Partnership

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II. Partnership

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ii. (1) No Formalities: occurs when there is an assoc. of two or more persons to carry on as co-owners for profit.
1. A voluntary relationship…Can be formed by words or by conduct.2. Co-owners implies joint control
3. If they share profits it is presumed to be a partnera. Factors to consider:
i. Who owns the assets, single name, single bank account, is there an agreement, who puts in the capital, who has access to the books, what do the parties call themselves (but labels are not controlling).
profits don’t = partnership if the profits were used to pay off a debt, or rent, or pay off a loan.

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b. Tax for Pp

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The taxes pass through to the partnersPartners pay tax whether the profits are distributed or not.
i. The partner’s share will be on the K-1 form provided by thePp iii. Losses pass through as well

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c. Capital raising in Pp

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you have an advantage because you have at least two people

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d. Management in Pp
i. Votes in Pp

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All partners manage the partnership and have equal rights.1. Ordinary bus.
a. Majority vote
2. Extraordinary decision (dissolve, sell off huge asset etc.)
a. Unanimity
b. Adding a partner requires unanimity
3. Amending the partnership agreement
a. Unanimous vote
4. Section 103 says you can change some stuff:
5. If there is an even split:
a. Most courts will find that it requires a majority vote to change the status quo (whatever you were

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ii. Formal meetings in Pp

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are not required, however partners have the right to be kept informed).
1. No qurom required etc.

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e. Financial rights in Pp

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i. Each partner will get an equal share of the partnership profits. Profits is whatever is left after you take out the expenses.

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capital contribution

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is putting assets into the partnership in return for a partnership interest.1. If the partners put in a different amount of contributions, financial rights are still equally divided unless the partnership agreement is changed.

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2. Capital accounts

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a. Each partner is deemed to have an account
i. how much you have put in (Your account is credited with that capital contribution)
ii. The profits you make that are still in the partnership are credited to the account as well
iii. When the profit is distributed out then the capital account goes down.
iv. Also goes down by the partner’s share of the partnership’s losses
v. Partners do not get interest on the accounts.

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b. Service partner

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A service partner is not entitled to remuneration for service

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a. Draw

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each partner has a right to draw out so much money every so often according to an agreement

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f. Liability in Gen Pp

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i. All partners are jointly and severally liable.
1. Exception not liable for stuff that incurred(1) before you became a partner or (2) while the partnership is an LLP.

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2. Partner liability
a. Liability in K

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i. Each partner is an agent of the Pp, whose acts bind the partnership as to ordinary business of the partnership unless the partner did not have authority and X knows the agent had no authority.

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b. Liability in Tort in Pp

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i. Partner who commits tort is liable because he is tortfeasor.
ii. P-ship is liability to a 3rd party in tort/contract for wrongful acts or omission of P’s, acting WITH AUTHORITY, OR in the ordinary course of the P-ship business
1. Ordinary course just means was it within the scope.
a. Time and space
b. Purpose for partnership or for partner?
c. List other factors..
2. With authority means both actual and apparent.

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iv. Partner Liability for misuse of money

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You will be liable as a partner if the partner steals money out of the trust funds.

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c. Indemnification in Pp

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i. The partnership will have to reimburse partner if partner paid rightfully on behalf of the partnership

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d. Contribution in Pp

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i. You have to serve each partner and get an individual judgment against them…And you have to get the partnership asset first. Then you can get A to pay.
ii. Partner A will have a cause of action against the other partners according to the loss equally or in proportion to their profit share agreed upon and this will go on the accounting.

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Partnership Property

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a. Was it acquired in the name of Pp
b. Acquired in the name of one or more partners with an indication that it is transferring to him in his capacity as a partner, even if it fails to name the partnership.
i. Or if you covey it by virtue of their being a partnership it will be Pp property.
c. It is purchased with partnership assets it is presumed to be Pp property.

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iii. Interest in Gen. Pp

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a. Pp interest (Whole bundle of rights)(piece of personal property)
i. This includes the transferable interest which is the financial rights to profits and losses and right to receive distributions.
ii. Includes rights to manage, right to be informed, right to access to the books.

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b. Transferability in Pp

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The transfer is generally permissible. It does not cause dissociation or dissolution of Pp but the transferee does not become a partner and cannot participate in Management or conduct of the Pp.

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i. Right of Transferee

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The transferee gets (1) the right to receive distributions to which the transferor would have been entitled. (2) He gets the net amount otherwise distributable to transferor upon dissolution. (3) Also has the right to seek a judicial determination that it is equitable to wind up the partnership business.

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c. Involuntary transfer/ How to get the transferable interest:

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A charging order is the sole remedy for a transfer of interest.
i. Procedure: you need a judgment against the person and then you need a charging order by the court that diverts the transfer interest, the income stream to the creditor.

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iii. Involuntary Transfer/ How to get the transferable interest:

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1. You can foreclose on a transferable interest. The creditor can get the court to force an involuntary sale on the court house steps. The debt is satisfied and whatever is left goes to the partner. The partner will have all the liabilities but will never see the income stream again.

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d. Partner’s Can get the Interest as well

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With property other than partnership property, the other partners can buy it up or (2)if all partners consent they can buy back partner’s interest through the partnership.

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e. Bankruptcy of Partner: What are the rights of partnership creditors and individ. Creditor?

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i. When a partner goes bankrupt then he is dissociated from the partnership.
1. Then the partners can chose to dissolve the partnership and continue the partnership and buy that partner out.
2. Creditors: Partnership and Individ. creditors are treated equally when dealing with personal assets of a partner.
b. As to partnership assets, the partnership creditors will have priority. If it is a partnership that goes bankrupt.

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h. Fiduciary Duties of a Partner:
i. Duty of Loyalty

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1. Duty is limited to
a. (1) accounting to the partnership and hold as trustee for it, any property, profit , or benefit derived in the conduct or winding up of Pp business or derived from the use of Pp property including the appropriation of a Pp opportunity.
i. No duty at formation of Pp
b. (2) have to refrain from direct conflicts of interest by representing somebody with an adverse interest
c. (3) must refrain from competing with Pp, but when it dissolves you may compete during that process.
d. You cannot eliminate the duty of loyalty but you can modify it if not manifestly unreasonable.
i. All partners may consent to specific things (have to know all material facts) something that might ordinarily violate the duty of loyalty.

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e. Self-Interest of Partners

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may pursue self-interest and it not be a violation of of duties owed.
i. Two Approaches:
1. Your self-interest cannot cause damage or detriment to the Pp.
2. Your selfish interest cannot violate good faith and fair dealing. So, as long as you deal fairly or openly and disclose, you can do what you want. Just have a pure heart and it be reasonable.
a. You can take away opportunity so long as you disclose and do it fairly

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f. Duty to disclose in Pp

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Partner has right to look at books reasonably. Duty to provide enough information so that the partner may that he can properly execute the rights and duties of being a partner. You cannot be disruptive or causing havoc.
i. The partnership agreement cannot unreasonably restrict this right

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ii. Good faith and fair dealing

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1. Pure heart- honest
2. Objectively reasonable conduct

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ii. A security

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security is stocks, investment K, notes and bonds, etc. Some type of investment in enterprise where someone else is going to run it.

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1. TWO purposes of securities law

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a. Disclose
b. Prevent fraud

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iv. Securities Act of 1933

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at initial sell the entity has to give a lot of info to the investors.

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v. Securities Exchange Act of 1934

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at the trading transaction the information must be updated before the transaction is complete and info must be given to the seller.
1. § Statute mandates disclosure as long as securities are out there floating around
2. § Set up securities exchg commission and gave licenses to dealers and brokers
3. § Set up regulatory scheme

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vii. IPO—initial public offering

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They file info abt the security—a registration statement-what are your major Ks, who is running it, what kind of outstanding debt to do you have, etc.
ix. § Prospectus furnished to investor

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xi. Securities Law: Exemptions

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a. Alternative protections may provide exemption
b. The sale is to an entity that can protect itself. (private placements) (Wealthier people).
c. Small offerings and will be stifled by the cost of registration. Maybe give an offering statement
d. If you fit into a specific reg. then you might be able to be exempted from the more rigorous disclosure process.
i. Reg D (a lot easier)
e. Offerings purely within the state. So you might be able to do a state disclosure.
i. The business of issuer has to be in AR, and only offer to AR residents.

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xiii. IS THE PARTNERSHIP INTEREST A SECURITY?

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2. A gen Pp interest is not a security because they are generally running the business.
a. Test for securities:
i. Investment
ii. Common enterprise (everyone has risk)
iii. Expect profits solely from the profits of others
iv. If partner gives up management or has not power and so unknowledgeable then it might turn into a security

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3. Security Law: Limited Pp

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limited partner interest is gen. a security because ltd p does not control.

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5. Security exemption in Ar:

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In AR, if a small bus, you are exempt if you have 7 or fewer investors and you meet the tests (handout):
a. No filing to claim it
i. Test:
ii. The purchaser intends to stay in
iii. Each purchaser knows what is going on
iv. You have access to info
v. No commission or remuneration is paid for selling the security
vi. No public advertising or solicitation.

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ii. Duty of Care in Pp

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Only a violation of duty of care if the partner is crim/intent/reckless/gross neglig. Breach of ordinary care is not a breach of duty of care.
2. The duty cannot be eliminated. It may not be unreasonably reduced.
v. UPA: if you do not have a buy-out provision
1. The partner’s rights are going to turn on whether the dissolution is rightful or wrongful dissolution
a. Rightful: Each partner may have the Pp assets (property) applied to discharge its liabilities, reduced to cash, and everyone takes their share. (Each partner may force liquidation.
b. Wrongful dissolution: When dissolution is caused in contravention they have the right to winding up or the right to continue the business.
i. Good guys can cause the partnership to wind up
1. Right to damages as well from the bad guy
ii. Good guys can (if they all desire) can continue the business. (Under the UPA they will not be continuing the partnership so would have to rename it but can continue the business.
iii. Bad guy: person who wrongfully causes dissolution:
1. If the good guy choose to wind-up, the bad guy has the right to his share of the assets or cash less the damages.
2. In the alternative, if under (ii) they continue the business, bad guy will have rights against his co-partners to have his value of the interest in the PP paid to him in cash. but will be reduced by damages that he has caused. In ascertaining the value of the p’s interest, the value of the good-will of the business shall not be considered.
c. NOTE: Under RUPA, you will be able to compete
2. What are the consequences of dissolution: How does it work?
a. On dissolution , the Pp is not terminated but continues until the winding up is complete.
i. The creditors get theirs first. UPA used to acknowledge a hierarchy between outside creditors and the inside creditor’s.
ii. RUPA puts outside creditors and inside creditors on the same level.
1. Everything is reduced to cash and then partners are given their share according to their capital accounts.
b. Can partners still bind the Pp during dissolution. Except is necessary to wind up, dissolution terminates a partner’s actual authority.
i. But as for X, until X knows about dissolution we protect X.
c. Under the UPA, when one partner leaves the Pp, if the other partners continue the business, it will be a new Pp.
d. Dissolution of Pp does not discharge the existing liability of the partners. Is the new partnership liable to the old creditors? Yes. When any new partner is admitted, if the business continues with liquidation creditors of the first Pp are also creditors of the new Pp.
e. Is the new partner liable to the old creditors? No because he was not there when the debt was incurred. But he will be liable to new creditors. Do problem on Feb 21, 2012 lecture.
f. NOTE: you can sale something as an ongoing business rather than completely dismantle the business. A partner

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vi. RUPA DISSOLUTION CURRENT ARK LAW
2. Dissociation can occur in 10 ways (Name first five):

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a. (1)From notice of the partner’s express will to withdraw whether rightful or wrongful.
b. (2) An event agreed to in the partnership agreement
c. (3) expulsion pursuant to the Pp agreement.
d. (4) partner’s expulsion by unanimous vote of the partners if:
i. unlawful to carry on the partnership business with that partner;
ii. There has been a transfer of all the partner’s interest
iii. Within 90 days after the partnership notifies a partner that it will be expelled because it has filed a certificate of dissolution or the equivalent (This is for entities.
iv. A partnership that is a partner has been dissolved and its business is being wound up
e. (5) the partner’s expulsion by judicial determination because he
i. Engaged in wrongful conduct that impacts the business.
ii. Willfully or persistently commits a material breach of Pp agreement
iii. Engages in conduct so that it is not reasonable or practical to carry on business with him anymore

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f. Dissociation inPp (List remaining five ways

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The partner’s financial in capabilities.
g. (7)Partners death or equivalent determination that the partner has otherwise become incapable of performing the partner’s duties under the partnership.
h. (8)Partner that is in trust or is acting as a partner virtue of being in trustee of a trust, distribution of the trust’s entire transferable interest in the partnership, but not merely by reason of the substitution of a successor.
i. (9)In case of a partner that is an estate or is acting as a partner by virtue of being a personal representative of an estate, distribution of the estate’s entire transferable interest in the partnership, but not merely by reason of the substitutions of a successor personal representative.
j. (10)Termination of a partner who is not an individual, partnership, corporation, trust, or estate.

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3. Liability to creditors of a dissociated Partner:

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a partner’s dissociation does not discharge him of old debts but does discharge him from new creditors.

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4. Liability for damages of dissociated partner

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a. If the partnership is dissolved, the partner gets his winding up share less damages if he was in the wrong
b. If the partnership continues, the partner gets a buy-out price less damages if he was in wrong.

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vii. RUPA DISSOLUTION

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During the winding up, the Pp is still in existence and partners still have fiduciary duties

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. SIX THINGS THAT CAUSE DISSOLUTION

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(1) notice partner’s express will to withdraw as a partner in at will Pp.in aTerm Pp
a. (1)Within 90 days after a partner’s dissociation by death or otherwise financial problems or entity deaths or wrongful dissociation, the express will of at least half of the remaining partners to wind up the partnership business.
b. (2)The express will of all of the partners to wind up the partnership business,
c. Or (3)the expiration of the term or the completion of the undertaking
3. (3) happening of an event agreed to in the partnership
4. (4) An event that makes it unlawful for all or substantially all of the business of the partnership to be continued.a judicial determination that
a. The economic purpose is unreasonably frustrated
b. Another partner has engaged in conduct which makes it not reasonably practicable to carry on the business
c. It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement, or
6. (6)On application by a transferee of a partner’s transferable interest, a judicial determination that it is equitable to wind up the partnership business:
a. After the expiration of the term or completion of the undertaking if the partnership was for a definite terms or particular undertaking at the time of the transfer or entry of the charging order that gave rise to the transfer
b. Or anytime, if the partnership was a partnership at will at the time of the transfer or entry of the charging order that gave rise to the transfer.

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Dissolution RIGHTS for Good Guys

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1. First option:
a. Any good guy can force a wind up and reduce to cash. Creditors get their stuff first, both outside and inside creditor. Any surplus must be applied to pay in cash the net amount distributable to the partners according to their capital accounts. Then if there is anything left the partners will split it according to their profit share.
2. Second option:
a. At any time after dissolution or before winding up, all of the partner, including any dissociating partner other than a wrongful one, may waive the right to have the business wound up and the Pp terminated. Both the Pp and the business are continued.

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Rights of BAD GUY

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1. First Option:
a. Buy-out right: If there is no dissolution or winding up, the Pp should cause the dissociate interest to be bought. The buy-out price is the amount that would have distributable distribution on the date of the dissociation the liquidation value or the going concern (goodwill) value without him (subtract his impact on the business), whichever is higher. Minus damages for breach.
2. Second Option:
a. If they decide to wind up he gets his winding up share minus the damages of the breach or wrongful dissolution.

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GOOD DISSOCIATOR: (Partner goes bankrupt

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Buy-out right: If there is no dissolution or winding up, the Pp should cause the dissociate interest to be bought. The buy-out price is the amount that would have distributable distribution on the date of the dissociation the liquidation value or the going concern (goodwill) value without him (subtract his impact on the business), whichever is higher