Partnerships

Sharing Control

Control must actually be shared.

Priority of Distributions:

Creditors First.

Transfer of Partnership Interests

Default Rule: A partner does have the right to transfer partnership interests to a third party. It's not longer the rule that this dissolves the partnership. Partners may still agree to restrict the transfer to require a majority vote of the partners.

Distributions:

Default Rule: Partners do not have the right to demand a distribution. Can agree in advance according to the partnership agreement.

New Partners

Default Rule: When a new partner is introduced, all partners must consent.

Profits and Loss

Division of profits and losses is generally dictated or determined by the partnership agreement. Division of profits and losses need not be the same. Financial contributions/capital contributions might have no effect on the division of profits and losses according to these terms. When there is no partnership agreement regarding division of profits and losses, profits are divided equally and losses follow profits.

How to withdraw as a limited partner

Give 6 months written notice.

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 preserve partnership business to maximize value as a growing concern.

Who may wind up?

1. Any partner that hasn't been wrongfully dissociated 2. Legal representative of the last surviving partner Any partner, legal rep, or transferee may seek judicial supervision.

Other ways to dissolve that apply to any partnership

1. Any dissolving event in the partnership agreement 2. Any event that makes it unlawful to continue if not fixed within 90 days 3. Judicial determination

Managing/Governing Relationships

1. Every partner has equal rights to the management and conduct of the partnership. This can be changed by agreement. One common division is to reflect the partner's capital contributions rather than have an even share. 2. Ordinary/Extraordinary Business Matter: • Ordinary business requires a vote of a majority of the partners. • Extra ordinary business requires a vote of 100% of the partners. 3. All partners and their agents must be provided with access to records.

Contract Liability

1. Express Authority Might come from the partnership agreement or a statement of authority filed with the state, or it could be an ad hoc vote by the partners at a meeting. 2. Implied Authority Exists based on the partner's reasonable believe that an action is necessary to carry out express authority 3. Apparent Authority The partnership may be bound based on the partner acting in the ordinary course. Like letter head.

Other Types of Partnerships

1. Limited Liability Partnerships (LLPs) 2. Limited Partnerships (LPs)

Consequences of a Partnership

1. Separate Legal Entity established 2. Partnership Liability - all partners are personally liable for partnership obligations 3. No Entity-Level Taxation (unlike with a corporation)

Dissolution of a Partnership at Will

A Partnership at Will is an open-ended partnership with no fixed termination tied to a time or undertaking. Generally, it's dissolved when any partner chooses to dissociate.

Statement of Dissolution

A filing that gives third parties notice that the partnership has been dissolved after 90 days. filing this limits the partners' liability.

Consequences of Dissociation

A former partner has no right to participate in management business, and no longer has duties to the partnership. If the partnership continues, it must buy out the dissociated partner's interest.

Dissociation

A partner ceases to be associated with the partnership. Can be voluntary or involuntary.

Limited Partnerships (LPs)

A partnership formed by two or more persons that has at least one general partner and one limited partner. The limited partners have limited liability, the general partners don't. To form: 1. Filed a certificate of LP with the state. Must contain: - Name of the LP - In-state address - Name of agents for process - Name and addresses for general partners - Statement of the duration of the partnership - must be signed by a general partner. Comes into existence when filed, or the effective date. Substantial compliance is sufficient to create it.

Tort Liability

A partnership is liable in tort for torts that are committed by partners acting within the scope of their partnership.

Persons

A partnership may be formed by an individual or a company. A person is anything that has the legal capacity to contract. Can't be humans who are incapacitated. Can be non-human legal entities

Limited Liability Partnerships (LLPs)

A partnership where a partner's personal liability to the partnership is eliminated. Only responsible for their own personal misconduct. To form: 1. Must have the same vote as any vote to change the partnership agreement. 2. Name must add RLLP/Registered Limited Liability Partnership/LLP/Limited Liability Partnership To terminate: 1. Partners can voluntarily cancel it 2. State can revoke an LLP if you fail to file reports/label things/etc.

General Partners

Admission: Join at the creation of the partnership or with the consent of all of the partners. Rights and Powers: Same as a partner in a partnership has. Liability to Third Parties: Personally Liable for obligations of the partnership. **To protect from liability, many general partners are corporations.

Limited Partners

Admission: Join at the creation of the partnership or with the consent of all of the partners. Voting: Allowed only if so provided under the partnership agreement. No voting rights by default. Right to Access Records Liability to Third Parties: Not generally liable, unless serves as a general partner or participated in the control of the partnership.

Limitations on the duty of loyalty

As a matter of state law, a partnership cannot eliminate the duty of loyalty. It can limit the duty of loyalty by describing it differently, as long as it is not manifestly unreasonable. If you are worried that something may be considered disloyal, there is a safe-harbor option: Do/propose the thing, disclose all material facts, and get the partners to ratify it.

Timing of Duties

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

Fiduciary Duties

Every partner is a fiduciary of the partnership. 1. Duty of Loyalty 2. Duty of Care

EXTERNAL AFFAIRS OF A PARTNERSHIP

Every partner is an agent of the partnership. Partners can enter contracts for which they have authority.

Consequences of Flow of Liability

Main consequence: partners are personally liable for the debts of the partnership. A partner is jointly and severally liable for all partnership obligations. (Though note that often, the partnership creditor must exhaust the partnership's funds before going after the partners' personal assets.) An incoming partner is not personally liable for contract or tortious obligations incurred prior to his becoming a partner, though they will be liable for his capital contribution. An outgoing partner may be personally liable for any partnership obligation that occurred after dissociation, in addition to those that occurred before his dissociation.

Dissolution of a Partnership for a Term or Undertaking

May be dissolved when the term expires or when the parties agree to dissolve it.

How to withdraw as a GP

May voluntarily withdraw. can be removed if dies, goes bankrupt, incompetent, etc. A business-entity partner is terminated.

Intent

No need to have specific intent to form a partnership

Can a partnership prevent a partner from withdrawing?

No, but can restrict it.

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

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 can't unreasonably reduce the duty of care.

Termination of Partnership

Termination of a partnership is a two-step process: 1. Dissolution 2. Winding Up

Partnership Agreement

The Partnership Agreement is the "Law of Partnerships." It's not required there be one, state law will govern. But when there is one, it trumps state law most of the time. Mandatory state laws that can't be trumped: 1. Liability to third parties 2. Can't deny partners access to books and records 3. Fiduciary duties can't be eliminated.

Partnership Defined

The association of 2 or more persons to carry on a for-profit business as co-owners. Must share control.

Voluntary Dissociation

The partner may give notice to the partnership that the partner wants to withdraw.

Involuntary Dissociation

Things that can constitute involuntary dissociation: 1) There may be an event triggered in the partnership agreement 2) They can be expelled pursuant to the partnership agreement. 3) It is unlawful for a partnership to carry on business with that partner. 4) A court order that a partner must be dissociated. 5) A partner goes bankrupt 6) A partner dies 7) A partner has become incapacitated 8) One of the entities of the partnership dissolves.

Dissolution

Triggered by the occurrence of an event. - Not the end; it is the beginning of the end - Can be brought by a partner or by operation of law

Co-Ownership: Presumption

When two or more persons share profits, there is a presumption of a partnership relationship.

What can a LP partner do that doesn't constitute control?

• Be an officer, director, shareholder of the general partner • Advise the GP on partnership affairs • Act as a surety of the partnership • Request to have a meeting • Wind up the LP • Propose or approve of partnership actions