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65 Cards in this Set

  • Front
  • Back
Definition of Partnership
A partnership is an association of two or more persons to carry on as co-owners of a business for profit
Formation issues to think about
Partnership agreement
Who is a partner
Partnership Agreement
Creation of a partnership may be express or implied, i.e. it is not necessary to have a written agreement
Absent an express agreement, the existence of a partnership is determined based on evidence including
1. an intent to enter a business as co-owners for profit (not necessarily intent to form partnership)
2. An agreement to share profits and losses and
3. A mutual right of control of the business
General Principal: A partnership agreement (verbal or written) is a contract. Thus, general contract rules apply
Who is a partner?
RULE: Receipt by a person of a share of business profit is prima facie evidence that he or she is a partner
EXCEPTIONS: Share of profit received in payment for wages, rent, consideration for sale of an asset, repayment of principal or interest on debt
Partnership Property. Think about
Property Held in the Partnership’s Name
Other property
Property held in the partnership’s name
RULE: Even though the partnership is not viewed as a distinct legal entity for all purposes, it may hold title to property in the partnership name. Property purchased in the name of the partnership is considered partnership property
Other Property
RULE: Property not titled in the partnership name may still be partnership property. The emphasis here will be on the intent of the parties that it be partnership property
Other Property (examples of those generally presumed to be partnership property)
property that was brought in or acquired by the partners for the partnership business
Unless a contrary attention appears, if the property was acquired by the partnership with partnership interests
Property acquired in the name of one or more individual partners if it is carried on the partnership books
Property improved by the partnership or property on which the partnership covers expenses such as tax, insurance or repairs/maintenance
Partners rights in Specific Partnership property
RULE: A partner’s interest in specific partnership property is as a tenant in partnership
1. Possession – partners may not possess partnership property for personal use without consent of the other partners
2. Attachment – A partner’s interest in specific partnership property may not be attached on a claim except on a claim against the partnership
3. Assignment – partners may not assign their interests in specific partnership property except in connection with assignment of rights of all partners in the property
4. Death – upon death of a partner, his or her right sin specific partnership property vest in the surviving partners
Partner’s Partnership Interest (defined)
Partnership interest defined: the partner’s interest in his or her share of business profits. The partnerships interest is considered capable of being transferred
Partner’s Partnership Interest (Assignment Generally)
A partnership interest may be transferred, sold, or otherwise assigned.
However, such an assignment entitles the assignee only to receive the income the assigning party would be entitled under the partnership agreement. The assignee is not entitled to interfere in the control or management of the partnership business, to require any information or accounting or to inspect the partnership books
Assignment of a partnership interest does not terminate the partnership and the partner whose interest was not transferred remains a partner
Partner’s Partnership Interest (Creditors)
A judgment creditor of a partner cannot receive a direct assignment of a partner’s partnership interest.
Instead, the creditor must seek a court order, referred to as a “charging order.”
The court may appoint a receiver to collect the partner’s share of income for purposes of satisfying the debt
General Determinations of Rights and Obligations among Partners
The rights and obligations of partners generally are controlled by the partnership agreement. Thus, partners have great flexibility in defining the contractual terms of their agreement.
However, there are certain rights and obligations that a partner cannot waive or alter through the partnership agreement. Include:
1. Duty of loyalty and fair dealing, i.e. fiduciary duties
2. Liabilities to partners, for partnership obligations
3. Right to an accounting
Determining a Partner’s Share in profit and Loss
GENERAL RULE: Absent evidence to the contrary, a partner is presumed to share equally in profit from the partnership business, and to share losses from the partnership business in proportion to the partner’s share of profits
Management Rights
Unless the partners otherwise agree
1. Every partner has an equal right in management and control of the partnership business
2. Any differences arising as to matters in the ordinary course of operation of a partnership business are decided by majority vote
3. No act in contravention of the partnership agreement may be done rightfully wrong without consent of all partners and
4. No person can become a partner without unanimous consent
Partner’s Right to an Accounting
An accounting is a legal proceeding to determine and resolve all transactions and financial matters in connection with a partnership. Based upon a final accounting, a partner may have a judgment against another partner
When Does an Accounting Occur
Generally as a matter of course upon dissolution and winding up of partnership affair
A partner may also demand a formal accounting in three situations (next card)
Formal accounting may also be used in resolving disputes of a fiduciary duty
When may a partner demand a formal accounting?
If he or she is wrongfully excluded form partnership business or possession of partnership property
If the partnership agreement provides for such an action
Whenever the other circumstances make it just and reasonable
Duties Between and Among Partners
Every partner has a fiduciary duty to the partnership and to the other partners in connection with the partnership business. Includes:
1. Duty of good faith, fair dealing, and honesty
2. Duty of loyalty and care
3. Duty to indemnify for losses incurred as a result of partnership business
Indemnification
Partnership must indemnify every partner for debts and obligations reasonable incurred in connection with the business
Contribution
Unless otherwise agreed, individual partners must contribute amounts necessary to meet partnership debts and obligations in proportion to his or her partnership interests
Right to Information
All partners have a right to demand and inspect the partnership books and to receive full and true info on all things affecting the partnership
Distribution of Profits
A partner is not automatically entitled to a distribution of partnership profits. Unless otherwise provided in the partnership agreement, the amount of any cash distribution to a partner, known as the draw, is determined by a majority vote of the partners.
Renumeration
Unless otherwise agreed, partners are generally not entitled to compensation for services
Application of Agency Principles to Partnership
Every partner is an agent of the partnership. Partnership is bound by the act of any partner for apparently carrying on in the usual way the business of the partnership.
Notice to one partner will do it
Types of Authority
Actual Authority (express or implied)
Apparent Authority
Ratification
Partnership by Estoppel
Express Actual Authority
Can be conferred by the express or implied consent of the other partners
Unanimous consent is required for assigning of partnership property for the benefit of creditors, disposing of the goodwill of the business, confessing of a judgment, submitting claims to arbitration, or doing any other act that would make it impossible the ordinary business of the partnership
Implied Actual Authority
Partners have implied authority for all things usual, reasonable, and necessary to accomplish express responsibilities or reasonably incident to express authority
Apparent Authority
Even though the act of a partner was without actual authority, a partnership may be bound by a partner’s acts if the third party with whom the purported partner is dealing reasonably believes that the actor is authorized and if this belief is traceable to a manifestation of the principal
Ratification
The unauthorized act of a partner may still bind the partnership if the co-partners subsequently ratify it. Such ratification can be express or implied by conduct that would only make sense if the parties had ratified.
Partnership By Estoppel
RULE: A person not a partner who represents him or herself as a partner or consent to another making such a representation may be liable to any person who has in good faith extended credit to the partnership based upon such representations.
The other partners may be liable for a non-partner’s conduct if they
1. Carelessly or negligently cause a third party to believe that she or she is a partner or
2. Knowing of such belief did not take reasonable action to notify the third party
Tort and Wrongful Act Liability
Partners are jointly and severally liable to third parties for any loss or injury from wrongful acts or omissions of any partner acting in the ordinary course of business or without the authority of his or her co-partners. Partners will be liable even if they are innocent or have no knowledge of the wrong.
Liability for Breach of Trust
Partners are jointly and severally liable for any partner’s (improper or unlawful) receipt and misappropriation of any money or property if the partner is acting within the scope of apparent authority or for misappropriation of money or property in the custody of the partnership that was received in the course of business from at third party
Contract Liability
Under UPA (which PA follows) partners are jointly liable for other debts and obligations of the partnership.
Meaning P can’t just sue one partner – she has to sue them all
May actions be brought against a partnership in the partnership name?
Yes. A judgment against the partnership in the partnership name, however, only entitles the P to execution upon partnership property
Liability of Incoming and Outgoing Partners
Incoming rule: New Partners are liable for all obligations of the partnership arising before their admission to the partnership as if they had been partners when the obligations were incurred. However, the liability can be satisfied only out of partnership property
Outgoing Rule: A withdrawing partner remains liable to creditors who extended credit while the partner was a member of the partnership
Title and Conveyance with Partnership Real Property Transfers
They MUST match. Real property owned in the partnership name must also be conveyed in the partnership name, i.e. the name on the title and on the conveyance must match
Bona Fide Purchaser of Partnership Property
A conveyance of partnership property to a bona fide purchaser is valid even if the conveying partner had no actual authority. A bona fide purchaser is one who takes possession for valuable consideration and the 3_ had no knowledge that the partner exceeded his or her own authority
Dissolution
The change in relation of partners caused by any partner ceasing to be associated with the partnership. Notable examples are withdrawal, bankruptcy or death of a partner
Termination
When all partnership affairs have been wound up
Winding up
The process of winding up partnership affairs, i.e. the period of time after dissolution but before termination
Causes of Dissolution Can be
“Rightful/Proper,” Wrongful, or by Court Decree
Rightful or Proper Dissolution Examples
1. End of a fixed term
2. At will, if there is no definite term
3. Bona fide expulsion of a partner
4. Death of any partner
5. Bankruptcy of any partner or the partnership
Wrongful Dissolutions (Examples)
In a breach of partnership agreement
Willful or persistent violation of partnership agreement
Wrongful expulsion of a member
RULE: Any partner who has wrongfully dissolved the partnership is liable to the other partners for damages for breach of contract
Dissolution by Court Decree
A partnership may be dissolved by court decree upon application of a partner upon a court finding of
1. Incapacity or willful breach of contract of another partner or
2. That it is not reasonably practicable to carry on the partnership business
Termination of Partner’s Authority (Effect of Dissolution)
Unless the partnership agreement explicitly provides for continuation of the partnership, dissolution of a partnership terminates the authority of any partner to act as agent for the partnership except for purposes of winding up partnership affairs
Continuation of the Business by Partnership Agreement After Dissolution
The partnership agreement may provide for continuation of the business. Thus, a dissolution of the dissolved partnership may not be required
Effect of Dissolution After Wrongful Dissolution
After a wrongful dissolution, the other partners may continue the partnership business. However, the partner who wrongfully dissolved still may be entitled to an effective “buy-out” the amount of damages recoverable by the remaining partners will be subtracted form the payment due to the departing partner
Rights of Creditors upon Dissolution
General Rule: When the partnership business continues after dissolution, creditors of dissolved partnership remain creditors of the new partnership.
Partner’s rights Upon “Rightful” or “Proper Dissolution
Liquidation Rights (next card)
Estate of Deceased Partner (subsequent card)
Liquidation Rights
Unless otherwise agreed in the partnership agreement, upon any dissolution that was not in violation of the partnership agreement, any partner can demand a liquidation of the partnership.
In effect, this gives partners right to force a sale of partnership assets.
Proceeds are first used to satisfy partnership liabilities.
Any excess is then distributed to each partner according to his or her respective partnership interests
Estate of Deceased Partner
RULE: The deceased partner’s interest in partnership property vests in the surviving parties.
However, the executor of the deceased has the right to demand payment of the value of the decedent’s partnership interest
Payment of Creditors and Distributions to Partners Upon Dissolution and Termination (Obligation to Contribute)
Unless otherwise provided in the partnership agreement, if the partnership has insufficient assets to pay off creditors, each partner must contribute equally the funds equally to satisfy partnership obligations
Payment of Creditors and Distributions to Partners Upon Dissolution and Termination (Distributions)
Priority of payment rule: in settling accounts after dissolution, partnership property is distributed in the following rank order
1. Payments to creditors other than partners
2. Debts owed to partners
3. Amounts owed to partners based upon their capital contributions and
4. Amounts owed to partners based upon their partnership interests
Limited Partnerships (Definition)
A limited partnership is a partnership formed by one or more persons and having one or more general and one or more limited partners.
A limited partnership must have at least one general partner.
NOTE: a general partner need not be an individual, but may be a corporation, trust or other entity
Formation of Limited Partnership
1. Partnership agreement – does not require a written one
2. Certificate of Limited Partnership – unlike a general partnership the limited partnership is required to file a Certificate of Limited Partnership with the Sec’y of State
Liability of General Partners in Limited Partnership
A general partner is one that is liable for contracts, torts, and other debts and obligations of the partnership under the same rules applicable to the partners of a general partnership
Limited Liability of Limited Partners in a Limited Partnership
General Rule: a limited partner is not liable for the limited partnership’s contracts and torts, wrongful acts, debts, obligation, etc.
There is an exception in other jxn’s for if a limited partner participates in control of business – but in PA this is no longer the case. Even if a limited liability participates in control, he is liable, unless he actively and knowingly participates in wrongful act
Share of Profit, Loss and Distributions in Limited Partnership
Unless otherwise provided in limited partnership agreement, a partner’s share of profit, loss or distribution shall be based on the proportion of the partner’s contribution as stated in partnership records
NOTE CONTRAST: Unless otherwise provided in general partnership agreement – partners in a general partnership share equally
Assignability of Partnership Interest in Limited Partnership
RULE: A limited partner may assign a partnership interest. Assignment does not dissolve the limited partnership
Unless the assignor gives the assignee the right in accordance with the partnership agreement, the assignee does not become a partner and is only entitled to share of profit the assignor would have been entitled to
Again – another good reason to discuss assignment right in partnership agreements
Dissolution of Limited Partnerships
Occurs:
1. At the end of a fixed term
2. Per limited partnership agreement
3. Written consent of all partners
4. Withdrawal of a general partner – UNLESS ONE GENERAL PARTNER REMAINS and the limited agreement permits continuation of partnership business or unless all partners agree in writing within 90 days to continue the partnership business and the appointment of one or more general partners
Partnership Tax Status
Partnership is not a taxable entity. Thus it does not file a tax return. However, it must still file an information return
Partnership as a Pass-Through Entity (Corporations compared) in contrast to corporation, which is a double tax business entity, partnerships pay only a single tax on profits
The partner’s distributive share of profit or loss (tax)
Each partner is responsible for paying tax on his or her share of partnership profits whether or not the actually receive it. Subject to certain limitations, partners may take their share of partnership losses into account on their individual tax returns.
Since the partners rather than the partnership itself pay tax partnership income, partnerships are often referred to as pass-through entities
Sale of Partnership Property (Tax)
Rule: Upon sale of partnership property, the partnership will use the same method to compute gain or loss that would be used by a taxable entity. There s no tax to the partnership. The individual partners will each report their appropriate share of the gain or loss on their individual tax returns.
LLP’s and LLC’s
Alternative business forms that offer the best of all worlds: limited liability to all members and tax benefits of a pass-through entity
NO GENERAL PARTNERS in LLC