Partnership

Front 1

Five issue areas of partnership

Back 1

1. General partnership formation;
2. liabilities of general partners to third parties;
3. rights and liabilities between general partners;
4. general partnership dissolution;
5. alternative unincorporated business organizations.

Front 2

General partnership formation

Back 2

Formalities: no formalities to becoming a general partnership.

Definition: a general partnership is an association of 2 or more persons who are carrying on as co-owners of a business for profit.

Sharing profits is the key factor. Therefore: the contribution of money/capital or services in return for a share of profits is prima facie evidence of a general partnership. NOT in return for salary, wage, commission, or a fixed rate of interest.

Front 3

Liabilities of general partners to third parties

Back 3

Agency principles apply:
1. Partners are agents of the partnership for apparently carrying on usual partnership business. 2. Therefore, the general partnership is liable for each partner's torts in the scope of partnership business and for each partner's authorized contracts.

Front 4

Liability for debts

Back 4

Each general partner is personally liable for all debts of the partnership and for each co-partner's torts.

1. Incoming partner's liability for pre-existing debts: generally not liable for prior debts BUT any money paid into the partnership by incoming partner can be used by the partnership for the purpose of satisfying prior debts.

2. Dissociating (withdrawing) partner's liability for subsequent debts: retain liability on future debts until actual notice of their dissociation is given to known creditors and until publication notice is given to all potential creditors.

Front 5

General partnership liability by estoppel

Back 5

One who represents to a third party that a general partnership exists will be liable as if a general partnership exists.

As a rule, general partners are liable for all partnership obligations, including co-partners torts. However if never formed a partnership because it is just a lending arrangement rather than sharing profits there can still be liability under estoppel. Non-tortfeasor can be liable to a third party because she represented that she and the tortfeasor were partners.

Front 6

Rights and liabilities between general partners

Back 6

General partners are FIDUCIARIES of each other and the partnership. Therefore, general partners owe to each other and the partnership the duty of loyalty, which means that general partners may never engage in self-dealing; may never usurp partnership opportunities; and may never make a secret profit at the partnership's expense.

Action for accounting: partnership may recover losses that are caused by the breach and also may disgorge profits made by the breaching partner as well.

Front 7

Partner's rights in partnership property and liquidity

Back 7

Specific partnership assets: land, leases, equipment- are owned only by the partnership itself and therefore may not be transferred without partnership authority. Not liquid.

Share of profits and surplus: share of profits is personal property owned by each individual partner and therefore may be transferred by individual partners to third persons. Liquid.

Share in management: asset owned only by the partnership itself and therefore may NOT be transferred by individual partners to third parties. Cannot sell right to vote or leave it in your will, etc. Not liquid.

Test to determine whether fact pattern involved specific partnership assets or personal property: whose money was used to buy the property? If partnership money= partnership property. If personal money= personal property.

Front 8

Management

Back 8

Absent an agreement, each partner is entitled to EQUAL control (vote). Also, majority vote governs ordinary partnership matters BUT unanimous consent is required for fundamental partnership matters.

Front 9

Salary

Back 9

Absent an agreement, partners get NO SALARY. Default rule.

Exception: partners receive compensation for helping to wind up the business.

Front 10

Partner's share of profits and losses

Back 10

1. Absent an agreement, PROFITS SHARED EQUALLY.
2. Absent an agreement, LOSSES SHARED LIKE PROFITS.

Front 11

General partnership dissolution

Back 11

Dissolution: a general partnership dissolves automatically upon any material change in the partnership caused by the death or withdrawal of any single general partner.

The real end of the partnership is called: termination.

Winding up: period between dissolution and termination in which the remaining partners liquidate the partnership's assets to satisfy the partnership's creditors.

Front 12

Partnership's liability

Back 12

Old business. The partnership and therefore its individual general partners retain liability on all transactions entered into to wind up old business by satisfying creditors who existed when winding up began its old business.

New business. The partnership and therefore its individual general partners retain liability on brand new business transactions during winding up until actual notice of dissolution is given to known creditors and until publication notice is given to all potential creditors.

Front 13

Priority of distribution

Back 13

Each level of priority must be fully satisfied before goign to the next level:

1. First, outside creditors MUST be paid. All non-partner, third party trade creditors- paid fully first.
2. Second, inside creditors MUST be paid. Partners who have loaned money to the partnership and become creditors thereby- paid fully next.
3. Third, capital contributions, by partners MUST be paid. Not loans- this is money for profits. Partnership is liable to its own partners for the full repayment of their capital contributions.
4. Profits and surplus, if any. If first three are paid, left owners are shared- equally, if any, without an agreement.

Rule: each partner must be repaid his or her loans and capital contributions, plus that partner's share of the profits or minus that partner's share of the losses.

Note: Partners contribute out of their own pocket if not enough for the first three.

Front 14

Alternative unincorporated business organizations
Limited partnerships

Back 14

A limited partnership is a partnership with at least 1 general partner and at least 1 limited partner.

Formation: file a limited partnership certificate that includes the names of all general partners.

Liability and control:
General partners: still general partners so liable for all limited partnership obligations. Also can control the business.
Limited partners: limited liability and therefore are not liable for the obligations of the limited partnership itself. Control- limited partners in NY may not manage the business without forfeiting limited liability status.

Front 15

Alternative unincorporated business organizations
Registered limited liability partnerships (RLLP)

Back 15

Formation: filing a certificate of registration with the label RLLP and stating the profession to be practiced.

Liabilities: no partner is liable for the debts and obligations of this partnership- not even general partners. But still liable for own personal torts.

Front 16

Alternative unincorporated business organizations
Limited liability companies (LLC)

Back 16

Hybrid between corporation and partnership in which owners who are called "members" have the same rights and limited liability of shareholders in a corporation plus the benefits of partnership tax treatment. Corporation tax= bad; partnership tax= good.

Formation requirements: file articles of organization and must publish a summary of the articles in at least two newspapers and you may adopt an operating agreement.

Control: owners/"members" may control, but also may delegate their control to a team of managers.

Limited liquidity: full membership interest may not be transferred without majority consent of the membership interest or as provided in the operating agreement.

Limited life: the company will dissolve upon majority vote of the membership interest or as provided in the operating agreement.

Therefore: LLCs= limited liability + limited liquidity + limited life + limited tax.

Front 17

Partnership summary

Back 17

Formation: 1. no general partnership formalities; 2. association, two or more persons, carrying on co-owners business for profit.

Liabilities to third parties: 1. general partners ARE liable for all partnership obligations; 2. estoppel- representers are liable as if general partners.

Relations between partners: 1. fiduciaries- accounting for profits; 2. only the share of profits is liquid transferable personal property; 3. without an agreement- equal control, no salary, equal profits, losses just like profits.

Dissolution: 1. priority: 1. all outside creditors, 2. all partner creditors, 3. all capital, 4. profits, if any, shared equally without an agreement; 2. distribution rule: each partner must receive their loans and capital and their share of profits, but also minus their share of losses.

Alternative unincorporated business organizations: 1. limited partners; 2. registered limited liability partners; 3. LLC members. ALL have limited liability.