Partnerships & Hybrid Business Orgs Flashcards
GPs - rules for partnership agreements (what they are; formalities; what they CANNOT do)
• partnership agreements are NOT required, but are often created
o within reason, courts will defer to the agreement between the parties before applying statutory rules, so look FIRST to what the partners have agreed on
o partnership agreements NEED NOT be in writing (could be oral or even implied)
o CANNOT use these to inhibit a 3p’s rights
»> like taking away statutory protection for apparent authority when you haven’t provided such notice in public filings
»> or like limiting one partner’s liability for partnership debts to 3ps (3p can still get to you, but the agreement will likely get you to force the other partners to cover the judgment)
o CANNOT use these to eliminate the fiduciary duties of care and loyalty
GPs - definition of a general partnership (in fact)
formalities required
parties’ intent
what it commonly connotes (traditional elements)
relationship to agency
relationship to partners as individuals
• definition: an association of two or more persons to carry on as co-owners of a business for profit
o no formal acts are required to form a partnership - formed immediately when the definition is met
»> however the SOF may require a writing
»> **common: if you intend to form a LP or an LLP and you fail to file a formal document with the state, you are likely a GP by default!
o regardless of what the parties actually call it or their subjective intent
o a partnership generally connotes co-ownership in the partnership ppty with a sharing in the profits and losses of a continuing business
o **a partnership is the default form of association/organization for a business with 2 or more owners
o **each ptnr is deemed to be an agent of the other(s)
o ptnshp treated as a DISTINCT legal entity from its partners (except for tax purposes)
GPs - INDIVIDUAL PARTNER liability
ALL partners are jointly and severally liable for ALL obligations of the partnership (torts, contracts, debts)
ONLY ONCE the 3p has exhausted partnership resources can he can then seek to collect from individual partner assets!
**unique suckiness of general partnerships and why they are very unpopular
GPs - factors for determining if it is a partnership (which 3 are the most important?)
focus on the meeting the legal definition and just let these factors help you get there:
o (1) intent of the ptys (not dispositive - focus on the legal definition
o (2) RIGHT TO SHARE IN PROFITS (not simply splitting revenue!)
»> typically supplies prima facie evidence of partnership UNLESS the profits were received in payment as a debt, as wages of an employee, as rent to a landlord, as an annuity to a widow/er, as interest on a loan, as the consideration for the sale of a good will of a business or other ppty
o (3) OBLIGATION TO SHARE IN LOSSES
o (4) OWNERSHIP & CONTROL
o (5) community of power in administration
o (6) language of the agreement
o (7) conduct of the ptys towards 3ps
o (8) rights of ptys upon dissolution
GPs - partnership by estoppel - definition; 4 elements
Purpose: if no partnership was formed in fact, BOTH parties may still be liable as if they were partners to protect reasonable reliance by THIRD PARTIES
Elements:
o (1) an express or implied representation that one person is the partner of another,
o (2) made by the person sought to be charged as a partner (or with his consent),
o (3) a reasonable reliance in good faith by the 3p upon the representation, AND
o (4) a change of position, with consequent injury, by the 3p in reliance on the representation
fiduciary duty of loyalty
o duty of loyalty: i.e. you must act with the utmost fairness
ex) account to the partnership for benefits derived from use of partnership property
ex) refrain from representing adverse parties or competing with the business
fiduciary duty of care
o duty of care in the conduct or winding up of the partnership business to refrain from engaging in grossly negligent or reckless conduct, willful or intentional misconduct, or a knowing violation of the law
**notice that this duty DOES NOT INCLUDE mere negligence - so you are PROTECTED there (similar to common law of business judgment rule)
can an internal agreement change the statutory fiduciary duties?
o **note: a partnership agreement cannot eliminate these duties, but, it may limit these duties so long as they are not manifestly unreasonable
GPs - what makes something partnership property; what are our presumptions in the area of partnership property?
property acquired in the name of:
- (1) the partnership, or
- (2) a partner’s name where it is apparent in the transfer document that he is acting for the partnership
**presumption of partnership property if purchased with partnership funds
»> even if not acquired in the name of the partnership or one or a partner’s name where it is apparent in the transfer document that he is acting for the partnership
in contrast: ppty acquired in the name of one or more of the partners (1) without indication in the title instrument of the person’s partner capacity/the existence of the partnership, AND (2) without the use of partnership assets is presumed to be separate ppty, even if used for partnership purposes
GPs - rights to partnership property (for partnerSHIP and partNERS)
partnerSHIP’s rights: generally, if it is in fact partnership property, the partnerships right to use it are unrestricted
partNER rights: a partner is not a co-owner of partnership ppty and has no such interest in such ppty that can transferred, voluntarily or involuntarily
GPs - how does a partnership handle profits and losses? (3 rules)
rule: partners share the profits EQUALLY by number (unless contrary agreement), and they share in losses IN PROPORTION to the profits
»> losses follow profits, but profits do not follow losses
GPs - rules for rights of partners in management & actual authority
o rule: in the absence of an agreement to the contrary, each partner has EQUAL rights in the management and conduct of the partnership business, REGARDLESS of ownership interests
ACTUAL AUTHORITY ANALYSIS:
partners have the authority to conduct business reasonably related to the scope of their duties - when a partner acts within the scope of their duties, they bind the other partners (making them personally liable)
a difference arising as to a matter in the ordinary course of business must be decided by a MAJORITY of the partners BY NUMBER (not ownership interest)
> > > it doesn’t matter for a 2 person partnership if the act is in the ordinary course or not – there can be no majority
o ex) one partner can’t deviate from the ordinary course without assent from the other
o ex) one partner can keep on with the ordinary course of business regardless of the other does not want to
in contrast: an act OUTSIDE the ordinary course of business and an amendment to the partnership agreement may be undertaken only with the consent of ALL the partners
GPs - 3 steps of dissolution process
o dissolution process:
(1) dissolution (triggers the “beginning of the end”)
(2) winding up (do the business you need to do to dissipate the partnership property and presence – like pay your creditors and term your leases)
»> **fiduciary duties – especially loyalty – still apply at this time
(3) termination (partnership is formally over)
GPs - partner dissociation (what it is; how it can occur; when it is considered “wrongful”)
o dissociation: when a partner retires/leaves the partnership, there has been a “dissociation,” – the partnership continues as to the remaining partners
dissociation can occur by: >>> express will & notice >>> happening of an event >>> expulsion >>> death/incapacity >>> bankruptcy
wrongful dissociation:
»> breach of express term in partnership agreement
»> w/d from a TERM partnership before the end of term (like you made a partnership to build a building - which has an end date - and you leave before the building is finished)
(NOTE: you ALWAYS have the POWER to dissociate, but not the RIGHT - in some cases it may be WRONGFUL - subjecting you to liability)
Limited Partnerships - how does a limited partnership differ from a GP in management and liability?
o definition: like a GP, except it has two classes of partners: general and limited – the two classes have the same economic claims, but ONLY the GP(s) have management control and ONLY the GP(s) are personally liable for the debts of the partnership
> > > so limited partners are just money men who don’t have to worry about being liable for the debts of the business
> > > limited partners only have a say in BIG decisions, like adding a new GP or selling all (or substantially all) of the partnership assets
> > > as far as liability, limited partners can only lose the value of their investments (cause creditors must come after the partnership assets before hitting the general partners)
