interest

Partner has no right to participate in management but no longer has any duties to partnership either