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Partnerships

Terms in this set (60)

Partnership
A partnership is an association of two or more persons to carry on a for-profit business as co-owners.
"Person" Per the UPA
An individual or legal entity, such as a corporation, limited liability company (LLC), trust, estate, governmental entity, or partnership. The person must have the capacity to contract. The persons involved in the partnership are partners.
SOF
While a written agreement is not necessary to form a partnership, a partnership agreement is subject to the Statute of Frauds, which requires contracts that cannot be performed in one year to be in writing.
Key Test
The key test applied to ascertain whether a business arrangement is a partnership is whether there is a SHARING OF PROFITS from the business; if so, such an arrangement is generally presumed to be a partnership and persons who share in the profits are partners. Note that the sharing of gross returns rather than profits does not create such a presumption.
Liability of Purported Partner
In order for liability as a purported partner to be imposed, the following elements must be established:

(i) There must be a representation—orally, in writing, or implied by conduct—that a person is a partner in an actual or purported partnership;

(ii) The purported partner must make or consent to the representation;

(iii) A third party must have reasonably relied on the representation; and

(iv) The third party must have suffered damages as result of that reliance.
No Duty to Deny
A person who, without her consent, is held out by another as a partner is not under a duty to deny that representation. Merely being named by another in a statement of partnership authority is not enough to create liability as a partner. Furthermore, failing to file or amend a statement of dissociation does not create liability as a partner.

*It is not a defense that the purported partner was unaware that he has been held out as a partner to the specific third party in question when he has been held out as a purported partner in a public manner.

**When a person represents that another is a partner who is not in fact a partner, the purported partner constitutes an agent of the person making the representation. The purported partner is also an agent of any partner of an existing partnership who consents to the representation.
Partnership Entity
Massachusetts adheres to the aggregate rather than entity theory with regard to a partnership. A partnership is not a legal entity that is distinct from its partners. A partnership generally may not sue and be sued separately from its partners.
Agreement v. UPA
While a formal agreement is not required to create a partnership, if the partners have entered into such an agreement - then the agreement, rather than the UPA, generally governs the relations among the partners and between the partners and the partnership when there is a conflict between the agreement and UPA.

*A partnership agreement may not eliminate the duty of loyalty. However, the agreement may identify specific types or categories of activities that do not violate this duty, if not manifestly unreasonable. For example, a real estate partnership agreement could permit a partner to retain commissions on partnership property bought and sold.

**There is no duty of care enumerated by the UPA.

***The partnership agreement controls a partner's rights to share in the partnership's profits and losses. The agreement may specify a percentage for sharing profits that differs from the percentage for sharing losses; neither profits nor losses are required to be shared on a per capita basis.
Partner = Agent
A partner is an agent of the partnership for its business purposes. As an agent, the partner can commit the partnership to binding contracts with third parties.
Fiduciary Duties
A partner may owes the partnership and the other partners the fiduciary duty of loyalty.

*Under the duty of loyalty, a partner is required to refrain from usurping a partnership opportunity or otherwise using partnership property or business to derive a personal benefit without accounting to or obtaining the consent of the partners
Loan by a Partner
A partner, in addition to contributing to the partnership (which becomes part of the partnership's capital) may make a loan to the partnership. The lending partner is treated as any other creditor of the partnership, subject to other applicable laws.
Partnership Dissociation or Dissolution
Upon a partner's dissociation from a partnership or upon the partnership's dissolution, these duties do not apply unless the partner is engaged in winding up the partnership business. When a partner or the representative of the last surviving partner is engaged in winding up the partnership business, these duties are generally applicable with the exception of the noncompete aspect of the duty of loyalty.
No Agreement or Agreement Silent re Profits & Losses
If there is no agreement or the agreement is silent as to the division of the profits and losses, each partner is entitled to an equal share of the partnership profits and losses. When the agreement only addresses the division of partnership profits, partnership losses are shared in the same manner.

Example: If Partner A gets 70% of the profits, Partner A is liable for 70% of the losses.
Partner's Account
Each partner has a partnership account. That account consists of contributions to the partnership and the partner's share of the profits, reduced by any liabilities, distributions, or losses.
Partner's Partnership Interest
A partner cannot assign or transfer an ownership interest in partnership property, voluntarily or involuntarily.

Instead, a partner has a partnership interest, which consists of the rights to share in the partnership's profits and losses, to receive distributions, and to possess the property in equal right with the other partners. Each partner's interest in the property is known as a tenant in partnership. This interest is personal property, regardless of the nature of the partnership's assets.

*A partner has the right to transfer his partnership interest to a third party. The transfer (i.e. assignment) may include his entire interest or only part of it.
Effect of Transfer on Partnership
The transfer of a partner's partnership interest to a third party does not trigger the dissolution of the partnership.

The transfer of a partner's partnership interest to a third party does not trigger the partner's dissociation from the partnership. Instead, the transferor partner retains all rights and duties of a partner in the partnership apart from an interest in the distributions transferred.

The transferee has the right to receive distributions from the partnership to which the transferor partner would otherwise have been entitled to receive, including both distributions made by the partnership as an ongoing concern and those made upon dissolution of the partnership and the winding up of its business. In addition, the transferee may seek a judicial order for dissolution of the partnership. In the event of dissolution, the transferee is entitled to an accounting, but only for the period beginning from the date of the last accounting agreed to by all of the partners.

*The transferee is NOT entitled to participate in the management or conduct of the partnership business, to access partnership records, or to demand other information from the partnership.
Factors for Determining Property Ownership
When the statutory rules discussed above do not resolve the issue of ownership, such as when the property is titled in a partner's name and the owner of the funds used to purchase the property is unclear, various factors may be considered to ascertain the partner's intent. Such factors include the use to which property is put, treatment of the property for tax purposes, and the source of funds used to maintain or improve the property.
New Partner
In order to become a partner, a person must secure the consent of ALL of the existing partners.
Ordinary Partnership Business
Each partner has equal rights in the management and conduct of the partnership.

A majority of the partners can make a decision as to a matter in the ordinary course of the partnership's business (such as a distribution of partnership profits).

A decision as to a matter outside the ordinary course of the partnership's business requires the consent of ALL partners. An amendment of the partnership agreement also requires the consent of all partners.
Remuneration for Services
A partner is not entitled to remuneration for services performed for the partnership. An exception exists when the partner renders services in winding up the business of the partnership, in which case the partner is entitled to reasonable compensation.
Reimbursement
A partner may make a loan in furtherance of the ordinary business of the partnership or to preserve the partnership's business or property. The partnership is required to repay the loan or reimburse the partner for advances, including interest from the date of the loan or advance.
Indemnification
A partner may incur a personal liability in the ordinary course of conducting partnership business or in order to preserve the partnership's business or property. The partnership is required to indemnify the partner for such liabilities.
Use of Partnership Property
A partner may use or possess partnership property only on behalf of the partnership. A partner who derives a personal benefit from the use or possession of partnership property is required to compensate the partnership for such benefit.
Access to Records
A partnership must provide its partners and their agents (including attorneys) with access to ALL its records, including its financial records, and permit them not only to inspect but also to COPY such records.

Each partner must give accurate and complete information in all things relating to the partnership, upon demand of a partner or a partner's legal representative.
Partnership as a Plaintiff
In general, a partner cannot bring a legal action against the partnership or individual partners, or be sued by the partnership or individual partners, on matters related to the partnership business.

The rationale is that the partner is essentially suing himself because he is personally liable for all debts and obligations of the partnership.

To resolve a partnership dispute, therefore, ordinarily an "accounting" will be necessary.
"Accounting"
A partner may seek an accounting as to the partnership business under the following circumstances:

(i) If he is wrongfully excluded from the partnership business or possession of its property by other partners;

(ii) If the right to seek an accounting is allowable under the partnership agreement;

(iii) If a personal benefit is derived by a partner from any partnership transaction, including use of partnership property for personal purposes, without the consent of the other partners; or

(iv) For any other just reason.
Transfer of Partnership Property
A partner has authority to transfer titled partnership property in the following situations:

(a) Partnership property held in partnership name

A partner has the authority to transfer partnership property held in the partnership's name by executing an instrument of transfer (e.g. a deed) in the partnership name. This authority is subject to limitation or elimination by a statement of partnership authority.

(b) Partnership property held in partner's name

A partner has the authority to transfer partnership property held in one or more partners' names by executing an instrument of transfer (e.g. a deed) in the partners' names. This authority exists whether or not the instrument transferring the property to the partnership reflected the existence of the partnership or the status of the transferees as partners.

(c) Recovery of partnership property from transferee

A partnership may be able to recover partnership property transferred by a partner without authority.
Liability of Partnership
A partnership is liable for a partner's tortious acts, including fraud, committed in the ordinary course of the partnership business or with partnership authority, whether actual or apparent. When the partner enjoys immunity from liability for such acts, the partnership is not entitled to assert that immunity.

Unlike a shareholder with respect to a corporate obligation, a partner is generally personally liable for a partnership obligation. For a partnership's obligations that arise from a partner's tortious conduct, each partner is jointly and severally liable. Consequently, a tort victim may sue one or more partners and secure a judgment for the full amount of her damages, subject to the defendants' rights of indemnification and contribution with respect to the partnership and the other partners. If the victim is unable to collect the full amount of her damages, she may bring another lawsuit against partners who were not defendants in the first lawsuit in order to gain complete satisfaction with regard to her claim. For all other partnership obligations (e.g. contractual obligations), each partner is jointly liable. Consequently, the plaintiff-obligee may sue one or more partners and secure a judgment for the full amount of her damages, but cannot subsequently sue other partners if she is unable to fully collect on that judgment. In some states, a plaintiff must first satisfy any judgment from partnership assets before proceeding to enforce the judgment against a partner';s personal assets.
Plan of Merger
A plan of merger must set forth:
(i) the name of each partnership or limited partnership that is a party to the merger,
(ii) the name of the surviving entity into which the other entities will merge,
(iii) the type of entity the surviving entity will be,
(iv) any terms or conditions of the merger,
(v) the manner of converting interests or obligations of the merging entities into interest or obligations of the surviving entity, and
(vi) the street address of the surviving entity's executive office.
Approval Required for Merger
If a partnership is a party to the merger, the merger must be approved by all of the partners, unless otherwise specified in the partnership agreement. If a limited partnership is a party to the merger, the merger must be approved by either (i) the vote required by the law of the jurisdiction in which the limited partnership is organized, or (ii) in the absence of a law, by all partners or by whatever number specified in the partnership agreement.
Date/Effect of Merger
The merger takes effect upon approval of all necessary parties, the filing of all required documents, or any date specified in the plan of merger, whichever is later.

When a merger becomes effective, all parties to the merger other than the surviving entity cease to exist. All property and obligations of the entities that are parties to the merger become the property and obligations of the surviving entity. All proceedings against a party to the merger may either continue as if the merger had not occurred, or may substitute the surviving entity into the proceeding. Any partner of a party to a merger who does not become a partner of the surviving entity is dissociated from the entity as of the date the merger takes effect.

A partner of the surviving entity is liable for (i) all obligations for which he was personally liable before the merger, (ii) all obligations the surviving entity incurred by a party to the merger before the merger (although those obligations must be satisfied by the entity's property), and (iii) all obligations the surviving entity incurred after the merger takes effect, unless otherwise provided by law.
Termination of Partnership
Termination of a partnership is a two-step process—dissolution and winding up. The happening of an event triggers dissolution, the first step in the termination of a partnership. Next, the partnership must wind up its business, which is a process that entails liquidating the assets, paying off creditors, and distributing any remaining funds to the partners. The partnership is not terminated until the partnership business is wound up.

*The events that may trigger dissolution differ depending on whether the partnership is a partnership at will, or one for a definite term or specific undertaking.
Dissolution
A partnership at will is an open-ended partnership that does not have fixed termination based on a period of time or particular undertaking. It is dissolved when a partner chooses to dissociate from the partnership by giving notice of her withdrawal.

*A partnership for a definite term or particular undertaking is dissolved when:
(1) A partner is expelled from the business in accordance with a power allowable under a partnership agreement;

(2) All partners agree to dissolve the partnership;

(3) The term expires or the undertaking is completed;

(4) A partner dies or the partnership declares bankruptcy; or

(5) A court decrees the dissolution.

**ANY partnership is dissolved when any of the following events occur:
(1) A dissolving event agreed to in the partnership agreement;

(2) An event that makes it unlawful for all or substantially all of the partnership business to be continued; or

(3) A judicial determination is made that:

(a) A partner has committed willful or persistent breaches of the partnership agreement;

(b) A partner's conduct is such that it is no longer reasonably practical to carry on the business of the partnership with that partner;

(c) The business may only be carried on at an economic loss;

(d) The partner's conduct prejudicially affects the business;

(e) A partner is found to be mentally ill or otherwise incompetent;

(f) A partner is incapable of performing the partnership agreement; or

(g) Circumstances are such that dissolution would be equitable.
Continuation After Term or Undertaking
When the partners continue the business without any settlement or liquidation AFTER the term expires or the undertaking is completed, there is a presumption that they have agreed to continue the business. The partnership is then transformed into a PARTNERSHIP AT WILL; the rights and duties of the partners remain the same as they were.
Winding Up
A partnership that has dissolved continues only to wind up its business.

Any partner who has not wrongfully dissociated may participate in winding up the partnership's business, including the legal representative of the last surviving partner.

Any partner, legal representative, or transferee may seek judicial supervision of the winding up.

After dissolution, the partnership is bound by a partner's act that is appropriate for dissolution and any act undertaken by a partner that would have bound the partnership before dissolution, if the other party does not have notice of the dissolution.

Each partner is liable to the other partners for his share of partnership liability incurred by such post-dissolution acts, but a partner who knowingly undertakes an act inappropriate for winding up the partnership business is liable to the partnership for any damage caused to the partnership for such an act.
Distribution of Partnership Assets
In winding up a partnership's business, creditors have priority over partners to the partnership's assets. Partnership assets are first applied to discharge partnership obligations to its creditors, including partners who are creditors of the partnership, before being distributed to the partners.

Each partner's account - which reflects not only that partner's contributions to the partnership but also the partner's share of the partnership's pre-dissolution profits and losses - must be adjusted to reflect the profits and losses that result from the liquidation of the partnership assets. After these adjustments, any partners with a negative account balance must contribute to the partnership the amount necessary to bring the account balance to zero. Then the partnership must make a final liquidating distribution to any partner with a positive account balance.
Limited Liability Partnership
A partnership in which a partner's personal liability for obligations of the partnership is eliminated.

In order to enjoy LLP status, a statement of qualification must be filed with the state. In other respects, a LLP is governed by the same rules as a partnership.

Limited liability partnership status is effective on the date that the statement is filed, unless a later date is specified in the statement. *Does not create a new partnership.

A partnership agreement cannot vary the law applicable to LLPs.
Authorization to Transform
The transformation of a partnership into a LLP must be approved by the vote necessary to amend the partnership agreement.

If the partnership agreement is silent on this voting requirement, the approval of the transformation requires the approval of ALL partners.
Name of a LLP
The name of a LLP must end with "Registered Limited Liability Partnership," "Limited Liability Partnership," "R.L.L.P.," "L.L.P.," "RLLP," or "LLP."
Liabilities of Partners and Partnership
A limited partner in a LLP is not personally liable for an obligation of a LLP, regardless of the type of obligation (e.g. tort, contract).

A limited partner IS personally liable for his OWN personal misconduct (e.g. negligence, negligent supervision).

An obligation of a LLP is solely an obligation of the partnership, notwithstanding a contrary provision in the partnership agreement that existed before the vote to transform from a partnership to a LLP. The LLP's assets may be reached to satisfy a LLP obligation.
Termination of LLP Status
The state may revoke the statement of qualification of a LLP for the failure to file an annual report; this revocation has the same effect as cancellation.
Limited Partnerships
A limited partnership is a partnership formed by two or more persons that has at least one general partner and at least one limited partner. Limited partnerships are governed by the Revised Uniform Limited Partnership Act of 1976 with the 1985 amendments (RULPA).

A limited partner's liability for partnership debts is limited to the amount of her capital contribution to the partnership.
Formation of a Limited Partnership
To form a limited partnership, a certificate of limited partnership must be filed with the state. The limited partnership comes into existence upon the filing of the certificate unless the certificate specifies a later date.

The certificate must contain only the name of the limited partnership, its in-state address, the name and address of its in-state AGENT for service of process, the name and business address of each general partner, and a statement about the duration of the limited partnership. The name of the limited partnership must contain, without abbreviation, the words "limited partnership." All of the general partners must sign the certificate.

A certificate need only SUBSTANTIALLY with statutory requirements in order to have effect as to third parties.

If a certificate of limited partnership is not filed, the limited partnership is not formed. If a person makes a contribution to a purported limited partnership and erroneously believes in good faith that he has become a limited partner, he is liable to a third party who transacts business with the purported limited partnership, believing in good faith that that the person was a general partner at the time of the transaction. A similar result occurs when a person is mistakenly listed as a general partner in the certificate.
Admission as a Limited Partner
A person may become a limited partner upon the creation of the limited partnership. Thereafter, that person may be admitted as a limited partner by acquiring her interest directly from the partnership only upon the written consent of all partners, unless the partnership agreement otherwise provides.

An assignee of a partnership interest, including a general or a limited partner's interest, may become a limited partner if the partnership agreement permits or all partners consent.

A limited partner has the right to inspect and copy records of the limited partnership. A limited partner also has the right to demand information regarding the business and financial condition of the partnership and other pertinent information about partnership affairs from the general partners.

A limited partner may lend money to and transact other business with the limited partnership. In such transactions, the limited partner has the same rights and obligations as a person who is not a partner.
Voting Rights of Limited Partners
A limited partner has the right to vote only to the extent allowed under the partnership agreement.

A limited partner does not have the right to vote on any partnership matter as a separate class.
Limited Partner Liability to Third Parties
A limited partner generally is not personally liable for the obligations of a limited partnership unless the limited partner also serves as a general partner or participates in the control of the business.

Solely doing one or more of the following does not constitute participation in the control of the business (safe harbor activities):

(1) Being a contractor for, or an agent of, the limited partnership or a general partner, or being an officer, director, or shareholder of a corporate general partner;

(2) Consulting with or advising a general partner with respect to the limited partnership's business;

(3) Acting as surety for the limited partnership or guaranteeing or assuming an obligation of the limited partnership;

(4) Requesting or attending a meeting of partners;

(5) Winding up the limited partnership; or

(6) Proposing, approving, or disapproving, limited partnership matters, such as the sale or transfer of substantially all of the assets of the limited partnership or the admission or removal of a general or limited partner.
Extent of Liability
Even if a limited partner participates in the control of the business, she is personally liable only to persons who transact business with the limited partnership, reasonably believing, based on the limited partner's conduct, that the limited partner is a general partner.

A limited partner who allows his name to be used in the name of the limited partnership is liable to a creditor who extends credit to the limited partnership, unless the creditor has actual knowledge that the limited partner is not a general partner.
Limited Partner Withdrawal
Unless the written partnership agreement provides otherwise, a limited partner must give six months' prior written notice to each general partner before withdrawing.
Admission as a General Partner
A person may become a general partner upon the creation of the limited partnership. Thereafter, a person may be admitted as a general partner only upon the WRITTEN consent of ALL partners -- unless the partnership agreement otherwise provides.

(Note: An assignee of a general partner's partnership interest may become a limited partner, but not a general partner, as long as the partnership agreement permits it or all other partners consent.)
Rights and Powers of a General Partner
Except as provided in the partnership agreement, a general partner has the rights and powers of a partner in a partnership without limited partners, and is subject to the same restrictions as such a partner.

Example: A general partner may have the right to vote on limited partnership matters in any manner specified in the partnership agreement.

A general partner may contribute to the limited partnership, share in its losses and profits, and receive distributions from it.
Liability of a General Partner to Third Parties
A general partner is personally liable to third parties for the obligations of the limited partnership. Except as provided in the partnership agreement, a general partner also has liabilities to the partnership and the other partners.

EXAM NOTE: While the general partner in a limited partnership has unlimited liability, the typical general partner is an entity such as a corporation that has its own liability shield.

With respect to a partnership creditor, the partner is liable for this obligation when the creditor acts in reliance on it.
Withdrawal or Termination of a General Partner
At any time, a general partner may withdraw from a limited partnership by giving WRITTEN notice to the other partners. *When the withdrawal violates the partnership agreement, the general partner may be liable to the limited partnership for any damages from his breach of the agreement.

Additional events causing a general partner to cease being partner:

(i) Assignment of her partnership interest, unless the partnership agreement provides otherwise;

(ii) Removal as a general partner in accordance with the partnership agreement;

(iii) Financial difficulties, such bankruptcy and insolvency;

(iv) Death or adjudicated incompetency of a natural person; or

(v) Termination of a partner as a business entity.
Liability for Contribution of General Partner
Except as provided in the partnership agreement, a partner is obligated to the limited partnership with respect to any written, enforceable promise of a future contribution. When a partner is unable to perform services due to death or disability, the partner or his estate must pay to the partnership the cash value of such services.

A partner who is required to contribute or to return money or other property paid or distributed can compromise this obligation only with the consent of all partners.
Allocations and Distributions
The partners may choose to allocate profits and losses on any basis, provided such allocation is in writing. In the absence of such a written agreement, both profits and losses are allocated among the partners based on each partner's partnership contributions, provided such contributions have not been returned to the partner.

A partner is entitled to receive distributions before withdrawal or dissolution only to the extent provided in the partnership agreement. Upon withdrawal from the partnership, a partner has the right to receive a distribution of the fair value of his partnership interest, as measured on the date of withdrawal, within a reasonable time after withdrawal.

A distribution constitutes a return of a partner's contribution to a limited partnership to the extent that it reduces her share of the net assets to less than her contribution. A partner is liable to the partnership for a return of a contribution to the extent necessary to discharge the limited partnership's liabilities to creditors.

The partner's liability extends for one year after the return of the contribution, unless the contribution was wrongful, in which case the time period is lengthened to six years.
Assignment of Partnership Interest
In general, a partnership interest in a limited partnership is personal property that can be assigned in whole or in part. Upon assignment, the partner ceases to be a partner in the limited partnership, but the assignee generally has rights only to receive the distribution to which the assignor partner would otherwise be entitled.

An assignee of a limited partnership interest, including a general partnership interest, may become a limited partner if the partnership agreement permits it or if all partners agree. An assignee is liable for the assignor's obligations to make and return contributions known to the assignee at the time he became a limited partner, but the assignor is not released from those obligations or obligations arising from false statements in the certificate of limited partnership.
Dissolution of a Limited Partnership
A partnership terminates after it is dissolved and its affairs are wound up. The following events cause a partnership to be dissolved.

(i) The occurrence of the event specified in the partnership agreement or reaching the termination date specified in the certificate of limited partnership;

(ii) The written consent of all partners;

(iii) The withdrawal of a general partner or other occurrence in which the general partner ceases to be a general partner, unless there is at least one other general partner to carry on the partnership business or - within 90 days - all partners agree in writing to carry on the business and appoint any necessary general partners; or

(iv) A decree of judicial dissolution based on a determination that it is not reasonably practical to carry on the business in conformity with the partnership agreement.
Winding Up of a Limited Partnership
Unless the partnership agreement provides otherwise, the task of winding up the limited partnership's affairs falls to the general partners who have not wrongfully dissolved the limited partnership. When there are not any such general partners, the limited partners may wind up the partnership's affairs. Alternatively, a partner, her legal representative, or an assignee may petition a court to wind up the limited partnership's affairs.
Distribution of Limited Partnership's Assets
Upon winding up, the partnership's assets are distributed to the following in order:

(1) Partnership creditors, including partners who are creditors; then

(2) Partners and former partners who are entitled to distributions that have accrued but not been paid; then

(3) Partners for the return of their contributions; and finally

(4) Partners in the proportions in which they share distributions.
Limited Partner Derivative Action
A limited partner has the right to bring a derivative action on behalf of the limited partnership.

A limited partner may bring an action if the general partners have refused to do so, or if an attempt to cause the general partners to bring such an action is likely to fail.

In the complaint, the limited partner is required to detail such effort or explain the reasons for not making the effort.

In order to bring the action, the limited partner must be a partner at the time of bringing the action AND at the time of the wrongful transaction, unless the status of partner is devolved on him by operation of law or pursuant to the terms of the operating agreement.
Recovery re Derivative Action
If the action is successful, the limited partner may receive an award for his reasonable expenses, including attorney's fees. The limited partnership is entitled to the remainder of the judgment proceeds.
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