Partnership Rules

Question 1

Partnership

Answer 1

An association of two or more persons to carry on as co-owners a business for profit (formed immediately) even if subjectively didn’t intend to be partners

Governing law = Revised Uniform Partnership Act (RUPA)

Question 2

Partnership Requirements

Answer 2

1. No formal writing/agreement; just based on parties’ intent implied from their conduct
2. Anyone who is capable of entering a binding contract is capable of being a partner
3. Partnership cannot have illegal purpose
4. No one may become a partner without consent of all partners

Question 3

Factors to Imply a Partnership

Answer 3

1. Intent of the parties
2. Sharing of profits = rebuttable presumption of partnership (except if payments for debt, serviced, rent, annuity/retirement benefits, interest on loan, or sale of goodwill of business)

Additional factors (do not create presumption, but evidence of formation):
- title to property held as joint tenant or tenant in common
- parties designate their relationship as partnership
- venture requires extensive activity
- sharing of gross returns

Question 4

Partnership by Estoppel

Answer 4

When person (words/conduct) represents himself as partner or consents to being represented by another as partner –> liable to third parties that extend credit to actual/apparent partnership in reliance on the representation

When person hold out another as partner –> makes that person his agent to bind him to 3rd parties

Question 5

Real & Personal Property Belongs to Partnership if:

Answer 5

1. Titled in partnership name; OR
2. Name of the partnership and instrument transferring title notes titleholders capacity as partner
3. Presumed partnership property if purchased with partnership funds

Question 6

Presumptions of Separate Property If:

Answer 6

1. Property held in name of partner
2. Instrument does not indicate person’s capacity as partner/mention existence of partnership
3. Partnership funds not used

Question 7

Factors to apply for untitled property to determine whether partnership or separate property:

Answer 7

1. Use of partnership funds
2. Use of property by partnership
3. Listed in partnership books as asset
4. Close relationship between property/business
5. Improvement with partnership funds
6. Maintenance with partnership funds

Question 8

Partners Rights in Partnership Property

Answer 8

1. Partners are not co-owners of partnership property and have no transferable interest in partnership property
2. Partners have no right to use partnership property other than for the benefit of the partnership

Question 9

Rights of Partners; unless Agreement specifies otherwise

Answer 9

1. Equal right to participate in management and control of the partnership
2. Equal right to share in profits/lossess and receive distributions
   - no right to compensation
3. Partners not entitled to renumeration except for compensation for services in winding up business
4. Partnership must indemnify partners for payments reasonably made and obligations reasonably incurred by a partner in carrying on business of the partnership
5. If partner must pay more than his fair share –> entitled to contribution from other partners
6. All partners have right to inspect partnership books/records
7. Partnership can be sued in the partnership name/names of individual partners

Question 10

Partners Owe These 4 Fiduciary Duties

Answer 10

1. Duty of loyalty
2. Duty of care
3. Duty of obedience
4. Duty to provide complete and accurate information (concerning the partnership)

Question 11

Duty of loyalty

Answer 11

1. Partners must acorn for all profits/benefits derived by partner in connection with partnership business
2. Partners may not deal with partnership as one with adverse interest
3. Partners may not compete with partnership

Question 12

Duty of Care

Answer 12

1. Partners must refrain from engaging in negligent, reckless, or unlawful conduct
2. Partners must refrain from engaging in intentional misconduct

Question 13

Duty of Obedience

Answer 13

1. Partners must obey all reasonable directions of the partnership
2. Partners must refrain from acting outside the scope of the partner’s actual authority

Question 14

Contract Liability

Answer 14

Partners liable on contracts made by a partner in the scope of the partnership business and on any other contracts expressly authorized by the partners

(joint/several)

Question 15

Tort Liability

Answer 15

Partners are liable for any torts committed by a partner or an employee of the partnership in the ordinary course of partnership business

(joint/several)

Question 16

Exhaustion Rule

Answer 16

Plaintiff must first exhaust partnership resources before seeking to collect from partners individual assets

Question 17

Dissociation (Withdrawal) Occurs Upon Following Events

Answer 17

1. Notice of partner’s express will to withdraw
2. Happening of an agreed upon event
3. Valid expulsion of partner
4. Partner becoming bankrupt
5. Death of partner, or termination of partner that is a business entity
6. Court decision that partner is incapable of performing her duties

Question 18

Dissolution

Answer 18

Partnership dissolved and business must be wound up when:

1. At will partnership, when a partner gives notice of her express will to withdraw
2. In partnership for definite term or particular undertaking, when:
   - in 90 days of partner’s death, bankruptcy, or wrongful dissociation @ least half of partners express will to be bound up
   - all partners express will to be wound up
   - term expires/undertaking is complete
3. Upon happening of agreed upon event
4. Upon happening of event that makes it unlawful for partnership to continue
5. Upon judicial decree

Question 19

Limited Partnership Formation & Governing Law

Answer 19

1. Governed by Uniform Limited Partnership Act “ULPA”
2. Need one or more general partners plus at least one limited partner
3. Formation occurs upon filing a certificate of limited partnership w/ Secretary of State
   LP’s can only be formed by statute
   - name of partnership
   -name/address of agent for service of process
   - name/address of each general partner

Question 20

Limited vs. General Partner Liability

Answer 20

Limited Partner: no personal liability for obligations of the partnership

General Partner: jointly/severally liable for partnership obligations

Question 21

Rights of BOTH General & Limited Partners

Answer 21

1. Right to distributions, transferred in whole or in part
2. May transact business with the limited partnership
3. May maintain a derivative action on behalf of the partnership if the partner first makes demand on general partners or demand would be futile
4. May apply for decree of dissolution whenever not reasonably practicable to carry on business in conformity w/ partnership agreement

Question 22

Limited vs. General Partner Duties

Answer 22

General partners: owe limited partnership fiduciary duties of care and loyalty

Limited partners: owe no fiduciary duty to the partnership and are free to compete with the partnership, unless otherwise provided by agreeement

Question 23

Rights of GENERAL Partners

Answer 23

1. Equal rights in management
2. Right to partnership’s business information
3. Not entitled to remuneration for services performed for the partnership
4. Entitled to indemnification for liabilities incurred in the ordinary course of the partnership’s activities

Question 24

Rights of LIMITED Partners

Answer 24

1. No right to participate in management, unless otherwise indicated in partnership agreement
2. Have right to inspect/copy certain partnership records that are required to be kept in records office

Question 25

Dissociation/Dissolution of Limited Partnership

Answer 25

1. Events that cause dissociation of a partner in a general partnership will also cause dissociation in LP 2. Limited partner has no right to dissociate before termination of LP 3. May be judicially/administratively dissolved; otherwise only by occurence of one of the following: - happening of agreed upon event; - consent of all partners "majority of interest" (those w/ right to receive distributions) - after dissociation of general partner and consent of majority in interest, if no general partner remains, after 90 days unless a new partner is admitted - 90 days after dissociation of last limited partner, unless new limited partner admitted *Assets distributed to creditors first (including partners who are creditors) Then to partners as distribution

Question 26

Formation of Limited Liability Partnership

Answer 26

General partnership, without the liability; all partners have limited liability! 1. File statement of qualification with Secretary of State including: - name/address of partnership - statement of election to be LLP - deferred effective date, if applicable -LLP, RLLP, in name 2. Must be executed by at least 2 partners

Question 27

Liability in an LLP

Answer 27

1. Partner not personally liable for obligations of the partnership 2. Partner remains personally liable for her own wrongful acts

Question 28

LLC Formation

Answer 28

Hybrid business organization where members are taxed like partnership, but enjoy limited liability like shareholders in a corporation; distinct from the members Governed by Revised Uniform Limited Liability Company Act (RULLCA) *Formed by filing a certificate of organization with the Secretary of State - Name of LLC (including LLC) - Address of LLC's registered office - Name/address of registered agent

Question 29

Management Rights in LLC

Answer 29

1. All members participate in management unless otherwise specified in operating agreement 2. Each member of member-managed LLC has authority to bind company to contracts, unless member lacks actual authority to do so and other party has notice

Question 30

Duties of Members in LLC

Answer 30

1. Member-Managed LLC - Members owe duties of care and loyalty to each other and LLC - Must discharge duties consistently with contractual obligation of good faith/fair dealing 2. Manager-Managed LLC - Only the managers are subject to duties of care and loyalty - Only members may authorize or ratify an act by a manager that would otherwise violate the duty of loyalty

Question 31

Piercing LLC Veil

Answer 31

Courts may pierce LLC veil to reach personal assets of members similar in justification with piercing corporate veil

Question 32

LLC Distributions

Answer 32

Distributions in equal shares unless the operating agreement provides otherwise; most states allocate distributions on the basis of contributions unless otherwise indicated in operating agreement

Question 33

Rights to Information in LLC

Answer 33

Member-Managed LLC: - Member has right to inspect/copy any record concerning the LLC's business that is material to the member's rights/duties Manager-Managed LLC: - Managers have same right to information and duty to furnish information as discussed above

Question 34

Dissociation in LLC

Answer 34

1. Member has power to dissociate at any time 2. Wrongfully dissociating member may be liable to LLC for damages 3. Events that cause dissociation of partner generally cause dissociation of member

Question 35

Dissolution of LLC

Answer 35

Will dissolve when any of the following events occur: 1. Agreed upon event of dissolution; 2. Consent of all members; 3. Passage of 90 consecutive days which LLC has no members; 4. Judicial decree; 5. Administrative dissolution by Secretary of State

Question 36

LLC Operating Agreement

Answer 36

Real details of the LLC on operation/governance are within operating agreement - Can displace statutory provisions - May eliminate duty of loyalty/duty of care if doing so is not reasonable - CANNOT eliminate duty of good faith and fair dealing

Question 37

Liability in LLC

Answer 37

Generally not personally liable for LLC obligations! - Can lose only amount of their investment - unless corporate veil pierced

Question 38

Transferring Interests

Answer 38

Management rights CANNOT be transferred Financial rights can be unilaterally transferred

Question 39

LLC Taxation

Answer 39

Taxed on "pass-through" basis No entity level tax; business income passed through to owners and reported on owners individual tax returns