Partnerships

Question 1

Partnership

Answer 1

An association of two or more people to co-own an ongoing business for profit. Distinct legal entity apart from the partners

Question 2

Types of Partnerships

Answer 2

• General Partnership (GP) = Two or more general partners
• Limited Partnership (LP) = At least one general partner and one limited partner
• Limited Liability Partnership (LLP) = Protects general partners from personal liability
  
  • Any partnership other than an LP can become an LLP Formation

Question 3

Formation of a General Partnership

Answer 3

Formed by an objective agreement between two or more persons to co-own an ongoing business for profit

• Agreement can be made expressly (oral or written) or implicitly (from the parties’ conduct)
• Parties’ subjective belief is immaterial
• No formal or statutory requirements

Proof of Association: Sharing of profits is prima facie evidence that the profit-receiving person is a partner in a GP

• “Sharing of profits” ≠ being paid for a loan, collecting rent, or earning a salary

Question 4

Formation of a Limited Partnership

Answer 4

• Formed by complying with statutory requirements:
  
  • execute a certificate of LP signed by all named general partners, and
  • file a certificate of LP with the secretary of state’s office
• The name of the LP must say “limited partnership” or an abbreviation (L.P. or LP)

Question 5

Formation of a Limited Liability Partnership

Answer 5

• Formed by filing with the secretary of state’s office a certificate of registration signed by at least one person •
  
  • Usually must also pay a filing fee
• The name of the LLP must say “limited liability partnership” or an abbreviation (R.L.L.P., L.L.P., LP, etc.)

Question 6

Partnership Agreement

Answer 6

In general, relations between partners and the partnership are governed by the PA, or, if the PA is silent, by the default provisions of the UPA

Question 7

A Partnership cannot opt out of what rules in the partnership agreement?

Answer 7

The partnership agreement cannot:

• unreasonably restrict a partner’s access to the books and records,
• remove the partner’s duties of loyalty and care, or
• disallow a partner’s right to dissociate (but can require the partner to give written notice of her intent to withdraw)

Question 8

Rights of General Partners (GP/LP)

Answer 8

• Each general partner has equal rights to manage the partnership and conduct business
  
  • Unless the PA says otherwise
• A general partner binds the partnership when acting within the ordinary course of business
  
  • Acts outside the ordinary course of business bind the partnership only if all general partners consent to the action

Question 9

How are disputes between General Partners resolved? (GP/LP)

Answer 9

• Acts within the ordinary course of business = majority vote
• Acts outside the ordinary course of business = unanimous consent

Question 10

Rights of Limited Partners (GP/LP)

Answer 10

• Right to seek information for a purpose reasonably related to their interest as a limited partner, including the right to:
  
  • inspect and copy tax returns and other documents required by law, and
  • obtain true and full information as to the financial condition and state of the partnership’s business
• No right to co-manage the partnership or engage in partnership business (limited partners aren’t agents of the LP)

Question 11

Duties Within the Partnership

Answer 11

• A partner is personally liable to the partnership and the other partners for damages caused by a breach of a fiduciary duty
• Duty of Care
• Duty of Loyalty
• Duty to Disclose

Question 12

Duty of Care

Answer 12

Can’t engage in

1. grossly negligent or reckless conduct,
2. intentional conduct that harms the partnership, or
3. a knowing violation of the law

• Applies to general partners in a GP or LP
• Applies during the partnership and throughout the winding-up process

Question 13

Duty of Loyalty

Answer 13

Can’t:

1. compete with the partnership or appropriate a partnership opportunity, or
2. enter deals with the partnership that are adverse to the partnership’s interest

• A partner who does must account for any benefit and hold any profit in trust
• Applies to general partners in a GP or LP

Question 14

Duty to Disclose

Answer 14

Disclosures to General Partners

• Without demand: Any information related to the partnership and reasonably required to exercise a partner’s rights and duties under the PA
• On demand: Any other information concerning the partnership if the demand is reasonable and made for a proper purpose o

Disclosures to Limited Partners

• Must provide the opportunity to inspect financial and tax records, and other documents reasonable related to the limited partner’s interest in the LP (i.e., financial interest)

Question 15

Duties of Limited Partners

Answer 15

Duties of good faith and fair dealing (less demanding than duties of care and loyalty)

Question 16

Sharing of Profits and Losses

Answer 16

• Profits are shared equally
• Losses are shared in proportion to the sharing of profits
  
  • These are the UPA’s default rules; if the partners are silent on this apply default rule
• If a partner pays more than his portion of losses, they have a right to contribution from any partner who didn’t pay their share

Question 17

Partner’s Interest in the Partnership

Answer 17

• A partner’s interest in partnership is personal property, which includes:
  
  • the financial interest in his share of the profits and losses, and
  • the right to receive distributions
• Interest in the partnership is freely transferable, but the transferee has no right to:
  
  • participate in the management and control of the partnership, and
  • demand access to the partnership’s information, books, and records
• A transfer of a partner’s partnership interest does not automatically dissolve the partnership

Question 18

General Partners Liability to Third Parties

Answer 18

• Personally liable for all partnership debts, which includes torts committed by a partner if done:
  
  • in the ordinary course of business, or
  • with authority from the partnership
• The general partners are jointly and severally liable
  
  • A partner may sue partners who didn’t pay their pro rata share for contribution
• Applies to all general partners in a GP and an LP, but not an LLP

Question 19

Limited Partners Liability to Third Parties

Answer 19

Not personally liable (except the partner’s capital contribution) for debts of the LP, even if the limited partner participated in the management

Question 20

Partner’s Power to Dissociate

Answer 20

• Partners always have the power to dissociate upon giving notice to the partnership
• Wrongful dissociation = dissociation in violation of an express provision of the PA
  
  • The partner who wrongfully dissociates is liable for any damages caused

Question 21

Events causing a partner’s dissociation

Answer 21

• death
• bankruptcy
  
  • Wrongful if the partnership is for a definite term or undertaking
• appointment of a guardian
• a judicial determination that a partner is incapable of performing the duties of a partner
• occurrence of an event specified in the PA that triggers dissociation
• expulsion from the partnership pursuant to:
  
  • a provision in the partnership agreement,
  • unanimous vote of the other partners, or
  • judicial determination made upon application of a partner

Question 22

Dissociation of a Partner in a Limited Partnership

Answer 22

• General Partner: dissociation is wrongful if it occurs before the termination of the LP
• Limited Partner: no right to dissociate

Question 23

Consequences of Dissociation

Answer 23

• Ends the partner’s rights to co-manage and conduct partnership business
  
  • Still liable for partnership obligations incurred before dissociation
• Ends the partner’s duties of loyalty and care going forward (still under duty for matters occurring before dissociation)
  
  • May compete with the partnership

Question 24

Causes of Dissolution (all partnerships)

Answer 24

• It becomes illegal to carry on the partnership’s business
• Upon occurrence of an event agreed upon and specified in the PA
• A partner may file an application to dissolve the partnership, which will be granted if:
  
  • The economic purpose of the partnership is likely to be unreasonably frustrated,
  • Carrying on the business in conformity with the PA isn’t reasonably practicable, or
  • Carrying on the business with that particular partner is no longer reasonably practicable because of that partner’s conduct
• Application to dissolve by a transferee of a partnership interest may be made only on the ground that equity demands the partnership be wound up
  
  • In a partnership at-will –> the transferee can file the application at any time
  • In a partnership for a definite term or particular undertaking –> transferee can file only after completion of the term or undertaking

Question 25

Dissolution Cause Applicable to At-Will Partnerships Only

Answer 25

Dissolution occurs if one partner gives the partnership notice of his express will to withdraw

Question 26

Dissolution Cause Applicable to Partnership for Definitely Term/Particular Undertaking Only

Answer 26

If a partner wrongfully dissociates --\> automatic dissolution in **90 days** _unless_ a **majority of partners** vote to continue the partnership

Question 27

Dissolution of Limited Partnerships

Answer 27

* If the sole general partner dissociates --\> automatic dissolution in **90 days** _unless_ a **majority of *limited* partners** vote to continue the business **and** a general partner is appointed * If only one of multiple general partners dissociates --\> **no automatic dissolution** _unless_ the majority of all partners (general and limited) vote to dissolve the LP * If the sole limited partner dissociates --\> automatic dissolution _unless_ a limited partner is admitted within **90 days**

Question 28

Consequences of Dissolution

Answer 28

* Partnership continues to exist only for the purpose of **winding up** the business (paying debts and distributing assets) * Partnership **terminates** after the winding-up process * Partnership’s liability on post-dissolution contracts: liable if the transaction would have bound the partnership before dissolution and the other party did not have **notice** of the dissolution * Partnership’s assets are distributed

Question 29

Order a Dissolved Partnership's Asssets Are Distributed:

Answer 29

* First, pay creditors (including partners who are creditors) * If not enough to pay creditors, partners are **jointly and severally liable** for the entire amount of the outstanding debt (but may seek contribution from other partners) * Second, reimburse partners for their capital contributions * Third, pay the balance to partners in accordance with their share of profits