Partnership

Front 1

General partnership formation

Back 1

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

• The receipt by a person of a share of the profits of a business is prima facie evidence that a partnership exists.

Establishing a partnership:

• In the absence of a statute, a partnership agreement may be express (written) or implied (established solely from the conduct of the parties). Thus, if the parties start conducting business as partners or draw up a partnership agreement, a partnership is established.
• A writing is required only if the partnership agreement cannot be performed within a year. Violation of this gives rise to a partnership at will.
  
• Consent: No one can become a member without consent of all partners
• Capacity: anyone who is capable of entering into a binding contract may be a partner
• Legality of purpose: if the purpose of the partnership is illegal, then the partnership is void.

How do you get actual authority to act on behalf of the partnership?

• If a partner is not specifically authorized to do a particular act by the partnership agreement, actual authority can still be granted to a partner by majority vote.

Front 2

Liabilities of general partners to third parties

Back 2

Contract liability

• As agents of the partnership, partners have apparent authority to bind the partnership to any contract within the scope of partnership business.
• If a contract is outside the scope, the partnership generally will not be bound unless the partner has actual authority (expressly authorized)
• Liability is joint (ALL partners must be sued)

Fraud on third party

• Where one partner acting within scope of partnership business defrauds third party, the partnership will be liable.
• Liability is joint (ALL partners must be sued)

Torts

• Partners are liable for torts committed by partners or employees within the ordinary course of partnership business.
• Liability is joint and several (one or more partners may be sued)

Breach of trust

• Partnership is liable if a partner misapplies the money or property of a third person received by him within the scope of his apparent authority.
  
• Liability is joint and several (one or more partners may be sued)

Criminal liability

A partner will not be criminally liable for the crimes of other partners committed within the scope of the partnership business, unless the other partners participated in in the commission of the crime either as principals or accessories.

Each general partner is personally and individually liable for the entire amount of all partnership obligations, whether arising in contract or tort

• Incoming partner is generally NOT liable for pre-existing debts, but any money paid into the partnership by that new incoming partner can be used by the partnership to satisfy those prior debts.
• Withdrawing (dissociating) partner retains liability on future/subsequent debts until actual notice of their dissociation is given to all known creditors and until publication notice is given to all potential creditors.

General partnership liability by estoppel

• When a person, by words or conduct, represents herself or permits another to represent her as a partner, she will be liable to third parties who extend credit to the actual or apparent partnership.
• When a person, by words or conduct, holds another person out to be her partner, she thereby makes the alleged partner her agent with the power to bind her to third parties as if the other were, in fact, a partner.
• So if you never form a partnership (never any lending arrangement, not based on a sharing of profits), but you hold yourself out as a partnership, you can then be liable for anything you could be liable for if you were a partner.
  

Front 3

Rights and liabilities between general partners

1) General partners are fiduciaries of each other and the partnership

Back 3

General partners owe to each other and the partnership a duty of loyalty

1. cant engage in self-dealing
   
2. can't usurp partnership opportunities
   
3. can't make a secret profit at the partnership's expense)
   

Generally partners cannot sue or be sued by his partnership, but...

(i) As a remedy for breach, can bring an action for accounting (equitable action) which allows partnership to:

1. Recover losses that are caused by the breach; and
2. Disgorge profits made by the breaching partner

(ii) One partner may sue the other at law when no complex accounting is required or when a single fully closed but unadjusted transaction is involved.

Indemnification: partnership must indemnify every partner with regard to payments made and personal liabilities reasonably incurred in the ordinary and proper conduct of business.

Contribution: Where one partner has been required to pay or satisfy more than her share of a partnership debt, she may require the other partners to contribute their pro rata shares.

Front 4

Rights and liabilities between general partners

2) Partners' rights in partnership property and liquidity

Back 4

Rule: partners do not have a right to use partnership property other than for the benefit of the partnership. Partners' interest in the partnership is treated as personal property and can be assigned and attached.

Specific partnership assets

• These are assets like land, leases, or equipment which are owned only by the partnership itself.
  
• may NOT be transferred by individual partners without partnership authority.
  

Share in management

• An asset owned only by the partnership itself
  
• Cannot be transferred by individual partners to third parties

Share of profits (remaining after liquidity)

• Share of profits is personal property owned by individual partners
  
• May be transferred by individual parties to third parties.

CONTROLLING FACTOR: If partners' intent was to devote the property to partnership purposes then it's partnership property. Can also look to whether partnership or personal money was used, but that doesn't control.

What happens when a partner dies?

• Upon the death of a partner, his rights in specific partnership property vest in the surviving partners.
  
• Upon the death of the last surviving partner, her rights in the partnership property vest in her legal representative.
  

Front 5

Rights and liabilities between general partners

3) Management

Back 5

Absent an agreement, each partner is entitled to EQUAL CONTROL (one partner, one vote).

Ordinary matters are governed by majority vote, but fundamental partnership matters require unanimous consent.

Front 6

Rights and liabilities between general partners

4) Salary (remuneration)

Back 6

Absent an agreement, partners get NO SALARY

Exception: partners get compensation for helping to wind up a partnership business.

Front 7

Rights and liabilities between general partners

5) Partner's share of profits and losses

Back 7

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

But remember the profits made in the course of the partnership belong to the partnership

Front 8

General partnership dissolution

1) Definitions

Back 8

Dissolution

• By acts of the partners: pursuant to partnership agreement, by mutual assent of all partners, by proper expulsion of a partner, or by express will of any one partner.
  
• By operation of law: dissolved in the event the partnership business becomes illegal, a partner dies, or there's a bankruptcy of a partner or the partnership
  
• By decree of equity court
  

Termination

The real end of the partnership is called "termination"

Winding up

The period between dissolution and termination in which the remaining partners liquidate assets to satisfy the partnership's creditors

Front 9

General partnership dissolution

2) Partnership's and partners' liability during winding down

Back 9

After dissolution, a partner partners do not have authority to act as an agent for either the partnership or for any other partner. EXCEPT...

• partner does have authority to wind up the partnership's affairs.
  
• If a partnership agreement provides that business is to be continued by one or more partners, the business will be continued without any winding up.
  

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.

New business (partner will be individually liable)

Partners retain liability on brand new transactions during winding up until personal notice of dissolution is given to known creditors (current and past) and publication notice is given to all potential creditors.

Front 10

General partnership dissolution

3) Priority of distributoin

Back 10

Each level of priority must be fully satisfied before beginning the next level. Order of priority:

1. Outside creditors must be paid (all non-partner trade creditors)
2. Inside creditors must be paid (partners who have loaned money to the partnership and have thereby become creditors)
3. Capital contributions by partners must be paid, or losses
4. Profits and surplus, if any (without an agreement, profits are shared equally)

What happens if partnership runs out of money to repay?

• Partnership MUST repay the first 3 categories, so if it can't it will force each of the partners to share EQUALLY in the LOSS of having to put in more money to satisfy partnership liabilities.
  
• Where a partner is forced to pay more than his share of the partnership's debts, he is entitled to contribution from the other partners to equalize the shares.

Front 11

Continuance of business after dissolution

Back 11

The remaining partners have a right to continue the partnership business after dissolution if:

1. A partner dissolves the partnership in contravention of the partnership agreement;
2. A partner is expelled according to the terms of the partnership agreement; or
3. The partners agree to continue the partnership

Front 12

Alternative unincorporated business organizations

1) Limited partnerships

Back 12

Definition:

A partnership with at least one general partner and at least one limited partner

Formation:

• Must file with the state a limited partnership certificate that includes the names of all general partners.
  
• Certificate must set forth partnership's name, county where office will be located, a designation of the department of state as agent for service of process, the latest date on which the partnership is to dissolve, the names and addresses of the partnership's general partners and agent for service of process.
  

Name of partnership

• Must contain the words "limited partnership" or LP
  
• May not contain the name of a limited partner unless it is also the name of a general partner or the partnership business had been carried on under that name before the admission of that limited partner.
  

Liability

• General partner is subject to all the liabilities of a partner in a regular partnership, including personal liability for partnership obligations.
• Limited partner is not personally liable for partnership obligations beyond their contributions. Three exceptions (where limited partner may be personally liable): (i) she is also a general partner; (ii) she participates in control of the business and the person dealing with the limited partnership reasonably believes the limited partner is a general partner; or (iii) she knowingly permits her name to be used improperly in the partnership name.

Rights of both general and limited partners

• Share in profits and losses
  
• Assign their interest in the partnership
  
• Transact business with the partnership
  
• Withdraw
  
• Apply for dissolution
  

Rights specific to general partners:

Right to manage the partnership

Rights specific to limited partners

• Vote on specific matters but not participate in control
  
• Obtain partnership information, including inspection of books
  

Front 13

Alternative unincorporated business organizations

2) Registered Limited Liability Partnerships (RLLP)

Back 13

Definition

General or limited partnerships engaged in professional services (likea law firm)

Formation

• File a certificate of registration with the state that is labeled "RLLP" or "limited partnership" and designating the profession to be practiced, that it is eligible to register as an RLLP, and that the partnership is filing a registration for status as an RLLP
  

Liabilities

No partner, not even general partners, is liable for the debts an obligations of this partnership, EXCEPT liabilities arising out of the partner's own negligent or wrongful act or out of the negligent or wrongful act of a person under partner's direct supervision and control

Front 14

Alternative unincorporated business organizations

3) Limited Liability Companies (LLC)

Back 14

Definition

• An LLC is a hybrid between a corporation and a partnership in which the owners who are called members have the same limited liability a shareholders in a corporation, plus the benefits of partnership tax treatment (corp tax is less favorable)
  
• Limited liability, limited liquidity, limited life, limited tax

Formation

• Organizers must file the articles of organization with the state and publish a summary of the articles once a week for at least 6 weeks in a row.
• Must adopt an operating agreement
  

Control

• Management of an LLC is presumed to be by all members.
• Other management arrangements can be made (e.g., management by only some of the members or by outside managers), but they must be specified in the articles of organization
  

Limited liability

Members, managers, and agents of an LLC are not personally liable for obligations of the LLC

Limited liquidity

A full membership interest may not be transferred without consent of a majority of the membership interest or as provided in the operating agreement.

Limited life

The company will dissolve upon a vote of the majority of the membership interest or as provided in the operating agreement