Partnerships and LLCs...

Formation of a General Partnership

>A partnership is formed as soon as two or more persons associate to carry on as co-owners of a business for profit, regardless of whether the parties subjectively intend to form a partnership. >The court will look to the intent, not the subjective intent, but whether the parties intended to carry on as co-owners of a business for profit There are no state filing or other formalities required Even if the two of them signed papers saying that they are not a partnership the answer is the same. Subjective intent is irrelevant. Only question is whether their association meets the definition You do not need a writing to have a partnership

Judicial dissolution of the LLC

A member may also apply for a judicial dissolution of the LLC. A court may grant an application for judicial dissolution if: 1. The conduct of all or substantially all the Elsies activities is unlawful; 2. It is not reasonably practicable to carry on the companies activities in conformity with a certificate of organization in the operating agreement; or 3. The managers or those members in control of the LLC (A) have acted, or acting, or will act in a manner that is illegal or fraudulent, or (B) have acted or are acting in a manner that is oppressive and wise, is, or will be directly harmful to the member applying for a dissolution.

Co ownership of real estate and partnerships

Coownership of real property does not by itself establish a partnership, even if the co-owners share profits made by the use of the property

LLC: formation:

Must file a certificate of organization with the department of state. The information required in the certificate is minimal it includes 1. The name of the LLC; and 2. The address of the LLC is registered office Name: the name must contain the words company, Limited, or limited liability company, or an abbreviation of those terms such as LLC, Ltd., or Co.

Dissolution: right to wind up

Partners who have not wrongfully dissociated May participate in the winding up of the partnerships business

Limited partnership agreement

The real detail on the operation and governance of a limited partnership is typically found in a partnership agreement. As in a general partnership, the agreement can displace most of the statutory provisions. 1. If a provision of the partnership agreement conflicts with the provision of the certificate of limited partnership, the certificate prevails.

Dissociation, the term dissociation

The term dissociation simply refers to a withdrawal. When a partner disassociate from a partnership, the partner with drawls or bows out of the partnership

Limited partnership: Dissociation

A limited partner does not have the right to dissociate from the LP. Meaning a limited partners dissociation is considered wrongful unless otherwise agreed.

What happens to the apparent authority of someone who dissociated?

A dissociated partner may have apparent authority to bind the partnership until two years after dissociation ( assuming dissolution hasn't occurred) . But the partnership Can protect itself by notifying creditors directly of the disassociation (Becomes effective immediately) or my filing a public certificate of the association (becomes effective 90 days after filing).

Dissolution

Dissolution and winding up are required only in limited circumstances (e.g., event in agreement requiring winding up, business becomes illegal, issuance of judicial decree, unanimous consent of the partners in a term partnership, expiration of a term partnership) The following circumstances are of the particular important importance: look at other slide

Liability of dissociated partner

Generally A dissociated Partner remains liable for pre-dissociation Partnership obligations (but remember the partnership indemnifies) He may also be liable for post dissociation partnership liabilities incurred less than two years after the dissociation (Assuming that dissolution has not occurred). But he can protect himself by notifying creditors directly over disassociation (effective immediately) or by filing A public certificate of disassociation (becomes effective 90 days after filing).

Liability of admitted partners

If the partnership admits a new partner, that partner is not personally liable for partnership obligations that arose before his admission. He can only lose the amount of his investment in the partnership

Final point!

LLPs and LLCs are generally the best vehicles for closely held businesses. They protect all of the owners from liability for the obligations of the businesses; they allow the owners to contract around almost all the statutory provisions (so that the business can be run as the owners desire); they allow all the owners to participate in the management of the business; and they provide pass-through income tax treatment

Entity status of a partnership

Once formed, a partnership is considered to be a legal entity distinct from its partners

Limited partnership: fiduciary duties

A general partner owes the LP and other partners the same fiduciary duties of loyalty and care that general partners oh and a general partnership. A limited partner does not have any fiduciary duty to the LP or to any other partner Sully by reason of being a limited partner (e.g., they are permitted to compete with the LP unless otherwise agreed).

Property issues: the partners ownership interest in the partnership:

A party ownership interest in a partnership is called his partnership interest (just like a shareholders ownership interest in a corporation is called stock). The partnership interest is the personal property of the partner. Although it is personal property, there are restrictions on what a partner can do with it.

Management and operation of an LLC:

Management of the LLC is presumed to be by all of the members. Other management arrangements can be made (e.g., management by outside managers), but they must be specified in the operating agreement. A majority vote of members (if member managed) or managers (if manager managed) is required to approve ordinary business decisions. For decisions outside the ordinary course of business, including amending the operating agreement or certificate of organization, a unanimous vote of members is usually required. This is true even if the LC is manager-managed.

Liability for LLCs obligations

Members generally are not personally liable for the LLCs obligations. They have limited liability and can only lose the amount of their investments. As always, members are liable for their own torts.

Limited partnerships: Definition

A partnership with at least one general partner and at least one limited partner. Because it is a partnership, general partnership principles typically apply unless displaced by limited partnership specific provisions. The major differences in the limited partnership rules are discussed below

Partnership By estopple

If no partnership was formed in fact, parties may still be liable as if they were partners to protect third parties who reasonably relied on the holding out of a partnership. The person who does the holding out as liable too Reliance is on a creditor by creditor basis.

Duty of loyalty

This duty requires each partner (A) to account to the partnership for any benefit drive by the partner in conducting the partnership business, using the partnerships property, or appropriating a partnership opportunity; (B) to refrain from dealing with the partnership in The conduct of its business as (or on behalf of) party having an interest adverse to the partnership; and (C) To refrain from competing with the partnership in the conduct of its business

Transfer ability of ownership interest in an LLC

Essentially the partnership rule applies here... Financial rights are unilaterally transferable, but management rights or not. One can become a member (i.e., management rights can be transferred) only with the consent of all of the members.

Dissolution: priority of distribution

(A) first, the partnership must pay all creditors. Creditors include outside creditors, (e.g., Trey creditors, lenders, suppliers) and inside creditors (e.g., partners who loaned money). (B) Second, the partnership must repay all capital contributions paid into the partnership by partners. (C) third, profits or losses, if any.

Limited liability partnership's: Definition

AnLLP is typically a general partnership were all of the partners have limited liability for the obligations of the business. It is rare, but a limited partnership can also register as an LLP, both the general partners and the limited partners have limited liability for obligations of the business. In general, you apply general partnership rules to LLPs, and limited partnership rules to LLLPs.

Dissociation in an LLC

Generally, the events that will cause Dissociation of a partner in a partnership will also cause Dissociation of a member of an LLC. Note that if a member with drawls by express will at any time before the LLC is wound up, it is considered a wrongful Dissociation. Unless otherwise agreed

Buy out and continuation of the business

If a partners disassociation does not result in a dissolution and winding up, the partner is entitled to receive a buyout of his partnership interest and indemnification against a partnership liabilities (meaning, if the dissociated partner is held liable for a partnership obligation, the partnership has to compensate him for his losses unless the liability is based on some thing he did). The remaining partners may continue the business. If the dissociation is wrong for, any damages will be offset against the buyout price

LLC and taxation

Partnerships are taxed on a pass-through basis, and LLCs can choose to be taxed on a pass-through basis as well. There is no entity level tax; instead, business income is passed through to the owners and report it on the owners individual tax returns (regardless of whether that business income is actually distributed to the owners). By contrast a corporation is subject to double taxation the corporation pays taxes on its income. Then, if the corporation distributes any of the income that is left after the payment of taxes (normally done in the form of a dividend), shareholders pay tax on the dividends, resulting in double taxation. In today's tax climate, pass-through treatment usually results in less taxes paid.

Liability to third parties for partnership: liability in contract

Liability and contract: with respect to the partnerships ability in contract , A partnership is liable for contracts entered into on his behalf by partners with actual or a parent authority Actual authority: actual authority can be created by the partnership agreement or by the requisite vote of the partners. Majority vote for ordinary business matters Actual authority can also be granted or restrict it by the partnerships filing of a certificate of partnership authority with the department of state. The effect of a certificate of partnership authority difference based on whether the transaction involves the transfer of real property of the partnership

Limited partnerships: formation

Must file a certificate of limited partnership with the department of state. The information required on the certificate as minimal it includes, among other items: (A) the name of the limited partnership; (B) the name and address of the limited partnerships office; and (c) The name and address of each general partner. If you fail to file you are just a general partnership. 1. Name: in Pennsylvania, The name of the limited partnership is not required to contain the phrase limited partnership or any other indication that it is a limited partnership. However if the limited partnership is an LLP, it must meet the LLP naming requirements.

Management an operation of a general partnership

(A) voting: unless otherwise agreed, all partners have equal rights in the management of the business and equal votes. Decisions regarding matters within the ordinary course of the partnership business require a majority vote of the partners. Matters outside of the ordinary course of business require the consent of all partners (B) no right to salary or other compensation: unless otherwise agreed, partners get no compensation (with the exception of a right to reasonable compensation for services rendered and winding up the partner ship business).

Duty of disclosure

(A) without demand, the partnership must furnish any information concerning the partnerships business and affairs reason will be required for the proper exercise of the partners rights and duties; & (B) on reasonable notice, each partner has a right to inspect and copy any records concerning the partnerships business and affairs (but the partnership may impose reasonable restrictions on the disclosure).

Limited liability company's (LLC): DefinitionDefinitley

A hybrid between corporation and a partnership in which the owners (called members) have a limited liability as well as the benefits of a partnership tax treatment. This is not a corporation, nor is it a partnership. It is its own business form. An LLC is treated as a separate legal entity distinct from its members. Note that unlike other entities covered in this lecture, an LLC can be formed with a single member. A Pennsylvania LLC may be formed for any lawful purpose, For profit or not-for-profit, other than acting as an insurer

Management an operation of a limited partnership

-Do you want me to partnership is managed by the general partners. Each general partner has equal rights in the management and conduct of the limited partnerships activities. Limited partners usually have no management rights unless the partnership agreement grant them rights. - The vote of a majority of the general partners is necessary for matters relating to the activities in affairs of the limited partnership - that said, unless otherwise agreed, the vote of all partners general and limited, is necessary for certain extra ordinary activities, including (1) an amendment of the partnership agreement, or (two) the admission of a new general or limited partner - The sale of all or substantially all the limited partnerships property (if such sale is outside the ordinary course of the limited partnerships activities) requires The approval of (one) all general partners, and (two) limited partners on in the rights to receive a majority of the distributions as limited partners.

Partnership interest

1. A partnership interest is comprised of (A) management rates (I.e. The partners right to participate in the management of the business, to obtain information about the partnership, and to be recognized as a partner); and (B) financial rights (I.E., the partners right to receive his share of any profit distributions made by the partnership). 2. Unless otherwise agreed, a partner cannot unilaterally transfer his management rights and thereby make the transfer a partner. The default rule for the admission of a new partner is that it requires a unanimous vote of the existing partners 3. Unless otherwise agreed, a partner can unilaterally transfer his financial rights. The transferee merely has a right to receive Profit distributions from the partnership that would have otherwise gone to the partner. The transferee is not a partner; the transferor is still a partner and maintains all the management rights of a partner

Limited partnership: liability

1. General partners: general partners are liable for the obligations of the limited partnership, just as they are in a general partnership. 2. Limited partners: a limited partner is not personally liable for an obligation of the LP (limited partnership) solely by reason of being a limited partner. Limited partners have a limited liability, meaning that they can only lose the value of their investments. Note: a limited partner, as well as a general partner, is always liable for her own torts. The limited liability shield of any business organization does not protect the person from liability for her own torts

The following circumstances are of particular importance in dissolution

1. In and Atwill partnership, when a partnership received notice of a partners express wheel to withdraw, the partnership is dissolved and it's business must be wound up. In other words, a partner in an Atwill partnership can compel dissolution by expressly withdrawing from the partnership. On the other hand, if a partner in an at will partnership dies, becomes bankrupt, etc., that does not automatically trigger a dissolution 2. In a term partnership, if one partner disassociate wrongfully (e.g., withdraws before the end of the term, is expelled, or becomes bankrupt) , Or if a dissociation occurs because of a partner's death, the partnership is dissolved and must be wound up only if, within 90 days after this dissociation , At least 1/2 of the remaining partners agree to wind up the partnership. 3. Any partnership is dissolved after the passage of 90 consecutive days during which the partnership does not have at least two partners.

Property issues: rules for determining partnership property

1. It is partnership property if it is acquired in the partnerships name, or in a partner's name where it is aparent from the document that she is acting for a partnership (e.g., it mentions a Partnership or says she has a partner). 2. It is presumed to be partnership property if partnership funds are used 3. It is presume to be a partners property if acquired in her name without Partnership funds and there is no sign that she is acting for a partnership

Property issues: rights and partnership property

1. The partnership: rights are totally unrestricted (the partnership owns the property!) 2. A partner: a partner is not a co-owner of partnership property and has no interest in partnership property that can be transferred. (The partnership is an entity; the partnership itself, not the partners, owns the property!) A partner can simply use partnership property for partnership purposes

Limited liability partnership's (LLP): Liability:

A partner in an LLP is not personally liable (directly, indirectly, or by way of contribution) for the obligations of the LLP, whether arising in tort, contract, or otherwise. As always, however, a partner remains personally liable for her on one for acts.

Apparent authority

A partner is an agent of the partnership, and that's a partner has an apparent authority to buy the partnership to transactions within the ordinary course of the partnerships business (unless the third party is aware that the partner lacks actual authority).

Wrongful Dissociation

A partner will be deemed to have wrongfully Dissocated if the deer is in breach of an express term in the partnership agreement. A D is also wrong for in a term partnership if the partner withdraws, is expelled by judicial order, or becomes bankrupt before the end of the term. A partner who wrongfully D is is liable to the partnership for any damages caused by the D. (A) An Atwill Partnership is one where the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking. It is the default form a partnership. (B) A term partnership is the converse, it is a partnership where the partners have a greed, explicitly or implicitly, to remain partners for a definite term or until the completion of a particular undertaking

Dissolution in an LLC

An LLC will be dissolved when any of the following events occur: 1. An event or circumstance that the operating agreement states causes dissolution; 2. The consent of all the members; 3. The passage of 180 consecutive days during which the LLC has no members.

Factors

An important factor in the partnership inquiry is the person's right to participate in the control of the business (even if control is never actually exercise). To state that partners are co-owners of a business is to state that they each have the power to control a business. For the bar exam the most important factor in deciding whether an association rises to the level of a partnership is the sharing of profits. A person who gets profits is presumed partner unless the profits were received in payment: (1) of a debt; (2) as wages or other compensation; (3) as rent; (4) of an annuity or other retirement or health benefit to a deceased or retired partner or their beneficiary or representative; (5) as interest on a loan; or(6) for the sale of the Goodwill of a business. The sharing of gross revenues does not, by itself, establish a partnership or give rise to a presumption of a partnership.

Effective certificate and transactions involving the transfer of real property:

Certificate may grant or restrict the partners authority to transfer a real property of the partnership. Both grants and restrictions on authority are conclusive, but only if the certificate is also recorded in the county where the property is located. Meaning, the certificate must be double filed to be effective. First in this state and then in the county where the property is located

Liability of the partners:

Defining characteristic of the general partnership is that each partner is jointly and severally liable for all the obligations of the partnership (weather arising in tour or contract). But: the plaintiff must first exhaust partnership resources before seeking to collect from an individual partners assets (so the partners are essentially guarantors). Where one partner pays a partnership obligation, she is entitled to indemnification from the partnership. She may also require the other partners to contribute their pro Rata shares of the payment if the partnership is unable to idemnifu.

Effect of certificate in transactions Not involving the transfer of real property:

Grants of partner authority in the certificate are binding on the partnership (unless the third-party has actual knowledge that the partner locked authority. In other words, the grant is conclusive in favor of a third-party who enters into the transaction without knowledge that the partner lacked authority. On the other hand, restrictions on partner authority in the certificate are not binding on third parties. In other words third parties are only deemed to have constructive knowledge of a file the grants of authority, not filed restrictions

Limited liability partnership's (LLP): Formation

Must file a statement of registration with the department of state (alternatively, in the case of an LLLP, the required information can be included in the certificate of limited partnership). The required information includes: 1. The name and address of the partnership; 2. A statement that the partnership Elects to be an LLP; and 3.A statement that the registration has been authorized by at least the majority in interest of the partners. The partnership becomes an LLP at the time of filing. (There is no LLP unless this statement is filed.)

Name in the statement of registration for the LLP

Name: the name of a limited liability partnership must contain the term company, limited, or limited liability partnership, or an abbreviation of one of those terms. (Ltd, LLP). Note that the termination of a statement of registration (thus removing the partnerships LLP status) generally requires the approval of all partners.

Partnership agreements

No agreement is required to form a partnership. Nevertheless, you should be on the lookout for the existence of a partnership agreement because partnership law allows the partners to contract around most of the statutory provisions. Look for an agreement first and then fall back on statutory default rules in the absence of the agreement An agreement may be written, oral, or implied by conduct

Limiting liability to third parties in a partnership

Partners cannot limit a third-party's rights without the third parties consent. The agreement is effective, however, among the partners themselves.

Fiduciary duties in general

Partners in general partnerships of fiduciary duties of loyalty and care to each other and to the partnership. They also are statutory duty of disclosure.

Dissolution:Apparent authority during wind up

Partners retain a parent authority to bind the partnership to a third-party on new business even after an event requiring wind up. But the partnership can protect itself by notifying creditors directly of the dissolution, effective immediately,. In addition, any partner who has not wrongfully dissociated may file a public certificate of dissolution (Becomes effective 90 days after filing).

Duty of care

That's what he requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. A partnership agreement cannot completely illuminate the duties of loyalty and care. However, they can alter these duties if not manifestly unreasonable, And can spell out what constitutes a violation and what does not.

LLC fiduciary duties

The fiduciary duties owed by a member to the LLC and to its members are the fiduciary duties of care and loyalty 1. Duty of care: members must refrain from engaging in gross negligence, recklessness, willful misconduct, or knowing violation of the law. 2. Duty of loyalty: pursuant to the duty of loyalty a member must: (A) account to and hold for the LLC any benefit she derives from the LLCs activities or from the appropriation of an LLC opportunity; (B) refrain from dealing with the LLC as, or on behalf of, a person who has an adverse interest to the LLC, unless the transaction is fair to the LLC; and (c) refrain from competing with the LLC's business

LLC operating agreement:

The real detail on the operation and governance of an LLC is typically found in an operating agreement. The operating agreement can displace most of the statutory provisions.

Events of Dissociation

The statute specifies various events of the dissociation , Including, I'm on others: 1. A partner giving notice to the partnership of his desire to withdraw (D by express will) 2. A partner is expulsion, death, or bankruptcy; 3. An agreed-upon event; and 4. The appointment of a guardian for a partner

Financial rights in limited partnerships

Unless otherwise agreed, distributions from the limited partnership are made on the basis of the partners contributions (i.e., in proportion to the value of each partner's contribution). Note: this is different from the default rule for General partnerships, where distributions are made an equal shares. General partner to consent to an improper distribution (basically, I distribution that would make the LP install them) or personally liable to the LP for the amount that exceeds what could have been properly distributed.

LLC financial rights

Unless otherwise agreed, profits and losses are allocated and equal shares 1. Liability for improper distributions: members (or managers if manager managed) who consent to an improper distribution (basically, a distribution that would make the LLC insolvent) are personally liable to the LLC for the amount that exceeds what could have been properly distributed.

Financial rights and obligations of a partnership: sharing profits and losses

Unless otherwise agreed, profits are shared equally among the partners. Unless otherwise agreed, losses are shared in the same manner as profit. If they agree by agreement to split the profit 60% 30% and 20% then the losses will follow the same percentages and not an equal percentage because they follow the profits If the agreement divides losses by a certain percentage but it's silent on profits then profits are shared equally

Consequences or Dissociation

When a partner D from a partnership, one of two statutory avenues is implicated: (A) The first Avenue provides that the partnership is dissolved and that its business must be round up. This means that the partnership business will be liquidated i.e. sold off (B) The second Avenue provides that the partnership continues in existence with the dissociated partner becoming entitled to a buyout of his partnership interest The nature of the event of the dissociation dictates which avenue is implicated.

Dissolution:

When dissolution of winding up occur, partnership assets must be applied to the discharge of Partnership liabilities. If the assets are insufficient, individual partners are required to contribute in accordance with their loss shares. If there are excess assets, they are distributable to the partners in cash in accordance with their profit share

Financial rights and obligations of a partnership: liability to third parties.... Liability and tort

With respect to the partnerships liability in tort, a partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting in the ordinary course of business of a partnership or with the authority of the partnership.