Partnerships

Front 1

Definition of a partnership?

Back 1

An association of two or more persons to carry on as co-owners of a business for profit.

Front 2

Formation of a Partnership?

Back 2

To form a partnership you need a partnership agreement, which may be express or implied.

Implied agreement:
1. intent to enter into a business as co-owners for profit
2. an agreement to share profits and losses AND
3. a mutual right of control over the business

A partnership agreement is a contract, so contract rules apply.

Front 3

Who is a partner?

Back 3

Receipt by a person of a share of business profits is prima facie evidence they are a partner.
Except: if payments of profits are received in payment for wages, rent, consideration from sale of asset, repayment of principal or interest on debt.

Front 4

What is Partnership Property?

Back 4

1. property held in the partnership name
2. property intended by the parties to be partnership property
Factors that weigh heavily but are not determinative: property brought in or acquired by the partners, property acquired by partnership funds, property the partnership pays taxes on or insurance on or repairs, etc.

Front 5

What are a partner's rights in partnership property?

Back 5

A partner has an equity interest in partnership property. A partner is a tenant in partnership of partnership property.

1. Partners may not possess partnership property for personal use without consent of other partners.

2. A partner's interest in specific partnership property may not be attached except on a claim against the partnership.

3. Partners may not assign their interest in specific partnership property except in connection with assignment of rights of all partners in property.

4. A partner's interest in specific partnership property is no subject to dower, curtesy, or allowances to widows, heirs, or next of kin.

5. Upon death of a partner, his rights in specific partnership property vest in surviving partners.

Front 6

What is a partner's interest in his share of the partnership?

Back 6

The partner's interest in his or her share of partnership profits or surplus. This is a personal property interest.

Front 7

Can you assign a partnership interest?

Back 7

Yes, a partner may transfer, sale, or otherwise assign their interest in a partnership. However, the assignment only creates a righ tot receive profits the assigning partner would have otherwise been entitled to. The assigning partner is still a partner.

Front 8

How can a creditor reach a partner's partnership interest?

Back 8

Can't receive a direct assignment. Instead, must seek a court order, called a CHARGING ORDER.

Front 9

Generally, how are rights and obligations of partners determined?

Back 9

By the language of the partnership agreement.

Front 10

Non-waivable rights and obligations of partners?

Back 10

Can't be waived in the partnership agreement:

1. duty of loyalty and care (fiduciary duty)

2. liabilities to third parties for partnership obligations

3. right to an accounting

Front 11

Default rule: what is a partner's share in the profits and losses of the partnership business?

Back 11

Equal, unless partnership agreement says otherwise.

Front 12

Who gets to manage / how are decisions made about the partnership?

Back 12

Unless partnership agreement says otherwise...

All partners have an equal right in management and control of the business.
Matters in connection with normal day-to-day business are determined by majority vote. Other matters are determined by unanimous consent.

Front 13

Can a partner sue the partnership?

Back 13

Generally, a partners can't sue or be sued by the partnership and one partner can't sue another for breach of the partnership agreement or other partnership matters.

Front 14

What is a partner's right to an accounting?

Back 14

An accounting is an equitable 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 legal claim against another partner.

Front 15

When might an accounting occur?

Back 15

1. generally as a final settlement upon dissolution and winding up of partnership affairs

2. a partner may also demand a formal accounting:
a) if he or she is wrongfully excluded from business or possession of partnership property
b) if the agreement provides for such an action OR
c) whenever other circumstances make it just and reasonable

3. a formal accounting may be used to settle disputes over violations of fiduciary duty

Front 16

What are partners' duties to each other?

Back 16

Fiduciary duty to the partnership and to the other partners in connection with the partnership business. Includes:

1. duty of loyalty, good faith, fair dealing

2. duty of trust and confidence

3. duty to indemnify for losses incurred as a result of misconduct

Front 17

Indemnification?

Back 17

The partnership must indemnify partners for payments made and liabilities reasonably incurred in connection to the partnership business.

Front 18

Contribution?

Back 18

Unless otherwise agreed,
partners must contribute to the partnership amounts necessary to meet the obligations and liabilities of the partnership.

Front 19

What is a partner's right to information?

Back 19

Partner has right to access and inspect the books and receive full and true information on all things affecting the partnership.

Front 20

What is a partner's right to distribution of partnership profits?

Back 20

Partner not automatically entitled to partnership profits. Unless otherwise provided in the agreement, the draw (cash distribution) is determined by majority vote of the partners.

Front 21

Are partners entitled to remuneration?

Back 21

No. Unless otherwise agreed, partners are generally not entitled to compensation for services.

Front 22

How to agency rules apply to partners?

Back 22

Every partner is an agent of the partnership. Partnersihp is bound by act of any partner apparently carrying on in the usual way of business of the partnership.

Front 23

Actual Authority?

Back 23

Express actual authority can be conferred by the express or implied consent of the other parties.

Front 24

When is actual authority insufficient?

Back 24

UNANIMOUS CONSENT is required for:
1. assignment of partnership property for the benefit of creditors
2. disposing of the goodwill of the business
3. confessing a judgment
4. submitting claims to arbitration
5. or doing any other act that would make it IMPOSSIBLE TO CARRY ON THE ORDINARY BUSINESS OF THE PARTNERSHIP.

Front 25

Implied Actual Authority?

Back 25

Partners have implied actual authority for all things necessary, usual, and proper to accomplish express responsibilities or reasonably incident to express authority.

Front 26

Apparent authority?

Back 26

A partnership may be bound by a partner's acts if 3rd party with whom the partner dealt reasonably believed the actor is authorized and the belief is traceable to a manifestation of the principal.

Front 27

Ratification?

Back 27

Unauthorized act of a partner may still bind the partnership if the co-partners subsequently ratify it. Ratification can be express or implied by conduct that would only make sense if partners had ratified.

Front 28

What is partnership by estoppel?

Back 28

A person who is not a partner,
who represents himself as a partner or consents 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:
1. they carelessly or intentionally cause the third party to believe he is a partner or
2. knowing of such belief did not take reasonable action to notify the third party

Front 29

Partner liability for torts and wrongful acts?

Back 29

Partners are jointly and severally liable to third parties for loss or injury from wrongful acts or omissions of any partner acting in the ordinary course of business or with the authority of his or her co-partners.

Partners liable even if innocent or had no knowledge of the wrong.

Front 30

Partner liability for breach of trust?

Back 30

Partners are joint and severally liable for any one partner's improper receipt and misapplication 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 a third party.

Front 31

Partner contract liability?

Back 31

Under the Uniform Partnership Act, partnerships are JOINTLY LIABLE for other debts and obligations of the parties (all partners would have to be sued).

Front 32

Liability of incoming / new partners?

Back 32

Liable for all obligations of the partnership arising before their admission. However, the liability arising before the new partner's arrival can be satisfied only out of partnership property.

Front 33

Liability of departing partner?

Back 33

Withdrawing partner remains liable to third parties who extended credit while the partner was a member of the partnership.

Front 34

Special issues w/ real property transfers:
1. Title and Conveyance requirement?

2. Bona fide purchaser?

Back 34

1. Real property owned in the partnership name must also be conveyed in the partnership name. The name on the title and conveyance must match. (or things will be messy)

2. A conveyance of a partnership property to a bona fide purchaser is valid even if the conveying partner had no actual authority. A BFP is one who takes for value and w/out knowledge that the partner exceeded his authority.

Front 35

Definition of dissolution?

Back 35

The change in relation of partners caused by any partner ceasing to be associated with the partnership.

Examples of events that cause dissolution:
1. w/drawal
2. death
3. or bankruptcy
of a partner

Front 36

Definition of termination?

Back 36

when all partnership affairs have been wound up

Front 37

Definition of Winding Up?

Back 37

the process of winding up partnership affairs; i.e. the period of time after dissolution but before termination

Front 38

Rightful v. Wrongful dissolution?

Back 38

1. Rightful or Proper Dissolutions:
end of a specific pd of time specified in partnership agreement
at will if there is no spec. time in partnership agreement
bona fide expulsion of a partner
death of a partner
bankruptcy of a partner

2. Wrongful dissolutions
withdrawal in violation of a partnership agreement
willful or persistent breach of partnership agreement
wrongful expulsion of a member
*any partner who wrongfully dissolves the partnership is liable to the other partners for damages for breach of contract.

Front 39

Dissolution by court decree?

Back 39

A partnership may be dissolved by court decree upon application of a partner upon a court finding of:
1. incapacity or misconduct of another partner
2. that it is not reasonably practicable to carry on the partnership

Front 40

Effect of dissolution on partner's authority?

Back 40

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

(note apparent authority might still be found)

Front 41

Continuation of the business?
By partnership agreement?
After wrongful dissolution?

Back 41

The partnership agreement may provide for continuation of the business. Thus, a termination of the disolved partnership may not be required.

After a wrongful dissolution, the other partners may continue the business. However the partner who wrongfully dissolved may be entitled to an effective cash buy out. The amount of any damages recoverable by the remaining partners will be subtracted from the payment due the departing partner.

Front 42

What happens to creditors when the partnership business continues after dissolution?

Back 42

The creditors of the old partnership remain creditors of the new partnership.

Front 43

Partner's liquidation rights in dissolved partnership?

Back 43

Unless otherwise agreed in the partnership agreement, upon any dissolution that was not in violatio nof the partnership agreement, any partner can demand a liquidation of the partnership. Gives partners the right to force sale of partnership assets. Proceeds are first used to satisfy partnership liabilities. Any surplus is then distributed to partners according to his or her respective partnership interests.

Front 44

What happens w/ the estate of a deceased partner?

Back 44

The deceased partner's interst in partnership property vests in the partnership. However, the executor of teh deceased has the right to demand cash value of the value of the dead partner's interest.

Front 45

Payment of Creditors Upon Dissolution and Termination?

Back 45

Unless otherwise provided in the partnership agreement, if the partnership has insufficient assets to pay off creditors, each partner must contribute equally the amount necessary to satisfy partnership obligations.

Front 46

Distributions to Partners Upon Dissolution and Termination?

Back 46

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 contribution; and amounts owed to partners based upon their proper share

Front 47

Definition of a limited partnership?

Back 47

A partnership formed by one or more persons and having one or more general partners and one or more limited partners.
A general partner may be a corporation, trust, or other entity.

Front 48

Formation of a limited partnership?

Back 48

1. Does not require a written partnership agreement.

2. Limited partnership required to file a Certificate of Limited Partnership with the Secretary of State

3. The partnership name must include the words "limited partnership" or "LLC" etc.

Front 49

What is the limited liability of limited partners?

Back 49

a limited partner is not liable for the limited partnership's debts and obligations

Exception: is limited partnership participates in the (day to day) control of the business, he or she loses the right to limited liability. However, a limited partners who participates in control is liable only to persons who transact with the partnership reasonably believing that the limited partner is a general partner.

Front 50

Liability of general partners in a limited partnership?

Back 50

liable for wrongful acts, breach of trust, and other debts and obligations of the partnership under the same rules applicable to partners of general partnerships.

Front 51

Share of profit, loss, and distributions in a limited partnership?

Back 51

Unless otherwise provided in teh limited partnership agreement, a partner's share of profit, loss or distribution shall be based on proportion of the partner's contribution as stated in partnership records.

Note this is different than a general partnership where, unless provided otherwise in the agreement, partnership share equally.

Front 52

Assignability of partnership interests in limited partnerships?

Back 52

A limited partner may assign a partnership interest. The 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 limited partner and is only entitled to the limited distribution the assignor would have been entitled to.

Front 53

Dissolution of limited partnership?

Back 53

occurs when:
1. end of a definite term
2. per limited partnership agreement
3. written consent of all partners
4. w/drawal of a general partner
*unless at least one general partner remains and the limited partnership agreement permits continuation of partnership business or
-unless all partners agree in writing within 90 days to continue the partnership business and to the appointment of one or more general partners

Front 54

Parnerships and taxes?

Back 54

A partnership is a pass through entity, not a taxable entity. It must file an information return, but not a tax return. It pays only a single tax on profits - paid by the individual partners (unlike corporations which are a double tax entity)

Front 55

Partnership taxes: the partner's distributive share of profit or loss?

Back 55

Whether or not they actually receive it, partners must pay taxes on their share of partnership profits.
Subject to certain limitations, partners may take their share of partnership losses into account o their individual tax returns. The partners, not the partnership pays the taxes.

Front 56

Effect of sale of partnership property on taxes?

Back 56

Upon sale of partnership property, the partnership will use the proceeds to compute gain or loss that would typically be used by a taxable entity.
The individual partners will each report their appropriate gain or loss on their individual returns.

Front 57

LLPs and LLCs

Back 57

Limited Liability Partnerships and Limited Liability Companies are alternative business forms that offer limited liability to all members and the tax benefits of a pass through entity.