Sole Proprietorship, Partnerships
Limited Partnership - Limited Partner Participates in Control
If a limited partner participates in control of the business, he is only liable to people who conduct business with the LP who think he's a GP Limited partner doesn't "conduct business" solely by doing one of the following: - being an agent, contractor, or employee of the LP - Being a general partner, officer, director, SH of a corp that is a GP of the LP - consulting/advising a general partner - acting as surety, guarantor or endorser for the LP or providing collateral
Limited Partnerships - Amending Certificate of LP
Can be amended by filing amendment with SoS Must be amended within 60 days of: - admission of new GP - withdrawal of a GP - discovery by GP of any false or inaccurate statement in the certificate
Limited Partnerships - Formation
Can't accidentally make an LP. Requires: - a partnership agreement, and - filing a certificate of limited partnership with the SoS the LP is formed at time of filing
General Partnership - Dissolution
Caused by any partner leaving the partnership. Partnership does not terminate. Continues until winding up is complete. Caused by: - Termination of a fixed term or specified event in partnership agreement - express will of any partner - agreement of all partners - expulsion of any partner - death of any partner - bankruptcy of partnership or any partner Adding a new partner does not result in dissolution
General Partnership - Winding Up
Completing obligations, collecting outstanding debts, reducing partnership assets to cash, paying partnership liabilities, then distributing any surplus to partners All partners who didn't wrongfully dissolve have right to wind up Business can continue without winding up: - if partnership agreement allows it - by payment of wrongfully dissolving partner's interest minus damages (allowed even if partnership agreement requires termination after dissolution) - by paying expelled partner's interest
Limited Partnerships - General
Consists of limited and general partners, but must have at least one general partner General partners manage business Limited partners: - Can be divided in classes or groups - Can't manage unless they are also general partners - Partnership agreement controls rights to distribution of profits and losses - Can contribute cash, property or services
General Partnership - Effect of Dissolution on Authority
Dissolution terminates partners' actual authority, except for the purpose of winding up If dissolution is caused by act, death or bankruptcy, and a partner is acting for the partnership without knowing it dissolved, each other partner is liable to him for his share of any liabilities he creates As general agents, partners may have apparent authority after dissolution if notice not given to TPs
Limited Partnerships - Liability of Partners
General Partners: same personal liability as a regular partnership Limited Partners: No personal liability for liabilities of partnership or for acts of other partners.
General Partnership - Binding Authority
Written partnership agreement controls. If no agreement or agreement doesn't address an issue, UPA defaults apply
General Partnership - Elements
(1) an association (2) of 2 or more persons (3) to carry on as co-owners (4) a business (5) for profit Existence of a partnership is a question of fact: may be found if parties conduct and circumstances indicate a community of interest in both property and profits of a common venture/business
General Partnership - Important Differences between Personal and Partnership Property
- Creditors of individual partners can't attach partnership property to satisfy judgments - Partners have a right to have partnership property applied first to payment of partnership debts - Partner can only possess partnership property for partnership purposes and can't assign it without assigning the other partners' rights in the property - Upon insolvency, partnership creditors have priority over partnership property, and creditors of individual partners have priority of individual property
General Partnership - Property Rights of Partners
- rights in specific partnership property - interest in the partnership itself, and - right to participate in management Right to repayment of contributions is NOT a property right or interest in the partnership! It is a liability - debt owed to the partner As tenants in partnership, each partner has equal right to use partnership property for partnership purposes, but can't use it for other purposes without unanimous consent
Limited Partnership - Assignment
A partner's interest is personal property and assignable unless agreement says otherwise - Partner who assigns his entire interest is no longer a partner - assignee is entitled to share in profits and losses, and receive distributions - assignee of a general or limited partner's interest can become a limited partner if all partners consent in writing (or however partnership agmt provides)
General Partnership - Authority of Partners
Acts by any partner bind the partnership unless partner doesn't have authority to act and TP knows of his lack of authority Any partner has authority to sell or purchase partnership property IF done in the partnership's usual course of business
General Partnership - Notice of Dissolution
Actual notice of dissolution must be given to people who are aware of and/or extended credit to the partnership, by posting notice in newspaper in each place where business was carried on No notice required if partnership dissolves b/c of illegality or bankrupt partner
General Partnership - Distribution
After winding up, liabilities paid in the following order: (1) creditors other than partners (2) liabilities owed to partners other than for capital/profits (loans, reimbursement of expenses, indemnification) (3) return capital to partners (but they must contribute toward any loss first) (4) any surplus is given to partners as profits If partnership is insolvent, no surplus and each partner is personally liable for partnership liabilities in proportion to share of profits
General Partnership - Partnership Property
All property originally brought into the partnership stock or later acquired by purchase or otherwise, on account of the partnership. Property acquired with partnership funds Partnership property is held by the partners as tenants in partnership Factors if unclear whether personal or partnership property: (1) whether property was purchased with partnership funds (2) whether property was used in partnership business (3) whether title is in partnership's name (4) whether property is on partnership's books and records as partnership property (5) whether repairs are made with partnership funds (6) whether taxes, insurance, mortgages are paid with partnership funds When a partner holds funds/property of partnership, he holds it as trustee. Accountable to other partners for any loss.
General Partnership - Effect of Dissolution on Existing Liabilities
Does not affect existing liabilities of the partners unless: - agreement to discharge liability reached between leaving partner, creditors, and continuing partners, or - a person agrees to assume existing obligations of a dissolved partnership - discharges liability of all dissolved partners if creditor knows of agreement and consents to alternation in the nature/time of payment A new partner's liability for obligations before he joined is limited to partnership property unless he agrees to assume it personally Individual property of a deceased/retired partner is subject to obligations incurred while he was a partner, but subject to individual creditors for payment of his separate debts
Limited Partnerships - Required Records
Each LP must keep record of: - list of full name, address of each partner and designate whether general or limited - copy of certificate of LP, any amendments, and any PoAs - all tax returns for past 3 yrs - copy of partnership agreement, amendments, any financial statements of past 3 yrs - If not in the partnership agreement: - each partner's cash/property/service contributions, - times or events when additional contributions will be made - right of a partner to receive, or a general partner to make, distributions, and - any event upon which LP is to dissolve and wind up
General Partnership - Management & Decisions
Each partner has equal rights in management unless agreement provides otherwise All ordinary matters must be decided by majority vote Any act in contravention with the partnership agreement requires unanimous consent Partnership books/records must be kept at principal place of business and every partner has right to copy and inspect them
General Partnership - Court Ordered Dissolution
If a partner applies for it, court will decree dissolution whenever: - a partner is declared insane - a partner becomes incapable of performing his part of the partnership agreement - a partner has been guilty of conduct that prejudicially affects the business - a partner willfully or persistently breached the partnership agreement or conducts himself in a way that it is not reasonably practical to continue in partnership with him - Business can only carry on at a loss, or - other circumstances render dissolution equitable
General Partnership - Partnership by Estoppel
If a person represents himself or consents to another representing him as a partner in an existing/apparent partnership, and a TP extends credit to the partnership, such person is estopped from denying partnership If it was an existing partnership, the partners that consented to the representation will also be liable If all existing partners consented, it become a partnership obligation
Limited Partnership - Erroneous Contribution
If someone makes a contribution to the partnership and believes he's becoming a limited partner, but he actually becomes a general partner He will not be bound by partnership obligations if within 60 days of learning of the mistake he: (1) causes an appropriate certificate or amendment to be filed, or (2) takes necessary actions to withdraw from the partnership He will still be liable to any TP who, before the corrective action: - believed in good faith that person was a GP - acted in reasonable reliance on that belief, and - extended credit to the partnership in reasonable reliance of that person's credit
Limited Partnerships - Liability of a Limited Partner to Third Parties
Limited Partner not liable for obligations of the LP unless: (1) he is also a general partner, or (2) he participates in control of the business, or (3) he knowingly lets his name be used in the LP's name, if creditors don't know he's not a GP
Limited Partnerships - Limited Partner's Rights and Obligations
May be given power to vote separately, with all, or specific group of other LPs May contribute cash, property, or services to LP Right to inspect/copy partnership records, and obtain info on financial condition of LP or tax returns Profits and losses allocated in manner provided in partnership agreement, or default is value of contribution made If partnership agreement doesn't provide otherwise, limited partner may only withdraw after giving 6 months written notice to each general partner
Limited Partnerships - Certificate of Limited Partnership
Must be signed by all general partners Must include: - name of the LP (can't include a LP unless also a GP or old business name) - name and address of agent for service of process - name and business address of general partners only - latest date LP can be dissolved - any other matters
General Partnership - Formation
No filing required - Parties may be totally unaware that they've created a partnership No formal K, but statute of frauds required a writing if there is specific agreement to continue more than 1 year
General Partnership - Accounting before Dissolution
No partner is entitled to an accounting before dissolution unless either: (1) he has been wrongfully excluded from the partnership; or (2) the rights exist under the terms of an agreement; or (3) he is entitled to accounting from a partner b/c such partner breached his fiduciary duty; or (4) other circumstances render it just and reasonable
General Partnership - Tax Treatment
Not treated as a separate tax entity. Partnership only files an information return indicating profits received by partners Profits are taxed as individual income of partners, and losses are treated as individual losses of partners
Sole Proprietorship
One person owns and operates the business Personal liability for all debts. No buffer between the individual and the general public If owner sells the business, must sell each asset individually Ends if owner dies. Assets and obligations go to his estate
General Partnership - Association
Parties may only enter into a partnership freely and consensually. No one can be a partner without consent from all other partners No one can be forced to continue in partnership against his will. Partner may dissolve the partnership at anytime even if it violates the partnership agreement
General Partnership - Assignment
Partner may not assign his interest in specific partnership property expect in connection with all other partners' rights in it Partner may assign his interest in the partnership. Assignee entitled to profits, but does not become partner and does not get management rights Assignor-partner remains liable for losses to extent of his contribution
General Partnership - Duties Between Partners
Partners owe each other fiduciary duty of utmost good faith and loyalty No secret profits from transactions within scope of partnership. No competition. Can't act adversely to interests of partnership No partner has right to compensation besides his share of profits unless agreement provides otherwise Partners must indemnify each other for any reasonably incurred expenses in ordinary course of business
General Partnership - Husband & Wife
To have a partnership, must be something more than usual marital functions. Co-tenancy and sharing profits/losses is not enough
General Partnership - Liability of Partners
Tort by any partner: All partners jointly and severally liable Debts/Obligations of partnership: partners are jointly, but NOT severally, liable. Creditors must sue all partners or the partnership name. Release of one partner releases all of them When a partner is compelled to satisfy a partnership debt out of his personal assets, he is entitled to contribution from his copartners
General Partnership - Acts Requiring Unanimity
Unanimous consent of partners required to: - Make an assignment of partnership property for benefit of creditors - Dispose of the good will of the partnership - Do any act that would make it impossible to carry on business - Confess a judgment, or - Submit a partnership claim or liability to arbitration
General Partnership - UPA Profit-sharing as Prima Facie Evidence
Under UPA, receiving a share of profits is prima facie evidence that someone is a partner unless it is: (1) Repayment for debt (2) Wages of an employee: (4) Rent (5) Annuity to window or legal rep of deceased partner, or (6) Interest on a loan
General Partnership - Profits and Losses
Unless otherwise agreed to in the partnership agreement, partners share equally in profits and losses IN does not require equal share of losses
General Partnership - Dissolution in Contravention of Agreement
When partner leaves under circumstances where partnership agreement does not permit dissolution innocent partners may continue partnership if: - they pay dissolving partner his interest minus damages from breach, agree to assume all partnership liabilities and obtain a release/novation from creditors, or - post bond with ct for dissolving partner's intrest minus damages, and indemnify him against partnership liabilities
General Partnership - Expulsion
When the partnership agreement provides for expulsion, remaining partners may continue the business after paying the expelled partner the value of his interest (but have to pay off existing debts first or get release from creditors) Must protect the expelled partner against any personal liability for existing obligations If impractical to get a release/novation from all creditors, ct may allow partners to continue partnership by posting a surety bond to protect the expelled partner