Chapter 3 - General Partnerships

who signs on behalf of a partner that is a corporation?

appropriate corporate officer

severally means

individually

unanimity

100% of the specified group (partners or interests)

Uniform partnership laws

1914 Uniform Partnership Act (UPA) 1997 Revised Uniform Partnership Act (RUPA)

super-majority

2/3 of the specified group (partners or interest); normally for extraordinary business decisions, such as borrowing money or selling assets

all partners in a general partners have joint and several liability for

the partnership's debts and obligations; and the wrongdoing of each other

partnership agreement, minimum vote of partners - examples of minimum vote requirements

Amend the partnership agreement add new partner expel existing partner make ordinary business decisions make extraordinary business decisions wind up and dissolve the partnership

In all states in which it operates, a general partnership must comply with all applicable laws regarding:

Assumed name filings business licenses and/or permits Sales taxes, unemployment taxes, state income taxes, franchise taxes federal income taxes, including any applicable requirement to obtain a federal employer ID number (EIN) Workers' compensation insurance

Two ways a partnership can acquire cash, property, or services

Contributions by individual partners Acquisition by partnership itself from sources outside partnership

what do GPs have to file with the IRS

Form 1065 to report income, gains, and losses

Preamble of Partnership Agreement

Location of Agreement Date of Agreement Names and addresses of partners

which state neither adopts the Uniform Partnership Act, nor the Revised Uniform Partnership Act?

Louisiana, due to different legal system (civil law instead of common law)

examples of property rights in a general partnership

Office furniture company cars computers

Three rights relating to the partnership

Property rights Distribution rights *interest in the partnership Governance (management rights)

when dissolution is not triggered under TX RUPA

any other circumstance outside of those that do trigger dissolution under TX RUPA, in which a partner withdraws for any reason

where would you find the basic law, if any, in Texas regarding general partnerships?

Texas Business Organizations Code

examples of unofficial publications of Texas Business Organizations Code

Texas Corporation and Partnership Laws, published by West Publishing O'Connor's (Texas) Business Organizations Code Plus, published by Jones McClure Publishing (includes such annotations as abstracts of cases that interpret or apply the statutory provisions)

examples of TX commercial practice guides

Texas Transaction Guide: Legal Forms, published by LexisNexis Matthew Bender Westlaw Doc & Form Builder ProDoc Texas General Practice Library (also TX Office Practice Library) Google

Sections of partnership agreement

Title Preamble Recitals Formation, purpose, and term provisions Financial provisions Management and control provisions Withdrawal and admission of partners Miscellaneous provisions (if desired) Signature and date

In what Texas code, including the title and chapter numbers, does RUPA appear

Title 4, Chapter 152 of the Texas Business Organizations Code

True or false? A general partnership must apply for an Employer Identification Number (EIN) from the IRS even if the partnership has no employees.

True, because although general partnerships normally do not pay taxes on their income (the partners do instead) a partnership must nevertheless file Form 1065 with the IRS to inform the IRS of the amount of the partnership's income

Title of official publication of the Texas code in which the RUPA appears

Vernon's Texas Codes Annotated, Business Organizations Code and supplemental pamphlet, published by West Publishing

may general partnerships operate under assumed (fictitious or trade) name?

Yes

joint venture

a partnership that...is formed to accomplish a single project for profit, and dissolves when that single project is completed

Purpose of both UPA and RUPA

act as a "safety net" for partnerships if a dispute arises on some issue on which the partners' agreement is silent. UPA or RUPA will govern the issue

general partners' rights

act as general agent of the partnership unless partnership agreement denies a partner this authority and the third party with whom the partner is dealing knows that fact

1914 Uniform Partnership Act (UPA)

adopted and still used by 12 states

1997 Revised Uniform Partnership Act (RUPA)

adopted and still used by 37 states (including Texas) and the District of Columbia

common sources of forms or templates for drafting partnership agreements

agreements prepared by your supervising attorney or firm in the past state-specific commercial practice guides

joint

all together

partnership agreement: finances

amount of partners' respective capital contributions profit/loss allocation any guarantees that a certain partner(s) will receive certain profits and/or will bear no losses (or disproportionately low share of losses) any requirements that losses caused by the reckless conduct or fraud of one partner be borne solely by the at-fault partner Any desired salaries for partners reimbursement of partners for obligations and expenses incurred in the ordinary course of partnership business circumstances, if any, under which a partner is entitled to receive back his or her capital contribution to the business

whereas

archaic legal term meaning "taking into consideration the fact that." In current legal practice, which emphasizes plain language, it is better to omit this word in recitals and just use sample sentences

if a partner withdraws from the partnership in breach of the partnership agreement, he or she may

be liable for damages for the breach, usually called wrongful dissolution (or, in TX, wrongful withdrawal)

management options

by all partners by appointed managing partner by appointed committees

partnership agreement: withdrawal of a partner

circumstances under which a partner may properly withdraw from the partnership entitlement, if any, of withdrawing partner to return of capital contribution circumstances under which withdrawal of partner will or will not require the partnership to dissolve (terminate) and wind up its business

partnership agreement: expulsion of partner

circumstances under which partnership may properly expel a partner from the partnership any entitlement of expelled partner to return of capital contribution

no-oral-modification clause

clause requiring any amendments to the agreement to be in writing and signed by all partners

arbitration clause

clause requiring partnership disputes to be submitted to arbitration

non-compete clause

clause restricting the withdrawing partner from engaging in any activity competitive with the partnership business for some period of time

standard clauses

clause setting forth the location and rights to inspect partnership books and records clause setting forth how notice of meetings will be given

choice-of-law clause

clause stating that the law of a particular state will govern the agreement

partnership that dissolves must wind up its business by

completing its contracts collecting its assets paying its creditors in full then distributing any remaining assets to the partners according to the partnership agreement (or, if no agreement exists, in equal shares)

types of decisions made by majority vote

decisions regarding ordinary partnership business

general partnership profit/loss allocation

default rule under RUPA (or UPA) is they are shared equally; however, agreement can specify that partners share profits/losses in proportion to partners' respective capital contributions (this is more common)

withdrawal provisions

define circumstances when partner may withdraw from partnership without triggering dissolution of partnership specify whether withdrawing partners will be repaid their capital contributions defining permissible grounds, if any, for expelling partners and methods of expulsion specifying the circumstances under which a partner may properly withdraw, else commit wrongful withdrawal

a partner disagreeing with the Statement of Authority may

deny it by filing a Statement of Denial

If, instead of money, a partner contributes property or services, the agreement should

describe the property or services and assign them a monetary value

Under TX RUPA, regarding acts occurring within 1 year after departure, partnership only has liability of the third party...

did not know about the partner's departure; and had done business with partnership within 1 year before partner's departure; and reasonably believed the withdrawn partner was a partner at time of transaction

what constitutes an assumed name for partnerships

does not include all of the partners' last names

advantage of general partnerships' continuity of existence in RUPA states (including Texas)

not every departure of a partner necessitates dissolution (termination) of partnership

what is the presumption regarding property acquired by partnership with respect to partnership funds?

during the partnership's existence, it is presumed that such property is owned by the partnership itself, not the individual partners

partners in a general partnership owe each other and the partnership fiduciaries of

duty of loyalty duty of care duty to discharge partnership obligations and exercise partnership rights in good faith and in manner he or she reasonably believes to be in the best interest of the partnership

meaning of general partners' unlimited joint and several liability

each individual partner is 100% liable to third parties for all partnership obligations. a creditor may elect to either: sue all partners for a wrongful act; or, pick and choose which partner(s) to sue

advantage of general partnerships' formation

easy, inexpensive to form and maintain

effect of non-compete clause

ensures that withdrawing partner will not take customer lists and knowledge acquired from the partnership and use them for his or her benefit to the detriment of the remaining partners

impacts on transferee's transfer of interest int he partnership

entitles transferee to receive distributions to which the transferor would have been entitled, to the extent that interest was transferred; transferee entitled to net amount otherwise distributable to transferor (to the extent that interest was transferred) in the event of a winding up of the partnership; it does not entitle transferee to participate in management or conduct of the business; by itself, it does not cause transferee to have liability as a partner

management of general partnership; default rules under RUPA when agreement is silent

equal rights of management, regardless of initial or later contributions to the partnership. Decision-making is by majority vote re: ordinary partnership business; by unanimous vote otherwise

partnership agreement: winding up of business activities and dissolution (termination)

events requiring dissolution of the business Identity of partner who will liquidate or wind up the business by completing contracts, collecting assets, and paying creditors

general partnerships' governing law - federal law applicability

federal income tax laws anti-discrimination laws OSHA regulations

In Texas, can a partnership be liable for the acts of a dissociated partner?

for the acts of dissociated partner occurring more than 1 year after his or her departure, partnership is not liable to a third party

Unless agreement provides otherwise, what happens to cash, property, or services that partners contribute to the partnership?

it becomes the partnership's property, and the contributing partner cannot retrieve it partners should agree on value of all property and services contributed

does a general partnership name require a legal designation such as inc., co, etc.

not required in TX

Effect of "checking the box" on IRS Form 8832

general partnership elects to be taxed as a corporation instead (double taxation)

governing law of general partnerships

governed by the law of the state in which they are formed

general agent

i.e., to act for/bind partnership and other partners by signing contracts, executing documents, and making purchases in connection with the partnership business

Partnership agreement; issues involved in business management

identity of any managing partner, his or her duties, and limitations on his or her permissible activity designation of any committees of partners for particular purposes and their duties

contribution

if a wealthy partner is sued and pays the entire debt of a general partnership, she may later seek this, partial reimbursement, from the rest of the partners as appropriate

UPA partnership at will (in contrast to RUPA states such as TX)

if any partner withdraws, partnership's existence is terminated unless partnership agreement specifies otherwise

RUPA Admission of Partners Provisions

if partnership agreement is silent on the issue, under TX RUPA all existing partners must unanimously consent to the addition of a new partner new partners should sign the partnership agreement new partners will not have personal liability for obligations arising before their admission to the partnership

potential reasons for wanting to exercise the option to check the box on IRS Form 8832

if the partnership has retained some profits instead of distributing (e.g., to cover operating expenses or for emergencies), the individual partners will not be taxed for those retained profits. Instead, partnership will be taxed on retained profits, and partnership's tax rate may be more favorable than individual partners' tax rates

where may a general partnership usually operate

in a state other than the state in which it was formed, without filing formation documents in the other state

impacts on transferor's transfer of interest int he partnership

it does not constitute transferor's withdrawal as a partner from the partnership; transferor retains all rights and duties as a partner under the partnership agreement, except for the interest transferred

why is a written agreement preferable with respect to general partnership formation

it provides certainty in the event of a dispute among partners

joint ventures are governed by the following partnership principles:

joint venturers owe fiduciary duties to each other. Their agreement can be either written or oral no state formalities are required to form the joint venture joint venturers share in profits and losses according to their agreement (equally, if no agreement on this issue) joint venturers have unlimited joint and several personal liability for the venture's debts and obligations joint venture is treated as a partnership for tax purposes

permissible business activity of general partnership

legal for-profit

2 ways of calculating simple majority

majority of partners (more than 50% of the partners) majority-in-interest of partners (partners who, collectively, are entitled to more than 50% of the partnership profits)

requirements for enforceability of non-compete clause

must be reasonable in length of time, scope, and geographic area

May an individual partner in a general partnership assign or transfer governance rights to someone else?

no

may a creditor of an individual partner (properly) seize property rights to satisfy that partner's personal debt?

no

may a creditor of an individual partner in a general partnership seize governance rights to satisfy that partner's personal debt?

no

may an individual owner (property) assign or transfer property rights to someone else?

no

partnership at will

no limited duration

can general partnerships only be humans?

no, can also be entities

can a general partnership be not for profit?

no, must be for profit

are a partner's withdrawals from partnership funds considered "salaries"?

no, they are advances on later profit distributions

is a general partnership a filing entity or a non-filing entity

non-filing entity; GP comes into existence when 2 or more persons enter into a partnership agreement, in which they agree to do business together as a partnership

general partnership filing or non-filing entity?

non-filing entity; no state approval required for formation

Uniform Law Commission (ULC)

nongovernmental body composed of lawyers chosen by the states to prepare proposed laws, called "Uniform Laws" which the states are encouraged to adopt

simple majority

normally for ordinary business decisions

ways partners in a general partnership (like a sole proprietorship) may attempt to protect themselves against unlimited personal liability

obtaining liability insurance attempting to secure agreements from others that they will not look to a partner's personal assets to satisfy partnership debts applying the marshalling of assets partnership principle choosing to operate the partnership as a limited liability (LLP), thus eliminating the partners' personal liability for any partnership obligations

disadvantage of transferability of interest in a general partnership

partner can assign or transfer to a third party his "interest in partnership", but that third party cannot participate in the management of the partnership unless the other partners consent

instead of triggering a dissolution, what instead happens under RUPA when partner withdraws

partner is bought out, and the partnership, as a separate entity, continues on

who holds distribution rights in a general partnership

partner personally

who holds governance rights in a general partnership

partner personally

accounting in a general partnership

partners are entitled to: be reimbursed for expenses properly incurred on the partnership's behalf beyond the partner's agreed contribution; inspect and copy partnership books/records to determine whether distributions are correct

disadvantages of partnerships' formation

partners are vulnerable to negligence of other partners; partners must share profits among themselves

advantages of general partnerships' formation

partners can rely on each other for advice; partnership can raise capital by requiring additional contributions from the partners or by admitting new members; other partners share burden if partnership sustains losses

general partnerships' management

partners have option of either: share management and rely on each other for expertise and advise, and/or appoint certain partners or committees to manage the business

option of filing Statement of Authority with secretary of state in some states that have adopted RUPA

partners have the option of filing Statement of Authority with secretary of state to provide public notice of which partners have authority to perform certain acts (including real estate)

joint venturers

partners in a joint venture

if a partnership is wound up and its creditors cannot be paid in full with partnership assets

partners must make the appropriate personal contributions to pay these debts

advantage of profits-losses allocation in a general partnership

partners share losses

disadvantage of profits-losses allocation in general partnership

partners share profits

general partnership agreement

partnership agreement required (can be oral, written, or implied)

disadvantage of general partnerships' continuity of existence in UPA states

partnership cannot survive the death or withdrawal of a partner, unless partnership agreement provides otherwise

who holds property rights in a general partnership?

partnership itself

marshalling of assets

partnership principle which requires creditors first to exhaust all partnership assets before going after the personal assets of any partner (RUPA confirms this principle). Note: individual partners can still be sued and found personally liable before the partnership assets have been exhausted, but their personal assets are safe unless and until the partnership assets are exhausted

partnership at will

partnership with no specific term

General partnerships' taxation

pass-through tax status

advantage of general partnerships' federal income taxation

pass-through tax status

types of decisions made by unanimous vote

performing any act that would make carrying on partnership business impossible disposing of business's goodwill submitting a partnership claim to arbitration

recitals

preliminary clauses in agreements, often identifying the intent or purpose of the agreement

winding up

process of completing the affairs of a business

Goal of Uniform Law Commission (ULC)

promote uniformity in state laws on all subjects where uniformity is deemed desirable and practicable

2 impacts of unlimited joint and several liability in general partnership

protects innocent third-party creditors leaves it up to the partners later on to sort out the true allocation of the damages among themselves

general partnerships' governing law - state law applicability

providing default provisions where GP agreement is silent and some mandatory provisions 12 states: based on Uniform Partnership Act 37 states (including TX): Revised Uniform Partnership Act (RUPA) Regulating assumed/trade names, business licenses, sales, unemployment, state income taxes

role of a paralegal with respect to general partnership

research requirements for assumed (trade or fictitious) business names prepare and file the Assumed (or Fictitious) Name Certificate obtain appropriate forms, including those for tax identification numbers and income tax payments Consult with clients to determine appropriate terms for the partnership agreement draft the partnership agreement Work with clients to provide any notices required under partnership agreements (e.g., of meetings, dissociation, and Statements of Authority)

examples of distribution rights in a general partnership

right to profit distributions and obligation to share in losses

interest in the partnership

right to profit distributions and obligation to share in losses

example of governance rights in a general partnership

right to vote on business decisions

partnership agreements normally prescribe minimum voting requirements by 3 main measures

simple majority super-majority unanimity

if some profit will be retained for emergencies, the agreement should

so state

can the partnership be liable for the acts of a disassociated partner

some RUPA states: partnership can file with the secretary of state a Statement of Dissociation, which identifies the dissociating partner and binds third parties to this notice beginning 90 days after filing

issues commonly addressed in the partnership

specific duration or, alternatively, partnership at will Minimum vote of partners required Management of business Withdrawal of a partner expulsion of partner winding up of business activities and dissolution

when is dissolution triggered under TX RUPA law?

term of partnership ends; when an event specified in partnership agreement requiring dissolution or winding up occurs; when a court decrees dissolution; if partnership is for a specific undertaking, and that undertaking is completed (unless agreement says otherwise); when an event occurs making it illegal for all or substantially all partnership business to be continued; when all or substantially all of the partnership property is sold outside of the ordinary course of business (unless agreement says otherwise) in a partnership that does not have a term, a specified undertaking, or obligation under the agreement to wind up upon occurrence of a specified event, when a majority-in-interest of the partners who have not assigned their interests voluntarily agree to wind up; or, when a partner requests dissolution and a majority-in-interest of the partners neither deny the request nor agree to continue the business; in partnership that has either 1. a term or specified undertaking and/or 2. an obligation under the agreement to wind up upon the occurrence of a specified event, when all partners unanimously agree to wind up; therefore, a partner who withdraws from this type of partnership will not cause dissolution

dissolution

termination of a business organization as a legal entity

impacts on partnership itself's transfer of interest int he partnership

the transfer does not cause a winding up of the partnership business

In Texas, if the partnership is liable for acts of dissociated partner within 1 year...

the withdrawn partner is liable to the partnership for any liability the partnership may have here

number of owners required for a general partnership

two

profits in a general partnership

unless otherwise agreed, shared equally (but in reality most partnership agreements provide for profit sharing in that way)

procedure for adding new partners

unless otherwise agreed, unanimous consent is required in TX

compensation in a general partnership

unless partners otherwise agree: no regular, fixed salaries. Instead, profit distributions

RUPA profits and losses allocation of interest in the partnership

unless partnership agreement specifies otherwise, each partner, regardless of capital contribution, has an equal interest in the partnership

disadvantage of personal liability in a general partnership

unlimited joint and several liability for: debts and contractual obligations of the business (both) partners' own wrongdoing also wrongdoing by employees committed in course and scope of employment

what a partnership agreement in Texas (under RUPA) may not do

unreasonably restrict a partner's access to partnership books and records eliminate the duty of loyalty, care, or good faith

advantage of management options in general partnerships

very flexible management

General partnership

voluntary association of 2 or more persons/entities who agree to carry on business together for profit as owners

partnership at will; termination options:

when partners mutually agree to dissolve the partnership; or when partnership's purposes have been accomplished; or upon notice of withdrawal by any partner

may a creditor of an individual partner seize distribution rights to satisfy that partner's personal debt?

yes

may a general partner transfer all or part of his or her interest in the partnership?

yes

may an individual partner assign or transfer distribution rights in a general partnership?

yes