Partnerships

Limited Partners

- ADMISSION: Join at the creation of partnership or with consent of all partners unless partnership agreement says otherwise. - VOTING: Only what is allowed under partnership agreement. - LIABILITY TO 3rd PARTIES: A limited partner is generally not personally liable for the obligations of the partnership unless she serves as a general partner or they participate in the control of the partnership. - WHAT LIMITED PARTNERS CAN DO WITHOUT RUNNING THE BUSINESS: 1. Be an officer, a director, or a shareholder of the general partner 2. Consult or advise the general partner on partnership affairs 3. Act as a surety of the partnership 4. Request to attend meetings of the partnership 5. Help windup the partnership 6. Propose of approve of partnership matters - WITHDRAWING: The limited partner must give 6 months written notice unless partnership agreement says something else.

Mandatory State Laws With Respect to Partnerships

1. Cannot deny liability to third party 2. Cannot deny partners access to the books and records 3. Fiduciary duties cannot be eliminated.

Contract Liability

1. Express Authority 2. Implied Authority 3. Apparent Authority

Express Authority

3 Ways: 1. Might come from partnership agreement or 2. A statement of authority filing or 3. It could be an ad hoc vote by the partners at a meeting.

Statement of a Dissolution

A filing that gives 3rd parties notice that the partnership has been dissolved after 90 days. This limits the partners' power and authority.

Dissociation

A partner ceases to be associated with the partnership wither voluntarily or involuntarily. Cannot prevent a partner from wtihdrawing, but can require certain restrictions on withdrawal.

Partnership at Will & Dissolution

A partnership at will is an open-ended partnership with no fixed termination tied to time or undertaking and it is generally dissolved when any partner chooses to dissociate.

Limited Partnerships

A partnership formed by 2 or more persons that has at least 1 general partner and 1 limited partner. The limited partners have limited liability, the general partners do not. To form, you must file a certificate of L.P. with state. It must contain: 1. Name of limited partnership 2. In state address 3. Names and addresses of agents for services of process 4. Names and addresses of general partners 5. Statement of duration of partnership 6. Signed by general partner It comes into existence when filed, or the effective date, if included. NOTE: Substantial compliance is sufficient to be effective (if cert. incomplete for some reason). NOTE: Any type of business that can be a partnership can be a LP.

Limited Liability Partnerships (LLPs)

A partnership in which a partner's personal liability is eliminated. It must be filed with the state. To transform a partnership into an LLP, you must have same vote as any amendment to the partnership agreement. The name of the LLP must always end with either: 1. Registered Limited Liability Partnership (RLLP) or 2. Limited Liability Partnership (LLP)

Consequences of a Partnership

A partnership is a legal entity that is distinct from its partners. A partnership may hold property and can also sue and be sued. All partners are personally liable for partnership obligations. No entity level taxation.

Tort Liability

A partnership is liable in tort for torts that are committed by partners acting within the scope of their partnership.

Involuntary Dissociation

Any of the following constitute involuntary dissociation: 1. There may be an event triggered in the partnership agreement. 2. They can be expelled pursuant to the partnership agreement. 3. It is unlawful for a partnership to carry on business with that partner. 4. A court order (because of some misconduct) that a partner must be dissociated. 5. A partner goes bankrupt 6. A partner dies. 7. A partner has become incapacitated and guardian appointed. 8. One of the entities of the partnership dissolves.

Forming a Partnership

Association of 2 or more person to carry on a for-profit business as co-owners. A partnership may be formed by an individual or a company. You do not need to have specific intent to form a partnership, but must meet the other requirements. Can be done orally or written. Must be dividing control (ask is there a sharing a control?!) and dividing profits. Persons: Anything that has the legal capacity to contract. Persons Excludes: Humans who are incapacitated (minors, drugs, etc.).

General Partners

BECOMING A GENERAL PARTNER: Join at the creation of partnership or be admitted upon consent of all partners in LP. RIGHS AND POWERS: Same as in a partnership without limited partners or as otherwise suggested in the partnership agreement and can share in contributions and distributions, just like LPs/ LIABILITY TO 3rd PARTIES: General partner is personally liable for obligations of the partnership. so, to protect from liability, many general partners are corps (shields people from personal liability). TERMINATION STATUS: At any time, the general partner may withdraw from a LP by giving written notice to the other partners. Also, termination when: 1. Assignment of his partnership interest, unless the partnership agreement provides otherwise 2. Removal as a general partner in accordance with the partnership agreement 3. Financial difficulties, such as bankruptcy and insolvency 4. Death or adjudicated incompetency of a natural person or 5. Termination of a partner as a business entity.

Priority of Distributions With Dissoltion

Creditors first before partners.

Transfer of Partnership Interests

Default Rule: A partner does have the right to transfer partnership interest o a 3rd party. But, partners may still agree to restrict transfer to require a majority rule of the partners.

Managing/Governing Relationships

Default Rule: Every partner has equal rights to management of the partnership and the conduct of the partnership. But, can be changed by agreement with a common division being to reflect the partners' capital contributions, rather than an even share.

New Partner

Default Rule: When a new partner is introduced, all existing partners must consent. But, partnership agreement can change this.

Dissolution

Dissolution is triggered by the occurrence of an event, but it is not the end of the partnership; it is the beginning of the end. It can be brought by a partner or by operation of law.

Profits and Losses

Division of profits and losses is generally dictated or determined by the partnership agreement. Division of profits and losses need not be the same. Financial contributions/capital contributions may have no effect on the division of profits. When there is no partnership agreement regarding the division of profits and losses or the agreement is silent, each partner is entitled to an equal share of the partnership profits and losses. When the agreement addresses only the division of partnership profits, partnership losses are shared in the same manner.

Timing of Duties of Care and Loyalty

Duties of loyalty and care apply only to partners, not to former partners or prospective partners.

Dissolution of Any Partnership

Either type of partnership may also be dissolved in 1 of 3 ways: 1. Any dissolving event set forth in the partnership agreement 2. Any event that makes it unlawful to continue if not cured in 90 days 3. Judicial determination that the economic purpose of the partnership is being frustrated

Fiduciary Duties

Every partner is a fiduciary of the partnership, so every partner owes 2 duties: 1. Duty of loyalty 2. Duty of care

External Affairs of a Partnership

Every partner is an agent of the partnership, so kicks in all the agency principals. Partners can enter into contracts for which they have authority and they are bound by them.

Implied Authority

Exists based on the partner's reasonable belief that an action is necessary to carry out express authority.

Consequences of Dissociation

If a partner is dissociated, that partner does not dissolve partnership. Once dissociated, a former partner has no right to participate in management business, and the partner no longer has any duties to partnership. If a partnership continues, it must buy out the dissociated partner's interest.

Partnership Agreement

If there is a partnership agreement, it is the law of the partnership, rather than Revised Uniform Partnership Act of 1997 (RUPA) (in most states). The partnership agreement is the understanding of partners as to what the nature of relationship is. - There need not always be a written partnership agreement and if there is not one, then state law will govern the partnership with default rules. - If there is written partnership agreement, for the most part, it will trump state laws except when the state law is mandatory.

Liabilities of LLP

Limited partners are NOT personally liable for obligations of the LLP whether tort or contract, but limited partners are personally liable for own personal misconduct.

Consequences of Flow of Liability

Main Consequence: Partners are personally liable for debts of partnership. A partner is jointly and severally liable for all partnership obligations -both contractual and tort. NOTE: Often the partnership creditor must exhaust the partnership's funds before going after the partners' personal assets. Incoming partner is NOT personally liable for contract or tortious obligations incurred prior to his becoming a partner. He will be liable for his capital contributions, but not personally liable. An outgoing partner may be personally liable for any partnership obligation that occurred after dissociation, in addition to those that occurred before his dissociation.

Partnership for a Term or Undertaking & Dissolution

May be dissolved when: 1. The term expires or undertaking is complete 2. All partners agree to dissolve or 3. A partner is dissociated due to death, bankruptcy, or other circumstance, and within 90 days of such occurrence, at least 1/2 f the remaining partners agree to dissolve the partnership.

Ordinary and Extraordinary Business Matters

Ordinary business requires a vote of majority of partnership interest. Extraordinary business requires a vote of all partners. NOTE: Cannot change that access to records MUST be provided to the parties and agents.

Distribution of Profits

Parties do NOT have the right to demand a distribution, but partners can agree in advance according to the partnership agreement.

Duty of Loyalty

Partners MUST not: 1. Compete with a partnership business 2. Advance an interest that is adverse to the partnership 3. Usurp a partnership opportunity. LIMITATIONS on Duty of Loyalty: 1. As a matter of state law, a partnership CANNOT eliminate the duty of loyalty. 2. It can limit the duty of loyalty by describing it differently, as long as it is not manifestly unreasonable. SAFE HARBOR OPTION: If partner makes full disclosure of all material facts and a certain % of other partners agree, they can authorize or ratify the transaction.

Duty of Care

Partners MUST not: 1. Engage in grossly negligent or reckless conduct 2. Engage in intentional misconduct 3. Engage in knowing violations of the law. The partnership agreement may not unreasonably reduce the duty of care or eliminate it.

Termination of Partnership

Termination of a partnership is a 2-step process: 1. Dissolution 2. Winding Up

Voluntary Dissociation

The partner may give notice expressly will to withdraw to the partnership that the partner wants to withdraw.

Apparent Authority

The partnership may be bound based on the partner acting in the ordinary course of apparently carrying on either the partnership business or business of a kind carried on by the partnership. REMEMBER: This is between principal and 3rd party.

Power of the Person Winding Up

The person winding up a partnership may dispose of and transfer partnership property, and discharge partnership liabilities. He can also keep/preserve partnership business to maximize value as a growing concern.

Terminating LLP Status

Ways to Terminate: 1. Partners can voluntarily cancel LLP status without dissolving partnership, it just converts back to a general partnership. 2. The state can revoke an LLP status for failure to observe formalities: a. Failure to make annual reports b. Failure to make annual fees or c. Failure to put "LLP" everywhere

Co-Ownership

When 2 or more persons share profits, there is a presumption of a partnership relationship. These are NOT agreements to share profits: 1. Payment of a debt 2. Interest payments 3. Rent 4. Wages 5. Goodwill Not Partnerships: 1. Lenders 2. Employers/employees

Winding Up

Winding up is the process that entails liquidating the assets, paying off creditors, and distributing any remaining funds to the partners. The partnership is not terminated until the partnership is wound up. The people that may wind up are as follows: 1. Any partner that has not been wrongfully disassociated 2. Legal representative of the last surviving partner 3. Any partner, legal representative, or transferee may seek judicial supervision of winding up.

Forming a Corp

You must file with the secretary of state, pay fees, write charter or bylaws, and prepare a large packet of info and take affirmative, concrete steps.