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LMF Texas Bar Exam > Partnerships > Flashcards

Flashcards in Partnerships Deck (107)
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1
Q

How are partnerships formed? What governs them?

A

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).

2
Q

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

A

No.

3
Q

Must parties comply with any formalities to form a partnership?

A

No.

4
Q

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

A

False.

Must have an intent to share profits.

5
Q

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

A

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.

6
Q

What about sharing of losses?

A

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.

7
Q

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

A

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.

8
Q

What are at-will partnerships?

A

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.

9
Q

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

A

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.

10
Q

What can a partnership agreement NOT do?

A

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.

11
Q

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

A

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.

12
Q

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

A

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

13
Q

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

A

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.

14
Q

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

A

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.

15
Q

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

A

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.

16
Q

How are profits and losses shared?

A

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.

17
Q

How are management rights shared?

A

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

18
Q

How are differences between partners decided?

A

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.

19
Q

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

A

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

20
Q

Can partners receive compensation?

A

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.

21
Q

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.

A

True

22
Q

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

A

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.

23
Q

When is property considered “partnership property?”

A

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.

24
Q

What is the partner’s right to partnership property?

A

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

25
Q

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

A

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.

26
Q

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

A

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.

27
Q

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

A

False.

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

28
Q

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

A

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.

29
Q

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

A

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.

30
Q

Does a transferee of a partnership interest have any liability?

A

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

31
Q

What is a Charging Order?

A

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.

32
Q

When can a partner bind a partnership to an agreement?

A

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.

33
Q

When does a partner have express actual authority?

A

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.

34
Q

When does a partner have implied actual authority?

A

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.

35
Q

When does a partner bind the partnership with apparent authority?

A

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.

36
Q

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

A

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.

37
Q

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

A

True

38
Q

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

A

True.

39
Q

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

A

True

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

40
Q

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?

A

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.

41
Q

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

A

Yes

42
Q

What form of partner liability is present for partnership obligations?

A

JOINT AND SEVERAL LIABILITY.

43
Q

Is a new partner liable for old partnership obligations?

A

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.

44
Q

What are the liabilities of a withdrawn partner?

A

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.

45
Q

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

A

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.

46
Q

When does a partner withdrawal occur?

A

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.

47
Q

What is the effect of a withdrawal of a partner?

A

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.

48
Q

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

A

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).

49
Q

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

A

True.

50
Q

When is a partner’s withdrawal wrongful?

A

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.

51
Q

Can a withdrawn partner bind a partnership?

A

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.

52
Q

What is “winding up?”

A

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

53
Q

Who may wind up the partnership?

A

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.

54
Q

What business may a partnership partake in during winding up?

A

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

55
Q

What may the person winding up the partnership do?

A

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.

56
Q

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

A

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.

57
Q

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

A

True

58
Q

Can a partnership agree when to terminate?

A

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.

59
Q

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

A

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.

60
Q

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

A

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.

61
Q

How are assets distributed in winding up a partnership?

A

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.

62
Q

How is a Capital Account calculated?

A

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.

63
Q

What is an LLP?

A

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.

64
Q

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.

A

True.

This liability was repealed.

65
Q

How does one create an LLP?

A

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.

66
Q

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.

A

True.

This requirement was repealed.

67
Q

What is a limited partnership?

A

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

68
Q

How is an LP formed?

A

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).

69
Q

What governs an LP?

A

Partnership agreement.

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

70
Q

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

A

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.

71
Q

Can a general partner withdraw?

A

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.

72
Q

What if there are no general partners left?

A

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.

73
Q

Can Limited Partners vote?

A

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

74
Q

Can limited partners withdraw?

A

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.

75
Q

Can a limited partner ever be personally liable?

A

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.

76
Q

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

A

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.

77
Q

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.

A

True

78
Q

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

A

No

Only gets rights to distributions.

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

79
Q

What if a general partner transfers his interest?

A

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

80
Q

When is winding up of a limited partnership required?

A

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.

81
Q

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

A

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.

82
Q

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

A

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

83
Q

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.

A

True.

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

84
Q

What is an LLC?

A

Neither a partnership nor a corporation.

85
Q

Who are the owners of an LLC?

A

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.

86
Q

Who is personally liable in an LLC?

A

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.

87
Q

What is a PLLC?

A

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

88
Q

How is an LLC formed?

A

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.

89
Q

What governs the LLC?

A

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

90
Q

How is voting done in an LLC?

A

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.

91
Q

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

A

True.

92
Q

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

A

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.

93
Q

What is an absolute majority?

A

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).

94
Q

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

A

True.

95
Q

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

A

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.

96
Q

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.

A

True.

97
Q

How are profits and losses shared in an LLC?

A

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).

98
Q

Who are the agents of an LLC?

A

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.

99
Q

Are member interests transferable?

A

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.

100
Q

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

A

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.

101
Q

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

A

True

UNLESS the company agreement states otherwise.

102
Q

What power to withdraw does a member have?

A

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

103
Q

When is the winding up of an LLC required?

A

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.

104
Q

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

A

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

105
Q

How are LLC’s taxed?

A

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

106
Q

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

A

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.

107
Q

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

A

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.