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39 Cards in this Set

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Partnership Law: based on
Based on Contract Law & Agency Law
5 things you need for a Contract :

OCLCA
1.) Offer
2.) Consideration
3.) Legality
4.) Capacity - can’t be mentally incompetent, under 18, intoxicated
5.) Acceptance

*Under certain instances, the agreement must be in writing.
Agency Duties
1.) Obedience
2.) Reasonable Care
3.) Loyalty
What is the most common reason for forming a partnership?
Most common - Joint venture, short-term, to accomplish 1 piece of business
*Main Thing to remember about Partnerships:
Partners are jointly and severally liable for all claims.
Why does the law protect stockholders?
-XYZ is a separate legal entity
-In the eyes of the law, a partnership is not
-Corporation has a separation of management and ownership
-With a corporation the board of directors has control of the day-to-day operations of a company
-Board -> Officers -> Management

- As a stockholder, I will not have day-to-day control over operations.
Examples of forming a partnership with an underage partner?
Example:
Witherspoon makes a deal to sell a boat to a 16 year old for $25,000. The 16 year old can demand his money back.

Example 2:
1.) Witherspoon and the 16 yr. old contribute $1M to partnership
2.) Duration of 10 yrs, stated in the partnership agreement
3.) Next day, the 16 yr. old demands his money back, he gets it.

Example 3:
-Same terms. 6 mos. after partnership is formed
-P/A = $2.8M
-The 16 yr. old quits, he gets the profits.

Example 4:
Same terms
-16 yr. old wants to get out of the agreement
-$1M in assets, $11M in debt
-16 yr. old is not entitled to a refund in this instance.

Example 5:
-Same terms
- Tomorrow, the same guy will turn 18
- If he gets out today, he only loses his original capital contribution of $1M
- If he waits until tomorrow, he becomes fully liable for the $11M
What determines whether or not a partnership exists?
If the partnership agreement is in writing, there will be no problem proving a partnership agreement.
Determining whether a Partnership exists - no document - 5 Ways
1.) Do they hold title to property jointly?
2.) Do they claim to be partners?
3.) How much activity is involved?
4.) Are they sharing the gross receipts?
*You need to have 2 of the previous 4 to determine “Yes.”
5.) Are they sharing the net profits?
* This is almost always a determining factor.
Six (6) Factors for determining property ownership:

PIU CNL
1.) Was the property purchased with partnership funds?
2.) Has the property been improved with partnership funds?
3.) Has the property been utilized in the business?
4.) Is the property closely related in character to the business?
5.) Is the title held in the name of the partnership?
6.) Has the property been listed on the partnership books?
Partnership by Estoppel: Example:
Example:
A&J form a partnership to buy a Cookout franchise.

Witherspoon wants to join the partnership. They say no.

A&J have bad credit. Witherspoon calls the supplier, puts his credit on the line, claims to be a member of A&J. A&J default. W is still liable to the supplier. He has no liability to any other creditors.

Example 2:
Witherspoon runs an ad in the paper claiming the same things. He is now liable to all creditors.
Can one partner, acting on his own, sell property to W?
Example:
A&J are 50/50 partners.
Can J sell or give away his interest in the partnership?
Yes.
Does he have to get J’s permission? No.
Only right W has is to collect 50% of the profit.
A presumption of law:
Partners will devote all their time and energy to the business.
Why might you enter into a partnership with particular people?
Special skill sets, connections, money, etc.
Is Barry entitled to more pay, just because he did a greater share of the work?
No.

*Exception: A partner works on the dissolution of the partnership.
Partners have the duty to...
Indemnify (Reimburse) their partners.

Example:
Partner A pays a $120K claim. He is entitled to be reimbursed $80K (2/3) of the claim by B&C.
Payout on Dissolution: There are plenty of assets to pay debt:
1.) Partner debt is paid back first.
2.) Pay back A’s $1M original contribution.
3.) Split the remainder in equal parts between partners.
Payout on Dissolution, enough assets to repay Creditors, and little else:
Example 2:

Same situation as example 1, except Partner Assets are $1.6M, and Partner Debt = $1.2M.

A only gets back $400K of his original investment. B is responsible to pay back the rest.
Partners cannot sue their fellow partners based on __ ___ __ ___.
an action at law.
Under a unified court system, you are asking the court to serve as either..
You are asking the court to serve as either a court of Law or Equity.
n a partnership with B &C.
A owns his own company
Sells materials to the partnership. He was supposed to be paid $120K. A was not paid. Can he sue the partnership? If not, why not?
No.
Why? He would be suing himself.
3 instances where an accounting is warranted:

DSE
1.) This will typically happen at dissolution.
2.) A partner takes a secret profit.
3.) A partner is wrongfully excluded from the business.
Exception for when a partner can sue another partner:
The claim has absolutely nothing to do with the business.
The types of Authority to Act stem from the 3 types that we would see in agency law.
1.) Actual Authority - What a partner reasonably believes they can do.
2.) Apparent Authority
3.) Inherent Authority
Actual Authority

In a a partnership, this is found:
1.) In the partnership document.
2.) An authorizing vote. Most of the time, a majority vote is all that is necessary.
-Cases where a unanimous vote is required---Actual Authority
--A is doing something that would make it impossible to go on.
--An assignment of goodwill.
Liability of an Incoming Partner
C is an incoming partner, making a $400K capital contribution.

What liabilities does C have, if any?
His original investment, unless he renegotiates with creditors, then he's liable for the full amount of debt he renegotiated.
Retiring Partners

What is the Partner's liability debtwise?
Depends on whether actual and constructive notice have been given.
3 ways dissolution takes place:

AOD
1.) By an act of the partners
2.) Operation of Law
i.) A partner dies
ii) A partner declares bankruptcy
3.) A decree from a court of equity.
5 Decrees from a court of Equity that allow dissolution:

MIB GC
1.) A partner has been declared mentally incompetent.
2.) A partner is incapable of performing.
i) A is injured, and physically unable to work.
ii) A knows nothing about accounting.

3.) If the partner breaches the contract, and does not perform.
4.) Guilty of conduct that would adversely affect the business.
5.) If the company can only carry on at a loss.
What are partners not to do after dissolution?
1.) Entering into new business.
2.) Increasing the obligations of the firm (taking out new debts).
If you have a dissolution, what is the order of distribution of assets?
1.) Outside creditors
2.) The Partners
i.) Advances
ii.) Capital contributions
iii.) Remainder as profit
Limited partnerships: Requirements:
1.) With a limited partnership, the agreement must be in writing.
2.) The limited partner’s name can’t appear in the partnership name, or the name of the business.
3.) The limited partner cannot have any control over the running of the business.

If a creditor can prove that the LP took part in management, then the agreement is worthless.
What are 5 things a General Partner cannot do.
1.) He cannot do anything that would make it impossible to carry on.
2.) He cannot confess a judgment against the partnership.
3.) He cannot assign property for other than the partnership purposes.
4.) He cannot admit another person as a general partner.
5.) He cannot admit another person as a limited partner. unless the agreement gives him this right.
Rights of an LP

IDFS
1.) He has the right to inspect the records of the company.
2.) Demand info on anything affecting the business.
3.) He has the right to force a dissolution under certain circumstances.
4.) A right to a share of the profits.
When is a limited partner entitled to the return of his contribution?
1.) All liabilities must have been paid, or there must be sufficient assets to pay them.
2.) You must have the consent of the partners, unless the contribution can be rightfully demanded.
When would you not need to vote on payout - Limited partnership:

DDSIX
i.) A dissolution
ii.) If the date specified in the agreement for the return has arrived.
iii.) If there is no set date for repayment, you may give six months notice in writing.

*Note: All these examples are subject to Rule #1 being satisfied.
When would a Limited Partner be able to force dissolution?
He has rightfully demanded the capital, and has not been repaid.
If you have a dissolution of an Limited Partnership, what is the order of distribution of assets?
1.) Outside creditors
2.) Limited Partners - Profit, then Capital Contributions
3.) General Partners - advances, capital contributions, profits.