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Partnership Requirements - Definition.
- A partnership is an association of two or more people who go into business as co-owners to make a profit.
- A person can be an individual or an entity, so long as there is capacity to contract.
- The persons in the partnership need to intend to do business together, but need not intend to be in a partnership.
Partnership Requirements - Agreement.
While an agreement is evidence of a partnership, a partnership can arise without any agreement and need not satisfy the Statute of Frauds.
Presumption of Partnership.
- When people intend to share profits, there is a presumption of a partnership. Six statutory exceptions exist to this presumption, which are receipt of money for payment of:
- (1) debts,
- (2) wages or other compensation,
- (3) rent,
- (4) annuity, retirement or health benefits,
- (5) interest related to loans or
- (6) goodwill payments.
A partnership for a limited time and a specific purpose to which the rules of partnership apply.
- A purported partner is someone who is not a partner, but it treated as a partner for purposes of liability. Will arise if
- (1) representation that a person was a partner,
- (2) representation made by the purported partner or with the purported partners consent,
- (3) a third party reasonably relied on the representation, and
- (4) the third party suffered damages in reliance.
Purported Partner - Representation to 3rd parties.
- Representation must be made by actual partner or purported partner a statement by a third party is insufficient to hold the partnership or purported partner liable.
- There is no duty to deny the representation by the third party.
- Purported partner which is held out in a public fashion is liable to the relying party, even when the purported partner does not know the identity of the third party.
- When a partner consents to a purported partners representation, then the purported partner is treated as an agent of the consenting partner.
Nature of Partnership - Liability and Agreement
- Each partner can be held personally liable for the debts and obligations of the partnership.
- A partnership agreement can govern the partnership actions.
- The partnership agreement will control any conflict between the agreement and the Partnership Act.
Partner as an Agent.
- A partner is an agent of the partnership.
- The partner can bind the partnership when (1) there is authority for the partners act, and (2) the acts are done in the ordinary course of business.
Fiduciary Duties of the Partners - Duty of Loyalty.
- A partner must account to the partnership for conduct.
- A partner must not engage in deals adverse to the partnerships interest.
- A partner must not compete with the partnership. The duty of loyalty cannot be eliminated by agreement, but it may be limited by
- (1) agreement that certain actions will not violate the duty of loyalty or
- (2) set up a safe harbor process so transactions which might breach the duty of loyalty can be approved.
Fiduciary Duties of the Partners -Duty of Care.
- Partners have a duty to ensure that they do not act recklessly or negligently and that partners carry out their duties with reasonable diligence.
- Partners must carry out their duties in good faith and fair dealing.
Partnership Profits and Losses.
- Absent an agreement to the contrary, partners split profits and losses equally.
- Partners split losses in proportion to their share of the profits.
- Each partner must have a partnership account (contributions liabilities) + (profit distributions share of profits/losses).
- A partner cannot demand a distribution, and a partnership is not required to make a distribution to its partners during the life of the partnership.
- A partnership interest is a partners right to receive profits, losses and distributions.
- This interest can be transferred in whole or in part, but it does not transfer the right to share in management or access partnership records. A partnership agreement can restrict transfers.
- A creditor can enforce a judgment against a partners interest.
- Property which is acquired by the partnership is partnership property, even when only one partner contributes.
- If a partner acquires the property, partnership property provided (1) it is in partners capacity and (2) name of partnership is on the title.
Presumptions of Partnership Property
- When there is a question of partnership property, the intent of the parties will control.
- Two presumptions
- (1) if purchased with partnership assets, then partnership property
- (2) if acquired in a partners name without partnership assets and no mention of partnership on the title, then its not partnership property.
New partners can join by unanimous consent of the other partners.
Management of the Partnership.
- Each partner has the equal right to manage the affairs of the business. Ordinary business decisions are decided by majority vote.
- Things outside the ordinary course of business must have consent of all of the partners.
- A partner is not entitled to compensation for his services except when winding up the business.
- A partner is entitled to have his account credited with his share of the profits.
Reimbursement for Contributions
- If a partner makes a loan or advance to the partnership, that partner is entitled to reimbursement with interest.
- A partner is not entitled to her capital contribution.
A partnership must indemnify a partner for a liability incurred in the ordinary course of the partnerships business.
Partnership Property and Records.
- A partner may use partnership property, but must compensate the other partners for personal benefit derived from partnership property.
- A partner is entitled to access the books and records of the partnership during normal business hours.
Lawsuits by Partners
- Partnership v. Partner. A partnership may sue a partner for breach of the partnership agreement or violation of a fiduciary duty.
- Partner v. Partnership. A partner may sue the partnership to enforce her rights under the partnership agreement or Partnership Act.
- Accounting. A partner may sue to get an accounting of the business at any time.
- The process by which a partner ends his association with the partnership.
- Can be triggered by (1) a partners notice of desire to dissociate, (2) a partners expulsion from the partnership, (3) a partners person bankruptcy, (4) a partners death or (5) a partners termination. A partner has a unilateral power to dissociate which cannot be blocked by the partnership agreement.
- Dissociation does not automatically dissolve the partnership.
- In an unlimited partnership, dissociation is only wrongful if it breaches an express provision of the partnership agreement.
- In partnerships for a definite term, dissociation is only wrongful if (1) the partner withdraws from the partnership without proper notice, (2) the partner is expelled by the court, or (3) partner files for bankruptcy.
Dissociations effect on a partners rights/obligations/duties.
- A dissociated partner cannot participate in management except with regard to winding up affairs.
- Dissociation terminates fiduciary duties. A partnership must buy out a dissociated partners interest.
- Dissociation terminates the partners actual authority to bind the partnership.
- A partner/partnership can file a statement of dissociation which is treated as public notice of dissociation effective 90 days from notice.
Partners Power to Bind Partnership - Actual authority.
When a partner reasonably believes that the partnership has authorized her to act through express words or conduct or through implied authority, the partner can bind the partnership.
Partners Power to Bind Partnership - Apparent authority.
- When a third party reasonably believes that the partnership has authorized the partner to act, the partner can bind the partnership.
- A third party must have actual knowledge of an agents lack of authority to avoid liability under apparent authority.
Partners Power to Bind Partnership - Authority to Transfer P'ship Property
- A partner has the authority to transfer property so long as the property is held in the partnerships name or held in a partners name.
- A partnership can take action to recover property transferred without authority.
Partnership Statement of authority.
A partnership may file this form with the state to clarify the limited nature of a partners authority.
Partners Liability to Third Parties Under Tort and Contract Law
- Tort liability. A partnership is liable for tortious acts of its partners committed in the ordinary course of business.
- Contract liability. A partnership may be sued for failing to meet obligations.
- Joint and several liability. Partners are jointly and severally liable for all partnership obligations.
Collecting on judgments against a partnership.
- A judgment against a partnership is not the same as a judgment against a partner, and a plaintiff must file a separate action to collect against the partner.
- Generally, a plaintiff must collect against partnership assets before collecting against the assets of personal partners. Exhaustion remedy not required when (1) partnership is in bankruptcy, (2) partner has consented to the action or (3) partner is independently liable for the action.
Direct execution of judgment
- A court may authorize execution directly against a partner even if the partnerships assets have not been exhausted if - (1) the partnerships assets are clearly insufficient to satisfy a claim,
- (2) when exhaustion would be burdensome, or
- (3) it is equitable to go after individual partners.
Partnership Liability for Crimes.
- A partnership can be convicted of a crime and barred from engaging in certain activities upon conviction.
- A partnership conviction does not result in criminal liability for the partners.
Dissolution of the Partnership.
When the partners seek to end the partnership. It is triggered by some event, but the partnership is not terminated until the business is completely wound up.
Dissolution - indefinite term
In a partnership for an indefinite term, dissolution is triggered when a partner chooses to dissociate from the partnership by giving notice.
Dissolution - definite term
In a partnership for a definite term, dissolution is triggered through (1) death/bankruptcy and partners decide not to continue, (2) when the partners agree to dissolve, or (3) when the term expires.
Dissolution - any term
Dissolution is triggered for all partnership when (1) events occur as indicated in the partnership agreement, (2) all/substantially all partnership activity becomes unlawful and is not cured within 90 days, or (3) judicial decision that it is not reasonably practicable to carry on the business.
Partnership at will
If partners continue to do business after the partnership expires, there is a presumption of a partnership at will.
Winding up of a partnership.
- After dissolution, a partnership only exists for the purposes of winding up the business.
- Any partner who has not wrongfully dissociated can participate in winding up the business, which can be supervised by any partner.
- The partner winding up the partnership may dispose or transfer any partnership property, can discharge liabilities, and can distribute the assets of the partnership to satisfy partners account. A partnership is bound by acts which are necessary to wind up, and for acts that would bind the partnership under apparent authority.
Statement of dissolution.
Notice to be filed with the state which provides notice of dissolution and limits liability to 90 days after the filing.
Priority in winding up.
Creditors are first in line for assets. Remaining assets are distributed to the partners.
- A merger is a combination of the partnership with another entity which results in one surviving entities.
- A merger requires approval by all general partners. An Articles of Merger must be filed with the state.
Partners liability after merger.
- A partners post-merger status will not impact liability for pre-merger events.
- A general partner who becomes a limited partner will be liability as a general partner for obligations incurred prior to the change.
- A limited partner who becomes a general partner is shielded from liability for events pre-change.
A partnership can convert to another entity provided that the partnership follows the rules to form the new entity. Decision to convert must be approved by all partners. General partnership all general partners. Limited partnership all general partners and majority of limited partners.