Partnerships

Rules for Determining Partnership Property

1) It is partnership property if it is acquired in the partnership's name or in a partner's name where it is apparent from the document that she is acting for a partnership. 2) It is presumed to be a partnership property if partnership funds are used. 3) It is presumed to be a partner's property if acquired in her name without partnership funds and there is no sign that she is acting for a partnership.

Rights in Partnership Property

1) The Partnership: the rights are unrestricted in the partnership's own property. Thus, a partnership creditor may seize partnership assets to satisfy the partnership's debt. 2) A Partner: is not a co-owner of partnership property and has no interest in partnership property which can be transferred. A partner can simply use partnership property for partnership purposes or with consent of the partnership.

Liability of the Partners

A defining characteristic of the general partnership is that each partner is jointly and severally liable for all the obligations of the partners (whether arising in tort or contract). But P must first exhaust partnership resources before seeking to collect from an individual partner's assets. a. Limiting Liability to Third Parties: Partners cannot limit a third party's rights without the third party's consent. The agreement is effective, however, among the partners themselves. b. Liabilities of Admitted Partners: if the partnership admits a new partner (unless otherwise agreed, this requires a unanimous vote), the newly admitted partner is not personally liable for partnership obligations that arose before his admission. He can only lose the amount of his investment in the partnership.

The Partner's Ownership Interest in the Partnership

A partner's ownership interest in a partnership is called his 'partnership interest'. The partnership interest is the personal property of the partner. Although it is personal property, there are restrictions on its alienability. 1) A partnership interest is comprised of: 1) management rights and 2) financial rights. 2) Unless otherwise agreed, a partner cannot unilaterally transfer his management rights and thereby make the transferee a 'partner'. The default rule for admission of a new partner is that it requires a unanimous vote of the existing partners. However, a partner's financial rights are unilaterally transferable (voluntarily or involuntarily). A transfer of financial rights does not make the transferee a partner, the transferee is simply entitled to distributions. 3) Unless otherwise agreed, a partner can unilaterally transfer his financial rights. The transferee merely has the right to receive profit distributions from the partnership that would have otherwise gone to the partner. The transferee is not a partner; the transferor is still a partner and retains all of the management rights of a partner.

Limited Partnerships ("LP")

A) Definition: a partnership with at least one general partner and at least one limited partner. Because it is a partnership, general partnership principles typically apply unless displaced by LP-specific provisions. B) Formation: must file a certificate of limited partnership with the secretary of state. The information required in the certificate is minimal. It includes among other items: (if failing to file it is just a general partnership) 1) The name of the LP; • The name of the LP must contain the phrase "L.P." or "LP." 2) The name and address of the agent for service of process; and 3) The name and address of each general partner. C) Partnership Agreement: the real detail on the operation and governance of a LP is typically found in a partnership agreement. It can be written, oral, or implied. As in a general partnership, the agreement can displace almost all of the statutory provisions. D) Management & Operation: the LP is managed by the general partner(s). Each general partner has equal rights in the management and conduct of the LP's activities. The vote of a majority of the general partners is necessary for ordinary business activities. Limited partners usually have no management rights unless the partnership grants them rights. However, a vote of all partners is required for extraordinary activities- amending the partnership agreement, admitting a new general or limited partner, an the sale of all or substantially all of the LP's property (if such sale is outside the ordinary course of the LP's activities). E) Financial Rights: unless otherwise agreed, distributions from a LP are made on the basis of the partners' contributions (i.e. in proportion to the value of each partner's contributions). F) Liability: • General Partners: general partners are liable for the obligations of the LP, just as in a general partnership. • Limited Partners: a limited partner is not personally liable for an obligation of the LP solely by reason of being a limited partner. Limited partners have limited liability, meaning they can only lose their investment. G) Fiduciary Duties: a general partner owes the LP and the other partners the same fiduciary duties of loyalty and care that general partners owe in a general partnership. A limited partner does not have any fiduciary duty to the LP or to any other partner solely by reason of being a limited partner.

Limited Liability Partnerships ("LLP" or "RLLP")

A) Definition: an LLP is typically a general partnership where all of the partners have limited liability. Generally, partnership rules apply to LLP, with the following exceptions noted below. • Rarely, an LLP can also register as an LLP, creating an LLLP (limited liability limited partnership). In an LLLP the general partners and the limited partners have limited liability for the obligations of the business. The same rules as general partnerships and LLPs apply. B) Formation: must file a "statement of qualification" with the secretary of state. The partnership becomes an LLP at the time of the filing of the statement or on the date specified in the statement. The required minimal information includes: 1) The name and address of the partnership; o The name of a registered LLP or LLLP must end "L.L.P.", "LLP", "R.L.L.P." or "RLLP" 2) A statement that the partnership elects to be an LLP; and 3) A deferred effective date, if any. C) Liability: a partner is an LLP is not personally liable (directly, indirectly, or by way of contribution) for the obligations of the LLP, whether arising in tort, contract, or otherwise. As always, however, a partner remains personally liable for her own wrongful acts.

Limited Liability Companies ("LLC")

A. Definition: a hybrid between a corporation and a partnership in which the owners (called 'members') have limited liability as well as the benefits of partnership tax treatment. This is not a corporation, nor is it a partnership. It is its own business form. An LLC is a separate legal entity distinct from its members. B. Formation: must file articles (or certificate) of registration with the secretary of state. The information required is minimal and includes: 1) The name of the LLC; o The name should contain the words limited liability company or "LLC" or "L.L.C." 2) The address of the LLC"s registered office; and 3) The name and address of its registered agent. C. Operating Agreement: the real detail on the operation and governance of an LLC is typically found in the operating agreement. The operating agreement can displace almost all of the statutory provisions. D. Management and Operation: management of the LLC is presumed to be by all members (member-managed). Other management arrangements can be made, but they must be specified in the operating agreement. • A majority vote of members (or managers if manager-managed) is required to approve ordinary business decisions. • A unanimous vote of members (or managers if manager-managed) is required to approve extraordinary business decisions, including amending the operating agreement. E. Financial Rights: unless otherwise agreed, profits and losses are allocated on the basis of contributions. F. Liability: members are generally not personally liable for the LLC's obligations. They have limited liability and can only lose the amount of their investments. As always, members are liable for their own torts. G. Fiduciary Duties: the fiduciary duties owed by a member (if member-managed) or a manger (if manager-managed) to the LLC AND to its members are the fiduciary duties of care and loyalty. 1) Duty of Care: members (or managers if manager-managed) must act with the care that a person in a like position would exercise under similar circumstances, in a manner reasonably believed in the best interest of the LLC. The Business Judgment Rule protection is provided meaning that members cannot be held liable for negligent decisions (but can be held liable for decisions tainted by gross negligence or worse). 2) Duty of Loyalty: pursuant to the duty of loyalty, a member (or manager if manager-managed) must: i. Account to and hold for the LLC any benefit he derives from the LLC's activities or from the appropriation of an LLC opportunity; ii. Refrain from dealing with the LLC as, or on behalf of, a person who has an adverse interest o the LLC, unless the transaction is fair to the LLC; and iii. Refrain from competing with the LLC's business. iv. However, after disclosure of all material facts, all of the members may authorize or ratify a specific act by a member that would otherwise violate the duty of loyalty. H. Transferability of Ownership Interests: partnership rules apply here. Financial rights are unilaterally transferable, but management rights are not. One can become a member only with the consent of all of the members. I. Dissociation: a person has the power to dissociate as a member of an LLC at any time, rightfully or wrongfully, by expressly withdrawing as a member. Generally, the events that will cause dissociation of a partner in a partnership will also cause dissociation of a member of an LLC. A wrongfully dissociating member may be liable to the LLC for damages. J. Dissolution: • A LLC will be dissolved when any of the following events occur: i. An event or circumstance that the operating agreement states causes dissolution; ii. The consent of all of the members; or iii. The passage of 90 consecutive days during which the LLC has no members. • A member may also apply for a judicial dissolution of the LLC. A court may grant an application for judicial dissolution if: i. The conduct of all or substantially all of the LLC's activities is unlawful; or ii. It is not reasonably practicable to carry on the company's activities in conformity with the certificate of organization and the operating agreement. • A court may also dissolve the LLC if the managers or those members in control of the LLC: i. Have acted, are acting, or will act in a manner that is illegal or fraudulent; or ii. Have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the member applying for dissolution. K. Taxation: partnerships and LLCs are taxed on a "pass-through" basis. There is no entity-level tax; instead, business income is passed-through to the owners and reported on the owners' individual tax returns (regardless of whether that business iincome is actually distributed to the partners). By contrast a corporation is subject to double taxation. The corporation pays taxes on its income, and then shareholders pay taxes on that income again when and if it is distributed to them. Normally, pass through treatment results in less taxes paid.

Formation of a General Partnership

A. Definition: a partnership is formed as soon as two or more persons associate to carry on as co-owners a business for profit, regardless of whether the parties subjectively intend to form a partnership. No state filing or other formalities are required. It is irrelevant whether the parties intended to form a partnership. The inquiry is whether the parties intended to carry on as co-owners a business for profit. B. Factors: • The most important factor in deciding whether an association rises to the level of a partnership is the sharing of profits. A person who receives a share of the profits is presumed to be a partner unless the profits (but not gross receipts) were received in payment: 1) of a debt; 2) as wages or other compensation; 3) as rent; or 4) as interest of a loan. o This presumption can be rebutted with evidence suggesting the lack of a co-ownership, such as no right to control or no sharing of losses. • Another important factor in the presumption inquiry is the person's right in the control of a business (even if control never actually existed). To state that partners are co-owners is to say each has the power to control the business. C. Writing: partnership law does not require a writing, but the statute of frauds may (a term partnership longer than one year). D. Partnership by Estoppel: if no partnership was formed in fact, parties may still be liable as if they were partners to protect reasonable reliance by third parties. E. Partnership Agreement: no agreement is required to form a partnership. However, the partnership agreement allows the partners to contract around almost all of the statutory provisions. A partnership agreement may be written, oral, or implied. If there is no partnership agreement then use default terms. F. Entity Status: once formed, a partnership is considered to be a legal entity distinct from its partners.

Liability of the Partnership

A. Liability in Tort: with respect to the partnership's liability in tort, a partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting in the ordinary course of business of the partnership or with authority of the partnership. B. Liability in Contract: with respect to the partnership's liability in contract, a partnership is liable for contracts entered into on its behalf by partners with actual or apparent authority. 1) Actual Authority: can be created by the partnership agreement or by the requisite vote of the partners. Actual authority can also be created by the partnership's filing of a 'statement of partnership authority' with the Secretary of State. The effect of the statement differs depending upon whether the transaction involves a transfer of real property. a. Grants of and restrictions on partner authority to transfer partnership real property are binding on third parties if the statement is also recorded in the county where the property is located. The third party is deemed to have constructive knowledge of the statement if the secretary of state and county filings are made. Third parties are benefited by filed grants of authority, and burdened by filed restrictions on authority. b. Al other transactions of the partnership other than real property transfers, grants of partnership authority in the statement are binding on the partnership. Restrictions on partner authority in the statement however, are not binding on third parties. Third parties are only deemed to have constructive knowledge of filed grants of authority, but not filed restrictions. 2) Apparent Authority: the partnership statute states that a partner is an agent of the partnership, and that a partner has apparent authority to bind the partnership to transactions within the ordinary course of the partnership's business (unless the third party is aware that the partner lacks actual authority).

Management and Operation of a General Partnership

A. Voting: unless otherwise agreed, all partners have equal rights in the management of the business and equal votes. Decisions regarding matters within the ordinary course of the partnership business require a majority vote of the partners. Matters outside of the ordinary course of business require the consent of all partners. B. No Right to Salary or Other Compensation: unless otherwise agreed, partners get no compensation (with the exception of a right to reasonable compensation for services rendered in winding up the partnership business).

Dissociation

Dissociation means the withdrawal of a partner from the partnership. A) Events of Dissociation: dissociation can occur because of various events, including: 1) A partner giving notice to the partnership of his desire to withdraw (express will); 2) A partner's expulsion, death, or bankruptcy; 3) An agreed upon event; and 4) The appointment of a receiver for a partner. B) Wrongful Dissociation: a partner is deemed to have wrongfully dissociated if the dissociation is in breach of an express term in the partnership agreement. A dissociation is also wrongful in a term partnership (if the partners have agreed explicitly or implicitly to remain partners for a definite term or until the completion of a particular undertaking).if the partnership withdraws, is expelled, or becomes bankrupt before the end of the term (the default partnership is at-will). A partner who wrongfully dissociates is liable to the partner for any damages caused by the dissociation. C) Consequences of Dissociation: when a partner dissociates from a partnership, one of two statutory avenues is implicated. The nature of the event of dissociation dictates which avenue is implicated. 1) The partnership is dissolved and business is wound-up. The partnership is wound-up (liquidated). 2) The partnership continues in existence with the dissociated partner becoming entitled to a buy-out of his partnership interest. D) Dissolution: dissolution and winding up are required only in limited circumstances. Two in particular: a. In an at-will partnership, any partner who dissociates by express will may compel dissolution and winding up. b. In a term partnership, if one partner dissociates wrongfully, or if dissociation occurs because of a partner's death or bankruptcy, dissolution and winding up of the partnership are required only if within 90 days after the dissociation, half of the remaining partners agree to wind up the partnership. E) Buyout and Continuation of the Business: if a partner's dissociation does not result in a dissolution and winding up, the partner is entitled to receive a buyout of his partnership interest. The remaining partners may continue the business. If the dissociation is wrongful, any damages will be offset against the buyout price. F) Liability of Dissociated Partner: generally, a dissociated partner remains liable for pre-dissociation partnership obligations. He may also be liable for post-dissociation partnership liabilities incurred within two years after the dissociation. He can protect himself by notifying creditors directly of his dissociation (effective immediately) or by filing a public statement of dissociation (effective 90 days after filing). Alternatively, the partnership may file. G) Apparent Authority of Dissociated Partner: a dissociated partner has apparent authority to bind the partnership for a period of time not exceeding two years after the dissociation. The partnership can protect itself by notifying creditors of the dissociation (effective immediately) or by filing a public statement of dissociation (effective 90 days after filing).

Concepts in Partnership Law

I. Formation of a General Partnership II. Management and Operation of a General Partnership III. Financial Rights and Obligations a. Sharing Profits and Losses b. Liability to Third Parties i. Liability of the Partnership ii. Liability of the Partners IV. Fiduciary Duties V. Property Issues a. Rules for Determining Partnership Property b. Rights in Partnership Property c. The Partner's Ownership Interest in the Partnership VI. Dissociation and Dissolution of a Partnership a. Dissociation b. Dissolution c. Concluding Hypotheticals

Concepts of Other Unincorporated Business Forms

I. Limited Partnerships ("LP") II. Limited Liability Partnerships ("LLP" or "RLLP") III. Limited Liability Companies ("LLC")

Fiduciary Duties

Partners in general partnerships owe fiduciary duties of loyalty and care to each other and to the partnership. They also owe a statutory duty of disclosure. The partnership agreement may not eliminate the duties of loyalty or care. But, the duty of disclosure may be eliminated. A) Duty of Loyalty: this duty requires each partner to: 1) To account to the partnership for any benefit derived by the partner in conducting the partnership business, using the partnership's property, or appropriating a partnership opportunity; 2) To refrain from dealing with the partnership in the conduct of its business as (or on behalf of) a party having an interest adverse to the partnership; and 3) To refrain from competing with the partnership in the conduct of its business. B) Duty of Care: this duty requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. C) Duty of Disclosure: this is a statutory duty rather than a fiduciary one (though some judicial opinions treat it as fiduciary in nature). The partnership statute states that each partner and the partnership shall furnish to a partner: 1) Without demand, any information concerning the partnership's business and affairs reasonably required for the proper exercise of the partner's rights and duties; and 2) On demand, any other information concerning the partnership's business and affairs (except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances).

Dissolution

When dissolution and winding up occur, partnership assets must be applied to the discharge of partnership liabilities. If the assets are insufficient, individual partners are required to contribute in accordance with their loss shares. If there are excess assets, they are distributable to the partners in cash in accordance with their profit shares. 1) Priority of distribution: each level of priority must be fully satisfied before beginning the next level: a. First, the partnership must pay all creditors including 'outside creditors' and 'inside creditors' (partners who loaned money to the partnership). b. Second, the partnership must repay all capital contributions paid into the partnership by partners. c. Third, profits or losses, if any. 2) Right to Wind Up: partners who have not wrongfully dissociated may participate in the winding up of the partnership's business. 3) Apparent Authority: partners retain apparent authority to bind the partnership to a third party on new business even after an event requiring winding up. But the partnership can protect itself by notifying creditors directly of the dissolution (effective immediately). Additionally, any partner who has not wrongfully dissociated may file a public statement of dissolution (becomes effective 90 days after filing).

Dissociation and Dissolution of a Partnership

a. Dissociation b. Dissolution c. Concluding Hypotheticals

Property Issues

a. Rules for Determining Partnership Property b. Rights in Partnership Property c. The Partner's Ownership Interest in the Partnership

Financial Rights and Obligations

a. Sharing Profits and Losses b. Liability to Third Parties i. Liability of the Partnership ii. Liability of the Partners

Sharing Profits and Losses

• Unless otherwise agreed, profits are shared equally among the partners (by number). • Unless otherwise agreed, losses are shared in the same manner as profits.