Law and business associations
**Requirements for a general partnership (by UPA)
1. A voluntary association of two or more persons: Includes natural persons, partnerships, corporations 2. Carrying on a business 3. As co-owner: All partners must agree to participation 4. For profit
distribution of assets in order:
1. Creditors (except partners who are creditors) 2. Creditor-partners 3. Capital contributions 4. Profits
partners breach their duty of loyalty if they:
1. Self-deal with the partner-ship without permission 2. Usurp a partnership opportunity 3. Compete with the partner-ship without permission 4. Make secret profits from partnership business 5. Disclose confidential partnership information 6. Misuse partnership property 7. Make other breaches of their fiduciary duty
name of limited partnership- other restrictions:
1. The name cannot be the same as or deceptively similar to the names of other businesses or partnerships. 2. States can designate the words that cannot be used in limited partnership names 3. The name must contain without abbreviation the words limited partnership
ULPA- more info
A 1976 revision of the ULPA Provides a more modern comprehensive law for the formation, operation, and dissolution of limited partnerships. A majority of states have adopted the RULPA
limited partnership
A limited partnership must have at least one general partner and one limited partner. There are no restrictions on the number of general or limited partners allowed. Any person may be a general or limited partner. Corporation may be sole general partner-Shareholders are liable only up to their capital contributions.
winding up a limited partnership
A limited partnership must wind up its affairs upon dissolution. Certificate of cancellation must be filed by the limited partnership with the secretary of state of the state in which the limited partnership is organized.
the uniform limited liability company act
A model act that provides comprehensive and uniform laws for the formation, operation, and dissolution of LLCs. The ULLCA is not law unless a state adopts it as its LLC statute. Many states have adopted all or part of the ULLCA as their limited liability company law.
admission of new partners
A new limited partner can be added only upon the written consent of all partners.- Agreement can provide otherwise. Admission effective after amendment filed.
entrepreneur
A person who forms and operates a new business either by himself or herself or with others.
limited liability partnership (LLP_
A special form of partnership where all partners are limited partners and there are no general partners. No partners are personally liable; all have limited liability. LLPs have flow through tax benefits.- No taxes at entity level.
disadvantages of a sole proprietorship
Access to capital is limited to: personal funds, plus any loans he or she can obtain. Legally responsible for the business's contracts. Responsible for any torts committed in the course of employment.
permissible activities of limited partners
Acting as a surety for the limited partnership. Approving or disapproving an amendment to the limited partnership agreement. Voting on certain specific partnership matters.
distribution of assets
After the assets of the limited partnership have been liquidated, the proceeds must be distributed.
permissible activities of limited partners: being an:
Agent of the limited partnership, Employee of the limited partnership, Contractor of the limited partnership, General partner
compelling evidence
Agreement to share in profits and losses, Right to participate in management
LLC Legal entity
An LLC is a separate legal entity (an artificial person) that can: Own property, Sue and be sued, Enter into and enforce contracts, Be found civilly and criminally liable for violations of law
articles of organization
An LLC is formed by delivering articles of organization to the office of the secretary of state of the state of organization for filing. The existence begins when the articles of organization are filed. Articles include name, address of office, name and address of agent and organizers, type of LLC.
formation of an LLC
An LLC may be organized to operate businesses and real estate developments. May not be certain professional groups.An LLC can be organized in only one state even though it can conduct business in all other states.
duration- term LLC
An LLC that has a specified term of duration
duration- at-will LLC
An LLC that has no specified term of duration
certificate of limited partnership
Document that two or more persons must execute and sign. Contains name of limited partnership, purpose, names and addresses of partners, agent, and principal place of business, contributions of each partner. Must be filed with secretary of state. Not formed until certificate filed.
duty to inform
Duty partner owes to inform his or her co-partners of all information he or she possesses, that is relevant to the affairs of the partnership. Knowledge is imputed to other partners.
duty of loyalty
Duty that a partner owes not to act adversely to the interests of the partnership. Duty is imposed by law. Cannot be waived. In case of conflict between partnership interests and personal interests, partner must choose the interest of the partnership.
duty of obedience
Duty that partners must adhere to the provisions of the partnership agreement and the decisions of the partnership. Partner who breaches this duty is liable to the partnership for any damages caused by the breach.
advantages of a sole proprietorship
Ease and low cost of formation. Owner can make all management decisions: hiring and firing employees, No other approvals required. Sole proprietor owns all of the business Has the right to receive all of the business's profits. Easily transferred or sold
general partnership: partnership for a term
For a fixed duration, Until event occurs, Terminates automatically at end of time or when objective accomplished.
participation in management
General partners have management rights. Limited partners give up these right in exchange for limited liability.- Liable as general partner if participation is substantially the same. Only liable to persons who reasonably believe them to be general partners.
liability of general partners
General partners of a limited partnership have unlimited liability for debts and obligations of the partnership.
partnerships can:
Hold title to personal and real property, Transact business in the partnership name, Sue in the partnership name
articles of partnership
LLP's must be created formally by filing articles of partnership with the secretary of the state in which the LLP is organized. The LLP is a domestic LLP in the state in which it is organized. An LLP must register as a foreign LLP in any state in which it wants to conduct business.
limited liability creations
Limited liability companies are creatures of state law, not federal law. Limited liability companies can only be created pursuant to the laws of the state in which the LLC is being organized.- Limited liability company codes regulate the formation, operation, and dissolution of LLCs.
liability of limited partners: exceptions to the general rule
Limited partners are individually liable for the debt, obligations, and tortious acts of the partnership in three situations: 1. Defective Formation 2. Participation in Management 3. Personal Guarantee
liability of limited partners
Limited partners are liable only up to amount of their capital contributions.- Give up right to participate in the control and management
liability of limited partners: general rule
Limited partners are not individually liable for the obligations or conduct of the partnership beyond the amount of their capital contribution.
liability insurance required
Many state laws require LLPs to carry a minimum of $1 million of liability insurance that covers negligence, wrongful acts, and misconduct by partners or employees of the LLP. Quid pro quo for limited liability of partners.
partnership agreement
May be written or oral- Statute of Frauds applies. No formalities required. Recommended that it be in writing- Called partnership agreement or articles of partnership, UPA will fill gaps
member's limited liability
Member - an owner of an LLC. Members have limited liability. Members are liable for the LLC's debts, obligations, and liabilities only to the extent of their capital contributions.
uniform partnership act (UPA)
Model act, Codifies partnership law, Most states have adopted, Covers most problems that arise in the formation, operation, and dissolution of ordinary partnerships
capital contribution
Money, tangible or intangible property, services performed or promised to be performed, promissory notes, or other agreements to provide cash or property. Not excused by death or disability
fictitious name:
Must file fictitious business name certificate, Publish notice, Cannot be similar to name used by another business
liability of incoming partners
New partner who is admitted to the partnership is liable for the existing debts and obligations (antecedent debts) of the partnership only to the extent of his or her capital contribution. The new partner is personally liable for debts and obligations incurred by the partnership after becoming a partner.
creation of a sole proprietorship
No formalities. No federal or state government approval is required. Some local governments require a license to do business within the city.
sole proprietorship
Owner is actually the business. Business is not a separate legal entity. Most common form of business organization in the United States.
indemnification
Partner entitled to indemnification- Partner to be reimbursed for expenditures incurred on behalf of the partnership
right to return of loans and capital
Partner entitled to repayment of loan- Right is subordinated to claims of creditors who are not partners. Partners entitle to have capital contributions returned at termination of partnership- Right is subordinated to rights of creditors
wrongful dissolution
Partner has power to withdraw at any time, but may not have the right to withdraw: Withdraws before expiration of term, Withdraws before occurrence of event. Partner is liable for damages caused by the wrongful dissolution of the partnership.
right to information
Partner has right to true and full information: From any partner, All things affecting partnership. Partner has a duty to provide information. Partnership books must be kept at partnership's principal place of business- Partners have absolute right to inspect and copy records
general partnership: partnership at will
Partner may rightfully withdraw and dissolve partnership at any time.
joint and several liability
Partners are jointly and severally liable for tort liability of the partnership.
contract liability
Partners are jointly liable for contracts and debts of partnership. Third party must name all partners in suit. Successful third party may collect judgment against any or all partners.
right to accounting
Partners cannot sue partnership, They may bring an action for an accounting
duty of care
Partners must use the same level of care and skill that a reasonable person in the same position would use in the same circumstances. A breach of the duty of care is negligence. A partner is liable to the partnership for any damages caused by his or her negligence.
tort liability
Partnership is liable for the tortious act of a partner, employee, or agent that is committed while the person is acting within the ordinary course of partnership business or with the authority of his or her co-partners- Both negligence and intentional torts covered
winding- up
Process of liquidating the partnership's assets and distributing the proceeds to satisfy claims against the partnership. The surviving or remaining partners have the right to wind-up the partnership. A bankrupt partner cannot participate in the winding-up of a partnership.
the revised uniform limited partnership act (RULPA)- Uniform limited partnership act (ULPA)
Promulgated in 1916, Contained a uniform set of provisions for the formation, operation, and dissolution of limited partnerships, Most states originally enacted this law
accounting: formal judicial proceeding in which the court is authorized to:
Review the partnership and the partners' transactions, and Award each partner his or her share of the partnership assets
continuation agreement
Sets forth events that allow for continuation, amount paid to out-going partners, and other details.
limited partnerships
Statutory creations, Have both general and limited partners, Used for investing in real estate, movie productions, oil and gas
notice of dissolution
Terminates partners' actual authority to enter into contracts or act on behalf of partnership. Notice must be given to certain third parties. If no notice given, apparent authority to continue to bind partnership
formation of limited partnerships
The creation of limited partnerships is formal Requires public disclosure. Entity must comply with the statutory requirements of the RULPA or other state statute.
name of limited partnership
The firm name of a limited partnership may not include the surname of a limited partner unless: 1. it is also the surname of a general partner, or 2. The business was carried on under that name before the admission of the limited partner.
share of profits and losses
The limited partnership agreement may specify how profits and losses are to be allocated among the general and limited partners. If there is no such agreement, RULPA provides that profits and losses from a limited partnership are shared on the basis of the value of the partner's capital contribution- A limited partner is not liable for losses beyond his or her capital contribution
personal liability for a sole proprietor
The sole proprietor bears the risk of loss of the business- Will lose his or her entire capital contribution if the business fails. The sole proprietor has unlimited personal liability. Creditors may recover claims against the business from the sole proprietor's personal assets.
notice of dissolution: notice to 3rd parties
Third parties who dealt with partnership must be given actual notice. Third parties who had knowledge of partnership must be given actual or constructive notice. Third parties who had no knowledge owed no notice.
entity theory of partnership
UPA considers partnerships as separate legal entities.
Partners' rights to share in profits
UPA mandates right to an equal share in profits and losses. Agreements often provide otherwise
remuneration
UPA provides that no partner is entitled to remuneration- Implied partners will devote full time and service to partnership
capital contributions
Under RULPA, these may be in cash, property, services rendered, or a promissory note or other obligations to contribute cash, property, or to perform services. Partners or creditors may bring lawsuit to enforce promise to make contribution.
limited partnership
a type of partnership that has two types of partners: general partners and limited partners
duties among partners
duty of loyalty, duty of obedience, duty to inform, duty of care
joint and several liability example
i.e., the plaintiff can sue one or more of the partners separately. If successful, the plaintiff can recover the entire amount of the judgment from any or all of the defendant-partners. Release of one partner does not discharge the others.
limited partners
invest capital, but do not participate in management and are not personally liable for partnership debts beyond their capital contribution.
general partners
invest capital, manage the business, and are personally liable for partnership debts.
evidence of partnership
prima facie evidence, compelling evidence
prima facie evidence
receipt of a share of business profits
continuation of partnership after dissolution
remaining partners have right to continue after dissolution. Continuation agreement. Old partnership dissolved and new partnership created
entrepreneurial forms of conducting business
sole proprietorship, general partnership, limited partnership, limited liability partnership, limited liability company, corporation
limited liability companies (LLC)
An unincorporated business entity that combines the most favorable attributes of general partnerships, limited partnerships, and corporations. An LLC may elect to be taxed as a partnership. The owners can manage the business. The owners have limited liability.
dissolution of a limited partnership: may be dissolved when:
At the end of the life of the limited partnership as specified in the certificate of limited partnership. With the written consent of all general and limited partners. Because of the withdrawal of a general partner. With the entry of a decree of judicial dissolution.
permissible activities of limited partners
Being a consultant or advisor to a general partner regarding the limited partnership.
general partnership name
Can operate under name of any one or all of partners, May use fictitious name
dissolution of general partnership definition
Change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business
right to information: records at the principal office
Copy of certificate of limited liability and all amendments thereto. List of the full names and business addresses of each partner. Copies of effective written limited partnership agreements. Copies of federal, state, and local income tax returns. Copies of financial statements for the three most recent years.
old partnership dissolved and new partnership created
Creditors of old partnership become creditors of new partnership, Have equal status with creditors of new partnership
The RULPA provides the following order of distribution of partnership assets:
Creditors of the limited partnership, Partners with respect to: Unpaid distributions, Capital contributions, The remainder of the proceeds
liability of outgoing partners
Dissolution of partnership does not discharge liability of outgoing partners for existing partnership debts and obligations
certificate of interest
Document that evidences a member's ownership interest in an LLC. Acts the same as a stock certificate issued by a corporation.
limited partnership agreement
Document that sets forth: The rights and duties of the general and limited partners; and The terms and conditions regarding the operation dissolution and termination terms. If no agreement, certificate serves as articles.
agreements in regards to partners rights to share in profits
If agreement describes sharing of profits, but losses are silent, then losses are shared in same proportion. If agreement states sharing of losses, but is silent as to profits, then profits are shared equally
contract liability- third parties
If suit does not list all partners in suit, judgment cannot be collected. If one is released, all are released. Partners may seek indemnification if they pay more than their share.
powers of an LLC (same as an individual):
It can own, mortgage, and transfer real estate. It can own and transfer personal property. It can enter into contracts and make guarantees. The LLC may borrow money, and issue notes and bonds. An LLC can be sued and can sue.
liability of an LLC
LLC is liable for loss or injury caused by wrongful act or omission or member, manager, employee, or agent in course of ordinary business. Managers are not personally liable for debts, obligations, and liabilities of LLC. Tortfeasors are still personally liable for injuries they cause.
taxation of LLCs
LLCs are taxed as partnerships unless it elects to be taxed as a corporation.- Taxes flow through to individual's tax returns.- No taxation at the entity level
rights among partners
Unless otherwise agreed, each partner: Has a right to participate in management, and Has an equal vote on partnership matters. Under UPA, a simple majority decides most ordinary partnership matters.
right to information
Upon reasonable demand true and full information regarding the state of the business, the financial condition, etc. The limited partnership must keep records at its principal office
right of survivorship
Upon the death of a partner, deceased partner's right in specific partnership property vests in the remaining partner or partners. Does not pass to heirs or next of kin- Value passes to beneficiaries and heirs. Upon death of last partner, rights in specific partnership property vest in the deceased partner's legal representative
distribution of assets
Upon the winding-up of a dissolved partnership, the assets of the partnership are distributed
general partnership
Voluntary association, Two or more people, Carry on business for profit, Creates rights and duties between partners and with third parties, General partners personally liable for the debts and obligations of the partnership.
liability on personal guarantee
When an extension of credit from a bank, supplier, or other creditor is not approved based on the credit of the limited partnership, the creditor my require a limited partner to guarantee the repayment of the loan in order to secure repayment. Creditor may enforce personal guarantee if limited partnership defaults.
