BUSINESS ORGANIZATIONS: PARTNERSHIPS

What factors does TBOC list to determine whether a partnership exists b/w parties?

5 FACTORS: 1) receipt of or the right to receive profits; 2) intent to be partners; 3) participation or right to participate in control of the business; 4) sharing or agreeing to share losses; or 5) contributing or agreeing to contribute capital ($ or property).

What are the main characteristics of a limited liability partnership?

A LLP is exactly like a GP except the partners are NOT vicariously liable for the p'ship's liabilities, contracts, or torts of other partners.

How much control is allowed for a limited partner?

A limited partner may work for the partnership as an employee but cannot run the day-to-day affairs of the p'ship (ie limited partner given lots of slack!).

What is the characterization of a partnership interest (ie partner's econ interest)?

A p'ship interest is like any other financial asset. If acquired during marriage its CP. It can be transferred upon death, or even sold. If acquired by 3rd party p'ship interest is merely an assignment of profits partner would receive.

What are the main characteristics of a limited partnership?

A p'ship with 1 or more general partners (generally liable) & 1 or more limited partners (liability limited to their investment).

What duties does a partner owe to a partnership?

A partner owes strict FIDUCIARY duties to the partnership. A partnership agreement can't eliminate these duties but it can set the applicable standards if not manifestly unreasonable. These fiduciary duties include the duty of care of an ordinary prudent person in similar circumstances, a duty of loyalty, a duty to exercise good faith, & a duty to render full information about the partnership upon a reasonable request.

When does a partnership exist?

A partnership is an association of two or more people to carry on as co-owners a business for profit. A partnership exists whether or not the persons intend to create a partnership & whether the association is called by another name. The TX Biz Organizations Code (TBOC) governs.

Flexible Management

ALL owners may exercise control, unlike LP. Exactly how control allocated is usually determined by agreement among owners.

Limited Liability

ALL owners shielded from vicarious liability, unlike GP or LP. • GP: Joint & Several Liability • LLP: NO liability • LP: Joint & Several liability for GENERAL PARTNERS (unless LLLP), NO liability for LIMITED PARTNERS (unless control) • LLC: NO liability ???34. *********LLP & LLC ARE THE BEST!!********????

How is an LLC formed?

Any natural person must file w/ SoS + fee; include "Ltd Liab Co" or "LLC" in name. PLLC (Professionals): members must be licensed to render professional services in TX or elsewhere.

What rights does a partner have in p'ship property?

EXTREMELY LIMITED RTS! Partner can use p'ship property ONLY for p'ship purposes! Non-transferable! The partnership ALONE owns the property.

Do partners have right to view p'ship books?

Each partner has the right to inspect/copy the p'ship's books.

What events require that a partnership wind up (6 things)?

End of a definite term (ex. 2 yr p'ship); consent (unanimous for definite term p'ship, majority in interest for at will p'ship); an event that makes the business illegal; judicial decree; sale of substantially all assets; at partner's request to wind up. NOTE: may be apparent authority to bind p'ship to an innocent 3rd P on new business even after even requiring wind up!

What is a partner's liability for partnership obligations?

FIRST: Partnership; SECOND: Partners. The partnership itself is primarily liable (it's the p'ships obligation!), but there is joint & several liability for all debts & general obligations. The partnership resources must be exhausted before partners are personally liable.

How is a limited liability partnership formed?

File application w/ SoS + pay fee; maintain registered agent; name must include "Lmtd Liab P'ship" or "LLP;" must purchase insurance to cover p'ship errors/ommissions

What is the order of distribution of partnership assets upon winding up?

First: ALL creditors paid. Second: remaining to partners according to their capital accounts (contribution + profit - loss). If there is not enough money to pay obligations, split on a pro-rata basis. P'ship creditors have priority on p'ship assets, but equal claims on a partner's separate property.

What is the liability of partners in an LP?

General partners are treated just like a normal p'ship (Jnt&Sev). Lmtd partners can only lose their capital contribution. EXCEPTION: where lmtd partner takes part in control!

Conversion/Merger:

If choose the wrong form, you CAN convert to another form or merge into another form by owner approval and making appropriate filings.

What are the main characteristics of a limited liability COMPANY (NOT corporation!)?

It can be structured like a company or a p'ship, but managers run the LLCompany unless otherwise provided in the certificate. Split profits/losses in proportion to capital contributions, unless agrmt. Allows pass-through tax treatment like a p'ship if you check a box. Members get limited liability for all obligations except their own torts. LLC not req'd to buy insurance / segregate funds.

Formula

LP [shields limited partners] + LLP [shields general partners = LLLP ????31. Shields general partner from personal liability just like LLP!!!????

Effect of partner's TORT?

Only issue is whether tort was committed in the ordinary course of the partnership's business. Use regular tort analysis for tort committed by p'ship EE (ie servant, scope of emplymt). BUT NOTE: ALWAYS liable for OWN torts - individual tortfeasor can NEVER escape liability!!!

Conveying real property without authority?

Partnership can get the property back from the initial transferee [who should have check authority], but not from a subsequent BFP [who had no reason to check].

Partnership liability to 3rd parties via CONTRACT?

Partnership is the Principal; partners are agents. ACTUAL auth is created by p'ship agreement, majority vote of partners, or TBOC (which makes every partner an agent for carrying on business in the usual way). APPARENT auth may be created by a partner's title or prior conduct (ie way p'ship has conducted biz in the past or how similar firms conduct their biz). As agents of the p'ship, partners have apparent authority to bind the partnership to any contract w/in the scope of the partnership business. A withdrawn partner may have the apparent authority to bind the partnership for 1 year. The partnership can protect itself by notifying creditors of partner's withdrawal.

What property belongs to the partnership?

Property IS partnership property if acquired in the partnership's name, or in a partner's name where apparent from the document he's acting for the p'ship (ie doc mentions p'ship or says he's a partner). PRESUMED to be partnership property if acquired w/partnership funds. PRESUMED to be partner's individual prop if acquired in his name w/out partnership funds and no sign he's acting for p'ship - even if it is used for p'ship purposes.

When can a creditor recover against a limited partner?

RELIANCE TEST; when the creditor believes LP to be a GP based on LP's conduct or if LP knowingly lets his name be included in the LP's & the creditor didn't know of LP status. If no certificate is filed w/SOS LP is liable as a GP.

Rights and obligations of Lmtd Partners?

Right to vote on extraordinary matters, promise to contribute must be in signed writing, & may withdraw only if the agreement permits. NOTE: General partner's capital contributions are superior on winding up.

How is an LP formed?

The partners must: FILE cert of formation w/ SoS + pay FEE + have a written LP agreement; the name must include "LP" or "Ltd."

What is the effect of a withdrawal of a partner?

The partnership usually buys out the partner for fair value & continues w/out her. Withdrawing partner generally remains liable for obligations arising while he was a partner. Withdrawer remains liable to: 1) EXISTING CREDITORS unless released by the creditor 2) SUBSEQUENT CREDITORS who were unaware of the withdrawal (partner can notify them to protect himself) & 3) OTHER PARTNERS if his withdrawal was wrongful.]

How much are partners entitled to be paid for their service to the partnership?

Unless otherwise agreed, a partner is not paid for his service to the partnership.

What management rights does a partner have?

Unless otherwise agreed, all partners have equal management rights. Majority rules.

How do partnerships share profits & losses?

Unless otherwise agreed, partners split profits equally, not in proportion to capital contributions. Unless otherwise agreed, losses follow profits. A p'ship agreement that absolves one party from any losses is NOT enforceable against a 3rd party w/out their consent.

How are new partners added to a partnership?

Unless otherwise agreed, unanimous consent is required. New partners are NOT personally liable for partnership debts incurred before he became a partner.

Are partners entitled to indemnification for money spent on the partnership?

Yes, they have right to be indemnified by fellow partners for expenses incurred on behalf of p'ship. Partner is entitled to contribution when he has paid more than his fair share of a p'ship liability.

Are agency principals applicable to partnerships?

Yes; a partner's act apparently done in ordinary course of biz BINDS the p'ship unless 3rd P knows the partner lacked authority (& partner doesn't actually have).

Less Taxes to Pay:

income is passed through to owners, unlike a corporation which is subject to double taxation (corp taxed on income, then SHs taxed again on distribution)

Joint Venture:

is treated exactly like p'ship EXCEPT JV requires an agreement on how losses will be shared.