Partnerships

Partnership

Two or more persons associate to carry out a business as co-owners for profit. Regardless of whether the parties subjectively intended to form a partnership. No formal signing or filing required 

General partnership

Two or more persons associate to carry out a business as co-owners for profit. Regardless of whether the parties subjectively intended to form a partnership. No formal signing or filing required 

Intent to form a partnership

Courts look at the intent of the parties, just whether they intended to be co-owners not if they intended to form a partnership 

Partnership formation factors

Profit sharing (most important); right to participate in the control of the business; loss sharing; title held in tenancy in common

Writing requirements for partnerships

Partnership law doesn’t require one but the SOF may if it’s for more than a year 

Partnership by estoppel

When someone acts or lets others think they’re a partner, and a third party relies on that belief when dealing with the business 

Analyzing partnership agreements

Rely on the provisions of the agreement first then fall back on the statutory provisions. Almost all partnership statutes can be contracted. 

A partnership’s legal entity

It’s distinct from the partners. A partnership can sue/be sued. Title can be in the partnership name. 

Additional partnership formation considerations

Capacity, legality of purpose (illegal purposes are void), consent, statement of partnership authority

Default voting rules

Unless otherwise agreed, all partners have equal votes and ordinary business decisions need a majority vote. Matters outside the business need a unanimous vote

Default compensation for partners

Unless otherwise stated, there’s no right to compensation (except for compensation after winding up the partnership) 

Legal actions by and against partners

The partnership can sue or be sued. A partner’s personal assets can be reached if judgment is against the individual partner 

Default profit/loss sharing

Unless otherwise agreed, profits are split equally. Losses must be split the same way profits are split (unless otherwise specified)

Liabilities to third parties in tort

A partnership is liable for loss or injury caused to a person as a result of a tort committed by a partner (or employee) acting in the ordinary course of business 

Liabilities to third parties in contract

A partnership is liable for all contracts entered into by a partner in the scope of partnership business or with actual/apparent authority of the partnership 

Actual authority

Authority a partner reasonably believes they have based on the communications between the partnership

Statement of authority

Document filed publicly limiting partners’ authority to transfer real property. Third parties are deemed to have constructive knowledge if the statement is recorded in the county where the property is located

Apparent Authority

When a third party reasonably believes a partner has the power to act on behalf of the partnership, even if the partner doesn’t actually have that authority. The partnership can be bound by the partner’s actions 

Liability of the partners

Each partner is jointly and severally liable for the partnership obligations. All partnership resources must be exhausted before going after an individual partner’s assets. 

Partnership indemnification

When one partner pays the whole obligation of the partnership, they’re entitled to indemnification from the partnership 

Limiting a third party’s rights

Partners can’t limit a third party’s rights without consent. A third party could still go after the partner, but recover from the other partners. Indemnification agreements are only among the partners, not the third parties 

Liabilities of admitted partners

The default rule is that a unanimous vote is required to admit a new partner (unless otherwise agreed). A new partner is not liable for debts incurred before their admission

Liability of dissociating partners

An outgoing or dissociated partner is liable for all obligations while they were a partner unless there has been payment, release, or novation 

Liability for criminal liability

Partners are not criminally liable for the crimes of other partners committed within the scope of the partnership unless the other partners participated in the commission of the crime

When a partner has notice to a fact

When they have actual knowledge of the fact, is notified of the fact, or has reason to know of the fact based on the surrounding circumstances 

The four duties owed to the partnership

Two fiduciary (loyalty and care to each other and the partnership); two statutory (disclosure and obedience) 

Duty of loyalty

A fiduciary duty. Requires each partner to: To account to the partnership for any benefit; not take adverse positions to the partnership; not compete with the partnership 

Duty of care

A fiduciary duty that each party must refrain from grossly negligent or reckless conduct or knowing violations of law

Duty of disclosure

A statutory duty. Each partner must: without demand, give any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partnership; and On demand, any other information concerning the partnership’s business and affairs (except if the demand is unreasonable) 

Duty of obedience

A statutory duty. Partners must obey all reasonable directions of the partnership and not act outside the scope of their authority 

Eliminating a partner’s duties

Fiduciary duties cannot be eliminated, only statutory duties 

Partnership capital

The property or money contributed by each partner for the purpose of carrying on the partnership’s business

Partnership property

Everything the partnership owns, including both capital and property subsequently acquired in the partnership transactions 

Property deemed to be partnership property

Titled property if acquired in the partnership’s name or in the partner’s name where it’s apparent from the document they’re acting for the partnership

Property presumed to be partnership property

Property is rebuttably presumed to be partnership property if it was purchased with partnership funds 

Property presumed to be partner’s separate property

Property is rebuttably presumed to be the partner’s separate property if: it’s held in the name of one or more partners; the instrument transferring title gives no sign they’re acting for the partnership; and partnership funds were not used to acquire the property 

Rights in the partnership property

The partnership owns the partnership property. A partner is not a co-owner of partnership property and has no interest in it. A partner can simply use partnership property for partnership purposes 

Transferring management rights

Unless otherwise agreed, management rights cannot be unilaterally done because the making the transferee a “partner” requires a unanimous vote

Transferring financial rights

Unless otherwise agreed, a partner can unilaterally transfer financial rights. The transferee is not a partner. The transferor retains all the rights 

Dissociation

A partner’s withdrawal from the partnership. A single partner does this and leaves the partnership. 

Events triggering dissociation

Oral and written notice of their express will to withdraw; happening of an agreed event; valid expulsion of the partner; the partner’s bankruptcy or the appointment of a receiver; the partner’s death or incapacity to perform partnership duties; the decision of a court that a partner is incapable of performing their duties; terminating the partnership 

Wrongful dissociation

A dissociation in breach of an express term in the partnership agreement. One who wrongfully dissociates is liable for any damages caused by it. 

At-will partnership

Where the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking. It’s the default form of the partnership. 

Term partnership

Agreement to remain partners for a definite amount of time or until the completion of a project

Consequences of dissociation for a partnership

When a partner dissociates, one of two paths is taken: Dissolution or the partnership continues and the partner is bought out 

Dissolution

The partnership ends, business is wound up, assets are sold off (liquidated). Selling off the business asset by asset and then pay off liabilities. If it’s insufficient, pay off with shares

When a partner dissociates and the partnership continues…

The partner is bought out

Consequences of dissociation for the partner

Their right to manage ceases. The partnership must buy out their interest and indemnify them against known pre-dissociation liabilities. But a partner who wrongfully dissociates before the expiration is not entitled to payment of the buyout price until the term expires or the undertaking is complete. 

Express will

When a partner voluntarily leaves

When dissolution and winding up are required

When a partner dissociates by express will; or in a term partnership, if one partner dissociates wrongfully or if dissociation occurs because of death or bankruptcy and ½ the remaining partners agree to wind up within 90 days

Dissolution when a partner dissociates by express will

Dissolution and winding up are required. The dissolving partner can force the whole partnership to dissolve. Any partner can shut down the whole thing 

Dissolution and winding up in a term partnership

Dissolution and winding up are required if one partner dissociates wrongfully or because of death or bankruptcy and ½ the members agree to wind up within 90 days 

Buyout

Dissociating partner’s right to be paid the value of their partnership interest by the continuing partners

A dissociated partner’s liabilities

They’re still liable for pre-dissociation partnership obligations

When a dissociated partner is liable for post-dissociation liabilities

Within two years after the dissociation if: When entering the transaction, the other party reasonably believed the dissociated partner was still a partner, and did not have notice of the partner’s dissociation. So to protect yourself, reach out to creditors or file a public statement of dissociation 

How long a dissociated partner has apparent authority for post-dissociation

2 years

Events causing dissolution

In a partnership at will, notification of an express will to withdraw. In a partnership for a definite term or particular undertaking: 1) expiration of the term or completion of the undertaking, 2) consent of all the partners to dissolve, or 3) within 90 days after a partner’s death, bankruptcy, or wrongful dissociation, at least half want to dissolve 

Event causing dissolution in a partnership at will

Notification of an express will to withdraw 

Events causing dissolution of a partnership for a definite term or particular undertaking

1) expiration of the term or completion of the undertaking, 2) consent of all the partners to dissolve, or 3) within 90 days after a partner’s death, bankruptcy, or wrongful dissociation, at least half of the remaining partners want to dissolve 

Priority of distribution

First pay off all creditors, then reimburse partners for capital contributions, then split the profits and loses 

Winding up

The process of selling off assets

Who must participate in the winding-up process

All living partners

Limited partnership

Partnership with at least one general partner and at least one limited partner. Two classes of partners: general and limited 

General partnership

The owners and managers of a general partnership. They can bind the partnership, share in profits and losses, and are personally liable for debts and obligations 

Limited partners

Investors in a limited partnership who contribute money or property but don’t manage the business 

Forming a limited partnership

File a certificate of limited partnership with the Secretary of State that includes the name of the partnership, name and address of the agent for service of process, and the names and addresses of each general partner. The name must have the name “limited partnership” or the like in it. 

What the certificate of limited partnership must include

Name of the partnership, name and address of the agent for service of process, and the names and addresses of each general partner 

What happens if you fail to file for a limited partnership

It’s a general partnership

Voting rights of general and limited partners

Both are required for extraordinary purposes like amending the partnership agreement, converting into an LLLP, disposing of partnership property outside the regular course of dealing, admitting a new partner

Liability in a limited partnership

General partners are liable. Limited partners are not personally liable for obligations solely by being a partner. They can only lose the value of their investments 

Fiduciary duties of limited partners

They have none

Voting rights of limited partners

none, absent some extraordinary circumstance requiring voting from both general and limited partners 

Limited Liability Partnership

A general partnership where all partners have limited liability 

Forming an LLP

 File a statement of qualification with the Secretary of State, including the name and address of the partnership, a statement the partnership elects to be an LLP, and a deferred effective date. Also the words LLP. 

Liability in an LLP

No vicarious liability