Partnerships

What is dissolution?

Dissolution = when the entire partnership comes to an end. "Dissolution" refers to the ending of a partnership due to the occurrence of some specified event or by operation of law.

How do partnerships work?

Each partner contributes to the business (by investing money, time, specialized skills, or even name recognition), and each partner shares in the profits and losses.

Liability of a purported partner

If a partnership holds out a person as a partner, whether by words or by conduct, the partnership will be bound by any transaction entered into by that person with a third party who reasonably relied on the validity of the partnership relationship. Unif. P'ship Act § 308(b) (1997). Similarly, even if there is no partnership, a person or group of people who hold out another as a partner will be bound by the purported partner's acts in the same manner

What is joint and several liability?

Joint and several liability, by contrast, is liability that is shared by multiple parties, but the third party may seek to recover from any or all of the liable parties.

What is joint liability?

Joint liability is simply an obligation or liability that is shared jointly between multiple parties.

How are losses shared between partners?

Losses are shared in the same manner as profits. Unif. P'ship Act § 401(b) (1997). This means that if two partners have agreed to share profits equally, they will also share the losses equally. If, however, the partners have agreed to split the profits 70% to 30%, and the agreement is silent as to losses, the losses will be split in the same manner as profits would be. **Again, partners are free to modify this rule by agreement

Are partners allowed to modify the profit sharing agreement?

Partners are free to modify this by agreement and may opt to apportion profits in some other way, such as in proportion to the amount of capital invested.

What law(s) govern partnerships?

Partnerships are governed by the laws of each state. All states have adopted some form of the Uniform Partnership Act UPA (1997). The law assumes that all general partners share equally in management rights, profits, and liabilities, absent some agreement otherwise.

What is the RULPA rule on liability for limited partners?

The Revised Uniform Limited Partnership Act shields limited partners from personal liability even if they participate in the management of the partnership.

What is the default rule in regards to profit sharing between partners?

The default rule is that all partners share equally in the partnership's profits. This means that every partner takes home an equal share of the profits, regardless of how much capital that partner invested in the partnership.

What does a partner's duty of loyalty require from the partner?

The duty of loyalty requires the partner to: i. Act in support and on behalf of the partnership. ii. Account to the partnership for any money or property made as partner, or hold it in trust for the partnership. iii. Avoid self-dealing or competition with the partnership.

Are general partners entitled to participate in management of partnership?

Under ULPA and RULPA, the general partner or partners are entitled to participate in the management of the partnership.

Can general partners be held personally liable for the partnership's debts and obligations?

Under ULPA and RULPA, the general partner or partners may be held personally liable for the partnership's debts and obligations.

What happens if a partner breaches the partnership agreement or a duty owed to the partnership?

Under the Revised Uniform Partnership Act (RUPA), if a partner breaches the partnership agreement or a duty owed to the partnership, the partnership may bring suit against the partner.

What kind of vote do you need for partner disagreements regarding issues outside course of business? (Ex: Majority or Unanimous)

Voting regarding Outside Ordinary Course of Business = Unanimous Rules

What happens to the partners' authority during the winding up process?

1. All partners' actual authority to bind the partnership ends after dissolution, except to the degree necessary to wind up the partnership. 2. A partner may still have lingering apparent authority even after the partnership is dissolved. Id. at 804(2). a. This authority continues until third parties have proper notice of the dissolution, which may be effected by personal notice or the filing of a statement of dissolution with the proper state authorities.

What is a partner's transferable interest in partnership?

1. Partner's share of partnership profits/losses; and 2. The right to receive distributions.

What is a general partnership?

A GP is one in which all partners are entitled to engage in the management of the company and share in the profits and liabilities.

What is a Limited Liability Partnership?

A Limited Liability Partnership (LLP) is a partnership made up of only limited partners.

How are partnerships taxed?

A partnership is not obligated to file a separate tax return. Rather, the business's profits and losses "pass through" to the partners, who include those amounts when filing their personal tax returns.

Do partnership liabilities apply to contracts entered by partner on behalf of the partnership?

A partnership will be bound on a contract entered into by a partner on behalf of the partnership

What is partnership property?

All partnership assets including property acquired by the partnership.

What is a partnership?

An association of two or more persons to carry on a business for profit as co-owners

What are the two kinds of dissociation?

Dissociation may be rightful or wrongful.

Do limited partners have personal liability for any type of partnership obligation?

Limited partners have no personal liability for any type of partnership obligation.

Are partners entitled to share in profits/losses of the partnership?

Partners are entitled to share in the profits and losses of the partnership. Unif. P'ship Act § 401(b) (1997).

What is the default type of partnership?

The General partnership

Are there general partners in a limited liability partnership?

There are no general partners in a limited liability partnership.

What kind of vote do you need for partner disagreements regarding issues in ordinary course of business? (Ex: Majority or Unanimous)

Voting regarding Ordinary Course of Business = Majority Rules (You need majority of votes)

It's easy to tell that property belongs to the partnership if it is titled in the partnership name but what if it's not?

1. The intent of the partners controls. 2. If the partners' intent is unclear, there is a presumption that any property bought with partnership money is partnership property.

May a partner use partnership property for purpose other than partnership business?

A partner generally may not use partnership property for any purpose other than partnership business without the agreement of the other partners.

Does a partner have a right to compensation for services rendered to the partnership?

A partner has no right to compensation for services rendered to the partnership. Unif. P'ship Act § 401(h) (1997). This means that even if one partner does a disproportionate share of work on behalf of the partnership, he or she is not entitled to a salary of any sort, unless some specific provision was made in the partnership agreement. The exception to this rule is that a partner may receive remuneration for services performed to wind up the business.

What is Dissociation?

Dissociation = When one partner is no longer associated with the partnership.

May a partner bind the partnership for acts that are not within the scope of the partnerships business but appear to be related to the partnership?

Even if a partner does an unauthorized act that appears to be related to the partnership, the partnership will be bound on any transaction with a third party who had no notice that the partner did not have the necessary authority. Unif. P'ship Act § 301(a) (1997). This is by virtue of the partner's apparent authority.

How is management of the partnership shared between partners?

Every partner has an equal right to manage the partnership. Ex: This means that even if the parties have contributed different amounts of money or time to the partnership, each has an equal vote when it comes to control of the business. **The partners, may, however agree to some other management structure.

Exhaustion Rule

In some states, though, a judgment creditor may be required to exhaust all partnership assets before seeking to recover from individual partners.

Can a partner transfer his/her right to participate in partnership management?

No. A partner cannot convey his/her right to participate in the management of the partnership, inspect partnership records, or otherwise interfere with partnership business

What is termination?

Once the process of winding up is complete, the partnership truly ceases to exist. This is called "termination."

1. What does a partner's duty of care require from the partner?

The partner must: i. Act in a manner that is not grossly negligent, reckless, intentionally improper, or illegal; and ii. Act in accordance with the principles of good faith and fair dealing.

What is tenancy in partnership?

The partner's specific interest in partnership property is called a tenancy in partnership.

How are LLP's created?

The partners generally must file a certificate of limited partnership or some other official document with the proper state authority, usually the secretary of state.

How are limited partnerships created?

The partners generally must file a certificate of limited partnership or some other official document with the proper state authority, usually the secretary of state.

What rights does a partner have in partnership property?

The right to both the use and the possession of the property, but only for partnership purposes.

Key Objective Signs of Partnership

i. Power to manage/ Control Business ii. Profit sharing between parties iii. Sharing of business losses iv. Contributions of capital to business v. Joint liability to creditors for business debts

How are disputes in the ordinary course of partnership business settled?

Disputes that occur in the ordinary course of partnership business can be settled by a simple vote. Unif. P'ship Act § 401(j) (1997).

What law(s) governs limited partnerships?

LPs are governed by individual state statutes, but every state has adopted some version of the Uniform Limited Partnership Act (1916) (ULPA) or the Revised Uniform Limited Partnership Act (1976) (RULPA).

How many types of partnerships are there?

There are three (3) common types of partnerships: 1. General Partnership 2. Limited Partnership 3. Limited Liability Partnership (or Registered LLP) A fourth, the limited liability limited partnership (LLLP), is not recognized in all states.

What is the purpose of wrongful dissociation?

Wrongful dissociation by any partner will cause that partner to be held liable for any resulting damages to the partnership.

Requirements for Forming a Partnership

(1) A partnership agreement is a contract, and, as such, partners must possess contractual capacity (2) All parties must consent, either by words or conduct. (3) Formal Agreement(s)

When does dissociation occur?

1. Dissociation may occur when a partner dies, becomes incompetent, or goes bankrupt. 2. A partner may choose to dissociate or be dissociated due to the happening of some event specified in the partnership agreement. 3. A partner may also be expelled by the remaining partners by agreement or by vote because of illegality, the partner's transfer of its interest, or if the partner is an entity, the entity's dissolution. 4. In addition, a partner may be dissociated by court order, such as when the partner engaged in serious misconduct.

When will a partnership be dissolved?

1. If the partners entered the partnership agreement for a specified term or a particular project, then the end of the period or the completion of the partnership's purpose will dissolve the partnership. 2. Even if the period has not ended or the project has not finished, the partnership may be dissolved if all partners agree. 3. In addition, if a partner is dissociated by death, bankruptcy, or some wrongful dissociation, the partnership will dissolve on the agreement of half of the remaining partners. 4. The partnership will also dissolve upon the occurrence of some event specified in the partnership agreement. 5. In a partnership at will, or a partnership for no specified term or specific undertaking, the partnership will dissolve on notice of any partner. 6. A partnership will dissolve if the partnership purpose has become illegal. 7. Further, a partnership may be dissolved by judicial decree. a. A partner may apply for such a dissolution in a number of situations, such as when the partnership is no longer economically viable, a partner has committed some misconduct, or the partnership agreement cannot be carried out. b. Someone other than a partner who has received a partner's transferable interest may seek judicial dissolution at the end of the specified term or undertaking or anytime in an at-will partnership.

Can a disassociated partner retain liability in partnership?

1. It is important to note that a dissociating partner may retain lingering apparent authority to bind the partnership in transactions with third parties who reasonably believe that partner is still affiliated with the partnership. Unif. P'ship Act § 702 (1997). 2. For this reason, it is vital to give notice and file a statement of dissociation with the relevant state authorities. 3. Similarly, while a dissociating partner normally will not be personally liable for partnership transactions undertaken after the dissociation, the partner may remain personally liable to third parties who entered those transactions in reliance on the reasonable belief that the partner was still part of the partnership. Unif. P'ship Act § 702 (1997). Giving notice to known creditors and filing a statement of dissociation are essential to avoid continuing personal liability.

What happens after a partnership is dissolved?

1. The partnership's business must be wound up. a. Any partner who has not been wrongfully dissociated may participate in the winding up, though other partners, representatives, or transferees can request court supervision if there is sufficient cause. Unif. P'ship Act § 803(a) (1997). b. If all partners have died, the legal representative of the last surviving partner may then be charged with winding up. 2. Those participating in the winding up may continue the business as a going concern for a reasonable amount of time, resolve any legal proceedings, close out any remaining partnership business, settle accounts, satisfy debts, and distribute any remaining assets.

What is a limited partnership?

A limited partnership (LP) is one in which at least one partner acts as general partner and at least one partner acts as a limited partner.

Does a partner have a transferable interest in partnership?

A partner does have a transferable property interest in the partnership, and this interest is personal property.

May a partner bind the partnership for acts that are not within the scope of the partnerships business?

A partner may also bind the partnership for acts that are not within the scope of the partnership's business, but only if authorized by the other partners, such as by a vote or an authorization in the partnership agreement.

Can a partner transfer interest in the partnership?

A partner may freely transfer or assign this interest

May a partner assign his/her interest in the property?

A partner may not individually assign his or her interest in the property, and the property may not be attached or executed by the individual creditors of the partner.

Can a partner sue the partnership or another partner?

A partner may sue either the partnership or another partner, in law or equity, to enforce a right, secure an accounting, or compel dissolution

Will new partners face personal liability for preexisting debts or obligations of partnership?

A partner who joins a partnership will not face personal liability for any preexisting debts or obligations of the partnership. The new partner may be held liable for any partnership obligations that arise after he or she joins.

Do partnership liabilities apply to torts by partner done on behalf of partnership?

A partnership's liability is not limited to contracts. A partnership may also be held liable in tort for any loss or injury caused by a partner acting within the scope of the partnership's business or on the authority of the partnership.

What is winding up?

After a partnership is dissolved, the partners must begin the process of completing any old business, settling all accounts, and liquidating assets to settle any outstanding debts and distribute the remainder, if any, among the partners.

Does a partner's act in the ordinary course of business bind the partnership?

Every partner is an agent with the power to act on behalf of and bind the partnership. Unif. P'ship Act § 301(a) (1997). This means that any act of a partner in the ordinary course of partnership business will bind the partnership. This is an exercise of the partner's actual authority.

Will a statement of partnership authority eliminate the potential liability in all circumstances?

Filing such a statement will not eliminate the risk of the partnership being bound by unauthorized acts of the partner in all circumstances, as generally filing alone will not be deemed constructive knowledge of the limitation for every third party who deals with the business.

Formal Agreements: General Partnerships

For general partnerships, there is generally no legal requirement that the parties enter into any type of formal agreement. However, even a general partnership agreement must be in writing if it falls within the Statute of Frauds, such as a partnership agreement for a period lasting longer than one year.

What happens if a partner is required to pay more than his/her share of some partnership obligation?

If a partner is required to pay more than his or her share of some partnership obligation, that partner may then seek a proportionate contribution from all other partners. See Black's Law Dictionary 146 (3d Pocket ed. 2006) This is called the right of contribution

Partnership by Estoppel

If a person holds herself out as a partner in a partnership, whether by words or conduct, that person will be personally liable to any third party who enters into a transaction in reliance on the existence of such a partnership, just as if that person were, in fact, a partner. A person may be held similarly liable for allowing someone else to hold her out as a partner. Put simply, a person who represents herself as a partner may be subjected to liability as if she were.

How can a partnership limit the apparent authority of partners?

In some states, a partnership may be able to limit the apparent authority of partners to bind the partnership in certain transactions by filing a statement of partnership authority with the relevant state official.

Are limited partners allowed to participate in management of the LLP?

Limited partners may manage the business.

Are limited partners in a limited liability partnership (LLP) personally liable for partnership debts/obligations?

No. There are no general partners who control the business and are personally liable for partnership debts. This means that all of the partners are protected from personal liability for partnership debts and obligations.

Do all states allow creation of LLP's?

Not all states allow for the creation of LLPs, and some states only permit LLPs for certain types of professional partnerships.

Under RUPA is partnership liability limited to only contract or tort liability?

The Revised Uniform Partnership Act does not expressly limit partnership liability to contractual or tort liability. Unif. P'ship Act § 306 (1997). In fact, the RUPA and its comments make multiple references to partnership liability arising in "contract, tort, or otherwise."

When will the dissociation be deemed wrongful?

The dissociation will be deemed wrongful if it breaches the partnership agreement. Where the dissociation occurred before the completion of a partnership's specified term or undertaking, the dissociation is wrongful if the partner voluntarily leaves (unless excused by death or dissociation of another partner), if the partner is expelled by a court for some misconduct, if the partner is dissociated due to bankruptcy, or, if the partner is an entity, because the entity willfully dissolved.

Are limited partners held personally liable for partnership debts?

The limited partners cannot be held personally liable for partnership debts.

Are limited partners allowed to participate in management of the partnership under ULPA or RULPA?

The limited partners may be limited in their participation in management.

Are limited partners allowed to contribute capital or share in profits?

The limited partners may contribute capital and are entitled to share in the profits.

What is the RUPA rule for general partner liability to partnership obligations?

The modern rule contained in the Revised Uniform Partnership Act is that all general partners may be held jointly and severally liable for any obligation of the partnership, no matter what type. Unif. P'ship Act § 306(a) (1997).

Could a partner sue the partnership or another partner under UPA?

The older Uniform Partnership Act (UPA) rule disallowed access to the courts for either the partnership or a partner under most circumstances without a dissolution and accounting.

What is the UPA rule for general partner liability for partnership obligations?

The original Uniform Partnership Act holds that: tort liabilities of the partnership = Partners may be held jointly and severally liable Contractual liabilities = Only jointly liable

How are partnership profits/losses, control, and contributions treated at the partner level?

The partners may make equal contributions to the business, have an equal say in controlling the business, and share equally in the profits and losses or agree to some other arrangement.

What happens when a partner dies?

When a partner dies, any interest that partner has in partnership property goes to the remaining partners.

What happens if a partnership has no formal agreement?

When parties begin a partnership without a formal agreement, the question of whether a partnership exists is often a question of fact. Owning property jointly is not enough, on its own, to evidence formation of a partnership. UPA § 202(c)(1) (1997). Receiving a share of the profits, however, is presumptive evidence that a partnership exists, unless the profits were received as payment on a debt, wages, rent, benefit, sale, or some other type of payment.

Can a new partner be admitted into general partnership?

Yes but you need unanimous consent of all existing members. However, this rule may be changed by the governing partnership agreement. If the written partnership agreement does not address the admission of a new partner to the firm then the default rule requiring unanimous partner consent applies.

Is there any paperwork needed for partnership formation?

Yes. A partnership may have to register with the state, obtain any necessary licenses or permits to engage in certain types of businesses, and make filings with the Internal Revenue Service (IRS).