Partnerships

LPs

A limited partnership is formed by two or more persons, and has at least one general partner and at least one limited partner. The limited partners have limited liability, unless they are participating in the control of the partnership, and the general partners do not. o Formation - They must file a certificate of limited partnership with the state that includes the name of the LP, its in-state address, the name of an in-state agent, the name and addresses of the general partners, a statement of duration of the partnership, and it must be signed by a general partner. (substantial compliance is effective, like a de facto corporation.) o Limited Partners Withdrawal of Limited Partner - A limited partner must give six months' written notice before withdrawing, unless the partnership agreement indicates otherwise. Participation in Running the Business - A limited partner is not considered to be running the business for merely being an officer, director, or shareholder of a general partner, for consulting or advising a general partner on partnership affairs, for acting as a surety of the partnership, for requesting to attend meetings of the partnership, for winding up the partnership, or for proposing or approving of partnership matters. o General Partners Becoming a GP - Join at creation or admitted upon consent of all (general?) partners Termination of Status - voluntarily, trying to sell your interest, bankruptcy, death, becoming incompetent, business entity is terminated.

Formation of a Partnership

A partnership exists when two or more persons associate to carry on a for-profit business as co-owners, though no specific intent to form a partnership is necessary. • Capacity - "Persons" means anything with legal capacity to contract, including legal entities. • Presumption - When two or more persons share profits, there is a presumption of a partnership relationship. • Liability - While the partnership is a separate legal entity from its partners and can sue or be sued in its own name, each partner is jointly and severally liable for the partnership's debts, obligations, etc. However, an incoming partner is not personally liable for contract or tortious obligations incurred prior to his becoming a partner. • Taxation - Unlike corporations, partnerships are not taxed at the entity level.

LLPs

An LLP is a partnership in which a partner's personal liability obligations to the partnership are eliminated. o But partners are still liable for their own personal misconduct o Must file with state, and name must end in LLP or RLLP o To transform from GP, require same vote necessary to amend Partnership Agreement o Termination - Partners can voluntarily cancel their LLP status, or the state can revoke an LLP status for failure to observe formalities.

Dissociation

Dissociation occurs when one partner ceases to be associated with the partnership. Once dissociated a former partner has no right to participate in management decisions, and the partner no longer has any duties to the partnership. If the partnership continues, it generally must buy out the dissociated partner's interest. • Voluntary Dissociation - The partnership can't prevent a partner from withdrawing, but can require certain restrictions on withdrawal, such as written notice, a sufficient period to find a replacement, etc. • Involuntary Dissociation - A number of events can constitute an involuntary dissociation of a partner, such as a triggering event noted in the partnership agreement, expulsion pursuant to the requirements in the partnership agreement, if it becomes unlawful for a partnership to carry on business with a partner, a court order that a partner must be dissociated, a partner goes bankrupt, a partner dies, a partner becomes incapacitated and guardian is appointed, or if an entity of the partnership dissolves.

Profits and Losses

Division of profits and losses is generally determined by the partnership agreement. When there is no partnership agreement regarding division of profits or losses, profits are divided equally, and losses follow profits. • Distributions - Partners do not have a right to demand a distribution, but they can agree to a distribution in advance in the partnership agreement. • Transfer of Partnership Interests - Partners now generally have the right to transfer a partnership interest to a third party, but partners may still agree to restrict transferability to require a majority vote of the partners. • New Partners - The default rule is that all partners must consent to the introduction of a new partner.

Fiduciary Duties

Duty of Loyalty - Partners owe a duty of loyalty to the partnership, which generally means partners cannot compete with a partnership business, advance an interest that is adverse to the partnership, or usurp a partnership opportunity. o Limiting the Duty of Loyalty - While a partnership cannot eliminate the duty of loyalty, it can limit the duty of loyalty by describing it differently in the partnership agreement, as long as the description is not manifestly unreasonable. o Safe Harbor - If a partner makes full disclosure of all the material facts of a transaction, and a certain percentage of other partners agree, they can ratify the transaction and the duty of loyalty will have been upheld. Duty of Care - Partners cannot engage in intentional, reckless, or grossly negligent misconduct, or engage in knowing violations of the law. The partnership agreement may not unreasonably reduce the duty of care. Timing: Only current partners owe the duties of loyalty and care to the partnership.

Property

Rule - All property acquired by the partnership is property of P and not individual partners; can be acquired in name of P or in name of indiv. partner and P. Intent of partners controls - property presumed P property if purchased w P assets or P credit used to finance; if unclear, consider totality of circumstances such as use, tax treatment, source of funds, improvements Partners must reimburse P for personal use of P property

Termination

Terminating a partnership is a two-step process. First, an event must occur that triggers dissolution. A partnership at will generally may be dissolved whenever a partner decides to dissociate, and a partnership for a term or undertaking may be dissolved when the term expires or the partners agree. A partnership may also be dissolved by any dissolving event set forth in the partnership agreement, any event that makes it unlawful to continue the partnership if it is not cured within 90 days, or a judicial determination. After the event triggering dissolution occurs, the partnership must be wound up. Any partner that has not been wrongfully dissociated or a legal representative of the last surviving partner may wind up a partnership. The person winding up a partnership may dispose of and transfer partnership property, and can also preserve partnership business to maximize value as a growing concern. A statement of dissolution may be filed that gives third parties notice that the partnership has been dissolved, and will absolve the partners of future liabilities after 90 days.

Management

The default rule is that each partner has equal rights to management of the partnership, but partners often divide management rights in the partnership agreement based upon capital contributions. • Ordinary v. Extraordinary Business - Ordinary business requires a vote of the majority of partnership interests, but extraordinary business requires a vote of all partners.

Partnership Agreement

The partnership agreement will generally govern the rights and obligations of the parties involved, but if there is no applicable partnership agreement, state law will govern the partnership with default rules. • Mandatory State Law Rules - The partnership cannot eliminate liability to third parties, deny a partner's access to the books and records, or eliminate a partner's fiduciary duties. • No written requirement.