Partnerships

MEE Rule Statements for Partnerships

Partnership

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

Partnership Requirements

Intent, Statute of Frauds, Profit Sharing

Intent

At least two or more people or entities must intend to carry on a for-profit business as co-owners. The specific intent to form a partnership is not required

Statute of Frauds

A written agreement is not required, but a contract that cannot be performed within a year must be in writing per the statute of frauds

Profit Sharing

If there is a sharing of profits from a business, then the arrangement is presumed to be a partnership except in six circumstances (DRAWING):

1. Debt Payments

2. Rent

3. Annuities or other retirement or health benefits

4. Wages or other compensation

5. INterest or loan charges and

6. Goodwill payments from the sale of a business

Purported Partner or Partner by Estoppel

If a partnership does not exist, or someone is not a real partner of a partnership that does exist, a person may still be treated as though that person is a partner (i.e., a purported partner or partner by estoppel) if:

1. There is a representation (oral, written, or implied by conduct) that the person is a partner

2. The purported partner makes or consents to the representation

3. A third party reasonably relies on the representation and

4. The third party suffers damages because of that reliance.

When a person misrepresents that another is a partner, the purported partner is an agent of the person who made the representation.

Nature of Partnership

A partnership is a separate legal entity from each of the partners. It may hold property, and it can sue and be sued. Its partners are personally liable for the partnership’s obligations

Partner’s Duty of Loyalty

A partner must not:

1. Compete with partnership business

2. Advance an interest adverse to the partnership or

3. Usurp a partnership opportunity

Partner’s Duty of Care

A partner must refrain from:

1. Grossly negligent or reckless conduct

2. Intentional misconduct or

3. Knowingly violating the law

Profits and Losses

If there is no partnership agreement or the agreement is silent regarding partnership profits and losses, each partner is entitled to an equal share of the profits and losses. If the agreement specifies only the division of profits, then losses are shared in the same manner as profits

Partnership Account

Each partner has a partnership account, which consists of contributions to the partnership and the partner’s share of the profits (reduced by any liabilities, distributions, or losses). A partner cannot demand a profit distribution but is entitled to have her account credited with a share of the profits.

Partnership Interest

A partner has a partnership interest, which consists of the rights to share in the profits and losses and to receive distributions. A partner can transfer all or part of the partnership interest to a third party (unless the transferee knows of a restriction in the partnership agreement), and the transfer does not cause dissolution or dissociation

Transferor Partner

Retains all rights and duties of a partner except for an interest in the distributions

Transferee Partner

Has a right to receive distributions, seek a judicial order for dissolution, and receive an accounting upon dissolution. However, the transferee has not right to participate in the management or conduct of the partnership business, to access partnership records, or demand other information

Property Ownership

All property acquired by the partnership belongs to the partnership—not the individual partners. Property is presumed to be partnership property if it was purchased with partnership assets or financed with partnership credit. If ownership is unclear, then consider such factors as the property’s use, treatment of the property for tax purposes, and the source of funds to maintain or improve the property

Management Rights

Each partner has equal rights in the management and conduct of the partnership. However, different types of decisions have different approval requirements.

1. Partners acting individually can make usual and customary matters

2. Majority of partners can make ordinary partnership decisions

3. All partners can make decisions for matters such as:

   1. outside the ordinary course of partnership’s business

   2. Amendments to the partnership agreement

   3. Admission of a new partner

Dissociation

A partner may cease to be associated with the partnership through the process of dissociation. The following events trigger a partner’s dissociation:

1. The partner’s notice of withdrawal (i.e., voluntary dissociation)

2. The partner’s expulsion due to the partnership agreement, unanimous vote of the other partners, or the partner’s bankruptcy

3. The partner’s death

4. Appointment of a guardian for the partner

5. A judicial determination of the partner’s incapacity to perform his duties under the partnership agreement or

6. Termination of an entity partner.

Wrongful Dissociation

A partner is liable to the partnership and other partners for damages from wrongful dissociation - a partnership cannot prevent a partner from withdrawing but it can impose liability

Wrongful Dissociation: Unlimited Term or Undertaking

Dissociation breaches an express provision of the partnership agreement - triggers dissolution

Wrongful Dissociation: Definite Term or Undertaking

Before the term or undertaking ends, the partner (1) withdraws, (2) is expelled by court order, (3) is a debtor in bankruptcy, or (4) is not an individual, trust, or estate and is willfully dissolved or terminated - triggers dissolution if a majority of the remaining partners agree to wind up the partnership within 90 days of dissociation

Dissociated Partner

1. A dissociated partner has no right to participate in management of the partnership and no longer has any duties to the partnership (unless the partner participates in winding up the business).

2. An ongoing partnership must buy out the dissociated partner’s partnership interest and indemnify the former partner against all partnership liabilities, whether incurred before or after the dissociation.

3. A dissociated partner is generally liable for partnership obligations incurred before the dissociation.

4. For up to two years after dissociation, a dissociated partner can still bind herself and the partnership to a transaction if the other party:

○ Reasonably believes that the dissociated partner is a partner

○ Does not have notice of the dissociation and

○ Is not deemed to have knowledge of the dissociated partner’s lack of authority.

Joint and Several Liability

However, a partner is jointly and severally liable for all partnership obligations that arise after the partner joins the partnership. This means that an incoming partner is generally not personally liable for prior partnership obligations

Judgment Against a Partnership

A judgment against a partnership is not a judgment against its partners, so the judgment can only be satisfied from the partnership’s assets. But even when the judgment is also against a partner, the judgment must first be satisfied from the partnership’s assets and then the partner’s personal assets

Conversion

Conversion is the legal process by which a partnership can change into a limited partnership, or vice versa. Conversion typically must be approved by all the partners, and the partnership must file articles of conversion with the state. If a limited partnership is converted to a partnership, then the limited partners continue to have limited liability for pre-conversion obligations

Merger

Merger is the legal process by which two or more entities combine to form one surviving entity. The partners must approve a plan of merger that specifies the terms of the merger

Termination

Requires:

1. Dissolution

2. Winding Up

Dissolution of Partnership at Will

Triggered by:

1. A partner’s notice of withdrawal (dissociation)

2. A dissolving event set forth in the partnership agreement

3. An event making it unlawful for the partnership business to continue

4. A judicial determination

Dissolution of Partnership for a Term or Undertaking

1. Judicial Determination

2. The term expires or the undertaking is completed

3. All partners agree to dissolve the partnership

4. A partner is dissociated due to death, bankruptcy, or other circumstance and, within 90 days of the occurrence, at least half of the remaining partners agree to dissolve

Winding Up

A partnership that has dissolved continues only to wind up its business unless, before winding up is complete, all partners agree to waive the right to terminate the partnership and resume partnership business as if dissolution had never occurred

Who May Wind Up

Any partner who has not wrongfully dissociated or the legal representative of the last surviving partner may wind up the partnership’s business. That person may dispose of and transfer partnership property to discharge the partnership’s liabilities and settle the partners’ accounts

Creditors

Creditors have priority over partners to the partnership’s assets

Liability for Winding Up

The partnership is bound by a partner’s acts that are appropriate for winding up the partnership. Each partner is liable to the other partners for his share of partnership liability incurred by those post-dissolution acts

Limited Liability Partnerships

A partner in a limited liability partnership (LLP) is not personally liable for LLP obligations but is personally liable for her own misconduct. To enjoy LLP status, the partnership must file a statement with the state, and the name must end with “RLLP” (Registered Limited Liability Partnership), “LLP,” or words describing such status. Revocation of the state’s qualification of LLP status transforms the LLP into a simple partnership but does not trigger dissolution

Limited Partnerships

A limited partnership (LP) is a partnership formed by two or more persons that has at least one general partner and one limited partner. To form an LP, a certificate of limited partnership must be filed with the state. The certificate must be signed by all general partners and contain the name of the LP, its in-state address, the name and address of its in-state agent for service of process, the name and business address of each general partner, and a statement about the duration of the LP

Limited Partner

A limited partner is an investor who contributes capital to the LP in exchange for a proportionate share of its profits. A limited partner is generally not personally liable for LP obligations unless the limited partner is also a general partner or participates in the control of the business

Joining Limited Partnership

A limited partner can join the LP at its creation or by written consent of all partners after creation and must give six months’ written notice to withdraw. A limited partner has the right to vote as permitted under the partnership agreement and to inspect the LP’s business and financial records. Additionally, a limited partner can lend money to and transact business with the LP like a nonpartner

General Partners

A general partner has the same rights and powers as a partner in a simple partnership and may contribute to the LP, share in its profits and losses, and receive distributions. A general partner is also personally liable to third parties for the LP’s obligations

General Partner

A general partner can join the LP at its creation or by written consent of all partners after creation. And a general partner’s status can be terminated by:

1. Voluntary withdrawal by giving written notice to the other partners

2. The general partner’s assignment of her partnership interest

3. Removal under the partnership agreement

4. Bankruptcy or insolvency

5. Death or incapacity or

6. Termination of the partner as a business entity.