Partnerships

What is a partnership? and how is it formed?

1) Two or more persons associate

2) to carry on

3) as co-owners

4) operating a business for profit

Only need to meet legal definition above to form

Creates “partnership in fact”

When is intent as to forming partnership come into play?

Just the intent to do the elements for a partnership- NOT the intent to form the actual partnership

Factors in deciding whether an association rises to level of partnership

1) Profit sharing ☆ (creates presumption)

2) Right to participate in control of business (can use to rebut presumption)

3) Loss sharing (can use to rebut presumption)

• sharing losses something owners typically have to bear

~ Factors that support partnership forming but do not create a presumption

4) Title held in joint tenancy or in common

5) Parties designate relationship to be a partnership

6) Business undertaken requires extensive activity

7) Sharing of Gross Returns

Profit Sharing does what? in contrast to what?

☆ Factor in deciding if there’s partnership - are you sharing profits?

• Sharing profits raises presumption of partnership

  • UNLESS it was payment for debt/loan/rent etc. - then not a real profit share

• Sharing gross returns not presumtive parnternship

  • Gross Returns = revenues (only)

  • profits = Revenues - expenses

Writing requirement rules for Partnership Law

Partnership law doesnt require it

but SoF might require it

Partnership by Estoppel

No Partnership in fact- BUT partnership liability imposed to protect reasonable reliance of 3rd parties based on the fake representation of partnership

• Person A: Represented the fake partnership through their words or conduct = liable

• Person B: Held out by the other as to be in a partnership = NOT liable (no duty to deny rep of partnership)

  • BUT liable if actually consent to the holding out

Partnership Agreement

no agreement required to form partnership - only need legal definition to be met

BUT if it exists

• Allows Partners to write K clauses to get around statutory default rules

  • Unwaivable rules:

    • duty of loyalty and

    • right of a court to expel a partner

    • rights of 3rd parties

• If no parternship agreement → all statutory default rules apply

What is the governing law in partnership (absent agreement)

Revised Uniform Partnership Act (R.U.P.A.)

Is a partnership an entity?

Yes, once formed- Partnership is considered a legal entity distrinct from its partners

• Law views it as a separate and distinct person than its owners

Default Statutory Voting Rules

Unless Otherwise agreed . . .

• All partners have equal rights in management of business and have equal vote (1 partner one vote)

• Ordinary business decision → require majority vote

• Extraordinary business decision (outside ordinary business) → require unanimous vite

  • Admitting a new partner requires unanimous vote

Default Salary Rule

Unless Otherwise agreed . . .

Partners have no right to salary or compensation for services rendered to partnership.

• logic → you’re gonna be getting profit distributions

Indemnification/ Repayments of Partners

A partnership must indemnify every partner for paryment made/ obglications reasonably incurred in carrying out business

Books and Information Rules

• Full and true books and info must be kept at partnership’s chief executive office.

• Each partner has right to inspect and copy the books

Default Profit Sharing Rule vs Deafult Loss Sharing Rule

Unless Otherwise agreed . . .

• If no rule on profits → Profits are shared equally

• If no rule on losses → Losses shared in same way profits are

  • Losses follow profits, but profits dont follow losses

Liability in a Partnership Default Rule

RUPA: Following Agency Law:

Each partner is agent

Partnership itself is the Principal

Partnership Liability in Tort Default Rule

Partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner or an employee acting in the ordinary course of business of the partnership OR with authority of the partnership

(basically vicaruous liability)

Partnership Liability in Contracts Default Rule

Partnership is liable for contracts entered into on its behalf by partners with actual or apparent authority

Actual authority created in partnership how?

authority a partner reasonably believes they have based on communicationsb/w partnership and the partner

Can be created through:

1) Partnership agreement

2) Requisite vote of the partners

3) Partnerships filing of Statement of Authority

“Statement of Authority”

Can create actual authority in partnership:

• File w/ secretary of state

  • + county recorder if real property

Documents filed publicly limiting or granting partners’ authority to transfer

• Real property

  • file w/ both secretary of state and country recorder

  • 3rd parties are deemed to have constructive knoweldge of the granting or limiting of power through this filing

• Non-real propety

  • File only w/ secretary of state

  • Grants → binding on partnership

  • Restrictions → Doesn’t give serve as constructive notice to 3rd parties

What to do if you dont want your partners to be dealing with the real property of your partnership?

1) Create a statement of partnership authority

2) saying partners will have no authority to transact in real property of this partnership

3) File w/ secretary of state and country where real property is located

~ This will Provide constrcutive notice to the world that partners cannot transact in partnership’s real property- which will bind to third parties

Apparent authority created in partnership how?

Because BY STATUTE Partner is an agent to partnership- THUS

Partner has apparent authority to bind partnership to transactions w/in the ordinary course of the partnership’s business or business of the kind carried out by the partnership

UNLESS 3rd P is ACTUALLY aware partner lacks actual authority to act

Liability of Partners in General Partnership

Each partner is personally jointly and severally liable for partnership obligations

• Meaning: Each partner is personally and individually liable for the entire amount of partnership obligations

  • entitled to indemnification from other partners, and if A can’t pay- can get B and C to contribute pro rata shres of the payment

But can ONLY be attacked as guarantors → Plaintiff must attack parnership FIRST and can only get to partners if they can’t recover from partnership

Can you limit partner’s liability in some way?

Partner A, B, and C agree C wont be liable. → 3rd Party sues C.

Partners cannot limit a 3rd parties rights without 3rd p consent

• 3rd P can sue C

But can limit against other partners.

• C can get full indeminification form A and B

Liabilities of Newly Admitted Partners

• A newly dmitted partner is not personally liable for obligations that arose before his admission

  • can only lose amount of his investment in partnership

What is notice to a partner, when is it effective and imputed to partnership?

Notice occurs when:

1) partner has actual knowledge of fact,

2) is notified of the fact, or

3) has reason to know of the fact based on surrounding circumstances

Effective when:

• comes to partner’s attention, OR

• delivered to place of business held out by partner as place for receiving communications

Imputed on Partnership:

• immediately

• UNLESS partner w/ notice is participating in fraud

What Duties do partners in general partnership owe?

• Fiduciary Duties (cannot be eliminated)

  • Duty of care & Duty of loyalty

    • To each other and to partnership

  • Duty of Obedience?

• Statutory (may be eliminated)

  • Duty of Disclosure

Duty of Loyalty

Fiduciary Duty: cannot be eliminated via agreement

“treat them w/ utmost fairly”

• Account to partnership for any benefit

• No taking adverse positions to aprtnership

• No competing w/ partnership

Duty of Care

Fiduciary Duty: cannot be eliminated via agreement

• no engaging in grossly negligent or reckless conduct

• no intentanal misconduct or knowing violation of law

• NOTICE: EXCUSES NEGLIGENT BEHAVIOR

Duty of Disclosure

Statutory Duty:

• Each Partner and partnership shall furnish to partner w/out demand any Info concerning partnerships business and affairs

  • push info out to you even when you don’t ask

• EXCEPT to etent the info demanded is unreasonable or otherwise improper under circumstances

Can be eliminated through partnership agreement

Duty of Obedience

Fiduciary Duty: cannot be eliminated via agreement (?)

Requires partner to obey all reasonable directions of the partnership and not act outside scope of his/her authority

Partnership Property Classifications

Partnership Capital: property or money contributed by each partner for carrying out business

Partnership Property: everything the partnership owns, including both capital and property later acquired in partnership transactions

When is something the partnership’s property? vs partners property

• Partnerships: if acquired in partnership’s name

  • or acquired by partner where it’s clear in document partner was acting for partnership

• Presumed Partnership: if partnership funds are used

• Presumed Partner: (a) acquired in partner’s name (b) without partnership funds and (c) no sign acting for partnership

If unclear who’s property it is- untitled property- what criteria is used to determine?

Use Common Law Criteria

• it’s really common sense factors analyzing facts indicating one or the other

Partnership’s Rights in Partnership Property vs Partner’s Rights

Partnership’s Rights:

• Partnership owns partnership property- their rights are unrestricted

Partner’s Rights:

• no a co-owner or partnership property; has NO interest in partnership property

• can just use for partnership purposes

Partner’s Ownership Interest in the Partnership

“Partnership Interest” : Partner’s ownership stake in the partnership

• Ownership interest considered personal property

• Comprised of:

  • Financial rights; and

  • Management rights

Partner Financial Rights in a Partnership

Right to receive profits distributions

• Can unilaterally transfer

  • transferee → not a partner, only has financial rights in partnership

  • transferor → still a partner, retains all management rights

Partner Management Rights in a Partnership

Everything else that’s not financial rights

• Cannot unilaterally transfer

  • requires unanimous vote of existing partners

Ownership Interest in Corporation

“Stock”

Dissociation of Partnership

A change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business

~ basically a withdrawal of a partner from a partnership

dissociates vs dissolves

Partnership → Dissolve / dissolution

Partners → Dissociate

Partner dissociates from partnership by:

1) oral or written notice of their express will to withdraw;

• “dissociation by express will”

2) happening of an agreed event;

3) valid expulsion of the partner;

4) partner’s bankruptcy or the appointment of a receiver for a partner;

5) partners death or incapacity to perform partnership duties;

6) decision of a court that partner is incapacble of performing duties; or

7) termination of a business entity that is a partner

Wrongful Dissociation

Partner who wrongfully dissociated is liable to partnership for any damages caused by dissociation

Wrongful:

• When dissociation is in breach of an express term in the partnership agreement. ; or

• in term partnership- if dissociated before end of term

“At-Will” Partnership vs “Term Partnership”

• At-Will: (DEFAULT term) No agreement to remain partners until expiration of definitive term or completion of an understanding

• Term: parties agrees, explicitly or implicity, to remain partners for a definitive term until the completion of a project

Consequences of Dissociation for a Partnership

Stautoryily (depending on event of dissociation)

Either:

1) (At-will) Partnership is dissolved and business must be wround up → partnership will be liquidated (sold off); or

2) (Term) partnership continuies in existence with dissociated partner becoming entitled to a buyout of their partnership interest

Consequences of Dissociation for a Partner

• Right to participated in management ceases

• partnership must

  • Buy out interest at either liquidation or going-concern value (w/ interest accumulating from date of d.)

  • Indeminfy them against known pre-dissociation liabilities, or post-dissociation liabilities not incured by d. partner’s acts

• IF wrongful:

  • not entitled to. buyout unless can prove payment would not cause undue harship to parnership

When is Dissolution required after a dissociation?

“winding up business”

Required

• At-will:

  • Dissolution happend when partner dissociated by express will in a at-will partnership

  • Any partner can dissolve partnership if they expressly dissociate

• In term

  • If one partner wrongully dissociated; or

  • if dissociation occurs because of partner’s death/ bankruptcy

  • → Dissolution required IF

    • w/in 90 days after dissociation, at least ½ of remaining partners agree to wind up

What’s the Dissociated Partner’s Liability for pre-dissociation obligation?

remain liable for pre-dissociation partnership obligations

What’s the Dissociated Partner’s Liability for post-dissociation obligation?

Liable for post-dissociation - incurred w/in 2 years afrer dissociation

if:

1) when entering transaction other party reasonably believes the dissociated partner was still a partner; and

2) did not have notice of partner’s dissociation

How can a partner protect themselves from post-dissociation liability?

File a public notice of dissociation (becomes effective 90 days after filing)- giving constructive notice that you’re out of there

What power does a dissociated partner have to bind a partnership?

Apparent Authority for a period of time after dissociation (but not after 2 years) if:

1) the act would have bound the partnership before dissociation, and

2) other party reasonably believes was a partner and no notice of dissociation

Dissolution

Selling off either business or asset by asset

• must pay off partnership liabilityies

• if assets insufficient individual partners are required to contribute with their loss shares

• excess profits distrubuted to partners in accordance to profit shares

Priority of Distribution of Partnership Assets

Creditors → reimburse partners for capital contributions → to partners based on profit sharing (for profits/losses)

• Note: Credtiors are both “outside creditors” and “inside creditors” which are partners who loaned money for example

“winding up”

process of selling the assets

Who may participate in winding up?

Partners who have not wrongfully dissociated

Does apparent authority end at winding up?

No, still liable for it- but can file public statement of dissolution (effective 90 days after filing)

Power vs right to dissociate

You always have the power to dissociate from a partnership even if you don’t have the right to (like if theres a term you dont fulfill)

• just might be wrongful + liable for damages

Can you waive dissolution?

Yes, partners (not wrongully dissolved) by unanimous vote can choose to continue the partnership.- you’ll be bought out

• waiver not affect rights of persons who have relief on dissolution before receiving notice of waiver

If dissociation happened by death- only need ½ vote to continue- 90 days after death

“Limited Partnership”

Partnership with at least one general partner and at least one limited member

• general Partnership pricnipails typiucally apply unless stated otherwise

How to Form Limited Partnership

MUST File a Certificate of Limited Partnership w/ secretary of state

• ONLY Must include:

  • name of partnership,

    • must include phrase “limited partnership” or “LP” / “L.P.”

  • name and address of agent for service of process,

    • person designated to receive official mail from state or service of process

  • names and addresses of each general partner

• if want must indicate its a “limited liability limited partnership”

If don’t file this → its general partnership

• Rest of info is in “partnership agreement” which you don’t file- also don’t need

Limited Partnership must do what w/ records?

must maintin in its state of organization an office with records of the certificate, any partnership agreements, and tax returns for 3 most recent years

Something there must contain amount and descirption of each aprtner’s contribution, special rights regarding distributions etc.

Partnership Agreement

can be written, oral, implied

if general → can replace statutory provisions

Management Powers of Limited Partners vs General Partners

General partners are managers of the LPs

Limited partners have no management rights unless agreement grants them - only really put in money otherwise just there for the ride

BUT

Vote of all partners including limited is necessary for certain extraordinary activities:

• amending partnership agreement

• admission of new general or limited partner

• sale of all or substantially all of LP propert

Laibility of Limited Partners if they participate in management

Not personally liable for an obglication

Limited partnernship profit deafult rule

U.L.P.A. say:

• Disritbute profit based on contributions (not equally)

  • if you gave 20% of capital- you get 20% of profits

• If partner made no contribution → then no rights to distribution

Partner’s “Contribution”

• Contribution is any benefit to partnership

  • Can be money, services, property, promises to make contributions

• Partner’s contribution obligation not excused by death or other disability

• can only be compromised on consent of all partners

Where’s liability for distributions that were improper?

General partner who consents to imrpoper distribution is personally liable to LP for amount that distribution is wrongfully in excess

• Any partner who received an improper distribution knowing improper may be forced to return

  • but if appearaed proper based on reasonably preprared financial statements→ no personal liability

Rights to assign partnership interest in distribution

it’s personal property and can be trasnferred

• but a transfer of entire transferable interest is grounds for explusion

Liability of General partners in LP

liable jointly and severally (just like general partners in general partnership)

Liability of Limited partners in LP

Limited liability

• can ONLY lose value of their investments

• not personally liable for obligation of the LP

• BUT always liable for own torts

Fiduciary Duties of General Partner in LP

Same duties of loyalty and care that they would owe in general partnership

• fiduciary duties only imposed on those with management rights

Fiduciary Duties of Limited Partner in LP

• no fiduciary duties soley by reason of being limited partner

Additional Rights of Partners in LP

• Direct Action against LP by Partner

  • a partner may maintain direct against again LP or another partner

• Derivative Action

  • allowed to enforce right of a LP as long as tried to make demand to general partners first but they did nothing in reasonable time

How to Merge/Convert LP w/ another form of business entitiy

upon consent of all partners and filing of a certification of converstion/merger w/ secretary of state

Right of Limited partner to Dissociate

No right before termination of limited partnership- if they do it’s wrongful

Dissolution of LP (Ways it happens)

Other than consent to, or term ending
May be:

• Judicially dissolved upon application of partner if no longer reasonbly practicable to carry on LP in conformity w/ agreement.

• Administratively dissolved by secratery fo state for failure to pay fees, or file annual report

  • LP may apply for reinstatement by curing the defect w/in 2 years of dissolution

• After dissociation of general partner:

  • if another general partner remains: upon consent of partners owning majority in interest

  • If no other general partner: after 90. days,

    • unless get a new one

• 90 days after dissociation of last limited partner

  • unless new one admitted in that time

Winding up of LP

• must discharge liabilities,

• settle and close partnership activities,

• marshal and distribute assets

Power to Bind LP after dissolution

Bound by acts of general partner that are appropriate for winding up partnership

• non-winding up activites may also bind if 3rd party no notice (and would have normalyl bound pre-wind up)

Distribution of Assets @ windup in LP - order

Creditors (outside and inside) → any surplus paid in cash as distribution

• if insufficient:

  • each person who was general partner when obligation was incurred must contribute to partnership using rules of contribution @ time

    • if someone pays more can recover from person who failed to pay

Limited Liability Partnerships (LLPs)

Also called RLLPs

• A General partnership where all partners have limited liability

  • no personal liability for debt of business

• Apply general partnership rules EXCEPT few things

  • formation

  • name

  • voting

LLP Formation

Partnership must file a statement of qualification w/ secretary of state

• statement must be executed by at least 2 parties

• Requires:

  • name and address of partnership

  • statement that partnership elects to be an LLP; and

  • deferred effective date, if any

• Becomes LLP @ time of filing of statement of date specified in statement

LLP Name requirement

Name must end in words:

• “Limited Liability Partnership” or one of appreviations

  • RLLP, LLP, etc.

Voting to create LLP

Terms and conditions onf which a partnership becomes LLP must be approved by whatever vote necessary to amend partnership agreement

• iIfnothing in agreement, all partners must approve terms and conditions of partnership becoming an LLP

LLP Partner Liability

Remain personally liable for own wrongful acts BUT

not liable for debts of business

• if assets of LLP insufficient, partners relieved of contribution from personal liability BUT they lost the right to receive contributions from other partners