Chapter 37 - Partnerships
Management and Voting Rights
All partners have equal management rights and voting rights. Partnership decisions require a majority vote of the partners, except in some specific cases which requires unanimous consent.
Partnership Books
All partners must have access to partnership books and records. Each partner has the right to receive, and a duty to produce, full and complete information concerning all aspects of partnership business. Each partner (including the personal representative of a deceased partner's estate) has the rights to inspect on demand and to copy all partnership books and records.
Unanimous Consent Decisions
Altering the essential nature of the partnership's business or entering a wholly new business. Admitting new partners or altering the capital structure of the partnership. Assigning partnership property into a trust for the benefit of creditors, disposing of the partnership's goodwill, or undertaking any act that would make conduct of the partnership's business impossible. Confessing judgment against the partnership. Amending the partnership agreement.
Family Limited Liability Partnership (FLLP)
An LLP in which the majority of the partners, all of whom must be natural persons, are persons related by blood or marriage or fiduciaries of persons so related.
Limited Liability Limited Partnership (LLLP)
An LP in which the general and limited partners' liability is limited to the amount each invested in the entity.
Limited Partnership Dissolution
An LP will dissolve for most of the same reasons as a general partnership, but only in the event that a general partner dissociates or withdraws.
Partnership
An association of two or more people to carry on as co-owners of a business for profit in which they, share profits and losses, jointly own the business, and enjoy equal management rights. Requires the intent to associate.
Limited Partnership (LP)
An entity composed of one or more general partners, who manage the business and are personally liable for its debts, and one or more limited partners, who contribute assets but do not participate in management.
Formation of LPs
Forming an LP requires complying with relevant (non-uniform) statutes, preparing a certificate of limited partnership, and filing it with the appropriate authorities.
Joint Liability
If a third party sues an individual partner for, e.g., a partnership debt, the partner sued has the right to insist that her other partners be joined as defendants (and share the burden of any judgment).
Liability for Partnership Obligations
In some states, partners incur only joint liability for partnership debts and other obligations. In other states, partners' liability for partnership debts and other obligations is joint and several.
Partnership Property
Includes all property acquired by the partnership, and in the name of the partnership, provided that the instrument transferring title indicates the partnership's existence or the acquirer's capacity as a partner. Otherwise, the UPA presumes property belongs to an individual partner, even if she uses it for partnership business.
Incoming Partners
Newly-admitted partners are liable for debts and obligations incurred before they joined the partnership only to the extent of their capital contribution.
Partnership Property Interest
No partner has a transferable or assignable interest in partnership property, nor can a partner sell, assign, or in any way deal with any item of partnership property except for the purposes of the partnership
Pass-Through Entity
Not a taxpaying entity. The entity's income is passed through to the owners of the entity, who pay income taxes on it., however, it may be treated as a separate entity for other purposes, such as bringing and defending lawsuits, bankruptcy, and owning property.
Distribution of Partnership Assets
Pay third party debts and refund loans or advances made by partners to or for the partnership; then return each partner's capital contribution and distribution of profits to the partners, in proportion to their pre-termination share of profits, unless otherwise agreed.
Partnership Duration
The partnership agreement may specify the duration of the partnership in terms of a date or the completion of some undertaking.
Partnership Compensation
Unless otherwise agreed, partners do not receive a salary for any work they do for the partnership's benefit; rather, they are paid a share of the partnership's profits, plus a return of their initially-invested capital when the partnership terminates.
Goodwill
Valuable reputation of a business viewed as an intangible asset.
Dissociation
When a partner ceases to be associated in the carrying on of the partnership business via (1) notifying her partners that she wishes to withdraw, (2) an event specified in the partnership agreement, (3) unanimous vote of the other partners under one or more of the circumstances set forth in UPA § 601, (4) by judicial (or arbitral) order, or (5) due to death, incapacity, bankruptcy, or assigning her partnership interest for the benefit of creditors.
Creditor's Claims During Wind Up
When a partnership terminates, creditors of the partnership, as well as creditors of individual partners, may make claims on the partnership's assets.
Partnership by Estoppel
Whenever a third party has reasonably and detrimentally relied on the representation, by a partner, that a non-partner was part of the partnership, the non-partner is deemed to be the partnership's agent and the partnership is liable for his acts.
Assignment of Partnership Interest
A partner may assign his interest in the partnership, entitling the assignee to receive the partner's share of profits and, upon termination, the partner's capital contribution.
Accounting
A partner may demand a formal accounting of the partnership's assets and liabilities to determine the value of her partnership interest.
Duty of Loyalty
A partner must account to the partnership for "any property, profit, or benefit" she derived in the conduct of partnership business or from use of partnership property, and refrain from competing with, or dealing as an adverse party to, the partnership.
Duty of Care
A partner must refrain from "grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law."
Effects of Dissociation
A partner who ceases to be associated with a partnership forfeits her authority to act for the partnership and to participate in partnership management; no longer owes the partnership a duty of loyalty; owes the partnership an ongoing duty of care only with respect to events that occurred prior to the dissociation (unless the dissociated partner participates in winding up the partnership's business); and is normally entitled to have the partnership purchase her interest at a buyout price based on what the partner would have received had the partnership wound up on the date the partner dissociated, less any amount the dissociated partner owes the partnership as of the date of dissociation.
Wrongful Dissociation
A partner's dissociation may expose the dissociating partner to liability to the partnership and individual partners damaged by her dissociation if: (1) the dissociation constitutes a breach of the partnership agreement; (2) the dissociation is premature; or (3) the partner is expelled by a court or arbitrator or declares bankruptcy.
Lien on Partnership Interest
A partner's interest may also be subject to a creditor's lien. If so, the creditor may obtain a charging order which will entitle the judgment creditor to the same rights as an assignee.
Partnership at Will
A partnership agreement silent as to duration implies a partnership at will. Any partner may dissolve the partnership at any time without incurring liability.
Articles of Partnership
A partnership agreement that sets forth the rights and obligations of each partner with respect to the partnership.
Partnership for a Term
A partnership whose term is so limited in the articles of partnership. Any dissolution of the partnership prior to the term, without the consent of all of the partners, will leave the partner or partners responsible for the dissolution personally liable for any resulting losses.
Joint and Several Liability
A third party may sue one or more individual partners, without suing all of the partners, and hold any partners sued fully liable for any judgment.
Partner's Authority
Agency and Implied Powers. Each partner is an agent of the partnership and, with respect to any act or omission within the partnership agreement's scope, of each other partner. Therefore, agency concepts of actual authority, apparent authority, and ratification apply to a partner's acts and omissions. Any act within the scope of a partner's actual or apparent authority binds the partnership unless the person with whom the partner deals knows that the partner lacks authority. A partner may expose the partnership to tort liability. Any act outside the scope of a partner's authority binds the partnership only if the other partners ratify the act. In most partnerships, any partner may exercise all implied powers reasonably necessary and customary to carry on the partnership's business.
Liability for Partners' Personal Obligations
As a general rule, a partner is not liable for her partner's personal debts.
General Partner
Assumes management responsibility for the partnership and has responsibility for it and all its debts
Charging Order
Attaches the partner's interest in the partnership to satisfy the partner's obligation
Partner's Authority During Wind Up
Complete transactions begun, but not completed, as of the date of dissolution, and wind up the partnership's affairs (i.e., collect and preserve partnership assets, pay partnership debts, and account to each partner for the value of his interest in the partnership).
Limited Partners
Contributes cash or other property and owns interest in the firm but is not involved in management or personally liable for debts.
Limited Liability Partnerships (LLPs)
Designed for professionals who historically have done business as partners (e.g., accountants, attorneys), prefer partnership tax treatment, but who want to limit their liability for their partners' (but not the entity's) misdeeds.
Notice Required
Dissolution requires either express (in words) or implied (by actions) notice to each partner. In addition, the partnership must give: (1) actual notice to any third party creditor of the partnership, and (2) actual or constructive notice to any other third party affected by the dissolution (e.g., customers, employees.
Partners Fiduciary Duties
Duty of Care and Duty of Loyalty
Partnership Interest
Each partner is entitled to (or obliged to bear) the share of the partnership's profits earned (and losses incurred) set forth in the partnership agreement, or an equal share if the agreement is silent.
LLP Liability
Each partner is liable only for her own wrongful acts; except that any partner who supervises another partner or a partnership employee who commits a misdeed is personally liable for that misdeed.
Breach of Fiduciary Duties
Each partner must act consistently with good faith and fair dealing. A partner is free to pursue his or her own interests, provided that he or she discloses the interest to the other partners. The partnership agreement may not waive a partner's fiduciary duties; however, the agreement may specify acts or omissions that violate a partner's fiduciary duties.
LLP Formation
Each state has a statute governing forming an LLP and maintaining LLP status.
Limited Partner Liability
Liability is limited to the amount of his capital contribution as long as he does not participate in management. If he does, the partner is subject to the same liability as a general partner.
Uniform Partnership Act
Provides that a corporation may be "person" for purposes of a partnership, although some states' partnership statutes exclude corporations from owning partnership interests.
Limited Partner Rights
Right to inspect the LP's books, to demand other information about the LP's operations, and, upon dissolution, to recoup their capital contribution as provided in the LP agreement
Buy-Sell Agreement
Sometimes called a buy-out agreement, sets forth the terms of the buy-out transaction. If a partner's dissociation does not result in the partnership's dissolution, the remaining partners must buy out the dissociated partner's interest. The UPA has an extensive set of rules that apply if the partners do not have a buyout agreement.
Winding up
The actual process of collecting, liquidating, and distributing the partnership assets.
Liability to Third Parties After Dissociation
The dissociated partner may be cloaked with apparent authority for up to two years after her dissociation, if the partnership fails to notify its creditors, its customers or clients, and the appropriate state office.
Partnership Dissolution
The formal disbanding of a partnership, which can be brought about by: (1) the terms of the partnership agreement, (2) voluntary or involuntary withdrawal, (3) the addition of one or more new partners, (4) death of a partner, (5) bankruptcy of a partner or of the partnership, or (6) judicial decree.
Limited Partnership Duties
The general partner and each limited partner owe one another a fiduciary duty to exercise good faith.
Partnership Liability
The knowledge of one partner regarding partnership affairs is imputed to all other partners.
Indemnification
partner reimburses the company for damage unless tort was committed in ordinary course of business
Information return
pass-through entity's pays no taxes and files info return with IRS
Dissolution
termination of a partnership