Partnership

Limited Liability Companies

-Defined: hybrid between a corporation and a partnership, in which the owners (members) have the same limited liability as shareholders in a corporation, but with the benefits of praetorship tax treatment Formation Requirements: the certificate of organization must be filed with the secretary of state and the LLC may adopt an operating agreement. -The name must indicate that it is an LLC -the members may control the business or may delegate control to team of managers -a full membership interest may not be transferred without unanimous consent of the members or as provided in the operating agreement -the company will dissolve upon unanimous consent of the members or as provided otherwise in the certificate of organization or in the operating agreement. -LLCs= limited liability, limited liquidity, limited life, and limited tax -In most states, profits and losses are allocated according to the vale of contributions (no provision under RULLCA) -distributions are made equally according to RULLCA and according to value of contributions in most states.

Relations of Partners to Third Parties: Apparent Authority: Transfers of Partnership Property

-P'ship Interest Indicated: any partner may transfer property held in the name of the p'ship. If p'ship property is held in the name of one or more partners (who are identified as such) but the p'ship is not named, transfer by the titleholders in their own names is effective. In either case, if the transferring partner lacked authority, the p'ship may recover the property from the initial transferee but not from a subsequent bona fide purchaser. -P'ship Interest Not Indicated: If the p'ship's interest is not indicated in the instrument transferring the property, the transfer may be made by those in whose name the property is held. If the transferee gives value without notice of lack of authority, she takes free of the p'ship interest.

Dissociation: Consequences: Dissociated Partner's Liability to Other Parties

A dissociated partner can be liable for obligations incurred by the partnership within two years after the partner dissociates if (i) when entering the transaction the other party reasonably believed the dissociating partner was still a partner and (ii) did not have notice of the partner's dissociation. A dissociating partner can cut short this period of liability by filing a notice of dissociation with the secretary of state; all persons are deemed to have notice of a dissociation 90 days after such a notice is filed.

Limited Liability Partnership (LLP) Liability

A partner in an LLP is not personally liable (directly, indirectly, or by way of contribution) for the obligations of the partnership, whether arising in contract, tort or otherwise. However, a partner remains personally liable for her own wrongful acts, and if partnership assets are insufficient to indemnify her for an obligation she incurred on behalf of the LLP, she forfeits the right to receive contributions from other partners in exchange for being relieved of the obligation to contribute to their personal liability. a partner will not be liable for the torts of a co-partner unless they also engaged in the tort.

Relations of the Partners to Third Parties: Actual Authority

A partnership also will be bound by an act of a partner if the partner had actual authority. Actual authority is authority a partner reasonably believes he has based on the communications between the partnership and the partner. Such actual authority can come from the partnership agreement or a vote of the partners. A majority vote of the partners is required to authorize ordinary business; a unanimous vote of the partners is required to authorize extraordinary acts.

Dissolution: Partner's Power to Bind Partnership After Dissolution

A partnership can be bound after dissolution by any act of a partner appropriate for winding up the partnership's business. The partnership will also be liable for other acts if the party with whom a partner dealt did not have notice of the dissolution. Such liability can be limited by filing a statement of dissolution with the secretary of state; all persons are deemed to have notice of a dissolution 90 days after such a notice is filed.

Partnership Defined

A partnership is an association of two or more persons to carry on as co-owners a business for profit. (a person may be an individual, trust, corporation, partnership, or other entity)

Relations Between Partners: Right to Participate in Management

All partners have equal rights in the management of partnership business absent an agreement to the contrary. Decisions involving ordinary business can be controlled by a majority vote of the partners, but matters outside the ordinary course of business require the unanimous consent of the partners.

Dissociation Defined

Dissociation is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business. Dissociation of a partner does not necessarily cause a dissolution and winding up of the partnership business.

Partnership Property: Untitled Property

In cases not governed by RUPA (i.e., untitled property), in determining whether property is partnership property or the separate property of a partner, courts will probably continue to look to the following criteria, which tend to indicate that the property was intended to be partnership property: (a) acquisition of the property with partnership funds; (b) use of the property by the partnership in conducting the partnership's business; (c) entry of the property in the partnership books as a partnership asset; (d) a close relationship between the property and the business operations of the partnership; (e) improvement of the property with partnership funds; and (f) maintenance of the property with partnership funds

Liability of Partners: Criminal Liability:

Partners will not be criminally liable for the crimes of other partners committed within the scope of the partnership business, unless the other partners participated in the commission of the crime either as principals or accessories.

Distribution of Assets as a result of Dissociation and Dissolution

Partnership assets are reduced to cash and partnership liabilities are paid in the following order: (1) creditors, including partners who are creditors (2) partnership must repay all capital contributions paid into the partnership by partners (3) profits, if any are shared equally among the partners (unless there is an agreement to the contrary) and losses are shared the same as profits Rule: each partner must be repaid his or her loans and capital contributions, plus that partner's share of any profits, or minus that partner's share of any losses. Where a partner is forced to pay more than his share of the partnership debts, he is entitled to contribution from the other partners to equalize his share.

Dissolution: Events Causing Dissolution

The following events trigger dissolution under RUPA: a. in a partnership at will, notification by any partner of an express will to withdraw as a partner b. in a partnership for a definite term or particular undertaking, (i) expiration of the term or completion of the undertaking, (ii) consent of all the partners to dissolve, or (iii) within 90 days after a partner's death, bankruptcy, or wrongful dissociation, at least half of the remaining partners wish to dissolve c. the happening of an event agreed to in the p'ship agreement that requires the winding up of partnership business; d. the happening of an event that makes it unlawful for the partnership to continue; e. inssuance of a judicial decree on application by a partner that (i) the economic purpose of the partnership is likely to be frustrated, (ii) a partner has engaged in conduct making it not reasonably practicable to carry on the business, or (iii) the business cannot practicably be carried on in conformity with the partnership agreement; and f. issuance of a judicial decree on application by a transferee of a partner's interest that it is equitable to wind up the partnership (i) after the term expires or the undertaking is completed in a partnership for a definite term or particular undertaking, or (ii) at any time in a partnership at will.

Governing Law

The revised uniform partnership act provides a default set of rules. Partners are free to agree-through a partnership agreement-to abide by different rules for governing the relationships among themselves, and the RUPA will govern only those issues not provided for in the partnership agreement. Note, however, that certain RUPA provisions cannot be waived (e.g., the duty of loyalty, the right of a court to expel a partner)

Relations of Partners to Third Parties: Notice

Under RUPA, a partner has notice of a fact when the partner (i) has actual knowledge of the fact, (ii) is notified of the fact, or (iii) has reason to know of the fact based on the surrounding circumstances. -notification is effective not only if and when it comes to a partner's attention, but also when it is delivered to a place of business held out by the partner as a place for receiving communications. -a partner's notice of a fact relating to the partnership is imputed to the partnership immediately unless the partner having notice is participating in fraud against the p'ship.

Partnership Property: Titled Property: Property Presumed to be Partner's Separate Property

Under RUPA, if (i) property is held in the name of one or more partners, (ii) the instrument transferring title does not indicate the person's capacity as a partner or mention the existence of the partnership, and (iii) the partnership funds were not used to acquire the property, the property is rebuttably presumed to be separate property, even if the property is used for p'ship purposes.

Partnership Property: Titled Property: Property Presumed to Be Partnership Property

Under RUPA, property is rebuttable presumed to be partnership property if it was purchased with partnership funds, regardless of whose name title is held. "Partnership funds" includes not only the partnership's cash, but also the partnership's credit.

Dissociation: Consequences of Dissociation

Upon a partner's dissociation, his right to participate in management ceases. The partnership must purchase (buy out) his interest at either liquidation or going-concern value, and must indemnify him against known pre dissociation liabilities, as well as against post dissociation liabilities not incurred by the dissociating partner's acts. -A partner who dissociates in violation of the partnership agreement or before the expiration of a partnership term or completion of a particular partnership undertaking is liable to the p'ship for damages caused by the wrongful dissociation. -A partner who wrongfully dissociates before the expiration of a partnership term or completion of a particular undertaking is not entitled to payment of the buyout price until the term expires or the undertaking is completed, unless he can establish that earlier payment will not cause undue hardship to the partnership business. -interest must be paid on the buyout price from the date of dissociation to the date of payment.

Limited Partnership: In General

a LP is comprised of one or more general partners and one or more limited partners. The general partners are personally liable for partnership obligations, while the limited partners generally do not have any liability beyond the liability to make agreed-upon contributions. A LP differs from a general partnership in that a limited partnership can be created only by filing a certification of formation with the state. Like a modern partnership, a LP is an entity distinct from its partners and has a perpetual duration unless otherwise provided. an LP is a creature of statute and thus can exist only on compliance with the limited partnership statute.

An Action for Accounting for Breach of Fiduciary Duty

the general partnership may recover losses caused by the breach, including indemnity, and also the partnership can disgorge profits made by breaching partners as well.

Dissolution

unlike dissociation, dissolution generally requires the partnership business to be wound up

Relations of Partners to Third Parties: Apparent Authority: Limitation-Knowledge or Notification

-Under RUPA, knowledge means subjective knowledge-what the person actually knew. What the person should have known based on the circumstances is irrelevant. -Under RUPA, a notification is effective either when it comes to the person's attention or when it is duly delivered. Thus, if a notification limiting a partner's authority is duly delivered to a third party (e.g., at the third party's place of business), the third party cannot rely on apparent authority with regard to the limitation even if the third party has not actually read the notification.

Relations Between Partners: Indemnification and Other Repayment

A partnership must indemnify every partner with regard to payments made and obligations reasonably incurred in carrying on the p'ship business. If a partner makes a payment or advance on behalf of the partnership beyond the contribution the partner agreed to make, the payment or advance constitutes a loan that must be repaid with interest.

Relations of Partners to Third Parties: Expanding and Limiting Authority-Statement of Authority

A statement of authority grants or limits a partner's authority to enter into transactions on behalf of the partnership. the statement must be filed with the secretary of state and, for real property transfers, the county recorder. Note that a grant of authority in a properly filed statement of authority is conclusive in favor of a bona fide purchaser for value. A properly filed limitation of authority to transfer real property gives purchasers constructive knowledge of a lack of authority, but filing a limitation does not give constructive knowledge of the limitation with regard to any other transaction.

Relations Between Partners: Fiduciary Duties

Each partner owes four fiduciary duties to the partnership: (1) the duty of loyalty requires that the partner (i) account for all profits or other benefits derived by the partner in connection with p'ship business; (ii) not deal with the p'ship as one with an adverse intent; and (iii) not compete with the partnership. (basically general partners may never engage in self-dealing; may never usurp partnership opportunities; and may never make a secret profit at the partnership's expense) (2) the duty of care requires the partner to refrain from engaging in negligent, reckless, or unlawful conduct or intentional misconduct. (3) the duty of obedience requires the partner to obey all reasonable directions of the partnership and not act outside the scope of his authority (4) the partner also has a duty to provide compete and accurate information concerning the partnership

Partnership Property: Classification as Either Partnership Capital or Partnership Property

Partnership capital is the property or money contributed by each partner for the purpose of carrying on the partnership's business. Partnership property, in its broadest sense, is everything the partnership owns, including both capital and property subsequently acquired in p'ship transactions

Relations of Partners to Third Party: Application of Agency Law

RUPA provides that each partner is an agent of the partnership for the purpose of its business. The authority of a partner to bind the partnership when dealing with third parties roughly follows agency law.

Relations of Partners to Third Parties: Apparent Authority

RUPA provides that: (i) the act of any partner; (ii) for apparently carrying on in the ordinary course the partnership business or business of the kind carried out by the p'ship; (iii) binds the partnership unless: (a) the partnership and no authority to act for the partnership in the particular matter; AND (b) the person with whom the partner was dealing knew or had received notification that the partner lacked authority. basically, partners have apparent authority to bind the p'ship to any K within the scope of the p'ship business. If a K is outside the scope of p'ship business, the p'ship generally will not be bound unless the partner had actual authority Generally partnership is liable for each partner's torts in the scope of partnership business and for each partner's authorized contracts.

Dissociation: Events of Dissociation:

a partner becomes dissociated from the partnership by: (i) oral or written notice of the partner's express will to withdraw; (ii) happening of an agreed event; (iii) valid expulsion of the partner; (iv) the partner's bankruptcy; (v) the partner's death or incapacity to perform partnership duties; (vi) the decision of a court that the partner is incapable of performing a partner's duties; or (vii) termination of a business entity that is partner Notice of a partner's express will to withdraw fro a partnership at will automatically triggers dissolution of the partnership.

Partnership Property: Rights of partner in partnership property

a partner is not a co-owner of p'ship property, and therefore has no transferable interest in specific property of the p'ship, like land, leases, or equipment owned only by partnership itself. A partner has no right to use p'ship property other than for the benefit of the p'ship

Dissociation: Consequences: Dissociated Partner's Power to Bind Partnership

a partnership can be bound by an act of a dissociated partner undertaken within two years after dissociation if: (i) the act would have bound the partnership before dissociation, and (ii) the other party to the transaction (a) reasonably believed the dissociated partner was still a partner and (b) did not have notice of the dissociation.

Formation of a Partnership: How a partnership is formed

a partnership is formed as soon as two or more people associate to carry on as co-owners a business for profit. -no formal agreement is required to form a partnership; the parties' intent may be implied from their conduct -no writing is required to form a p'ship. However, b/c of the statute of frauds, if partners wish to have an enforceable agreement to remain partners for more than one year, they generally must execute a writing reflecting their agreement. -anyone who is capable of entering into a binding contract may be a partner. A would-be partner who lacks capacity is liable only to the extent of his capital contribution, but the partnership with such person is not void; it will continue to exist until steps are taken to dissolve it. -a partnership formed to achieve an illegal purpose is void, and the courts will not compel an accounting or a settlement of a void partnership's affairs -unless otherwise agreed, no one can become a partner without the express or implied consent of all partners -a partnership may choose to file a statement of partnership authority with the secretary of state, which can give constructive knowledge of the extent of the partners' authority with regard to the partnership

Relations Between Partners: Legal Actions by or against Partners

a partnership may sue or be sued in its own name; however, to reach a partner's personal assets there must a judgment against the individual partner. A partnership may sue a partner for breach of the p'ship agreement or of a duty owed to the p'ship. A partner may sue a partnership or other partners to enforce a right created by a p'ship act or agreement, or a right otherwise belonging to the partner

Relations Between Partners: Remuneration

absent an agreement to the contrary, a partner has no right to remuneration for services rendered to the partnership except for reasonable compensation for services performed in winding up the p'ship business. When a partner has impliedly or expressly promised to devote time to the p'ship business and fails to do so, she may be charged in an accounting for damages caused to the p'ship. (absent an agreement, partners get no salary)

Liability of Partners: Civil Liability: Liability of Incoming Partner

an incoming partner is not personally liable for obligations incurred by the partnership before the person became a partner. But any capital paid in to the partnership by an incoming partner can be used by the partnership to satisfy prior debts.

Liability of Partners: Civil Liability: Liability of Outgoing (dissociated) Partner

an outgoing or dissociated partner remains liable for obligations arising while he was a partner unless there has been a payment, release, or novation. An outgoing partner can also be liable for acts done after dissociation. -Dissociating partners retain liability, even on future debts, until actual notice of their dissociation is given to creditors or until 90 days after filing with state a notice of dissociation

Dissolution: Partners may waive dissolution and continue the business

any time before the winding up of the partnership business is complete, the partners may decide to waive the dissolution and continue the partnership by unanimous vote of the partners who have not wrongfully dissolved. Such waiver does not affect the rights of persons who have relied on the dissolution before receiving notice of the waiver.

Relations of Partners to Third Parties: Apparent Authority: Business of the Kind

apparent authority is not limited merely to transactions that are in fact within the ordinary course of business for the p'ship in question, but extends also to transactions that would apparently be for carrying on business of the kind run by the partnership.

Dissolution: Who May Wind Up

as a general rule, all living partners have a right to participate in the winding up of the partnership's business except partners who have wrongfully dissolved the partnership and bankrupt partners. If all partners have died, the legal representative of the last surviving partner may wind up

Relations Between Partners: Books and Information

books and info must be kept at the partnership's chief executive office. each partner has a right to inspect and copy the partnership books. Upon demand, each partner must render true and full info of all things affecting the p'ship.

Partner's Interest in the Partnership

each partner has a transferable interest in the partnership, which consists of his share of partnership profits, losses, and distributions This interest is treated as personal property, transferable without dissolving the partnership, and attachable. Absent an agreement to the contrary, a partner shares equally in the p'ship profits and must contribute to the losses in proportion to his share of the profits. (Absent an agreement, losses are shared just like profits) A transfer of a partner's interest in the partnership gives the transferee no rights with regard to the operation of the partnership. It merely entitles the transferee to receive profits to which the transferring partner would otherwise be entitled. A partner may not sell his partner status (i.e., may not make another partner) without the unanimous consent of the other partners.

Relations Between Partners: Partners' Accounts

each partner is deemed to have an account that is credited with an amount equal to the partner's contribution plus his share of any profits and debited with the partner's share of any losses and p'ship liabilities. Where a partner personally profits at the expenses of the p'ship, the partner must account to the p'ship for those profits.

Liability of Partners: Civil Liability: Extent of Liability

each partner is personally and individually liable for the entire amount of partnership obligations. A partner who pays more than his fair share of an obligation is entitled to contribution from the other partners, and a partner who pays the whole obligation of the partnership is entitled to indemnification

Liability of Partners: Civil Liability: Nature of Liability

liability is joint and several (one or more partners may be sued) for all obligations of the partnership, whether arising in tort or contract. A judgment is not personally binding on a partner unless she has been served and the creditor has exhausted partnership assets, or exhaustion is exceed by agreement or court order or bc the partnership is bankrupt.

Liability of Partners: Civil Liability: Types of Liability

partners are liable for all contracts entered into by a partner in the scope of p'ship business or with authority of the p'ship. Similarly, partners also are liable for all torts committed by any partner or employee of the p'ship within the ordinary course of partnership business or with authority of the partnership

Limited Liability Partnership (LLP) Formation

partners are not personally liable for the LLP's obligations. -Voting: the terms and conditions on which a p'ship becomes an LLP must be approved by whatever vote is necessary to amend the p'ship agreement or, if specified, the vote necessary to amend the contribution obligations of the partners. if the partnership agreement is silent as to how it may be amended, all partners must approve the terms and conditions of the partnership becoming an LLP -Filing: to become an LLP, a partnership must file a statement of qualification with he secretary of state. The statement must be executed by at least two partners and contain such info as: (i) name and address of partnership; (ii) a statement that the partnership elects to become an LLP; and (iii) a deferred effective date, if any. The partnership becomes an LLP at the time of filing the statement or on the date specified in the statement, whichever is later.

Proof of Partnership Existence: sharing of profits

sharing of profits raises a presumption of partnership unless the share was received as payment of a debt, for services rendered, as rent payment, as an annuity or other retirement benefit, as interest on a loan, or for the sale of goodwill of a business

Proof of Partnership Existence

since no formalities are required to form a partnership, sometimes it is difficult to determine whether the relationship between parties is a partnership or something else. To determine whether a partnership exists, courts generally look to the intent of the parties. If they intended to carry on a business as co-owners, there is a partnership even if they did not subjectively intend to be partners. Where the parties' intent is uncertain, the courts consider both sharing of profits and evidence indicative of a partnership

Proof of Partnership Existence: Evidence Indicative of Partnership

the following factors may be additional evidence that a partnership has formed. However, in contrast to the sharing of profits, these factors do not raise a presumption of partnership: -title to property is held in joint tenancy or tenancy in common; -the parties designate their relationship as a partnership; -the venture undertaken by the parties requires extensive activity; -there is a sharing of gross returns

Dissolution: Partnership Continues

the partnership continues to exist after dissolution until the partnership is wound up. The real end of the partnership is called termination. Winding up is what happened in between dissolution and termination in which the remaining partners liquidate the assets to satisfy the creditors.

Limited Liability Partnership (LLP) Name

the partnership name must end with the words "Registered Limited Liability Partnership" or "Limited Liability Partnership" or the abbreviation "RLLP" or "LLP".

Limited Partnership:

to form: must file with the a certificate of limited partnership with the state; -the name must include "limited partnership" or "LP" -the liability is limited for limited partners -General partners have right to manage/control the business. -in most states, limited partners may not manage the business without forfeiting their limited liability status. (but under the newly revised uniform limited partnership act, limited partners may now manage the partnership without giving up their limited liability status) -there is no provision regarding the allocation of profits and losses in their code -distributions are made according to value of contributions

Partnership Property: Titled Property: Property Deemed to Be Partnership Property

under the RUPA, titled property is deemed to be partnership property if: (1) it is titled in the partnership name; or (2) it is titled in the name of one or more partners and the instrument transferring title notes the titleholder's capacity as a partner or the existence of a partnership

Relations Between Partners: Rights Upon Dissolution

upon dissolution, a partner is entitled to a settlement of her account

Dissolution: Dissolution of a Partnership at Will

when a partnership is formed with no particular undertaking or definite term, it is said to be a partnership at will. A partnership at will can be dissolved at any time by the express will (e.g., notice of dissolution) of any partner without penalty.

Purported Partners: Liability of Person Held Out as Partner

when a person by words or conduct represents himself as a partner or consents to being represented by another as partner, he will be liable to third parties who extend credit to the actual or apparent partnership in reliance on the representation. Note: a person held out by another as a partner is not liable as a partner unless he actually consents to the holding out-mere failure to deny a representation of partnership does not give rise to liability as a purported partner

Purported Partners: Liability of Person Who Holds Another Out as Partner

when a person holds another out as a partner, he thereby makes that person his agent to bind him to third parties. (if there is a partnership, only those partners who know of or consent to this holding out will be bound)