Partnerships & LLCs

Question 1

Partnership Formation + Remember Intent and Writing

Answer 1

A partnership is formed as soon as two or more persons associate to carry on as co-owners a business FOR PROFIT

Remember: Subjective intent and a writing declaring the partnership is IRRELEVANT

Question 2

When is someone presumed to be a partner?

Answer 2

If someone shares in the profits, but not because of a debt, wages, rent, etc.

Question 3

Partnership Estoppel - Being Held Out as a Partner to Creditors

Answer 3

Parties may be liable if they a creditor REASONABLY RELIED on the holding-out of a partnership (e.g. apparent authority)

Question 4

Management and Operation: Voting Rights - Decisions Requiring Ordinary Court of Business v. Matters Outside of the Business

Answer 4

Decisions regarding matter within the ordinary course of partnership business require a MAJORITY vote of partners, unless otherwise agreed

Matters outside of the ordinary course of business require the consent of ALL partners

Question 5

Management and Operation: Right to Salary or Other Compensation + Exception

Answer 5

Unless otherwise agreed, partners get NO compensation, with the exception of reasonable compensation for services rendered in winding up the business

Question 6

Financial Rights and Obligations: Sharing Profits and Losses + What if an agreement sets out the losses shared by partners but not profits?

Answer 6

Unless otherwise agreed, profits are shared EQUALLY among partners, despite contribution to partnership.

Losses are shared in the SAME MANNER as profits

If certain losses are agreed to but not profits, the profits are shared EQUALLY (not same rule as losses following profits)

Question 7

Management and Operation: Liability of the Partnership - Tort

Answer 7

Liable for loss or injury caused to a person as a result of the tortious conduct of a partner/employee acting in the ORDINARY COURSE of business of the partnership or with authority of the partnership

Question 8

Management and Operation: Liability of the Partnership - Contract

Answer 8

Liable for contracts entered into on its behalf as partners with ACTUAL (i.e. from partnership agreement) or APPARENT authority (i.e. agent of authority acting in ordinary course of business)

Question 9

Management and Operation: Liability of the Individual Partners - Type of Liability + Remember Who Plaintiffs Will Receive Resources from First

Answer 9

Each partner is jointly and severally liable for all of the obligations of the partnership

Remember: P must exhaust partnership resources before seeking to collect from an individual partner’s assets

Question 10

Management and Operation: Limited Liability to Third Parties Rule

Answer 10

Partners CANNOT limit 3rd party’s rights without the consent of the 3rd party (the agreement is effective, however, among the partners themselves)

Question 11

Management and Operation: Liabilities of Admitted Partners for Obligations Before Admission

Answer 11

A newly admitted partner is NOT personally liable for partnership obligations that arose BEFORE his admission

Question 12

Fiduciary Duties: Three Types of Duties Owed by Partners

Answer 12

1) Duty of Loyalty
2) Duty of Care
3) Duty of Disclosure

Question 13

Fiduciary Duties: Three Duty of Loyalty Requirements for Each Partner

Answer 13

1) Account to the partnership any BENEFIT derived by conducting partnership business
2) REFRAIN from dealing in ADVERSE business with the partnership
3) REFRAIN from COMPETING with the partnership

Question 14

Fiduciary Duties: Duty of Care Definition

Answer 14

Each partner must REFRAIN from engaging in grossly NEGLIGENT or RECKLESS conduct, INTENTIONAL MISCONDUCT, or KNOWING VIOLATION of LAW

Question 15

Fiduciary Duties: Can parties contractually eliminate these duties?

Answer 15

Not completely, it may be altered if not “manifestly unreasonable”

Question 16

Fiduciary Duties: Duty of Disclosure Requirements

Answer 16

1) Without demand, the PARTNERSHIP MUST FURNISH ANY INFORMATION concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties,
2) On reasonable notice, each partner has a RIGHT TO INSPECT AND COPY any partnership records concerning business and affairs

Question 17

Property Issues: Rule for Determining Partnership Property + Remember Presumption with Funds Used

Answer 17

It is partnership property if it is acquired in the partnership’s name, or in a partner’s name where he or she uses partnership title

Remember: If partnership funds are used, the property is PRESUMED to be partnership property, but if individual funds are used without title of partnership position, it is PRESUMED to be individual property

Question 18

Property Issues: Rights in Partnership Property + Remember Partner’s Individual Use in Partnership Property

Answer 18

Rights are UNRESTRICTED in partnership property (i.e. can be collateralized for a loan)

Remember: A partner cannot use or pledge partnership property individually (unless consented by other partners)

Question 19

Property Issues: Types of Partnership Rights + Transferring of Partnership Rights to Nonpartners

Answer 19

Partnership rights: 1) Management Rights (i.e. voting, participation in business); 2) Financial Rights

Unless otherwise agreed, a partner CANNOT unilaterally transfer management rights without UNANIMOUS VOTE of existing partners

A partner CAN transfer financial rights, but transferor remains a partner for managerial purposes

Question 20

Dissociation of Partners: Events of Dissociation

Answer 20

1) Partner gives notice of withdraw, 2) partner’s expulsion, death or bankruptcy, 3) an agreed-upon event, or 4) appointment of guardian for partner

Question 21

Dissociation of Partners: Wrongful Dissociation + Liability to Partnership

Answer 21

A person wrongfully dissociates if they breach an express term in the partnership agreement, or withdraws, judicially ordered, or becomes bankrupt

A partner who wrongfully dissociates is liable to the partnership for any damages caused by the dissociation

Question 22

Dissociation of Partners: Consequences of Dissociation

Answer 22

When a partner dissociates, either the partnership is DISSOLVED and the business is WOUND UP; or partnership continues and BUYS-OUT dissociated partner

Question 23

Dissolution: At Will Partnerships v. Term Partnerships + Remember If Partnership Falls Under 2 Partners

Answer 23

At Will partnerships (where partners have not agreed to the expiration of a definite term) will dissolve if a partner compels it

Term partnerships (partners have agreed to an explicit or implicit end) will dissolve if within 90 days after dissociation (by withdrawing before end of term, expulsion, or bankruptcy) at least 1/2 of the partners agree to wind-up

Remember: A partnership is dissolved after the passage of 90 consecutive days during which the partnership does not have at least TWO PARTNERS

Question 24

Dissociation: Buyout and Continuation - Dissociating Partner’s Rights

Answer 24

If a partner’s dissociation does not dissolve the partnership, the dissociating partner is entitled to a buyout interest and indemnification against partnership liabilities

Question 25

Dissociation: Liability of Dissociated Partner (Pre v. Post- Dissociation)

Answer 25

Pre: Remains liable for pre-dissociation partnership obligations Post: Can be liable for partnership liabilities incurred UP TO TWO YEARS after dissociating, UNLESS he notifies creditors directly or files a public certificate of dissociation

Question 26

Dissociation: Apparent Authority of Dissociated Partners + Remember How Partnership Can Protect Themselves

Answer 26

A dissociated partner may have apparent authority to bind partnership UNTIL TWO YEARS after dissociation Remember: A partnership can protect themselves by notifying creditors of filing a public certificate of dissolution

Question 27

Dissolution: Prioriority of Distribution

Answer 27

1) All creditors (outside or inside) 2) All capital accounts 3) Profits or losses shared by partners

Question 28

Dissolution: Apparent Authority During Windup

Answer 28

Partners RETAIN APPARENT authority to bind the partnership to a third party on new business even after requiring wind up (but partnership can protect itself by notifying creditors or filing a certificate of dissolution - which becomes effective 90 days after it is filed)

Question 29

Limited Partnerships Definition + Formation

Answer 29

A partnership with at least one GENERAL PARTNER (manages partnership operations) and one LIMITED PARTNER (no management rights, financial managers) Formation: A certificate of limited partnership must be filed with the state (including name of LP, name and address of office, and name and address of each general partner)

Question 30

Limited Partnerships: What requires the vote of all partners?

Answer 30

1) An amendment of the partnership agreement, or 2) the admission of a new general or limited partner

Question 31

Limited Partnerships: Financial Rights of Partners

Answer 31

Distributions are made on the basis of partner's contributions (as opposed to general partnerships where they share equally)

Question 32

Limited Partnerships: Liability for General Partners v. Limited Partners + Remember Either Partner's Liability for Their Own Torts

Answer 32

General: Unlimited liability, can be personally attacked Limited: Limited liability, creditors can only recover amount limited partner's invest into the company Remember: A either partner is ALWAYS LIABLE for her own torts, the limited liability shield NEVER protects a partner to this extent

Question 33

Limited Partnerships: Fiduciary Duties Owed (General v. Limited Partners)

Answer 33

General: Owes the LP the same duties of loyalty and care of a GP Limited: NO fiduciary duties owed (may actually compete with LP unless contracted otherwise)

Question 34

Limited Partnerships: Dissociation by Limited Partners

Answer 34

Limited partners DO NOT HAVE THE RIGHT to dissociate from LP, and would be WRONGFUL if they do

Question 35

Limited Liability Partnerships (LLP) Definition (Rules Associated with LLP) + Limited Liability Limited Partnerships (LLLP) (Rules Associated with LLLP)

Answer 35

A general partnership where ALL partners have limited liability for obligations of the business (apply GP rules) A LLLP is similar to a limited partnership, but ALL PARTNERS have limited liability (apply LP rules)

Question 36

Limited Liability Companies Definition + Remember Minimum Amount of Members + Remember Only Business Not Allowed to Be an LLC

Answer 36

Hybrid between a corporation and a partnership where the owners (called "members") have limited liability as well as the benefits of partnership tax treatment Remember: An LLC can be formed with ONLY ONE member Remember: An LLC can be formed for any lawful purpose, other than acting as AN INSURER

Question 37

LLC: Management of Operations - Who makes decisions?

Answer 37

All members (or managers if manager-managed LLC) govern LLC decisions

Question 38

LLC: Financial Rights

Answer 38

Profits and losses are shared EQUALLY unless otherwise agreed in the Operating Agreement

Question 39

LLC: Liability for LLC's Obligations

Answer 39

Members ARE NOT personally liable for LLC's obligations, they have limited liability and can only lose the amount of their investments

Question 40

LLC: Fiduciary Duties Owed

Answer 40

Duty of care and duty of loyalty

Question 41

LLC: Transferability of Ownership + Dissociation

Answer 41

Same as GP, you CANNOT transfer management rights (unless consent of all members), but can transfer financial rights Dissociation: Generally, events that will cause dissociation of a partnership will also cause dissociation of an LLC

Question 42

LLC: Ways for Dissolution + Remember Judicial Dissolution

Answer 42

1) By way of operating agreement, 2) consent of all members, or 3) passage of 180 days without ANY members in LLC Remember: Judicial dissolution may occur if the operation of an LLC is ILLEGAL, NOT REASONABLE to carry on company's activities, or managers have ACTED IN AN ILLEGAL OR FRAUDULENT MANNER

Question 43

LLC: Taxation (LLC v. Members)

Answer 43

LLC's have "pass-through" taxation, meaning no taxation of the LLC itself. Rather, only members pay taxes on their INDIVIDUAL tax returns