Partnerships MEE Flashcards
(39 cards)
Partnership requirements
- Intent—two or more persons or entities must intend to carry on a for-profit business as co-owners but do not need the specific intent to form a P
- Partnership agreement (PA)—to conduct a for-profit business as co-owners; can be implied by conduct in the absence of a written or oral agreement
- Statute of Frauds—a written agreement is not required for formation, but a contract that cannot be performed in one year must be in writing per the Statute of Frauds
- Extensive activity—a court will consider the amount of related activities directed toward achieving a business’s end goal when determining whether a P exists
- Profit sharing test:
o Rule—if there is profit sharing, it is presumed to be a P
o Exceptions—sharing profits does not create a presumption of a P in six statutorily enumerated circumstances: debt payments; interest or loan charges; rent; wages; goodwill payments from the sale of a business; and annuities or other retirement or health benefits
Partner by estoppel
- Case 1: P does not exist but a person is treated as a partner of a purported P
Case 2: P exists and a person who is not a partner of P is treated as a partner of P - Elements—a person may be treated as a purported partner if:
o There is a representation (oral, written, or implied by conduct) that a person is a partner in a P
o The person makes or consents to the representation
o A third party reasonably relied on the representation, and
o The third party suffered damages as a result of that reliance - Liability
o If P is liable, purported partner liable as if she were a partner
o If P is not liable, purported partner jointly & severally liable with those who consented to the representation. - No duty to deny the representation; merely being named by another is not enough to create liability
- It is not a defense that the purported partner was unaware that he had been held out as a partner to the specific third party if the representation was made in a public manner
- Purported partners are agents of the person making the representation
Nature of partnership
- Separate legal entity—a P may hold property and can sue and be sued
- Partners are not protected from personal liability for the P’s obligations
- If there is a formal PA, it generally governs when there is a conflict between the PA and RUPA
Partner as agent to P
a partner can commit the P to binding contracts with third parties
Fiduciary duties between partners
- Duty of loyalty
o Rule—no competing with P business, advancing an interest adverse to the P, or usurping a P opportunity
o Exception—the PA can designate certain activities as not violating the duty (but cannot eliminate the duty altogether) and may provide a safe harbor allowing the other partners to authorize or ratify a transaction between a partner and the P after full disclosure of material facts - Duty of care
o Duty to refrain from engaging in grossly negligent or reckless conduct, intentional conduct, or a knowing violation of the law
o The PA may not unreasonably reduce this duty - Dissociation/dissolution—upon a partner’s dissociation or the P’s dissolution, the duties do not apply unless the partner is engaged in winding up the P’s business
- Good faith and fair dealing—The PA cannot eliminate this obligation but can prescribe reasonable standards
Profits and losses
—if there is no PA or the PA is silent, each partner is entitled to an equal share of profits and losses; if the PA only specifies the division of profits, then losses are shared in same manner as profits
Partner’s account
—contains the partner’s contributions to the P and the partner’s share of the profits (less distributions, losses, and liabilities)
Distributions
—a partner cannot demand a profit distribution but is entitled to have her account credited with her share of profits
Partnership interest
- Personal property interest—consisting of the rights to share in the P’s profits and losses and to receive distributions
- Transfer to third party
o Rule—a partner can transfer all or part of the P interest (absent a restriction in the PA); the transferor partner retains all rights and duties of a partner (except for an interest in the distributions); transfer does not cause dissolution or dissociation
o Transferee rights
Right to receive distributions, to seek judicial order for dissolution, and to an accounting upon dissolution
No right to participate in the management or conduct of P business, access the P’s records, or demand other information
Property ownership
- Rule—all property acquired by the P belongs to the P and not to the individual partners; property may be acquired and titled in the name of the P or in the name of one or more partners who indicate their capacity as partners or the existence of the P
- Intent of partners controls—property is presumed to be P property if it was purchased with P assets or if P credit is used to get financing; but if ownership is unclear, consider other factors such as property’s use, tax treatment of the property, and the source of funds to maintain or improve the property
New partner
—an incoming partner must secure the consent of all existing partners
Management rights
—each partner has equal management rights and actual authority to conduct usual and customary P matters, unless there is reason to consult other partners
- A majority of partners needed to make ordinary P business decisions; the consent of all partners is required for matters outside the ordinary course of the P’s business and for amendments to the PA
Remuneration
—none, except for reasonable compensation for winding up the P’s business or when partners agree to it
Reimbursement and indemnification
—a P must reimburse a partner for loans made in furtherance of P business; and the P is required to indemnify partners for personal liability incurred in the ordinary course of P business
Use of P property
—a partner cannot derive a personal benefit from the use or possession of P property; the partner must compensate the P for such use or possession
Access to records
—a P must permit its partners and agents to access all P records
Lawsuits
a P may sue a partner for breach of the PA or for violating a duty owed to the P; a partner may sue the P or another partner to enforce the partner’s rights under the PA or RUPA
Events causing dissociation
o Partner’s notice of withdrawal
o Partner’s expulsion due to the PA, unanimous vote of the other partners, or the partner’s bankruptcy
o Partner’s death
o Appointment of a guardian for the partner or a judicial determination of the partner’s incapacity to perform his duties under the PA
o Termination of an entity partner
Wrongful dissociation
—a partner is liable to the P and the other partners for damages caused by wrongful dissociation
o P unlimited by time or undertaking—a partner’s dissociation is wrongful only when it is in breach of an express provision of the PA
o P for a definite term or undertaking—a partner’s dissociation is wrongful if, before the expiration of the term or completion of the undertaking, the partner withdraws, is expelled by court order, is a debtor in bankruptcy, or is not an individual, trust, or estate and the partner willfully dissolved or terminated
Effect of dissociation
o A dissociated partner is not permitted to participate in the management or conduct of P business
o A partner’s duty not to compete terminates upon dissociation; the partner’s other duties of loyalty and care terminate with respect to post-dissociation events
o An ongoing P must buy out the dissociated partner’s P interest
o Indemnification—the P must indemnify a dissociated partner against all P liabilities, whether incurred before or after the dissociation
o Dissociated partner’s liability—a dissociated partner is generally liable for P obligations incurred before the dissociation
o Post-dissociation action—a dissociated partner can bind himself and the P to a transaction if the other party (i) reasonably believes the dissociated partner is a partner, (ii) does not have notice of the dissociation, and (iii) is not deemed to have knowledge of the dissociated partner’s lack of authority; liability is limited to transactions within two years of the partner’s dissociation
Power to bind the P
- Partner as agent of the P—a partner can contractually bind the P when the partner acts with actual or apparent authority
o Actual authority—includes both express authority and implied authority
Express authority—can arise from the PA, the authorization of the partners, or a statement of authority filed with the state
Implied authority—based on a partner’s reasonable belief that an action is necessary to carry out his express authority
o Apparent authority—a partner must perform the unauthorized act in the ordinary course of P business; the third party with whom the partner was dealing cannot hold the P liable if the third party knew or was notified that the partner lacked authority
o Transfer of titled P property—in some circumstances, a partner has authority to transfer titled P property
P property held in the P’s name—a partner has the authority to execute an instrument of transfer in the P’s name
P property held in a partner’s name—a partner has the authority to execute an instrument of transfer in one or more partners’ names
Recovery of P property from transferee (P property transferred without authority)—recoverable if the P interest was indicated in the transfer instrument through which the P acquired the property or if the transferee was aware that the property belonged to the P and that the partner executed the transfer without authority
o P’s knowledge and notice—absent fraud, a partner’s knowledge or notice of a fact relating to the P is generally immediately imputed to the P
o A person who owns all partners’ interests in the P effectively has title to all of the P property and has the power to transfer title to himself
- Statements of P authority and denial—to clarify the existence and scope of a partner’s authority, statements of P authority and denial may be filed with the state
Effect of partner’s tortious acts
the P is liable for a partner’s tortious acts committed in the ordinary course of the P business or with P authority
Liability to third parties
- P obligations—a P is subject to suit for its obligations; partners are jointly and severally liable for all P obligations
- Effect of judgment—a judgment against a P is first satisfied from the P’s assets, and then the partners’ personal assets
- Criminal liability—a P can be convicted of a crime and a penalty levied on P assets
Conversion
- P to limited partnership (LP)—the conversion must be approved by all of the partners of the P, and the P must file the articles of conversion with the state; former general partners remain liable for pre-conversion obligations
- LP to P—the conversion must be approved by all of the general and limited partners, and the LP must cancel its LP certificate; partners remain liable as limited partners for preconversion LP obligations and are liable as general partners for post-conversion P obligations
- Effect on the P—a conversion has no effect on the P as an entity (e.g., property owned by the P remains owned by the P; legal proceedings by or against the P continue as if the conversion had not occurred)
