Law Ch 27 Terms and homework

Which of the following is true regarding partner liability to creditors in the continuation of a partnership?

New partners are liable for prior obligations only to extent of their contribution unless they agree to greater liability. Explanation New partners are liable for prior obligations only to extent of their contribution unless they agree to greater liability. The Revised Uniform Partnership Act (RUPA) declares that a new partner has no liability for partnership debts that arose before he became a partner. However, this rule can be changed by agreement. Accordingly, many partnership agreements require new partners to assume liability for all partnership obligations as a condition of joining the partnership.

Which of the following is true regarding a partnership?

One can engage unwittingly in behavior that gives rise to the creation of a partnership. Explanation A partnership is a voluntary and consensual association involving two (2) or more persons. Nobody can be forced to become a partner, although one can engage unwittingly in behavior that gives rise to the creation of a partnership. The RUPA is extremely liberal in that it permits individuals, partnerships, and corporations to qualify as persons that can form a partnership.

Which of the following is true of a partner's right to compensation?

The partners may agree that one or more of them is to be paid a salary in addition to sharing in profits. Explanation A partner is not ordinarily entitled to salary or wages. The compensation is presumed to be the partner's share of profits. Of course, the partners may agree that one or more of them is to be paid salary, rent, interest, or wages in addition to sharing in profits. Often, drawing accounts for all partners are agreed on, or perhaps regular monthly payments are made. These are then deducted from the partner's share of profits when year-end settlements are made.

+______ is required to act outside the ordinary course of business or contrary to the partnership agreement

Unanimous agreement

To act contrary to a partnership agreement, _____.

a unanimous agreement among the partners is required Explanation Unanimous agreement is required to act contrary to the partnership agreement or to act outside of the ordinary course of the partnership business. When a certain action is proposed and there is an even split among the partners, the action cannot be taken. If it is an important matter and the deadlock continues, it may be impossible to continue the business.

•Limited partners are not _________.

fiduciaries

Parties have _____duties when winding up. Under R U P A, partners may be paid for winding up.

fiduciary

Duty to Account

•Partners must account for any expenditure of partnership funds. •One partner usually keeps the account books and must be accurate.

Duty of Loyalty and Good Faith

•Partners must be honest and not put self-interest before their duty to the partnership.

Duty of Care in Business

•Partners must exercise reasonable care and skill in transacting business for the partnership. •Partners cannot exceed their authority. •Partners are liable for their negligence.

Continuation without winding up.

•Partnership agreements may specify that there will be no dissolution upon death of a partner. •Buyout agreements may be permitted.

Partnership Liability on Contracts.

•R U P A [Revised Uniform Partnership Act]: The Firm is primarily liable for contracts. •If a partnership doesn't pay, the partners are jointly liable.

Partnership Liability for Torts.

•Respondeat superior: The partnership is liable for torts committed while doing business.

Factors (two most important) when deciding whether co-ownership exists.

•Share of profits: Absent other evidence, shared profits are presumptive evidence of a partnership. •Sharing of partnership management.

Certificates must be filed with the state to form limited partnerships

•Statutory formalities must be kept in legal compliance. •The certificate must describe the business, its location and its assets.

Partnership Liability for Crimes.

•The partnership and individual partners are liable for fines. •Partners will not be imprisoned for a crime committed by one partner even if it was done in the name of the business.

Termination.

•The winding-up process is complete when all assets are distributed and creditors satisfied.

Allow some partners to have limited liability.

•There must be both general partners and limited liability partners. •Limited liability partners are not responsible for partnership debts.

Property belongs to the partnership if title or possession was transferred:

•To the partnership in its name. •To a partner by a transfer document naming the partnership. •To any partner by a transfer document indicating the partner's status or the existence of a partnership.

Distribution of assets is the final act of winding up a dissolved partnership.

•When there are losses, all creditors are paid first. •If assets remain, the proceeds from the sale are distributed pro rata among partners. •If a partner's net capital account is negative, he must pay the partnership the deficiency.

Purported partnerships.

•You can be liable as a partner without being a partner.

Zach, Khalid, and Ira form a partnership. Zach's capital contribution to the firm is $5,000, while Khalid and Ira contribute $10,000 each. The parties do not make any express agreement concerning how profits are to be divided. However, they agree to share losses as follows: Zach, 40%, Khalid and Ira, 30% each. During the first year of the partnership, the business makes a profit of $30,000. Given this scenario, what is Zach's share of the profit?

$10,000 Explanation A partner is not ordinarily entitled to salary or wages. The compensation is presumed to be the partner's share of profits. This is true even if one partner spends much more time than another on partnership business. In the absence of a contrary agreement, profits are shared equally even if capital contributions are unequal. In the given scenario, Zach's share of the profit is $10,000.

Express authority

to do whatever she is authorized to do by the rules of partnership. Express authority stems from any other agreement of the partners.

Charlene, Darrin, and Eleanor form a partnership. They make no express agreement concerning how profits are to be divided. Of the $30,000 initial capital of the firm, Charlene and Darrin each contributed $12,000. Eleanor contributed $6,000. The partnership had a profit of $15,000 during the first year of operation of the business. Given this information, Darrin's share of the profit is _____.

$5,000 Explanation A partner is not ordinarily entitled to salary or wages. The compensation is presumed to be the partner's share of profits. This is true even if one partner spends much more time than another on partnership business. In the absence of a contrary agreement, profits are shared equally even if capital contributions are unequal. In the given scenario, Darrin's share of the profit will be $5,000.

Disassociation:

A change in the relation of the partners caused by any partner ceasing to be associated with the business. •Starting point for dissolution, winding up, and termination.

Partners may agree to permit a partner to sell his interest to another and to accept that person as a substitute partner. What are these agreements called?

Buyout agreements Explanation Partners may agree to permit a partner to sell his interest to another and to accept that person as a substitute partner. These agreements are called buyout agreements. Normally, they include provisions seeking to protect the financial interests of the partners who are leaving (and those who are entering) the partnership.

Thomas and Millicent have operated their law partnership in Detroit, Michigan for five (5) years. In the early years, the practice was quite successful, so much so that two (2) years ago, Thomas and Millicent took on another lawyer, Forrest, as a third partner. Things have not worked out with Forrest. He has shown up to the office and to court on numerous occasions intoxicated, and clients have expressed regret and even anger over his poor lawyering. One client recently expressed to Thomas and Millicent that a "hung over" Forrest slept through most of his trial, resulting in an adverse verdict for the client and the firm. Both Thomas and Millicent are considering dissolution of the partnership. Not only are they upset (an understatement) with Forrest, but they are even seriously considering going their own separate ways because of the bad experience. Who may demand a dissolution and winding up of the existing partnership?

Either Thomas or Millicent Explanation Each non-wrongful partner may demand that the business of the partnership be dissolved and wound up. Thus, the partnership business cannot be continued in the absence of the unanimous approval of all the non-wrongful partners. In the subject case, either Thomas or Millicent may demand a dissolution and winding up of the existing partnership.

__________ formed by specific business organizations.

L L L P

Partners must indicate intent to create an_________

L L L P. Must comply with applicable state L L L P laws and regulations.

After retiring from Jones Corporation (a partnership founded by Megan Jones and other partners), Megan grew tired of staying at home and started visiting the firm's place of business. The current partners would introduce her to prospective customers as "My partner, Ms. Jones," or "Our partner, Ms. Jones." Megan did not bother to correct anybody about this. She was introduced in this manner to Tiffany, a new customer. Relying on the belief that Megan was a partner, Tiffany entered into a contract with Jones Corporation. Which of the following is true regarding Megan's liability to Tiffany if Jones Corporation does not fulfill its obligations?

Megan will be liable because she failed to correct the statement introducing her as a partner. Explanation In the given scenario, Megan would be held liable because she failed to correct the statement when she was being introduced as a partner. You can be liable as a partner without being a partner. If a person stated that you were his partner and you failed to correct the statement, you could be held liable.

Articles of Partnership.

•Not required but desirable.

Martin, Norris, and Olsen (MNO) was a partnership that contracted for and performed a variety of painting jobs. Before the partnership was dissolved, MNO had entered into a contract under which MNO was supposed to paint every room in the state capitol building. At the time of the partnership dissolution, MNO had not yet performed the work called for by this contract. If the partners involved in the winding up elect to perform the contract, they _____.

have the authority to enter into new contracts with subcontractors, material suppliers, and workers Explanation In a partnership involved in the construction business, it may be desirable to finish contracts for constructing large buildings that may take two or three years to complete. In order to finish these jobs, the winding-up partners would have authority to enter into new contracts with subcontractors, material suppliers, and workers. As a result, it may be necessary that the winding-up partners borrow money on behalf of the partnership in order to complete these contracts.

A partner who wrongfully dissociates _____.

loses the right to demand a dissolution and winding up Explanation A partner who wrongfully dissociates loses the right to demand a dissolution and winding up. In addition, the wrongful partner forfeits the right to participate in the winding-up process should any non-wrongful partner decide on one.

Back in Style Fashions is a partnership firm dealing in the manufacture of casual clothes. Raul, one of the partners, thinks the firm should liquidate its current clothing inventory before the end of the calendar year. For this purpose, Raul _____.

must have the unanimous agreement of all the partners Explanation In the given scenario, Rahul requires the unanimous agreement of all the partners of Back in Style Fashions. Unanimous agreement is required to act contrary to the partnership agreement or to act outside of the ordinary course of the partnership business. When a certain action is proposed and there is an even split among the partners, the action cannot be taken. If it is an important matter and the deadlock continues, it may be impossible to continue the business.

Duty to Inform

•Partners have a duty to timely disclose important information received that could impact the partnership.

Winding up involves liquidating assets at the highest value.

•Partners may need to complete contracts or assign contracts.

Having just passed the bar examination, Thomas and Millicent have decided to open their own law partnership in Detroit, Michigan. It will be a general services firm, with Thomas and Millicent practicing in many different areas of the law. The young lawyers hope the practice will be successful (for now, though, it will just involve the two of them), and they would like to operate the partnership together for their entire careers. Thomas and Millicent have a(n) _____.

partnership at will Explanation Where no time duration or specific undertaking is agreed on, the partnership is a partnership at will. Such a partnership may be dissolved at any time by any partner. In the subject case, Thomas and Millicent have a partnership at will, since their law practice will be wide-ranging in its scope (in other words, there is no specific, limited undertaking), and it is of indefinite (but hopefully permanent) duration.

If a partner assigns his or her partnership interest to a creditor, the creditor is entitled to _____.

receive that partner's share of the profits Explanation A creditor of a partner may not attach any of the property owned by the partnership; however, a partner may assign her partnership interest to a creditor or to anyone else. This entitles the assignee to receive that partner's share of the profits. It does not give the assignee a right to any information about partnership affairs or a right to look at its books.

Acme Chemical Consultants, a general partnership, discharges from its facility a pollutant prohibited by the Environmental Protection Agency (EPA). In this case, _____.

the firm is liable for the resulting fines Explanation A partnership may commit a crime by the manner in which it carries on its business. Examples of such crimes would include violating antitrust laws, failing to obtain a necessary business license, or discharging a prohibited pollutant. The firm is liable for the resulting fines. The individual partners are liable if the firm has inadequate assets.

Implied authority

to bind the partnership on contracts that are usually appropriate to that business. May be abolished or limited by agreement of the partners

Liability for Obligations.

•A continuing partnership is liable for debts incurred by the original partnership. •Former partners may become liable for new obligations of a continuing partnership.

Wrongful Disassociation.

•A partner exercises power to dissolve without the right to do so Innocent partners may continue without breaching partner.

Right to compensation

•A partner is not ordinarily entitled to a salary or wage. •Compensation = partner's share of profits.

Nonwrongful Disassociation.

•A partnership entered into for a period of time that dissolves at the end. •Partnerships with no time period specified are at will.

Creation of a Partnership requires: An association of two or more persons

•A partnership must be voluntary and consensual. •The "persons" may be natural or artificial (corporate) persons. Must be at least two partners

Partners usually wind up/liquidate assets.

•A party who wrongfully dissociates loses the right to demand dissolution and winding up. •A court may appoint a receiver if the dissolution is court ordered.

Limited partners Rights and Liabilities

•All partners maybecome personally liable if the limited partnership failed to complete the formalities. •Limited partners cannot take control of the business. •Limited partnerships may be dissolved and wound up.

Creation of a Partnership requires: Carrying on a business for profit

•Any trade, occupation, or profession is treated as a business in determining the existence of a partnership. •Profit is key. Nonprofits are not partnerships. Objective must be to make a profit

Voice in Management.

•Each partner normally has an equal voice. •Majority rules in disputes among partners.

Authority to act for a partnership can be:

•Express. •Implied. •Apparent. •Partners may become liable for ratified contracts.

Both limited and general partners are protected by limits on liability.

•General partners liable only for torts or crimes.

Partners have a "partnership interest" in property.

•It cannot be used for personal use. •Creditors cannot attach partnership property but may have an interest in it or a charging order against it.

Creation of a Partnership requires: As co-owners

•Multiple parties must own the business. •There is no requirement that partnership property be owned by all partners or in equal share by all partners. Must have a community interest: Sharing losses, sharing profits, sharing management