Partnership Law Review

Vocabulary-style flashcards covering partnership law, including formation, internal affairs, external liability, dissociation, and special partnership structures like LLPs and LPs.

Partnership

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

People (Partnership Requirement)

Anyone or anything with the legal capacity to contract, including corporations; excludes minors and those with mental illness/disability.

Intent (Formation)

A specific intent to form a partnership is not required; one only needs the intent to carry on as co-owners of a for-profit business.

Co-Ownership

A requirement for forming a partnership that involves sharing profits and the division of control.

Presumption of Partnership

Created when two or more entities split profits.

Non-Profit Revenue Streams

Streams of money that do not create a partnership presumption, including interest payments, debt payouts, rent, wages, and goodwill.

Control (Partnership Formation)

A necessary element for a partnership; if one entity has all discretion, it is NOT a partnership.

Separate Legal Entity

The status of a partnership as distinct from its partners, allowing it to sue, be sued, and own property in its own name.

Personal Liability

The status of partners being personally responsible for the partnership's obligations if partnership assets are insufficient.

Partnership Taxation

Partnerships do not have entity-level taxation; they are only taxed when profits are paid out to partners.

Partnership Agreement

The governing document for a partnership, often referred to as the 'law of partnerships,' which does not need to be written.

Default Rules

State law rules that govern a partnership in the absence of a specific partnership agreement.

Mandatory State Law: Liability

A category of state law that cannot be overridden by an agreement; partners cannot waive personal liability to third parties.

Mandatory State Law: Access

A rule stating that a partnership agreement cannot deny partners access to books and records.

Fiduciary Duties

Obligations including loyalty and care that all partners owe to the partnership and each other, which cannot be waived.

Duty of Loyalty

The requirement that partners must not compete with the business, advance adverse interests, or usurp business opportunities.

Usurping Business Opportunity

A violation of the duty of loyalty where a partner takes a business opportunity for themselves instead of the partnership.

Duty of Care

The requirement that partners refrain from grossly negligent or reckless misconduct, intentional misconduct, or knowing violations of the law.

Timing of Duties

Fiduciary duties apply only to current partners; they do not apply to prospective partners or former partners.

Manifestly Unreasonable

The standard used to determine if a partnership agreement's limitation on the duty of loyalty is invalid, often considering what is customary in the business.

Cleansing Act

A process where an act of potential disloyalty is ratified by the partners after full disclosure of all material facts.

Division of Profits and Losses

Determined by the partnership agreement; financial contribution has no effect on this division unless specified in the agreement.

Default Rule: Profits

In the absence of an agreement, profits are divided evenly.

Default Rule: Losses

In the absence of an agreement, losses follow the breakdown of profits.

Default Rule: Distributions

Partners do not have a default right to demand a distribution.

Default Rule: Transfer of Interest

A partner has the right to transfer their partnership interest.

Default Rule: New Partners

Existing partners must give unanimous consent to admit a new partner.

Default Rule: Voting Power

Every partner has equal shares of voting power regarding management and control.

Ordinary Business Activity

Day-to-day operations, such as declaring distributions or moving offices, which require a majority vote of partners.

Extraordinary Business Activity

Decisions outside the course of regular business (e.g., amending the agreement) which require a unanimous vote of all partners.

Dissociation

When a partner stops being associated with the partnership, which can be voluntary or involuntary.

Voluntary Dissociation

Occurs when a partner gives notice to the partnership of their intent to withdraw.

Involuntary Dissociation (Expulsion)

Can occur via triggers in the partnership agreement, a vote of partners, or a court order.

Involuntary Dissociation (Legal Status)

Triggers include it becoming unlawful to carry out business with the partner, or the partner's bankruptcy, death, or incapacity.

Management Rights (Post-Dissociation)

A dissociated partner has no right to participate in management and no further duties to the partnership.

Buy-out Requirement

If a partnership continues after a partner dissociates, it must buy out that partner’s ownership stake.

Buy-out Example

If a partnership worth $\$900k$ has $3$ equal partners and one leaves, the dissociated partner is paid $\$300k$.

Express Authority

Authority communicated directly to the partner via the partnership agreement, a statement of authority, or a partner meeting.

Statement of Authority

A document filed with the Secretary of State to communicate express authority granted to a partner.

Implied Authority

Authority based on a partner's reasonable belief that an action is necessary to carry out an express order.

Apparent Authority

Authority based on communications between the partnership and third parties, such as through business cards or letterhead.

Revocation of Apparent Authority

Requires a vote by the whole partnership and notification to third-party suppliers/individuals.

Partnership Tort Liability

Partnerships are liable for torts committed by partners acting within the scope of their partnership.

Joint and Several Liability

A legal status where creditors can go after any partner for the entire sum the partnership owes.

Creditor Recovery Order

Creditors must first take all money from the partnership itself before pursuing individual partners' assets.

Incoming Partner Liability

A new partner is not liable for obligations committed before they joined, though their capital contribution is at risk.

Outgoing Partner Liability

A partner may still be personally liable for obligations that occurred after their dissociation.

Partnership at Will

An open-ended partnership with no fixed term that dissolves when any partner chooses to dissociate.

Partnership for Term/Undertaking

A partnership that dissolves when a specific term expires or an undertaking is complete.

90-Day Cure Period

The timeframe to fix an event that makes a partnership's continuation unlawful before it must dissolve.

Winding Up

The second step of terminating a partnership involve disposing of property, discharging liabilities, and maximizing value.

Winding Up (Participants)

Includes any partner not dissociated for wrongdoing, a legal representative of the last surviving partner, or a court-appointed supervisor.

Statement of Dissolution

A filing with the Secretary of State that gives notice to third parties that the partnership is dissolved after $\text{90 days}$.

Winding Up Distribution Order

Creditors are paid first, followed by partners or their estates.

Limited Liability Partnership (LLP)

A partnership where a partner's personal liability is eliminated except for their own misconduct or negligence.

Formation of LLP

Requires an authorizing vote, changing the name to end in LLP/RLLP, and filing with the Secretary of State.

Limited Partnership (LP)

A partnership with at least one general partner and at least one limited partner.

LP Formation Timing

If liability occurs before the certificate is filed, it is a general partnership; after filing, it is an LP.

Limited Partner Control Rule

Limited partners are not personally liable unless they participate in the partnership by making management decisions.

General Partner Liability (LP)

Exposed to personal liability for partnership obligations, often managed by making a corporation the general partner.

Withdrawal of Limited Partner

A limited partner must generally provide $6$ months notice to withdraw.