Formation of a partnership
A partnership is created when two or more persons carry out a business for profit. The partnership is formed upon agreement, written or verbal. Sharing profits is a key indicator that a partnership has been formed.
Partnership rights
- Ownership of property
- Equal control, can’t transfer
- No right to salary (except for winding up)
- Equal right to profit & losses (unless agreement otherwise)
- Indemnification
Authority to bind
Each partner has the authority to bind the business contractually. An unanimous vote of all partners is required to bind the partnership if the action is beyond the normal scope of usual business. All partners have implied authority.
Partner fiduciary duties
A partnership may maintain an action against a partner for the violation of a duty to the partnership. When a partner violates a duty, the partner is liable to the partnership for their resulting loss.
Duty of loyalty
The partner is required to refrain from:
1. Competing with the partnership business:
2. Advancing an interest adverse to the partnership;
3. Usurping partnership opportunity, using partnership property or conducting partnership business to derive a personal benefit, unless the partner accounts to the Partnership for such benefit.
Duty of care
Each partner is required to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.
Partnership liability
A. Civil liability
1. Contracts: The partners are liable for all contracts entered into by a partner that are within the scope of partnership business and/or are made with authority of the partnership.
2. Torts: The partners are liable for all torts committed by any partner or partnership employee that occur within the course of partnership business or are made with authority of the partnership.
3. Joint and several: Partnership liability is joint and several for all obligations. Each partner is personally liable for the entire amount of partnership obligations. However, a partner paying more than his share may seek contribution or indemnity from the other partners.
B. Liability of incoming partners: Incoming partners are not personally liable for debts incurred prior to joining the partnership, but any money paid into the partnership by an incoming partner can be used by the partnership to satisfy prior debts.
C. Liability of outgoing (dissociated) partners
1. A dissociating (outgoing) partner remains liable for partnership debts incurred prior to dissociation unless there has been novation or release of liability.
2. A partnership can be bound by an act of a dissociated partner (and the dissociated partner may be liable for acts) undertaken within 2 years after dissociation if:
a. The act would have bound the partnership before dissociation,
b. The other party reasonably believed the dissociated partner was still a partner, and
c. The other party did not have notice of dissociation.
• If a notice of dissociation is filed with the state, all parties are deemed to have received notice within 90 days of the filing.
Dissolution of a general partnership
Occurs when the partnership stops being active and the partnership business is wound up. A partnership may dissolve for several reasons:
1. Voluntary dissolution occurs when:
a. A partnership is formed for a specific purpose and the objective is achieved,
b. The agreement specified an end date,
c. When all partners agree, or
d. In an at-will partnership when one party notifies the other.
- Involuntary dissolution can occur when the partnership is engaged in an unlawful activity, or by court decree at the request of a partner.
Winding up
Upon the termination of the partnership, partnership assets will be distributed to:
1. Outside creditors
2. Inside creditors
3. Capital contributions from the partners; and
4. The remaining assets, if any, will be divided among the partners equal to their percentage of ownership.
Additionally, if no assets remain and the partnership has outstanding creditors, these liabilities will be divided and assigned to each partner at their percentage of ownership.
Limited Partnership
A limited partnership is a partnership that has at least one general partner and at least one limited partner, which creates a two-tiered partnership structure with differing rights, duties, and liabilities for general and limited partners. The main difference is that a limited partner is liable for the obligations of the partnership only to the extent of his capital contribution and is not entitled to manage or control the partnership business.
Formation of a Limited Partnership
To form a limited partnership the partners must:
1. File a Limited Partnership Certificate of Formation, signed by all general partners, with the state:
2. Identify the name of the partnership, which includes the words ‘Limited Partnership’;
3. Provide the names and addresses of the agent for service of process and of each general partner; and
4. Maintain records: In the state of organization the limited partnership must have an office containing records of the certificate, any partnership agreements, the partnership’s tax returns for the 3 most current years, etc. There must also be a record of the amount and description of each partner’s contribution, any special distribution rights of each partner, etc.
General partner liability
General partners are personally liable for the liabilities of the partnership. Usually, judgments are not assessed against personal assets unless partnership assets have been depleted.
Dissolution of an LP
A limited partnership will dissolve:
1. At the time specified in the limited partnership certificate.
2. Upon written consent of all general partners and of limited partners holding a majority interest.
3. Upon dissociation of a general partner, unless the agreement provides otherwise, or the partners appoint a new general partner within 90 days.
4. After 90 days upon dissociation of the last limited partner.
5. Upon judicial decree of dissolution.
Winding up of an LP
The limited partnership will continue to exist for the purpose of the winding-up activities.
Priority of distribution in an LP
Assets are distributed in the following order:
1. Creditors, including outside creditors and partner loans.
2. Partners and former partners in satisfaction of distribution previously required under the limited partnership agreement.
3. Capital contributions by partners must be paid.
4. Partners for the amount due under the partnership agreement, or if not specified then in proportion to their distribution share.
LIMITED LIABILITY PARTNERSHIP (LLP) - (HAS MEMBERS)
An LLP is a form of partnership where the partners are not personally liable for the obligations of the partnership. Formation requires filing with the Secretary of State. A limited partner can actively manage the partnership, which is different from a Limited Partnership, where one partner has all the power, and the others simply have a financial stake.
Formation of an LLP
To form an LLP a partnership must:
1. File a Statement of Qualification with the Secretary of State executed by at least two partners,
2. Identify the name and address of the partnership, and
3. Have a partnership name ending in ‘LLP’ or ‘RLLP’ (if formed under RUPA).
Liability of limited liability partners
- LL partners have no personal liability for the partnership: All partners are not personally liable for the debts and obligations of the partnership, whether contract, tort, or otherwise. 2. ALL partner will still have personal liability for his own wrongful acts.
Dissociation and dissolution of an LLP
operate similarly to a limited partnership.
Limited Liability Company
An LLC is a business entity that has the limited liability of a corporation combined with the tax advantages of a partnership.
Formation
To form an LLC the members must:
1. File an ‘Articles of Organization’ with the state (which is similar to an article of incorporation),
2. Identify the name of the LLC, and the address of the registered office and agent, and
3. The LLC may also adopt an operating agreement identifying how the LLC is to be managed. In the absence of an agreement, the members will have an equal right to manage and control.
Liability of LLC members
LLC members are not personally liable for the obligations of the company itself beyond their own capital contributions; however courts may pierce the LLC veil of limited liability (as they do in corporations for alter ego, inadequate capitalization, or fraud-but not for lack of formalities).
Dissolution of an LLC
There is a split of authority on what terminates an LLC.
1. Traditional rule: Dissociation of any LLC member, such as by death, retirement, resignation, bankruptcy, etc., generally causes dissolution; or
- Modern trend: Dissolution is only caused by one of the following:
a. An event specified in the operating agreement,
b. Consent by all members,
c. 90 days with no members,
d. Judicial decree (unlawful actions, fraud, etc.), or
e. Administrative decree (failure to submit annual fee or report).
