Business Law Chapter 32 - Partnerships

Rightful Dissociation

- A partner in a partnership at wills serves notice he intends to withdraw - The partners agree in advance on an event that causes dissociation - a partner dies or becomes incompetent - a partner is expelled by the other partners

What can a partner NOT do according to the Duty of Loyalty?

- Compete with the Partnership - Take a Business Opportunity from the Partnership - Use Partnership Property; must turn over profits - Have Conflict of Interests with the Partnership

What are the 3 steps in ending a partnership?

- Dissolution - Winding Up - Termination

Formation of an LLC

- Filing - Name - Contribution - Operating Agreement

Rights of Members

- Financial Interest (right to distributions) - Management Interest (includes all other rights) - Financial Rights - Management Rights - Duties - Liabilities - Dissolution

Management Rights

- Management - Voting - Derivative Actions

When does a partnership by estoppel apply?

- Participants tell other people that they are partners (even though they are not), or allow people to say so - a third party relies on this assertion - the third party suffers harm

What do courts consider to determine if a partnership exists?

- Profit - Sharing Profits - Sharing Losses - Management of Business - Oral or Written Agreement

Financial Rights

- Profit and Loss Sharing - Distributions - Withdrawal

Wrongful Dissociation

- a partner violates the partnership agreement - a partner in a term partnership withdraws before the end of the term - a court expels a partner in a term partnership because her behavior is harmful - a partner in a term partnership becomes bankrupt

Distribution of Assets - Priorities for Distribution

1. creditors, including partners 2. partners and ex-partners for unpaid distributions 3. partners for the return of contributions, except as otherwise agreed 4. partners of their partnership interests in the proportions in which they share in distributions, except as otherwise agreed.

What causes dissolution?

1. the expiration of the time period 2. the withdrawal of a general partner, unless all partners agree to continue the business 3. a decree of judicial dissolution

Distribution of Assets of a LLC

1. to creditors, including members and managers, except with respect to liabilities for distributions 2. to members and former members in satisfaction of liabilities for unpaid distributions 3. to members for their limited liability company interests in the proportions in which members share in distributions

Rights

A general partner in a limited partnership has all the rights and powers of a partner in a general partnership

Tort Liability

A partnership is responsible for the intentional and negligent torts of a partner that occur in the ordinary course of business or with the authority of the partners

Information - Partnership's Liability

As agent, a partner has a duty to pass on all relevant information to the partnership; whatever one partner knows, the partnership is deemed to know

Defective Formation

If no certificate is filed or if the one filed does not substantially meet the statutory requirements, the formation is defective and the limited liability of the limited partners is jeopardized.

Liability of the Dissociated Partner to the Partnership

If the ex-partner harms the partnership after she leaves, she is liable for the damage she causes

When is a partnership liable because of a partner's actions?

If the partner acts with 1 of the 3 types of authority: - Actual Authority - Implied Authority - Apparent Authority Or acts: - Ratification - Information - Tort Liability

Name

LLC statutes generally require the name of the LLC to include the words limited liability company or the abbreviation LLC

Voting

LLC statutes usually specify the voting rights of members, subject to a contrary provision in a LLC's operating agreement

Is a member or manager of a LLC obligated personally for debt? Why?

No member or manager of a limited liability company is obligated personally for any debt, obligation, or liability of the limited liability company solely by reason of being a member or acting as a manager of the limited liability company

Does the UPA require partnerships to make a formal filing or prepare a written argument?

No, but the UPA does permit a partnership to file a statement with the local secretary of state that contains basic information about the partnership.

Payment for Work Done

Partners are not entitled to any payment beyond their share of profits unless they agree otherwise

Good Faith and Fair Dealing

Partners have an obligation of good faith and fair dealing to each other and to the partnership

Sharing Losses

Partners share losses according to their share of profits unless they agree otherwise

Default Rules

Rules that govern a partnership unless the partners agree otherwise

Winding Up

The debts of the partnership are paid, and the remaining proceeds are distributed to the partners - unless otherwise provided in the partnership agreement, the general partners who have not wrongfully dissolved the partnership may wind up its affairs

Sharing losses

This is strong evidence of a partnership

Are the rules governing the liability of the partnerships to outsides mandatory?

Under the UPA, the rules are mandatory - partners may not change them - In contract, many of the rules governing the relationship among partners are default provisions which the partners can change

Assignment of Partnership Interest

Unless otherwise provided in the partnership agreement, a partner may assign a partnership interest; an assignee may become a limited partner if all other partners consent.

Charging Order

a court order granting a third party the right to receive a share of partnership profits

Liability of the Dissociated Partner to Outsiders for Debts Incurred After Dissociation

a dissociated partner is liable to outsiders for debts incurred within two years after she leaves, but only if the creditor reasonably believes she is still a partner

Liability of the Dissociated Partner to Outsiders for Debts Incurred Before Dissociation

a dissociated partner is liable to outsides for debts incurred during her term as a partner, but the partnership must indemnify her for these debts

Withdrawal

a general partner may withdraw from a limited partnership at any time by giving written notice to the other partners; a limited partner may withdraw as provided in the limited partnership certificate.

Foreign Limited Liability Companies

a limited liability company is considered "foreign" in any State other than that in which it was formed

Derivative Actions

a limited partner may sue on behalf of a limited partnership if the general partners refuse to bring the action

Formation

a limited partnership can only be formed by substantial compliance with a State limited partnership statute

Foreign Limited Partnerships

a limited partnership is considered "foreign" in any state other than that in which it was formed

Dissolution

a member has ceased to associate with the company thru voluntary withdrawal, death, incompetence, expulsion, etc.

Derivative Actions Regarding Management Rights

a member may bring an action on behalf of the LLC to recover a judgment in its favor if the members with authority to bring the action refuse to do so

Withdrawal of a Member Regarding Financial Rights

a member may withdrawal and demand payment of her interest upon giving the notice specified in the statute or the LLC's operating agreement

Limited Liability Company (LLC)

a noncorporate business organization that provides limited liability to all of its owners (and members) and permits all of its members to participate in management of the business

Rightful versus Wrongful Dissociation

a partner always has the power to leave a partnership, but may not have the right

Apparent Authority

a partner appears to be conducting the business of the partnership

Liability of Incoming Partners

a partner is personally liable only for obligations the partnership incurred while he was a partner

Limited Partnership

a partnership formed by two or more persons under the laws of a State and having one or more general partners and one or more limited partners

Term Partnership

a partnership in which the partners agree in advance how long it will last

Implied Authority

acts reasonably necessary to carry out authorized acts

Who is liable for all debts of the partnership?

all partners are personally liable

Right to Manage

all partners have equal rights in the management of the business unless agreed otherwise

Partnership Property

all partnership property belongs to the partnership as a whole, not to the individual partners

Partnership at Will

an open-ended partnership that has no fixed termination or particular undertaking; dissolved when partner chooses to dissociate by giving notice of his withdrawal

Partnership

association of two or more persons who operate a business as co-owners by voluntary legal agreement

Actual Authority

authorized acts

Information

each partner has the right to inspect and copy the partnership records

Who is an agent for the partnership?

every partner is an agent for the partnership

Loans

general and limited partners may be secured or unsecured partnership creditors

Duties

general partners owe a duty of care and loyalty (fiduciary duty) to the general partners, the limited partners, and the limited partnership; limited partners do not.

Termination

happens automatically once the winding up is finished; the partnership is not required to do anything official

Right to Bind the Partnership

if a partner acts with actual, implied, or apparent authority, the partnership is liable to third parties for the partner's actions - If the actions are not authorized, the partner still has the power to bind the relationship, but not the right

How are distributions typically made?

if the operating agreement does not allocate distributions, they are typically made on the basis of the members' contributions

Ratification

if the partnership accepts the benefit of an unauthorized transaction, or fails to repudiate it, the partnership has ratified it, and is liable

Financial Settlement

if the partnership continues, it must pay the ex-partner the value of her share of the business

Oral or Written Agreement

if they act like partners, the law will treat them like partners

Management of the Business

if they are not involved in management, courts will not consider them to be partners

Management

in the absence of a contrary agreement, each member has equal rights in the management of the LLC, but LLCs may be managed by any number of the members

Name - Partnerships

inclusion of a limited partner's surname in the partnership name in most instances will result in the loss of the limited partner's limited liability

Contributions

may be cash, property, services, or a promise to contribute cash, property, or services

Member-Managed LLCs

members of member-managed LLCs have the same duties of care and loyalty that managers have in manager-managed LLCs.

Choice of Associates

no person may be added as a general partner or a limited partner without the consent of all partners

Duty of Care

partners are liable to the partnership for gross negligence, reckless conduct, intentional misconduct, or a knowing violation of the law; partners are not liable for ordinary negligence

Duty of Loyalty

partners have a limited fiduciary duty to their partnerships

Distributions

partners share distributions of cash or other assets of a limited partnership as provided in the partnership agreement

Sharing Profits Between Partners

partners share profits equally unless they agree otherwise

Profit and Loss Sharing

profits and losses are allocated among the partners as provided in the partnership agreement; if the partnership agreement has no such provision, then profits and losses are allocated on the basis of the contributions each partner actually made.

Filing

the LLC statutes generally require the central filing of articles of organization in a designated State office

Right to Know

the UPA requires that all partners have the right to ample information: - Inspect and copy the partnership's books and records - All partners and the partnership must volunteer any information that might be necessary for other partners to exercise their rights; and supply information a partner reasonably requests

Operating Agreement

the basic contract governing the affairs of a limited liability company and stating the various rights and duties of the members.

Contribution

the contribution of a member to a limited liability company may be cash, property, services rendered, a promissory note, or other obligation to contribute cash, property, or to perform services

Control

the general partners have almost exclusive control and management of the limited partnership; a limited partner who participate sin the control of the limited partnership may lose limited liability

Liabilities

the general partners have unlimited liability; the limited partners have limited liability

Manager-Managed LLCS

the managers of a manager-managed LLC have a duty of care and loyalty - usually, members of a manager-managed LLC have no duties to the LLC or its members by reason of being members

Profit

the organization must intend to make a profit

Sharing Profits

the owners must share profits

Voting Rights

the partnership agreement may grant to all or some general or limited partners the right to vote on any matter

Joint and Several Liability

the partnership and the partners are all individually liable for the full amount of the debt, but the creditor cannot collect more than the total amount he is owed - creditors cannot go after an individual partner's assets until al the partnership's assets are exhausted

What do the rules on termination depend on?

the type of partnership

Filing of Certificate

two or more persons must file a signed certificate of limited partnership

Partnership by Estoppel

two parties incur the liability of a partnership without actually being partners

Right to Vote

unless the partners agree otherwise, all partners have an equal vote, regardless of their contributions to the partnership

Dissociation

when a partner leaves the partnership - When one or more partners dissociate, the partnership can either buy out the departing partners and continue in business or wind up the business and terminate the partnership

Right to Transfer a Partnership Interest

without the approval of the other partners, a partner cannot sell her share, but can transfer her right to receive profits & losses