Forming a Partnership
Defintion |
An association of two or more legal persons who carry on a for profit business as co-owners. |
Person |
Anyone or anything that has a legal capacity to contract |
Intent |
Only need to intend to carry on as co-owners for profit |
Co-ownership |
Presumption that people who share profits are partners |
Sharing control |
One person cannot have all of the control |
Consequences of Forming a Partnership
Separate Legal Entity |
partnership is distinct from each of the partners |
Partnership Liability |
Partners are personally liable for the partnerships obligations |
Entity-level taxation |
Does not exist in a partnership |
Partnership agreement |
Law of partnership; does not need to be written, provision in a partnership agreement will typically govern over state law |
Mandatory State Laws |
Liability to third parties; cannot deny partners access to the books or records, cannot eliminate fiduciary duties |
Internal Affairs
Fiduciary Duties |
Every partner owes duty of loyalty and care |
Duty of Loyalty |
Partners must not compete with partnership business, advance an interest adverse to partnership, usurp a partnership opportunity, etc |
Limitation on Duty of Loyalty |
cannot eliminate but can limit as long as not manifestly unreasonable |
Safe Harbor |
If a partner makes full disclosure of all material facts, then a certain percentage of the other partners may authorize or ratify the transaction |
Duty of Care |
Partnersmust not engage in grossly negligent or reckless conduct, engage in intentional misconduct, engage in a knowing violation of the law |
Timing of Duties |
Duty of loyalty and care apply only to partners, not prospective partners or former partners |
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Profits and Losses
Division |
Dictated by the agreement. Losses and profits need not be the same. If no agreement, profits divided evenly and losses follow profits |
Distribution |
Default- patterns do not have the right to demand distributions. Can allow in partnership agreement |
Transfer of Partnership Interests |
Default- partner sold not have a right to transfer interest. Partners may agree to require a majority vote. In past, conveying interest would dissolve partnership |
New Partner |
Default- All existing partners must consent to the new partner |
Managing/ Governing Relationships
Default Rule |
Every partner has an equal rights in management and control of the partnership. Can be changed by agreement (often to reflect capital contribution) |
Ordinary Business Matters |
Requires vote of the majority of partners |
Extraordinary Business |
Requires vote of all the partners |
Quorums |
No default rule regarding parternship quorums for partnership voting |
Access to the Records |
Partners and agents must be provided access to the records; CANNOT be abridged by partnership agreement |
Dissociation
Dissociation |
when a partner ceases to be associated with the partnership |
Voluntary |
Partner may give notice to the partnership that the partner wants to withdraw |
Involuntary |
Event triggered in the partnership agreement; expelled pursuant to partnership agreement; unlawful to carry on business with that partner; court order; partner goes bankrupt; partner dies; partner becomes incapacitated; one of the entities in the partnership dissolves |
Consequences |
Partnership does not necessarily dissolve; former partner has no right to participate in management and no longer has duties; if partnership continues must buy out the dissociated partner's interest |
Wrongful Dissociation |
the wrongfully dissociated partner may not be entitled to payment of the buyout price until the expiration of the term or completion of the undertaking of the partnership. Because the partner will also be liable for damages caused by the wrongful dissociation, if the partner’s liability meets or exceeds the buyout value, the partner may not be entitled to receive any buyout price. |
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Liabilities of Partnership
Agency |
Every partner is an agent of the partnership |
Contract Liability |
Partners need authority |
Express Authority |
comes from the partnership agreement, statement of authority filing, or ad hoc authorization by the partners at a meeting |
Implied Authority |
Exists based on partner's reasonable belief that an action is necessary to carry out express authority |
Apparent Authority |
Partnership may be bound based on the partner acting in the ordinary course of dealings; based on interactions between partnership and third-parties |
Tort Liability |
A partnership is liable for torts that are committed by partners acting within the scope of their partnership |
Consequences of the Flow of Liability |
Partners are personally liable for the debts or obligations of the partnership; joint and several liability; partnership creditor must exhaust the partnership's funds before going after the partners' personal assets; incoming partner not liable for prior obligations; outgoing partner may be liable for obligation that occurred after dissociation |
Terminating a Partnership
Dissolution |
Can be brought around by partnership or operation of law; triggered by the occurrence of an event |
Partnership at Will |
Open ended partnership with no fixed term tied to time period or undertaking; generally, dissolved when a partner chooses to dissociate |
Partnership for a Term of Undertaking |
Partnership may be dissolved when the term ends or when the undertaking is completed |
Three ways to dissolve partnership |
Any dissolving event set forth in partnership agreement; any event making it unlawful to continue if not cured within 90 days; judicial determination |
Winding Up |
dispose of and transfer partnership property, and discharge partnership liabilities; person can also preserve partnership business to maximize value as a going concern |
Who may wind up |
Any partner who has not wrongfully dissociated, legal representative of the last surviving partner. May seek judicial supervision of winding up |
Statement of Dissolution |
Filing that gives notice to third parties that the partnership has been dissolved after 90 days. Limits the partners apparent authority and liability |
Priority of Distribution |
Creditors first and then partners |
Limited Liability Partnerships
Definition |
Partnership in which a partner's personal liability is eliminated; must file with the state |
Formation |
To transforma a general partnership into an LLP, you must vote to authorize transformation |
Name |
Must end with either: Registered Limited Liability Partnership (RLLP) or Limited Liability Partnership (LLP) |
Liabilities |
Limited partners are not personally liable; limited partners are personally responsible for their own personal misconduct or negligence |
Terminating LLP Status |
Partners can voluntarily transform and cancel LLP status; government can revoke LLP status |
Limited Partnerships
Definition |
A partnership formed by two or more persons that has at least one general partner and one limited partner |
Limited partners |
Have limited liability (unless serves as general partner or participates in partnership); may be admitted by agreement of all partners; default- don't vote; right to records |
Things a limited partner can do without running business |
Be an officer, director, or shareholder; consult general partner or partnership affairs; act as surety of the partnership request to attend meetings; wind up the partnership; propose or approve of partnership matters |
General Partners |
Have personal liability; admitted upon consent of all partners; same rights as general partnership |
Termination of general partner status |
voluntarily withdrawal; removal if tries to assign interest; goes bankrupt or becomes insolvent; death or incapacitation; business-entity partner is terminated |
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