Partnership

Indemnification

The partnership must indemnify partners for payment reasonably made and obligations reasonably incurred by a partner in carrying on partnership business.

Partnership capital

The property or money contributed by each partner for the purpose of carrying out the partnership's business.

Default rules when distribution is partially stated in the partnership agreement

-If the partnership agreement states how profit will be distributed but is silent on losses, losses will mirror profits. -If the partnership agreement states how losses will be distributed but is silent on profits, profits will be shared equally.

Default rules about profit and losses when there is no partnership agreement

-If there is no agreement, profits and losses are shared equally by the partners.

Factors that raise a presumption of partnership

-Joint ownership of property -Designation of the relationship as a partnership -Contribution of capital -Extensive activity required for venture -Sharing of gross returns -Sharing profits for business unless the profits were received as payment of a debt, rent, interest or for services -Sharing of losses (The absence of an agreement to share losses is evidence that the parties did not intend to form a partnership)

Vote required to authorize ordinary and extraordinary acts

-Majority required to authorize ordinary business -Unanimous vote required to authorize extraordinary acts

Events that lead to dissolution under UPA

-Notice of partner's express will to withdraw -Happening of an agreed-upon event -Expulsion of partner pursuant to an agreement, unanimous vote if unlawful to continue business with partner, or judicial decree -Partner's bankruptcy, death or incapacity to perform duties -Appointment of a receiver, or -Termination of a business entity that is a partner

When will apparent authority NOT be found?

-Partner had no authority to act for the partnership in the particular matter, AND -The person with whom partner was dealing knew or had received notification that partner lacked authority. Knowledge means subjective knowledge, meaning what the person actually knew. Notification is effective either when it comes to the person's attention or when it is duly delivered.

Distribution of assets

-Partnership assets reduced to cash -Property that partner has loaned returns to partner -Assets distributed to outside creditors, partners (who loaned money), and then partners (profits and surplus). Without agreement otherwise, profits divided equally. Losses are divided proportionally among interest.

Which provisions of RUPA cannot be waived?

-Right of inspection of the books -Duty of loyalty -Due care -Good faith and fair dealing -Power of dissociation -Rights of third parties

Common-Law Criteria for untitled property to be considered partnership property

1) Acquisition of the property was with partnership funds 2) Use of the property by the partnership in conducting the partnership's business 3) Entry of the property in the partnership books as a partnership asset 4) A close relationship between the property and the business operations of the partnership 5) Improvement of the property with partnership funds 6) Maintenance of the property with partnership funds.

Titled property is deemed partnership property under RUPA if:

1) It is titled in the partnership name; or 2) It is titled in the name of one or more partners and the instrument transferring title notes the titleholder's capacity as a partner or the existence of a partnership.

Events causing dissolution under RUPA

1) Notification of any partner of intent to withdraw 2) Expiration of the term of partnership, consent of all partners to dissolve, and at least half of the remaining partners want to dissolve after a partner's death, bankruptcy or wrongful dissocation 3) Event agreed to in partnership 4) Event that makes it unlawful for partnership to continue 5) Issuance of a judicial decree

Dissociation of partnership defined

A change in the relationship of the partners caused by any partner ceasing to be associated with the carrying on of the business. The remaining partners can purchase the interests of the dissociating partner and continue partnership business. The RUPA retains dissolution.

Wrongful dissociation

A partner who dissociates in violation of the partnership agreement or before the expiration of a partnership term or completion of a particular partnership undertaking is liable to the partnership for damages caused by the wrongful dissociation. He is also excluded from winding up activities. A partner who wrongfully dissociates before the expiration of a partnership term or completion of a particular partnership undertaking is not entitled to payment of the buyout price until the term expires or the undertaking is completed, unless he can establish that earlier payment will not cause undue hardship to the partnership business.

Legality of purpose

A partnership formed to achieve an illegal purpose is void, and courts will not compel an accounting or settlement of a void partnership's affairs.

What kind of entity is a partnership?

A partnership is a legal entity. Except with respect to Partner's personal liability for partnership obligations, a partnership is a legal entity distinct from its partners. Title to land may be held in the partnership name. A partnership sue or be sued in the partnership name.

Remuneration

A partnership is not based on salary because it is based on profits. Without an agreement, the default rule applies, which is that partners do not receive a salary for services rendered to the partnership except for reasonable compensation for services rendered in winding up the partnership business. Unless circumstances indicate otherwise, it is implied that each partner will devote his entire time and energy to the partnership business.

Who can sue whom: Third Party v. Partnership

A partnership may be sued in its own name. A judgment against the partnership is not itself a judgment against Partner, personally. To reach partner's personal assets, there must also be a judgment against partner. Actions may be brought against the partnership and partner in the same action.

Statement of partnership authority

A partnership may choose to file a statement of partnership authority with the secretary of state, which can give constructive knowledge of the extent of the partners' authority with regard to the partnership.

Who can sue whom: Partnership v. Third Party

A partnership may sue in its own name

Who can sue whom: Partnership v. Partner

A partnership may sue partner for breach of the partnership agreement or of a duty owed to the partnership

Actual authority of Partner

A partnership will be bound by an act of partner if partner has actual authority, meaning authority partner reasonably believes he has based on the communications between him and the partnership. Such actual authority can come from the partnership agreement or the vote of the partners.

Statement of authority

A statement of authority limits partner's authority to enter into transactions on behalf of the partnership. The statement must be filed with the secretary of state and, for real property transfers, with the county recorder. Grant of authority is conclusive in favor of bona fide purchaser. Limitation of authority gives third parties constructive knowledge of lack of authority regarding the specifically referenced act, but not regarding any other transactions.

What is the remedy for a violation of duty of loyalty?

Action for an accounting--the partnership may recover losses caused by the breach and may also force breaching party to disgorge profits made.

Contractual obligations of the partnership: generally

Agency principles apply. The RUPA generally provides that partners are agents of the partnership for carrying on usual partnership business. The authority of a partner to bind the partnership when dealing with third parties roughly follows agency law.

Who has the right to participate in winding up?

All living partners, except those who wrongfully dissolved the partnership and those who are bankrupt.

Liability of partners

All partners are jointly and severally liable for judgments arising against contractual obligations incurred by one or more partners. When one partner is compelled to pay the whole judgment, he is entitled to indemnification from the partnership. HE can also force the other partners to contribute their pro rata shares of the payment if the partnership if unable to indemnify.

Winding up

An action for accounting. This means the sale of assets, collection of claims, paying creditors, returning capital contributions, and distributing surplus. Partnership ends at the time of winding up, and only then.

Partnership

An association of two or more persons to carry on as co-owners of a business for profit. -Must be at least two persons involved. -A "person" may be an individual, trust, corporation, partnership or other entity.

Liability of incoming partner

An incoming partner is not personally liable for obligations incurred by the partnership before the person became acpartner. However, any capital contributed to the partnership by the incoming partner can be used by the partnership to satisfy the prior debts.

Transfers of partnership property: partnership interest indicated

Any partner may transfer property held in the name of the partnership. If partnership property is held in the name of one or more partners (who are identified as such) but the partnership is not named, transfer by the title-holders in their own names is effective. In either case, if the transferring partner lacked authority, the partnership may recover the property from the initial transferree, but not from a subsequent BFP.

Capacity to form a partnership

Anyone who is capable of entering into a contract may be a partner. A would-be-partner who lacks capacity is liable only to the extent of his capital contribution, but the partnership with such person is not void; it will continue to exist until steps are taken to dissolve it.

When is a partnership formed?

As soon as 2 or more people associate to carry on as co-owners of a business for profit. -There are no formalities to forming a general partnership such as a writing or filing. Per RUPA, the right to profit sharing is the crux of the partnership. A partnership agreement can even be implied from conduct.

Waiver of dissolution

At any time before the winding up of the partnership business is complete, the partners may decide to waive the dissolution and continue the partnership by unanimous vote of the partners who have not wrongfully dissolved.

Liability of partners in partnership

Each partner has unlimited liability, including their personal assets, for all of the debts and liabilities of the partnership.

Defense to duty of care violation

BJR When applied to Partner's conduct, holds that losses resulting to a firm from errors of judgment of one partner not amounting to fraud, bad faith, or reckless disregard of his obligations must be borne by the partnership. There is no BJR exception for personal injuries caused by a partner.

When does the RUPA govern?

Because RUPA provides a default set of rules, partners can either form different rules in their partnership agreement and RUPA will govern the unaddressed issues.

Inspection

Books and info must be kept at the partnership's chief executive office. Partner has the right to inspect and copy partnership books. Upon demand, each partner must render true and full info of all things affecting the partnership.

Dissociated partner's power to bind partnership

Can be bound by an act of a dissociated partner undertaken within two years after dissociation if: -The act would have bound the partnership before dissociation, and -The other party to the transaction reasonably believed the dissociated partner was still a partner and did not have notice of the dissocation.

Management rights of partners

Co-management is the cardinal quality of a partnership, and unless partnership agreement provides otherwise, RUPA provides the following rights: 1) Right to know what is going on in the partnership; 2) Right to be involved in conducting business of the partnership 3) Right to commit the partnership to third parties 4) Right to participate in decision making 5) Right to veto certain decisions.

Dissociated Partner's liability to other parties

Dissociated partner can be liable for 2 years after dissociation if: -When entering the transaction, the other party reasonably believed the dissociated partner was still a partner, and -Did not have notice of partner's dissociation. Partner can cut this short by filing a notice of dissociation with the state.

Titled property is presumed to be separate property under RUPA if:

EVEN IF USED FOR PARTNERSHIP PURPOSES: 1) It is held in the name of one or more partners, and 2) The instrument transferring title does not indicate the person's capacity as a partner or mention the existence of a partnership, and 3) Partnership funds were not used to acquire the property.

Partner's interest in partnership

Each partner has a transferable interest in the partnership, which consists of his share of partnership profits, losses and distributions.

Distributions under RUPA

Each partner is deemed, under RUPA, to have an account that is credited as the case may be, with a net amount equal to Partner's contribution, plus or minus partner's share of any profits or losses, less any partnership liabilities. The account is debited with partner's share of any loss and partnership liabilities, as they occur. For income-tax purposes, partnership are "pass through" entities. The losses serve as deductions on each partner's personal tax return.

Partnership property

Everything the partnership owns, including both capital and property subsequently acquired in partnership transactions.

Duty of loyalty between partners

General partners are fiduciaries to each other. They must: -Account to the partnership for every benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the partnership's work or property -Not deal with the partnership as one with an adverse interest (no self-dealing, no usurping partnership opportunity, no secret profits) -Not COMPETE with partnership.

Partner's power to bind partnership after dissolution

IF partner had apparent authority (other party had no notice of dissolution.)

When distribution is stated in the partnership agreement

If the partnership agreement states how profits and losses will be distributed, they are distributed according to the agreement.

Management mechanics

In the absence of a partnership agreement, there is a default rule that 1 partner = 1 vote, despite their ownership agreements. Decisions involving matters in ordinary course of business require only majority vote. Decisions OUTSIDE ordinary course require unanimous vote.

Partnership interest characteristics

It is: 1) Treated as personal property 2) Assignable without dissolving the partnership -An assigned of partner's interest in the partnership gives the assignee no rights to OPERATION of the partnership, just profits. -Partner may not sell his partner status or management without unanimous consent of all partners. 3) Attachable by creditors.

Titled property is presumed to be partnership property under RUPA if:

It was bought with partnership funds (cash or credit) regardless of in whose name it is held.

"Business of the kind"

Not limited to transactions that are in fact within the ordinary course of business for the partnership, but extends also to transactions that would apparently be for carrying on business of the kind run by the partnership.

Contribution

Partner has a right to contribution from fellow partners where partner has paid more than his share of partnership liability. If partner makes a payment or advance on behalf of the partnership beyond the contribution partner agreed to make, the payment or advance constitutes a loan which must be repaid with interest.

Notice under RUPA

Partner has notice of a fact when he: -Has actual notice -Is notified of a fact (including delivery to place of business held out by partner as place for receiving communications) -Has reason to know of the fact based on surrounding circumstances Partner's notice of a fact relating to the partnership is imputed immediately unless the partner having notice is participating in a fraud against the partnership.

Rights of partners in partnership property

Partner is not a co-owner of partnership property, and thus has no transferable interest in specific property of the partnership. Partner has no right to use partnership property other than for the benefit of the partnership.

Who can sue whom: Partner v. Partnership

Partner may sue the partnership or other partners to enforce a right created by partnership act or agreement, or a right otherwise belonging to partner.

Tort liability of partners

Partners are liable under RUPA for any torts committed by partners or by employee of the partnership in the ordinary course of partnership business or with authority of the partnership. This liability covers fraud, even if none of the members have knowledge of the fraud.

Criminal liability of partners

Partners will not be held criminally liable for the crimes of other partners within the scope of the partnership business, unless the other partners participated in the commission of the crime either as principals or accessories.

Rights of partner who contributes his own real property to the partnership

Per the RUPA, partners can contribute, in addition to capital, real property, to a partnership. Then, it becomes property of the partnership. The contributor's only remaining interest is his share of the profits and surplus as is true when he contributes personal property.

Liability during winding up: new business

Regarding business entered into after dissolution, the partnership and, therefore, its general partners still retain liability even for new business transactions until actual notice of dissolution is given to creditors or until 90 days after filing a statement of dissolution with the state.

Liability of outgoing partner

Remains liable for obligations arising while he was a partner unless there has been: 1) Payment, 2) Release, or 3) Novation. He retains liability on future debts until actual notice of dissociation is given creditors or until 90 days after filing notice of dissociation with the state. An outgoing partner can also be liable for acts done after dissociating.

Duty of care to other partners (cannot be waived in partnership agreement)

Requires partner to refrain from engaging in negligent, reckless or unlawful conduct or intentional misconduct.

Governing law

Revised Uniform Partnership Act (RUPA). 32 states have adopted it, including California.

Liability/Indemnification for torts

Same as contractual liability

Apparent authority

The RUPA provides that the partnership is bound by the act of any partner for apparently carrying on in the ordinary course the partnership business or "business of the kind" carried out by the partnership.

What do courts look at to determine if the parties meant to form a partnership?

The intent of the partnership--whether they intended to carry on a business as co-owners, even if they did not subjectively intend to be partners.

What is the relationship between the partners and the partnership?

The partners (whether general or limited) are AGENTS of the partnership.

Liability during winding up: old business

The partnership and, therefore, its general partners still retain liability on all transactions entered into to wind up old business.

Transfers of partnership property: partnership interest not indicated

The transfer may be made by those in whose names the property is held. If the transferee gives value without notice of lack of authority, he takes free of the partnership interest.

What is includable as partnership property

There is no restriction on what may be partnership property, and sometimes it is not always obvious whether property is partnership property or individual property of partner. The RUPA has several provisions concerning ownership of titled property, both personal and real. For untitled property, common-law principals probably continue to apply.

Dissociation under RUPA

Under RUPA, one partner can dissociate without dissolution. Under UPA, this can only result in dissolution, unless the partnership agreement says otherwise.

Consent required

Unless otherwise agreed, no one can become a partner without the express or implied consent of all partners.

Dissolution

Unlikely dissociation, dissolution requires the partnership business to be owund up.

Consequences of dissociation

Upon dissociation, his right to participate in management ceases. The partnership must buy out his interest at either liquidation or going-concern value. Interest must be paid on the buyout price from the date of dissociation to the date of payment. The partnership must indemnify the dissociating partner against any known pre-dissociation not incurred by his acts.

Liability of person held out as partner

When a person by words or conduct represents himself as a partner or consents to being represented by another person as a partner, he will be liable to third parties who extend credit to the actual or apparent partnership in reliance of this partnership. Mere FAILURE to deny a representation of partnership does not give rise to liability as purported partner.

Liability of person who holds another out as partner

When a person holds another out as partner, he thereby makes that person an agent to bind him to third parties. If there is a partnership, only those partners who know of or consent to this holding out will be bound.

Duty to perform promised services

When partner has impliedly or expressly promised to devote time to the partnership business and fails to do so, he may be charged in an accounting for damages caused to the partnership.