Partnerships HOT TOPICS

Question 1

What is a general partnership?

Answer 1

A partnership is an association of TWO OR MORE PERSONS to carry on CO-OWNERS of a FOR-PROFIT BUSINESS.

Question 2

When is a general partnership created, and what is required?

Answer 2

A general partnership is created when (1) TWO OR MORE PERSONS, (2) as CO-OWNERS, (3) carry on a BUSINESS FOR PROFIT.

No written agreement or formalities are required.

A person’s intent to form a partnership or be partners is not required.

Question 3

Factors to Consider on Whether there is a Partnership

Answer 3

Sharing of Profits: Raises Presumption of Partnership UNLESS the share was received as payment of a debt, as wages or compensation for services rendered, as rent payment, as an annuity or other retirement benefit, as interest on a loan, or for the sale of goodwill of a business.

Otherwise consider (none create the presumption)
Right to Control: Whether Parties Had Right to
Participate in Control of the business (even if control is never exercised).
Title to property is held in joint tenancy or in common
Parties designate their relationship as a partnership
Venture undertaken by the parties requires extensive activity
Sharing of gross returns

Question 4

How can you tell if a business arrangement is a partnership?

Priority: High

Answer 4

The key test applied to ascertain whether a business arrangement is a partnership is whether there is a sharing of the profits from the business; if so, such an arrangement generally is presumed to be a partnership, and persons who share in the profit are partners.

Question 5

T/F: Sharing in returns or revenue or calling someone a “partner” creates a presumption that there is a partnership.

Answer 5

False.

The only thing that create a presumption of partnership is if the parties agreed to share profits (and the disqualifying conditions are not met).

Question 6

How can the presumption of partnership for sharing in profits be rebutted?

Answer 6

The presumtion can be rebutted with evidence suggesting the lack of a co-ownership relationship, such as no right to control or no sharing of losses (something that owners would typically share).

Question 7

Partners’ Voting Rights

Answer 7

Unless otherwise agreed, all partners have equal rights in the management of the business and equal votes (one partner, one vote).

Matters Ordinary Course of Business: Require a majority vote of the partners.

Matters Outside Ordinary Course of Business: Require the unanimous consent of all partners.

Question 8

Does a partner have a right to compensation for services rendered to the partnership?

Answer 8

No.

Unless otherwise agreed, a partner has no right to compensation for services rendered to the partnership (exception: for reasonable compensation for services rendered in winding up the partnership business).

NOTE: If a partner has impliedly or expressly promised to devote time to the partnership business and fails to do so, they may be charged in an accounting for damages caused to the partnership.

Question 9

How are profits shared among the partners?

Answer 9

Unless otherwise agreed, profits are shared equally among the partners (by number).

Question 10

How are losses shared among the partners?

Answer 10

Unless otherwise agreed, losses are shared in the same manner as profits.

Question 11

What is the liability of partners in general partnership?

Answer 11

In a general partnership, each partner is **jointly and severally liable **for all obligations of the partnership ( whether from tort or contract).

BUT: The plaintiff must first exhaust partnership resources before seeking to collect from an individual partner’s assets (AKA P must first try to recover from the partnership’s assets before seeking to recover from your personal assets).

Question 12

Can a partnership be liable for a partner’s torts?

Answer 12

Yes. A partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting in the ordinary course of business of the partnership or with authority of the partnership.

Question 13

Is a partnership liable for contracts entered into by the partners?

Answer 13

A partnership is liable for** all contracts** entered into by a partner in the scope of partnership business or with** actual or apparent authority** of the partnership.

Question 14

What is actual authority? What are the sources of actual authority?

Answer 14

Actual authority is the authority a partner reasonably believes they have based on the communications between the partnership and the partner.

Actual authority can come from the partnership agreement or a vote of the partners.

Question 15

What vote is required to make decision in or outside of the ordinary course of business?

Answer 15

Ordinary Business: A majority vote of the partners is required to authorize ordinary business;

Not ordinary business: A unanimous vote of the partners is required to authorize extraordinary acts.

Question 16

Default Rule Regarding a Partners Authority

Answer 16

Each partner has the authority to take action in ordinary course of business unless majority decision to contrary (and exceptions not met)

Question 17

When does a partner have apparent authority?

Answer 17

A partner has apparent authority to bind the partnership to transactions within the ordinary course of the partnership’s business or business of the kind carried out by the partnership (unless the third party is actually aware (subjectively) that the partner lacks actual authority to act).

Question 18

What is the extent of a partner’s liability?

Answer 18

Each partner is personally and individually liable for the entire amount of partnership obligations.

So if one partner pays the entire obligation of a partnership, that partner is entitled to indemnification from the partnership. They may also require the other partners to contribute their pro rata shares of the payment if the partnership is unable to indemnify.

Question 19

What property is deemed to be partnership property?

Answer 19

Titled property if it is acquired in the partnership’s name or in a partner’s name and it is **apparent from document that they are acting for a partnership ** (ex: it mentions a partnership or says they are a partner).

Question 20

What Property is Presumed to Be Partnership Property?

Answer 20

Under the R.U.P.A., property is** rebuttably presumed to be partnership property if it was purchased with partnership funds**, regardless of in whose name title is held.
* “Partnership funds” includes not only the partnership’s cash, but also the partnership’s credit.

Question 21

What Property is Presumed to Be Partner’s Separate Property?

Answer 21

Under the R.U.P.A., property is rebuttably presumed to be a partner’s property if (1) it’s held in the name of one or more partners, (2) the instrument transferring title gives no sign that they’re acting for a partnership, and (3) partnership funds were not used to acquire the property.

Question 22

What is a partner’s ownership Interest in the Partnership? Who does it belong to?

Answer 22

A partner’s ownership interest in a partnership is called his “partnership interest” (just like a shareholder’s ownership interest in a corporation is called “stock”).

The partnership interest is the personal property of the partner but there are restrictions on what a partner can do with it.

Question 23

Can a partner unilaterally transfer his management rights and make the transferee a “partner?”

Answer 23

No. Unless otherwise agreed, a partner cannot unilaterally transfer his management rights and thereby make the transferee a “partner.”

Default Rule for New Partner: To admit a new partner requires a unanimous vote of the existing partners.

Question 24

Can a partner unilaterally transfer their financial rights?

Answer 24

Yes. Unless otherwise agreed, a partner can unilaterally transfer his financial rights.

Note: The transferee is not a partner; the transferor is still a partner and retains all of the management rights of a partner.

Question 25

What is Dissociation?

Answer 25

Dissociation is a change in the relationship of the partners caused by **any partner ceasing to be associated in the carrying on of the business ** (AKA the partner withdraws from the partnership) **Note**: Dissociation of a partner does not necessarily cause a dissolution and winding up (ending) of the partnership business.

Question 26

What Events Cause a Dissociation?

Answer 26

A partner becomes dissociated from the partnership by: 1. Voluntary Withdrawal (P at will, P dissolved. P for term or undertakings: Not dissolved). 2. Death or incapacity to perform partnership duties 3. Happening of an event Agreed to in the PS Agreement 4. Valid expulsion of the partner 5. Partner appointed a legal guardian 6. Partner files for bankruptcy 7. Partner assigns interest to creditor 8. The decision of a court that the partner is incapable of performing a partner’s duties.

Question 27

What is a wrongful dissociation? When is a partner wrongfully dissociated from a partnership? What is the partner's liabilities?

Answer 27

What is a wrongful dissociation occurs when the dissociation is in breach of an express term in the partnership agreement. **Term Partnership**: A dissociation is also wrongful in a term partnership if the **partner withdraws, is expelled, or becomes bankrupt before the end of the term**. **Liabilities**: A partner who wrongfully dissociates is liable to the partnership for any damages caused by the dissociation.

Question 28

Dissociated Partner’s Power to Bind Partnership (Apparent Authority to Bind)

Answer 28

A partnership can be bound by an act of a dissociated partner undertaken **within two years after dissociation** (assuming that dissolution has not occurred) if: (1) The act would have bound the partnership before dissociation, and (2) the other party to the transaction: (a) reasonably believed the dissociated partner was still a partner and (b) did not have notice of the dissociation.

Question 29

How can a partnership protect itself to not be bound by a dissociated partner?

Answer 29

The partnership can protect itself by (1) Notifying creditors directly of the dissociation (effective immediately) or (2) By filing a public statement of dissociation (**becomes effective 90 days after filing**).

Question 30

When does Dissociation = a Dissolution?

Answer 30

Generally, when a partner dissociates by express will in an** at-will partnership** (no definite end date or event), the partnership is dissolved and its business must be wound up. In a term partnership, if one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up of the partnership are required only if, within 90 days after the dissociation, at least one-half (50%) of the remaining partners agree to wind up the partnership.

Question 31

What is Dissolution?

Answer 31

The legal end of the partnership relationship between the partners. It's the first step in winding up a partnership and does not necessarily mean the immediate end of the business itself.

Question 32

What Events Cause a Dissolution?

Answer 32

Under R.U.P.A., the following events cause a dissolution: * **Partnership at will**: Notification by any partner of an express will to withdraw as a partner; * **Term Partnership**: In a partnership for a definite term or particular undertaking: (1) expiration of the term or completion of the undertaking, (2) consent of all of the partners to dissolve, or (3) within 90 days after a partner’s death, bankruptcy, or wrongful dissociation, at least half of the remaining partners wish to dissolve; * **Occurence of Agreed Upon Event**: The happening of an event agreed to in the partnership agreement that requires winding up the partnership business * **Illegality**: The happening of an event that makes it unlawful for the partnership to continue * **Issuance of a judicial decree on application by a partner** that (1) the economic purpose of the partnership is likely to be frustrated, (2) a partner has engaged in conduct making it not reasonably practicable to carry on the business, or (3) the business cannot practicably be carried on in conformity with the partnership agreement; * **Issuance of a judicial decree on ****application by a transferee of a partner’s interest** that it is equitable to wind up the partnership (1) after the term expires or the undertaking is completed in a partnership for a definite term or particular undertaking, or (2) at any time in a partnership at will; and * **Timing**: The passage of 90 consecutive days during which the partnership does not have at least two partners.

Question 33

What is the priority of distribution?

Answer 33

Each level of priority must be fully satisfied before beginning the next level: 1. The partnership must **pay all creditors** (“outside creditors” (ex, trade creditors, lenders, suppliers) and “inside creditors” (ex: partners who loaned money). 2. The partnership must r**epay all capital contributions paid into the partnership by partners**. 3. **Profits or losses**, if any.

Question 34

What is a limited partnership?

Answer 34

A partnership with at least one general partner and at least one limited partner. It’s a partnership, so general partnership principles typically apply unless displaced by LP-specific provisions.

Question 35

How do you form a LP?

Answer 35

* Must **File a Certificate of Limited Partnership with the secretary of state**. Must be signed by all general partners. Info on Form: Is minimal. Requires: (1) the name of the partnership, (2) the name and address of the agent for service of process, and (3) the names and addresses of each general partner. It should also include whether the limited partnership is a limited liability limited partnership. (If you fail to file this, remember, you’re just a general partnership.) * Name or partnership: The limited partnership name **must contain the phrase “limited partnership” or the abbreviation “L.P."** Note: if fail to file form = a general partnership!

Question 36

**Limited Partner's** Management Rights, Voting Rights, & Liability

Answer 36

**Management Rights**: Limited partners usually have no management rights unless the partnership agreement grants them rights. **Voting Rights**: Unless otherwise agreed, the vote of all partners (general and limited) is necessary for certain extraordinary activities, including to: (1) amend the partnership agreement; (2) convert the partnership to a limited liability limited partnership; (3) dispose of all or substantially all of the limited partnership’s property outside the usual and regular course of the partnership’s activities; (4) admit a new partner; or (5) compromise a partner’s obligation to make a contribution or to return an improper distribution. **Liability**: Generally does not have any liability beyond the liability to make agreed-upon contributions. * Participation in management does not cause a limited partner to become personally liable for an obligation of the limited partnership.

Question 37

**General Partner's **Management Rights, Voting Rights, & Liability

Answer 37

Manages the Limited Partnership. Each general partner has equal rights in the management and conduct of the LP’s activities. * Generally, any matter relating to the limited partnership’s ordinary business activities may be exclusively decided by the general partner or, if there is more than one general partner, by a majority of the general partners. **Liability**: Fully liable for LP’s debts

Question 38

How does a LP differ from a general partnership?

Answer 38

Creation: **A limited partnership can be created only by filing a certificate of formation with the state**. **Liability**: Only the general partner(s) is personally liable for partnership obligations, while the limited partner(s) generally does not have any liability beyond the liability to make agreed-upon contributions vs general P all partners are jointly and severally liable.

Question 39

What is a LLP

Answer 39

A partnership where all the partner (even those who control) experience some form of limited liability. In general, general partnership rules apply to LLPs.

Question 40

Formation of a LLP

Answer 40

Must file a** statement of qualification** with the secretary of state. The statement must be executed by at least two partners. The required minimal information includes: (1) the name and address of the partnership; (2) a statement that the partnership elects to be an LLP; and (3) a deferred effective date, if any. * Name must end with the words “Registered Limited Liability Partnership” or “Limited Liability Partnership” or one of the abbreviations “L.L.P.,” “LLP,” “R.L.L.P.,” or “RLLP.” **Timing**: The partnership becomes an LLP at the time of the filing of the statement or on the date specified in the statement, whichever is later. BUT no LLP unless and until this statement is filed (if not, = a general partnership).

Question 41

How does a LLP differ from a general partnership and from an LP?

Answer 41

An LLP differs from a general partnership and a limited partnership in that **in an LLP all of the partners have limited liability** (no partner is personally liable for a partnership obligation beyond their contribution to the partnership).