Chapter 2 Business Law
Events that cause dissociation
- Voluntary "Express will to withdraw" - Occurrence of an event agreed to in partnership agreement - Unanimous vote of other partners under certain circumstances - Order of a court or arbitrator - Partner's declaring bankruptcy
Liability in an LLP
-An LLP allows professionals, such as attorneys and accountants, to avoid personal liability for the malpractice of other partners. -A partner in an LLP is still liable for her or his own wrongful acts, such as negligence. -Also liable is the partner who supervised the individual who committed a wrongful act.
When unanimous consent may be required
1. Alter the essential nature of the firm's business as expressed in the partnership agreement. 2.) Change the capital structure of the partnership. 3.) Amend the terms of the partnership agreement 4.) Admit a new partner. 5.) Engage in a completely new business 6.) Assign partnership property to a trust for the benefit of creditors, or allow a creditor to enter a judgement against the partnership, for an agreed sum, without the use of legal proceedings. 7.) Dispose of the partnership's goodwill 8.) Submit partnership claims to arbitration 9.) Undertake any act that would make further conduct of the partnership business impossible.
Essential Elements of a Partnership
1. Sharing profits and losses 2. Joint ownership of the business 3. Equal right to be involved in the management of the business
Limitations of Authority
A partnership may limit a partner's capacity to act as the firm's agent or transfer property on its behalf by filing a "statement of partnership authority" in a designated state office
limited partnership
A partnership with one or more general partners and one or more limited partners.
information return
A tax return submitted by a partnership that only reports the income and losses earned by the business. The partnership as an entity does not pay taxes on the income received by the partnership.
limited liability limited partnership
A type of limited partnership permissible in some states in which the general partners have less than full liability for the actions of other general partners.
Buyouts
After a partner's dissociation, the partnerhsip must purchase his or her partnership interest according to the rule in UPA 701
Valuation of assets
Disputes commonly arise about how the partnership's assets should be valued and distributed and whether the business should be sold.
Partnership Termination
Dissolution and winding up
Agency Concepts and Partnership Law
Each partner is deemed to be the agent of the other partners and of the partnership, similar to an agency relationship.
Wrongful Dissociation
If the partner does not have the right to dissociate than its considered a wrongful dissociation
The Scope of Implied Powers
In an ordinary partnership, the partners can exercise all implied powers reasonably necessary and customary to carry on that particular business.
Rights of Partners
Management, interest in the partnership, compensation, inspection of books, accounting, and property.
Accounting of Partnership Assets or Profits
Required to determine the value of each partner's share in partnership
Duration of Partnership
Terminated by agreement of the partners, but can continue to do business even when a partner dissociates from the partnership.
Authority of Partners
The UPA affirms general principles of agency law that pertain to a partner's authority to bind a partnership in contract.
Distribution of Assets
The priorities for distribution are as follows: (1) creditors, including partners who are creditors; (2) partners and ex-partners in satisfaction of liabilities for unpaid distributions; (3) partners for the return of contributions, except as otherwise agreed; and (4) partners for their partnership interests in the proportions in which they share in distributions, except as otherwise agreed.
Tax Treatment of Partnerships
Under federal (and most state) tax laws, a partnership is treated as a "pass through" entity, with profits, losses, and taxes attributed on a pro-rata basis to the partners.
Joint and Several Liability
a third party has the option of suing all of the partners together (jointly) or one or more of the partners separately (severally)
joint liability
a third party must sue all of the partners as a group, but each partner can be held liable for the full amount
Winding Up and Distribution of Assets
collecting and distributing partnership assets
compensation
devoting time, skill, and energy to partnership business is a partner's duty and generally is not a compensable service.
buyout price
is based on the amount that would have been distributed to the partner if the partnership had been wound up on the date of dissociation
family limited liability partnership (FLLP)
limited liability partnership in which the partners are related to each other
Liability of Incoming Partners
new admitted partner has no personal liability for existing partnership debts and obligations.
Liability of Partners
partners are personally liable for the debts of the partnership
dissolution
termination of a partnership
Indemnification
the right of a partner to be reimbursed for expenditures incurred on behalf of the partnership EX: Nicole Moren
Articles of Corporation
(filled with sec of state) 1. Name of Corporation - must be distinguishable from other existing corporate names. Must also contain the words corporation, company, incorporated or limited or an abbreviation of these words. 2. Number of shares of stock corporation is authorized to issue. 3. Address of official registered office and agent. 4. Name and address of each incorporator.
pass-through entity
A business entity that has no tax liability. The entity's income is passed through to the owners, and they pay taxes on the income.
The Sharing of Profits and Losses
A court will not presume that a partnership exisits, however, if shared profits were received as payment of any of the following. 1.) debt by installments or interest on a loan. 2.) Wages of an employee or for the services of an independent contractor. 3.) Rent to a Landlord 4.) an annuity to a surviving spouse or representative of a deceased partner 5.) a sale of goodwill (the valuable reputation of a business viewed as an intangible asset) of a business or property. Example: Mason Snopel
Dissociation and Dissolution
A general partner has the power to voluntarily dissociate, or withdraw, from a limited partnership unless the partnership agreement specifies otherwise.
Partnership by Estoppel
A judicially created partnership that may, at the court's discretion, be imposed for purposes of fairness. The court can prevent those who present themselves as partners (but who are not) from escaping liability if a third person relies on an alleged partnership in good faith and is harmed as a result.
Breach and Waiver of Fiduciary Duties
A partner's fiduciary duties may not be waived or eliminated in the partnership agreement. Each partner must act consistently with good faith and fair dealing. In pursuing his or her own interests, the partner must disclose the interest to the other partners.
Limited liability partnership
All partners are limited partners and not responsible for the debts and other liabilities of other partners
charging order
An order that entitles a creditor to collect a partner's profits.
General Partner
An owner (partner) who has unlimited liability and is active in managing the firm.
Illegality or Impracticality
Any event that makes it unlawful for the partnership to continue its business will result in dissolution.
Partnership formation and operation
As a general rule, agreement to form a partnership can be oral, written, or implied by conduct.
Entity versus Aggregate Theory
At common law, a partnership was not distinct from its owners. Today, most states recognize the partnership as a separate legal entity. The partnership is a pass-through entity, and the owners pay taxes on income.
Events that cause dissociation
Bankruptcy, retirement, death, or mental incompetence of a general partner will cause the dissociation of that partner and the dissolution of the limited partnership unless the other members agree to continue the firm.
Creditors' Claims
Both creditors of the partnership and creditors of the individual partners can make claims on the partnership's assets. A partnership's assets are distributed according to the following priorities. 1.) Payment of debts, including those owed to partner and nonpartner creditors. 2.) Return of capital contributions and distribution of profits to partners.
Effects of Dissociation
Dissociation (rightful or wrongful) terminates some of the rights of the dissociated partner, requires that the partnership purchase his or her interest, and alters the liability of the parties to third parties.
Dissociation of a Partner
Dissociation occurs when one partner ceases to be associated in the partnership business. Allows partner to have her interest purchased by the partnership. Terminates her voting interest in the partnership. May not have the rights to dissociate
Interest in the partnership
Each partner is entitled to the proportion of business profits and losses that is specified in the partnership agreement.
good faith
Each partner must exercise good faith when dissolving a partnership.
Liabilities of Partners in a Limited Partnership
General partners are personally liable to the partnership's creditors. Limited partners enjoy limited liability as long as they do not participate in management.
Joint Property Ownership
Joint ownership of property does not in and of itself create a partnership
Formation of an LLP
LLPs must be formed and operated in compliance with state statutes, which may include provisions of the UPA.
Rights and Duties in a Limited Partnership
Limited partners have essentially the same rights as general partners under a general partnership except for the right to participate in management. If a limited partner acts as a general partner, the limited partner will lose its limited liability protection. Unanimous consent of all partners (general and limited) to admit a new partner to the existing limited partnership. Every partner, general or limited, has a right to complete access of the partnership's books.
Rights and Duties
On a partner's dissociation, his or her right to participate in the management and conduct of the partnership business terminates.
Duties and Compensation
Partners continue to have fiduciary duties during the winding up process and a partner may receive reimbursement for expenses incurred in the process.
Inspection of Books
Partnership books and records must be kept accessible to all partners
Basic Partnership Concepts
Partnerships are governed by common law and statutory laws.
property rights
Property acquired by a partnership is the property of the partnership and not of the partners individually.
Certificate of Limited Partnership
The basic document filed with a designated state official by which a limited partnership is formed. -name -mailing address -capital contribution of each general and limited partner Must be filed with the designated state official - Under the RULPA, the secretary of state. The certificate is usually open to public inspection.
Liability to Third Parties
The dissociated partner may be cloaked with apparent authority for up to two years after her dissociation, if the partnership fails to notify its creditors, its customers or clients, and the appropriate state office.
Duties and Liabilities of Partners
The duties and liabilities of partners are derived from agency law. Each partner is an agent of every other partner and acts as both a principal and an agent in any business transaction within the scope of the partnership agreement.
Duty of Care
The duty of all persons, as established by tort law, to exercise a reasonable amount of care in their dealings with others. Failure to exercise due care, which is normally determined by the reasonable person standard, constitutes the tort of negligence.
Formation of Limited Partnership
The formation of a limited partnership is a public and formal proceeding that must follow statutory requirements.
For Ordinary Decisions
The majority rule controls decisions on ordinary matters connected with partnership business, unless otherwise specified in the agreement.
Nonpartner Agents
When a partnership by estoppel is deemed to exist, the nonpartner is regarded as an agent whose acts are binding on the partnership
liability imposed
When a third person has reasonably and detrimentally relied on the representation that a non partner was part of a partnership, a court may conclude that a partnership by estoppel exists and impose liability - but not partnership rights - on the alleged partner.
liability from state to state
When an LLP formed in one state wants to do business in another state, it may be required to register in the second state for example, by filing a statement of foreign qualification.
Sharing Liability Among Partners
When more than one partner in an LLP is negligent, there is a question as to how liability should be shared.
Duty of Loyalty
a fiduciary duty owed by an agent not to act adversely to the interests of the principal
articles of partnership
a partnership agreement that spells out each partner's rights and responsibilities
Partnership for a term
a partnership created for a fixed duration
partnership at will
a partnership created with no fixed duration
Definition of partnership
an association of two or more persons to carry on, as co-owners, a business for profit; must have intent to engage in partnership business; profits will be divided as specified in the partnership agreement
limited partner
an owner who invests money in the business but does not have any management responsibility or liability for losses beyond the investment
Fiduciary Duties
duty of care and duty of loyalty
The Uniform Partnership Act
governs the operation of partnerships in the absence of express agreement and has done much to reduce controversies in the law relating to partnerships
Buy-Sell Agreement
provides for one or more partners to buy out the other or others, should the situation warrant
Management Rights
rights reserved so that the employer can manage, direct, and control its business
Winding up process
the actual process of collecting, liquidating, and distributing the partnership assets
