Partnerships

General Partnership

Formation

Partnership: Two or more persons associate to carry on as co-owners a business for profit

• Whether you intended to create a partnership is irrelevant

• Factors

  1. Profit sharing - Presumption of Partnership (Revenues → Expenses → Profits)

     • Unless received as payment of debt, wages, or services rendered

     • Gross Returns: Revenues of a business

       • Does not by itself make someone a partner

  2. Right to participate in control of business

  3. Loss sharing

Writing → Not required BUT statute of frauds

Partnership by Estoppel

• Partner liability imposed when a party is not a partner in fact

  • Person represents himself as a partner → liable to 3rd parties

  • Persons represents another as a partner → person becomes his agent and can bind him with 3rd parties

Partnership agreement → Not required

• Allows partners to contract around almost all of the statutory provisions

• Can agree to abide by different ruled

  • Not that certain provisions cannot be waived

General Partnership

Other Factors and Considerations

Other factors that do not raise a presumption of partnership

1. Title to property is held in joint tenancy or in common

2. The parties designate their relationship as a partnership

3. The venture undertaken by the parties requires extensive activity

4. Sharing of gross returns

Additional Formation Considerations

1. Capacity

   • Lacks capacity → liable only to the extent of his capital contribution

     • BUT NOT void

2. Legality of purpose

   • Illegal purpose → void

3. Consent

   • Need express or implied consent

4. Statement of Partnership Authority

   • May be filed

General Partnership

Management and Operation of a General Partnership

• Voting

• Compensation

• Information

Voting

• Default Rule

  • One partner → One vote

  • Ordinary business decision → Majority vote

  • Extraordinary business decision → Unanimous vote

• Can contract around the default rule

Salary or other compensation

• Default rule → No right

• Can contract around the default rule

Books and Information

• Kept at the partnership’s chief executive office

• Each partner has a right to inspect and copy the partnership books

General Partnership

Indemnification and Other Repayment

Partnership must indemnify every partner with regard to payments made and obligations reasonably incurred in carrying on the partnership business

General Partnership

Legal Actions by and Against Partners

Partnership may sue or be sued in its own name

• To reach a partner’s personal assets, there must be a judgment against the individual partner

Partner can sue Partner or vice versa

General Partnership

Financial Rights

Sharing Profits and Losses

• Default Rule

  1. Profits shared equally

  2. Losses shared in same manner as profits

• Can contract around the default rule

General Partnership

Liability of Partnership to Third Parties

• In Tort

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

General Partnership

Liability of Partnership to Third Parties

• In Contract

Liable for all contracts entered into by a partner in the scope of partnership business or with actual or apparent authority of the partnership

Actual Authority

1. Partnership Agreement 

2. Vote of the partners

3. Statement of Partnership Authority: Document filed publicly granting and limiting partners’ authority to enter into transactions on partnerships behalf

   • Transactions involving real property

     • Third parties are deemed to have constructive knowledge of the statement if secretary of state and county filings are made

   • Transitions not involving real property 

     • Third parties are deemed to have constructive knowledge only of filed grants of authority, not filed restrictions

Apparent Authority

• Partner → agent under agency law

  • Statutory Apparent Authority: Authority to bind the partnership to transactions within the ordinary course of the partnership’s business or business of the kind carried out by the partnership

General Partnership

Liability of the Partners

Each partner is jointly and severally liable for partnership obligations

• But only as guarantors (meaning that they have to try to recover from the partnership)

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

• May also require the other partners to contribute their pro rata shares of the payment if the partnership is unable to indemnify

Partners cannot limit 3rd parties rights without the 3rd parties consent

New Parter

• Admitting New Partner

  • Default rule: unanimous vote required

• Not personally liable for partnership obligations that arose before his admission

Outgoing or Dissociating Partner

• Remains liable for obligations arising while they were a partner unless there has been payment, release, or novation

No Criminal liability for the crimes of other partners

General Partnership

Fiduciary Duty

Fiduciary Duties → to each other and the partnership

• Cannot be eliminated by partnership agreement

Duty of Care

• No grossly negligent or reckless conduct

  • Ordinary negligence excussed

Duty of Loyalty → treat them with utmost fairness

• Account to partnership for any benefit

• Not taking adverse positions to partnership

• No competing with partnership

General Partnership

Statutory Duty

Duty of Disclosure

• Duty to provide complete and accurate information concerning the partnership

  • Without demand → any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties

  • On demand → any other information concerning the partnership’s business and affairs

• Can be eliminated by partnership agreement

General Partnership

Property Issues

• Who does it belong to?

Deemed to be Partnership Property

• Acquired in the partnership’s name or in a partner’s name where it is apparent from the document that they are acting for a partnership

Presumed to be Partnership Property

• Was purchased with partnership funds, regardless of in whose name title is held

Presumed to be Partner’s Separate Property if

• Held in the name of one or more partners;

• Instrument transferring title gives no sign that they’re acting for a partnership;

• Partnership funds were not used to acquire the property

General Partnership

Property Issues

• Rights in Partnership Property

Partnership’s Rights

• They own the property, so unrestricted rights

Partner’s Rights

• Not a co-owner of the property and thus has no interest in it

• Can use for partnership purposes

  • Unless consent

General Partnership

Property Issues

• Partner’s Ownership Interest in the Partnership

Partnership Interest: Partner’s ownership stake in the partnership

• Comprised of

  1. Management rights

     • Cannot unilaterally transfer and thereby make the transferee a partner, unless otherwise agreed

  2. Financial rights

     • Can unilaterally transfer, unless otherwise agreed

       • Does not make them a partner

General Partnership

Dissociation

• Events of Dissociation

Dissociation → Partner's withdraw from a Partnership

Events of Dissociation

1. Oral or written notice of the partner’s express will to withdraw; 

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. Partner’s death or incapacity to perform partnership duties; 

6. Decision of a court that the partner is incapable of performing a partner’s duties; 

7. Termination of a business entity that is a partner

General Partnership

Dissociation

• Wrongful Dissociation

Dissociation → Partner's withdraw from a Partnership

Types

1. In breach of an express term in the partnership agreement

2. Partner withdraws, is expelled, or becomes bankrupt before the end of the term

   • At will Partnership: no agreement to remain partners (default rule)

     • Not liable

   • Term Partnership: agreement to remain partners for amount of time or until completion of project

     • Liable

Liable to the partnership for any damages caused by the dissociation

General Partnership

Dissociation

• Consequences

Dissociation → Partner's withdraw from a Partnership

One or the other

1. Dissolution → Partnership ends, business is wound up, assets are sold off

   • Required in limited circumstances

     1. Dissociation by Express Will: Partner voluntarily leaves

        • Dissociating partner can force partnership to dissolve

     2. Term Partnership: one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy

        • Required only if, within 90 days after the dissociation, at least one-half of the remaining partners agree to wind up the partnership

2. Buyout → Partnership continues, dissociated partner entitled to a buyout of their partnership

General Partnership

Dissociation

• Liability of Dissociated Partner

Dissociation → Partner's withdraw from a Partnership

Pre-Dissociation → remains liable

Post-Dissociation → liable for liabilities incurred within two years after the dissociation (assuming that dissolution has not occurred) if

1. when entering the transaction the other party reasonably believed the dissociated partner was still a partner, and

2. did not have notice of the partner’s dissociation

   • Can protect themselves by:

     1. notifying creditors directly of their dissociation (effective immediately) or

     2. by filing a public notice of dissociation (becomes effective 90 days after filing)

General Partnership

Dissociation

• Dissociated Partner’s Power to Bind Partnership

Dissociation → Partner's withdraw from a Partnership

Partnership can be bound by an act of a dissociated partner undertaken within two years after dissociation (assuming that dissolution has not occurred) if:

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

2. the other party to the transaction (a) reasonably believed the dissociated partner was still a partner and (b) did not have notice of the dissociation

   • Can protect themselves by:

     1. notifying creditors directly of their dissociation (effective immediately) or

     2. by filing a public notice of dissociation (becomes effective 90 days after filing)

General Partnership

Dissolution

Partnership assets must be used to pay off Partnership Liability

• If insufficient, individual partners required to contribute

  • If excess, distribute to partners in accordance with profit shares

• Distribution of Partnership Assets

  • Creditors (inside or outside) → Partners for capital contributions → Partners based on profit sharing

Who can wind up? (Process of selling the assets)

• All living partners have a right to participate in the winding up of the partnership’s business

  • Except partners who have wrongfully dissolved the partnership and bankrupt partners

Partner’s Retain Apparent Authority to Bind Partnership After Dissolution

• Partnership can protect itself by

  1. notifying creditors directly of the dissolution (effective immediately

  2. any partner who has not wrongfully dissociated may file a statement of dissolution with the secretary of state

Partners May Waive Dissolution and Continue the Business by Unanimous Vote (of those who have not wrongfully dissolved)

General Partnership

Dissolution

• Events of Dissolution 

Events of Dissolution 

1. Partnership at will → notification by any partner of an express will to withdraw as a partner;

2. Partnership for a definite term or particular undertaking

   • expiration of the term or completion of the undertaking, or

   • consent of all of the partners to dissolve, or

   • within 90 days after a partner’s death, bankruptcy, or wrongful dissociation, at least half of the remaining partners wish to dissolve;

3. Happening of an event agreed to in the partnership agreement that requires winding up the partnership business;

4. Happening of an event that makes it unlawful for the partnership to continue;

5. Issuance of a judicial decree on application by a partner that 

   • the economic purpose of the partnership is likely to be frustrated, or 

   • a partner has engaged in conduct making it not reasonably practicable to carry on the business, or 

   • the business cannot practicably be carried on in conformity with the partnership agreement;

6. Issuance of a judicial decree on application by a transferee of a partner’s interest that it is equitable to wind up the partnership 

   • after the term expires or the undertaking is completed in a partnership for a definite term or particular undertaking, or 

   • at any time in a partnership at will; 

7. Passage of 90 consecutive days during which the partnership does not have at least two partners

Limited Partnership

Formation

Partnership with at least one limited member

• General partnership principles typically apply unless displaced by LP-specific provisions

Must file a certificate of limited partnership with the Secretary of State

• Requires limited information

  1. Name of the partnership

     • Must contain the phrase “limited partnership” or the abbreviation “L.P”

  2. Name and address of the agent for service of process

  3. Names and addresses of each general partner

• Partnership agreement does not have to be filed

Limited Partnership

Management & Operation

General partners

• Managers of LPs

• Ordinary business activities → majority vote

Limited partners

• No management rights unless the partnership agreement grants them rights

• Vote of all partners (general and limited) is necessary for certain extraordinary activities, including to:

  1. Amend the partnership agreement

  2. Convert the partnership to a limited liability limited partnership

  3. Dispose of all or substantially all of the limited partnership’s property outside the usual and regular course of the partnership’s activities

  4. Admit a new partner

  5. Compromise a partner’s obligation to make a contribution or to return an improper distribution

Limited Partnership

Financial Rights

Profits based on capital contribution

Right to Assign Partnership Interest

• partner’s right to distributions is personal property that may be transferred, in whole or in part

  • Does not make them a partner

Limited Partnership

Liability

General Partner → personally liability

• Still liable for their own torts

• Incoming partner → not personally liability for an obligation before

Limited Partner → limited liability

• Still liable for their own torts

Limited Partnership

Fiduciary Duties

General Partner → fiduciary duty to the partnership and partners

Limited Partners → no fiduciary duties

Limited Partnership

Additional Rights of Partners

May lend money to and transact other business with the limited partnership

Right to dissolve

May maintain a direct action against the limited partnership or another partner

May maintain a derivative action to enforce a right of a limited partnership

• If the partner

  • First makes a demand on the general partners to bring an action to enforce the right and the general partners do not bring the action within a reasonable time; or

  • Demand would be futile

• A derivative action may be maintained only by a person who is a partner at the time the action is commenced and:

  • who was a partner when the conduct giving rise to the action occurred; or

  • whose status as a partner devolved upon him by operation of law or pursuant to the terms of the partnership agreement from a person who was a partner at the time of the conduct

Right to inspect and copy any partnership records required to be maintained

Limited partnership must indemnify a general partner for liabilities that they incur in the ordinary course of the activities of the partnership

Limited Partnership

Admission of Additional General and Limited Partners

Consent of all partners

Limited Partnership

Dissociation

Same events as general partnership

• Limited partner has no right to dissociate before termination of the limited partnership

• General partner’s right to dissociate is similar to the right of a partner to dissociate in a general partnership

Effect on Limited Partner

• Treated as a transferee of the limited partner’s transferable interest

Effect on General Partner

• Similar to the effects of dissociation of a partner in a general partnership

Limited Partnership

Dissolution and Distribution

May be judicially dissolved

May be administratively dissolved

• Failure to pay fees or file an annual report

May be dissolved only upon the occurrence of one of the following:

1. Happening of an event specified in the partnership agreement

2. Consent of all general partners and limited partners holding a majority of the right to receive distributions (“majority in interest”)

3. After dissociation of a general partner, upon consent of partners owning a majority in interest if another general partner remains; if no general partner remains, after 90 days unless the partners admit a new general partner

4. Ninety days after dissociation of the last limited partner, unless a new limited partner is admitted within the 90 days

Distribution of Assets upon Winding Up

• Creditors first

Limited Liability Partnership

Formation

General partnership where all partners have limited liability

Must file a statement of qualification with the secretary of state

• Must be executed by at least two partners

• Required minimal information includes:

  1. Name and address of the partnership

     • Must end with the words “Registered Limited Liability Partnership” or “Limited Liability Partnership” or one of the abbreviations “L.L.P.,” “LLP,” “R.L.L.P.,” or “RLLP”

  2. Statement that the partnership elects to be an LLP

  3. Deferred effective date, if any

Limited Liability Partnership

Liability

Partner → not personally liable

Remains liable for their own wrongful acts