BLAW CH 28: PARTNERSHIPS
General parrnership
(1) an association of two or more people (2) who are co-owners and co-managers of the business and (3) who share in the profits of their ongoing business. General partnerships typically use the designation "GP" at the end of their business name to signify the general partnership as their chosen form of entity. - no formal document or government filing is necessary to form a general partnership
right to co-manage the business
-includes the right to enter into contracts with third parties. - a contract that is outside the ordinary course of business, on the other hand, requires the unanimous consent of all the partners.
right to vote
A disagreement among partners is resolved through a vote. Each partner is entitled to one vote regardless of how much he or she contributed, and the majority generally wins. Situations that require a unanimous vote under the RUPA include the admission of a new partner, acts outside the ordinary course of business, and amending the partnership agreement. In cases where an equal number of partners leads to a standstill related to a substantial matter, the default rules provide that a dissolution of the partnership will occur.
Withdrawal under the RULPA
A general partner may withdraw at any time without causing dissolution of the partnership. The withdrawal does not result in automatic dissolution provided that (1) the partnership still has at least one remaining general partner and (2) all of the partners (both general and limited) agree in writing to continue the partnership. If the partner's withdrawal does not result in dissolution of the partnership, the partnership must pay the departing partner the fair market value of her interest in the limited partnership within a reasonable time after withdrawal -limited partners are subject to restrictions on withdrawal. Absent an agreement in writing to the contrary, the general rule is that limited partners may not withdraw from a partnership before the partnership termination time agreed on by the partners.
Implied partnerships
A partnership in which the partners are silent about their partnership status, yet the law considers them partners by virtue of their actions
Term partnership
A partnership in which the partners set a specific future date or event for when the partnership will be disolved
Express partnership
A partnership in which the principals agree orally or in writing to form an ongoing business relationship. - most partnerships are express partnerships
winding up
After dissolution, the process of paying the debts of the partnership and liquidating and/or distributing the remaining assets.
a partnership is a pass-through entity
An entity such as a partnership that pays no level of corporate tax.
LO 28-8: limited liability partnerships (LLPs)
Articulate the legal protections from personal liability afforded to the principals in an LLP.
partnership agreement
Contract between partners that is meant to supercede the default partnership rules.
LO 28-9
Describe the various methods for partnership dissolution.
personal liability of principals
Each general partner in a limited partnership is personally liable for all of the partnership's debts and liabilities, just as if the general partners were in a general partnership. However, limited partners do not have the same automatic personal liability of a general partner.9 Rather, the limited partner's liability is limited to whatever the partner contributed to the partnership.
limited partnership
Entity that exists by virtue of a state statute that recognizes one or more partners as managing the business while other partners participate only in terms of contributing capital or property.A limited partnership has at least one general partner (managing principal) and at least one limited partner (investing principal). In the absence of an agreement, the Revised Uniform Limited Partnership Act (RULPA) governs a limited partnership.
LO 28-7
Explain the distinguishing attributes of limited partnerships and family limited partnerships.
management and operation of the partnership
General partners manage the business and are permitted to bind the partnership. Limited partners may not participate in daily management of the business, do not have authority to bind the partnership, and remain primarily investors. - Under the RULPA, limited partners may engage in consulting and contribute expertise but may not engage in management activities such as supervision of employees.
LO 28-1
Identify the necessary elements of partnership formation.
right to indemnity
If a partner within the ordinary course of business incurs a payment or liability made on behalf of the partnership, the partnership must reimburse that partner for the expense.
capitalization
LLPs are capitalized in the same way as a partnership: through debt via private or commercial lenders or by a sale of partnership equity for ownership in the LLP itself. The partnership agreement of the LLP often controls the amount and methods of capitalizing the business and the procedures for collecting additional contributions from partners as necessary (a process known as a capital call)
taxation
LLPs are treated as pass-through entities. They are not subject to tax; any income is taxed only when it is distributed to its partners.
formation of llp
Limited liability partnerships are formed when a general partnership files a statement of qualification with the appropriate public official. The conversion of the partnership must be approved by a majority of the ownership.
capitalization
Limited partnerships are generally funded either through debt (e.g., by borrowing money from the principals or a commercial lender) or through a sale of equity (e.g., by selling a percentage of ownership rights in the partnership and any profits of the business). Limited partnerships may not, however, sell ownership rights through the public markets such as the New York Stock Exchange (NYSE). Although not considered publicly traded equity, when limited partnership interests are sold to the public (usually through a broker-dealer with contacts in the investment community), they are subject to strict federal and state securities laws commonly known as blue-sky laws
taxation of partners and partnerships
Limited partnerships are pass-through entities just like general partnerships. The same rules apply for taxation as in a general partnership. That is, profits or losses are reported in the principal's personal tax return, and tax is paid in accordance with each partner's individual tax rate. The general partner is responsible for filing an information return with taxing authorities, but limited partnerships do not pay corporate taxes. As in the case of general partnerships, the information return informs tax authorities of profits or losses of the partnership entity.
LO 28-6 THE PARTNERSHIP AGREEMENT
List several important partnership agreement provisions.
profits and losses
Partners may wish to structure profits and losses to reflect their capital contributions or the level of work that will be required by each person. A partnership agreement gives the partners wide latitude to structure these terms any way they see fit.
LO 28-3:Describe how partnership law governs the internal and external aspects of a partnership.
Partnership and agency law also governs the relationship between the partnership, partners, and outside third parties.The rules that govern relationships with third parties, in contrast to the rules that govern the relationship between partners, cannot be altered by a partnership agreement.
dissociation under the RUPA
The RUPA lists 10 specific events of dissociation, but the majority of dissociations are the result of one of the following 3 events: 1. voluntary separation from the partnership, whereby one partner gives specific notice to withdraw from the partnership; 2. expulsion by the unanimous vote of the other partners; or 3. the partner's inability to carry out her duties to the partnership (as in the case of incapacity or death) or inability to have an economic stake in the business (as in the case of an individual partner filing for bankruptcy protection). can continue; If the remaining principals wish to continue operating the business partnership, they must purchase the partnership interest of the dissociating partner based on a formula contained in the RUPA.
fiduciary duties
The duties of loyalty, care, and good faith imposed on partners to ensure they are acting in the partnership's best interests. -under the RUPA, a partnership agreement may not completely eliminate the fiduciary duties
property provision
Therefore, partners must decide whether the property they owned individually prior to starting the business will become partnership property in the event it is used by the partnership and was not identified as a capital contribution
right to be informed
This involves being able to request and review partnership records of all kinds, including contracts, minutes taken during meetings, and financial information.
salary
This provision in a partnership agreement allows partners to receive a guaranteed salary for the work they will perform on behalf of the partnership.
right to partnership property
Under the RUPA, partners do not have rights to specific partnership property.Instead, partners have an interest in the general partnership's profits. Partners have equal rights to use any partnership property to conduct partnership business. Partnership property is any property that is: -held in the name of the partnership - acquired in the name of a partner with their title listed as "partner" - purchased with partnership funds -used for partnership business
management rights
Unless the agreement specifies otherwise, all partners have equal management rights and may sign contracts on behalf of the partnership that are within the ordinary course of the partnership's business. This can be dangerous if partners who lack the requisite skill make bad business decisions that are binding on the other partners. This can also lead to a frustrating situation if one partner enters into a binding agreement without consulting the other partners.
Joint-and-several liability
When general partners' personal assets are at risk both together (jointly) and separately (severally) for all debts and liabilities of the partnership, regardless of the source of the debt or liability. - general partnerships face this for contract and tort-related obligations
family limited partnerships
a limited partnership that is used for estate planning for families of considerable wealth.
UPA
a partnership is not an entity that is separated from its partners
liability
all partners have liability protection for debts and liabilities of the partnership, some states impose conditions on these limits. In cases where a partner has engaged in some misconduct or tortious conduct (such as negligence), the LLP acts to shield only the personal assets of other partners—never the partner who committed the misconduct or negligence.
buy-sell agreement
allows the remaining partners to purchase the partnership interest of a withdrawing partner. This provision helps ensure the continuity of the partnership business and can avoid legal disputes if a valuation methodology is provided.
Right to share profits and losses equally
each partner is entitled to receive an equal share of the partnership's profits regardless of the partner's degree of involvement in the success of the business.
duty of care
exercise due care in handling the affairs of the partnership and treat business affairs with diligence. - "refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law."
formation
he general partner files a certificate of limited partnership with the state government authority8 (usually the secretary of state's office). Generally, the certificate is fairly straightforward and requires routine information such as the name, address, and capital contribution of each partner - not required, but most fill one out
RUPA
if there is no written agreement between partners - a partnership is an entity distinct from its partners - fiduciary duties that partners owe to each other & to partnership included
capital contributions
lists how much value each partner has contributed to their individual capital accounts.This amount represents the initial equity investment into the partnership made by each partner. By law this amount must be returned to each partner when the partnership assets are liquidated. Services or knowledge that will be offered to the partnership cannot be recognized as a capital contribution.
duty of loyalty
loyalty standard prohibits a general partner from engaging in competition with the interests of the partnership and also prohibits other conflicts of interest such as using partnership property for personal gain.A partner likewise violates his duty of loyalty if he personally takes advantage of a business opportunity that would have benefited the partnership.
Partnership at will
partners agree to continue their association indefinitely.
duty of good faith
requires that partners exercise appropriate discretion in dealing with other partners and third parties concerning the partnership's business.
