MEE - Partnership

Priority of distributions

Creditors first, then partners get the leftovers Similar to corporations in this respect

Transfer of partnership interest

Default rule: A partner does have the right to transfer partnership interest to third party Partners may still agree to restrict to require a majority vote of the partners

Managing/governing relationships

Default rule: every partner has equal rights to management of the conduct of the partnership Can be changed by agreement; a common division is to reflect the partners' capital contributions, rather than an even share

Distributions

Default rule: partners do not have the right to demand a distribution Can agree in advance according to the partnership agreement

New Parter

Default rule: when a new partner is introduced, all existing partners must consent May be changed to reduce vote in the partnership agreement

Profits and losses

Divisions of profits and losses is generally dictated or determined in the partnership agreement Division of profits and losses do not need to be the same Financial contributions/capital contributions may have no effect on the division of profits and losses

Mandatory state laws

Partnership cannot agree to modify the following (must follow state laws): (1) liability to third parties (2) can't deny partners access to the books/records (3) fiduciary duties can't be eliminated

Apparent authority

REMEMBER: communicated between agent and third party Partnership may be bound based on the partner acting in the ordinary course

Express Authority

REMEMBER: every partner is an agent of the partnership Express authority might come from: 1) partnership agreement 2) statement of authority filing 3) ad hoc vote by partners at a meeting

Partnership agreement

The understanding of partners forming the relationship as to what that relationship is Does not have to always be a writing If no partnership agreement, then state law will govern the partnership with default rules When there is a written partnership agreement, it will trump state law *EXCEPTION*: when state law is mandatory

Who may wind up?

(1) Any partner that has not been wrongfully dissociated (2) Legal representative of the last surviving partner *NOTE* Any partner, legal representative, or transferee may seek a judicial supervision of winding up

Fiduciary Duties

(1) Duty of loyalty (2) Duty of care

Termination of general partner status

(1) May voluntarily withdraw at any time (2) If he tries to sell interest - may be removed 3) if he goes bankrupt - may be removed 4) Death or incompetence 5) A business-entity partner is terminated

Consequences of a partnership

(1) Separate legal entity - distinct, separate and apart from each of its constituent members (partnership can hold property and be sued in its own name) (2) Partnership liability - all partners are personally liable for partnership obligations (no limited liability) (3) No entity-level taxation - with a corporation, there is

Examples of things LPs can do without running the business

1) be an officer, director, or shareholder of the general partner 2) consult or advise the general partner on partnership affairs 3) act as a surety of the partnership 4) request to attend meetings of the partnership 5) help wind up the partnership 6) propose or approve of partnership matters

Ways to dissolve partnership

3 ways: 1) Any dissolving event set forth in the partnership agreement 2) Any event that makes it unlawful to continue if not cured within 90 days 3) Judicial determination that economic purpose of the partnership is being frustrated

Statement of dissolution

A filing that give third-parties notice that the partnership has been dissolved after 90 days Filed because it limits the partners' power and authority to enter into contracts and create new liability on behalf of the partnership Also tells the rest of the world that we are going to wrap this thing up so best not to make contracts with us

Dissociation

A partner ceases to be associated with the partnership Can be voluntary or involuntary Can't prevent a partner from withdrawing, but can require certain restrictions on withdrawal

Limited Partnerships (LPs)

A partnership formed by 2 or more persons that has at least 1 general partner (and typically only 1) and at least 1 limited partner (typically rest of partners are these) Limited partners have limited liability; general partners do not

Limited Liability Partnerships (LLPs)

A partnership in which a partner's personal liability for all obligations to the partnership is eliminated Must file with the state Formation: to transform a partnership into an LLP, you must have same vote (as required by the partnership agreement) as if you were amending the partnership agreement Name: Must always end with "registered limited liability partnership" (RLLP) or "limited liability partnership" (LLP) Terminating LLP status: partners can voluntarily cancel LLP status (changes back to a general partnership); the state can revoke an LLP status for failure to observe formalities

Tort Liability

A partnership is liable in tort for torts that are committed by partners acting within the scope of their partnership Partners are personally liable for the debts of a partnership - *jointly and severally liable* for all partnership obligations You can go after any partner for the entire sum owed by the partnership (often, the partnership creditor must exhaust the partnership's funds before going after the partners' personal assets)

Limited Partners

Admission: join at the creation of the partnership or with consent of all the partners (unless the partnership agreement says otherwise) Voting: allowed only under the partnership agreement Have rights to access records Liability to third parties: not personally liable for the obligations under the partnership *unless*: 1) she serves as a GP OR 2) participates in control of the partnership

Partnership at Will

An open-ended partnership with no fixed termination tied to time or undertaking Generally, dissolved when any partner choses to dissociate (unless partnership agreement says otherwise)

Involuntary dissociation

Any of the following constitute involuntary dissociation: 1) Triggering of event in the partnership agreement 2) Expelled pursuant to the partnership agreement 3) Unlawful for a partnership to carry on a business with that partner 4) A court order that a partner must be dissociated 5) A partner goes bankrupt 6) a partner dies 7) partner has become incapacitated and guardian is appointed 8) one of the entities of the partnership dissolves

Partnership

Association of 2 or more persons (doesn't have to be humans) to carry on a for-profit business as co-owners

Timing of duties

Duties of loyalty and care apply only to partners, not to former partners or prospective partners

Implied Authority

Exists based on the partner's reasonable belief that an action is necessary to carry out express authority

Formation of LP

File a certificate of LP with the state which must contain: 1) Name of partnership 2) In-state address 3) Name of agents for service of process 4) Names and addresses of each general partner 5) Statement of duration of the partnership 6) Signed by general partner Comes into existence: when filed, or if there is an effective date, if included Substantial compliance is sufficient to be effective

Consequences of dissociation

If partner is dissociated, that partner does not dissolve partnership Once dissociated, a former partner has no right to participate in management business, and the partner no longer has any duties to the partnership If the partnership continues, it must buy out the dissociated partner's interest

Safe-harbor protection for duty of loyalty

If you are worried that something may be considered disloyal: it is safe-harbored if the partner makes full disclosure of ALL material facts AND a certain percentage of other partners agree to the transaction then they can authorize or ratify the transaction and it is safe-harbored from a breach of the duty of loyalty

Incoming/outgoing partner liability

Incoming partner: is not personally liable for contract or tortious obligations incurred prior to his becoming a partner (will be liable for his capital contribution) Outgoing partner: may be personally liable for any partnership obligation that occurred after dissociation, in addition to those that occurred before his dissociation

Forming a partnership

Intent: no need to have a specific intent to form a partnership, but must meet other requirements Co-Ownership: when two or more persons share profits, there is a presumption of partnership Sharing Control: ask, has there been a sharing of control?

General Partners

Join at the creation of the partnership or be admitted upon all partner approval Have same rights and powers as in a partnership without limited partners or as otherwise suggested in the partnership agreement Personally liable to third parties for obligations of the partnership - *NOTE* many general partners are corporations to shield humans from liability

Limited partner withdrawal

Limited partner must give 6 months written notice

Partnership for a Term or Undertaking

May be dissolved when the term expires or before the expiration of the term when the partners agree (all) to dissolve

Ordinary and Extraordinary business matters

Ordinary business: requires a vote of majority of partners (e.g. declaring a distribution) Extraordinary business: requires a vote of all partners (e.g. amending the partnership agreement) These are default rules and can be changed in the original partnership agreement Also - access to records must be provided to the partners and their agents (no way to get around this in partnership agreement)

Duty of Loyalty

Partners must not: (1) compete with a partnership business (2) advance an interest that is adverse to the partnership (3) usurp a partnership opportunity Limitations: As a matter of state law, a partnership cannot eliminate the duty of loyalty; HOWEVER, it can limit the duty of loyalty by describing it differently, as long as it is not manifestly unreasonable

Duty of Care

Partners must not: (1) engage in grossly negligent or reckless conduct (2) engage in intentional misconduct (3) engage in a knowing violation of the law The partnership agreement may not unreasonably reduce the duty of care

Voluntary dissociation

The partner may give notice to the partnership that the partner wants to withdraw (and then can withdraw)

What power does the person who is winding up have?

The person winding up a partnership may dispose of and transfer partnership property, and discharge partnership liabilities Can also keep and preserve partnership business to maximize value as a growing concern

Contrast to corporation (formation)

To form a corporation, you must file with the secretary of state, pay fees, write a charter/bylaws, and prepare a large packet of information and take affirmative, concrete steps

Dissolution of partnership

Triggered by the occurrence of an event - can be brought by partner or operation of law

Termination of Partnership

Two-step process: (1) dissolution (2) winding up

Partnership agreement silent as to profits and losses

When there is no partnership agreement regarding division of profits and losses, profits are divided equally and losses will follow profits

Persons

anything that has legal capacity to contract