Partnerships (GP, LLP, LP, LLC, etc)

What is a limited partnership composed of? What is the liability of the limited partner? Can this liability change?

A limited partnership is composed of at least one general partner and at least one limited partner. Generally, a limited partner is not liable beyond her contribution for obligations of the limited partnership. Therefore, in an action by or against the limited partnership, only the general partners are necessary parties. However, there are two exceptions that cause a limited partner to be liable as a general partner (i.e., personally liable for partnership obligations). First, a limited partner is liable to any creditor of the limited partnership if the limited partner also is a general partner. Second, a limited partner is liable as a general partner if she participates in the control of the business and the person dealing with the limited partnership reasonably believes, based on the limited partner's conduct, that the limited partner is a general partner.

When will a partnership be bound by the acts of another partner?

A partnership will be bound by an act of a partner if the partner has actual authority. One way that actual authority can be granted is in the partnership agreement. If the agreement authorizes a partner to act, no further action is required for a partner to act. For matters within the ordinary course of business, actual authority may also be granted by the approval of a majority-in-interest of the partners. For acts outside the ordinary course of business, the unanimous vote of the partners is required. A partner does not have actual authority to act on behalf of the partnership simply by virtue of being a partner (although a partner may have apparent authority to carry on business within the scope of partnership business by virtue of being a partner).

A person who erroneously believes herself to be a limited partner can avoid being held liable as a general partner if, on ascertaining the mistake, she files a certificate of formation or amendment with the secretary of state, or ____________________:

A person who makes a contribution to a business enterprise and erroneously but in good faith believes that she thereby became a limited partner, rather than a general partner, can avoid being held liable as a general partner if, on ascertaining the mistake, she either: (i) files an appropriate certificate of formation or certificate of amendment with the secretary of state, or (ii) withdraws from future equity participation in the enterprise and files a certificate to that effect with the secretary of state. Requesting that the original contribution be returned would not be effective. Additionally, neither withdrawal alone nor sending a written explanation of the mistake, signed by the person and also by the general partners of the partnership, to the third party with whom she dealt, will prevent the person from being held liable as a general partner.

Generally, what are a partners liability in a general partnership?

All partners are jointly and severally liable for all obligations of the partnership, whether they arise in contract or tort. As such, an action may be brought against any one or more of the partners or the partnership. Furthermore, each partner is personally and individually liable for the entire amount of all partnership obligations. However, an incoming partner is not personally liable for any partnership obligation incurred before her admission to the partnership, although the incoming partner's contributions to the partnership may be used to satisfy existing partnership obligations. An outgoing partner remains liable on all obligations incurred by the partnership while a member of the partnership, unless she has been discharged from liability by the partnership creditor. Generally, even if a partner has withdrawn, she remains liable until she also has given notice of her withdrawal.

What is necessary to form a limited Liability Company (LLC)?

An LLC is formed by filing a certificate of formation with the secretary of state. The LLC can be formed with at least one member (i.e., owner) and may, but need not, adopt a company agreement to control most aspects of the LLC's business and management. Although professionals, such as lawyers, may form a professional limited liability company to render a professional service, it is not necessary that an LLC render a professional service.

When is an affirmative vote of a majority of all the members of an LLC is required?

An affirmative vote of a majority of all the members of an LLC is required to approve actions that would make it impossible for the company to carry on its ordinary business. Unless the certificate of formation or company agreement provides otherwise, the following actions require the affirmative vote of all the LLC's members: (i) amending the certificate of formation or company agreement; (ii) issuing new membership interests in the LLC; and (iii) changing the structure of the LLC from member-run to manager run, or vice versa-

Which of the following is required to form a partnership?

An intent to run a business as co-owners is required to form a partnership. A partnership is formed as soon as two or more people associate to carry on as co-owners a business for profit. There is no requirement that the parties subjectively intend to form a partnership, only that they intend to run a business as co-owners. No particular formalities are essential to the validity of a contract of partnership. In the absence of a controlling statute, the partnership agreement may be either express or implied. It is normally not necessary for the partnership agreement to be in writing. Furthermore, a certificate of formation is not necessary to form a partnership.

When does a partner have apparent authority?

Apparent authority is authority a third party reasonably believes a partner has based on his being held out by the partnership as a partner. The act of any partner, for apparently carrying on in the ordinary course of the partnership business or business of the kind carried out by the partnership, binds the partnership unless the partner had no authority to act for the partnership in the particular matter, and the person with whom the partner was dealing knew that the partner lacked authority. Authority that a partner reasonably believes he has based on the communications between the partnership and the partner is actual authority.

Unless otherwise provided in the company agreement, what is the liability of a member or manager of an LLC?

In Texas, except as otherwise provided in the company agreement, a member or manager of an LLC is not liable for the debts, obligations, or liabilities of an LLC, including a judgment decree or order of a court. There are exceptions to this rule. A member who receives a distribution that he knew caused the liabilities of the LLC to exceed the fair value of its assets is liable to return the distribution. Additionally, a member is obligated to make contributions of cash or property to the LLC as promised, unless the certificate of formation or company agreement provides to the contrary.

What are the limits of transferability of an LLC interest?

In Texas, except as otherwise provided in the company agreement, a membership interest in an LLC is assignable. A person also may become an assignee of an LLC membership interest through divorce or upon a member's death. However, assignment does not entitle the assignee to become a member of the LLC or to other rights, such as voting rights. Instead, the assignee only can receive distributions from the LLC. However, an assignee may become a full member of the LLC if all members of the LLC consent.

What acts cannot be limited by a company agreement in a LLC (or maybe even other partnerships)?

Liability for the following acts may not be limited by agreement: (i) breach of the duty of loyalty, (ii) receipt of an improper personal benefit, (iii) intentional misconduct or a knowing violation of the law, or (iv) an act for which liability is provided for by statute.

What factors do not indicate the intent to create a partnership?

The following factors do not indicate an intent to create a partnership: (i) receipt of or the right to receive a share of profits as repayment of a debt, wages or compensation to an employee, payment of rent, payment of interest on a loan, payment to a former partner, representative of a deceased or disabled partner or transferee of a partnership interest, or payment of consideration for the sale of a business or other property; (ii) existence of joint or common tenancies of any type; (iii) sharing or possession of a right to share gross receipts; and (iv) ownership of a mineral property under a joint operating agreement.

What are the factors used to determine whether a partnership exists?

To determine whether a partnership exists, courts consider the following factors: (i) receipt of or the right to receive a share of profits; (ii) expression of an intent to be partners; (iii) participation or the right to participate in control of the business; (iv) sharing or agreeing to share losses or liability for claims by third parties against the business; and (v) contributing or agreeing to contribute money or other property to the business.

What is required to form a limited partnership (LP)?

To form a limited partnership, a certificate of formation signed by all the general partners must be filed with the secretary of state. The limited partnership must maintain in its state of organization an office with certain records of the limited partnership. Furthermore, each limited partnership must continuously maintain an agent in the state to receive service of process. A written partnership agreement is not required, but some record must contain information about partners' contributions, the events that will require winding up of the partnership, and the date on which each partner became a partner.

Under the Texas Business Organizations Code ("TBOC"), at what point may a creditor proceed directly against a partner on a partnership obligation?

Under the TBOC, a creditor cannot proceed against a partner on a partnership obligation unless the partnership is bankrupt, the creditor has first obtained a judgment against the partnership that remains unsatisfied for 90 days, or the creditor and the partnership have agreed that obtaining a judgment against the partnership is not required. Because all partners are jointly and severally liable for all obligations of the partnership, an action may be brought against any one or more of the partners or the partnership.

Who is presumed to be the manager of an LLC?

Unlike most states, in Texas, management of an LLC is presumed to be by one or more managers. However, management can be reserved to the LLC's members in the certificate of formation or company agreement. Generally, the certificate of formation or company agreement may limit or eliminate the liability of a manager in a manager-run LLC (or the liability of a member in a member-run LLC) to the LLC or its members, for any act in the manager's capacity as a manager.