partnerships
PARTNERSHIPS PROFESSOR WILLIAM BIRDTHISTLE CHICAGO – KENT COLLEGE OF LAW
CHAPTER 1:
FORMATION OF PARTNERSHIP
A. Forming a Partnership •
Definition: An association of ___________________________________________ who carry on a _______________________________________________ as __________________________
•
A partnership may be formed by an individual or a company. o
Persons: Anything that has legal _________________________ to contract
•
Humans who are not __________________________________ Includes ________________________________________, such as corporations, LLCs, trusts, etc.
Intent: No specific intent to form a partnership is required o
Simply requires the intent to carry on a ___________________________________ ___________________________ as _______________________________ Example 1:
A and B decide to sell flowers from A’s garden at the local fair. B
secures space at the fair, and A cuts the flowers. They verbally agreed to split the profits. Was there a partnership? Answer: _________, a partnership ________________ been formed.
o •
Corporation: By contrast, to form a corporation, you must file documents with the secretary of state, write a charter or bylaws, etc.
Co-Ownership: The sharing of profits, which creates a _________________________________ of a partnership o
These are NOT agreements to share profits:
•
_____________ payments Interest charges Rent Wages Goodwill
Sharing Control: Voting or areas of control
Example 2:
Refer to example 1. B was responsible for sales at the fair, and A
was responsible for cutting the flowers.
•
Divisions of ownership and control need not be equal, but both are required Example 3:
Fenwick v. The Unemployment Compensation Commission, 132
N.J.L. 185 (N.J. Sup. Ct. 1947). An employer did not want to pay unemployment, so it drew up a partnership agreement and split the profits 80/20, subject to employer's approval. This looked like a partnership; there was a division of profits, but there was no division of control—the employer had all of the control. He alone could decide whether or not to pay the profits.
o
Employee-employer relationships and borrower-lender relationships are not partnerships
B. Consequences of a Partnership 1. Separate Legal Entity o o
Distinct from each of the _______________________ who are part of the partnership The partnership can hold property and sue and be sued in its own name.
2. Partnership Liability o o
Partners ________________________________________ liable for partnership obligations No limited liability
3. No Entity-Level Taxation o o
A corporation is taxed as a business; investors are also taxed when money is paid out A partnership is not taxed as an entity; partners are taxed when money is paid out
C. Partnership Agreement •
The partnership agreement is the _________________________________________________. o o
A written partnership agreement is not required In the absence of an agreement, state partnership law will govern Example 4:
If the partners agree to divide profits and control, but not losses,
the state default rules will govern. If the agreement is silent, losses are divided the same as profits. Editor's Note 1: The state default rules are discussed more thoroughly in Chapter 2.
o •
When there is a written partnership agreement, the agreement _______________ ______________________.
Exception: When the agreement conflicts with state laws that are mandatory 1) Liability to ___________________________________
2 | © 2016 Themis Bar Review, LLC | TX Partnerships
2) Cannot deny partners access to books and _____________________ 3) ____________________________________ duties cannot be eliminated
CHAPTER 2:
INTERNAL AFFAIRS OF A PARTNERSHIP
A. Fiduciary Duties •
Every Partner is a fiduciary of the partnership
1. Duty of Loyalty o
Partners Must Not: 1) _______________________________ with partnership business Example 5:
A partner in a civil litigation law firm cannot also have his own
civil litigation solo practice. This would be in direct competition.
2) Advance an _______________________ that is ________________________ to the partnership Example 6:
A partner at a law firm cannot lobby Congress to outlaw law
firms.
3) Usurp a partnership _________________________________ Example 7:
If a client is considering hiring a law firm, a partner in the firm
cannot offer to represent the client on the side.
o
Limitations on the Duty of Loyalty
A partnership agreement cannot eliminate the duty of loyalty. The agreement can specify certain activities that do not violate the duty of loyalty, as long as it is not manifestly unreasonable. Example 8:
In a real-estate partnership, the agreement might permit certain
partners to retain commissions on property that they buy and sell.
There is a safe-harbor: •
If a partner makes full disclosure of all _____________________________________, a certain percentage of the other partners may __________________________ or ___________________ the transaction.
Example 9:
A partner discloses a business opportunity at the partnership
meeting. If the other partners vote to allow it, the partner may act on the opportunity without violating the duty of loyalty.
TX Partnerships | © 2016 Themis Bar Review, LLC | 3
2. Duty of Care o
Partners must not: 1) Engage in ______________________________________ or _____________________ conduct 2) Engage in ___________________________________________ 3) Engage in a ___________________________________________________ of the law Example 10: A partner cannot run a Ponzi scheme out of his office.
o
The partnership agreement may not unreasonably reduce the duty of care.
3. Timing of Duties o
Duties of loyalty and care apply only to partners, not to ________________________ partners or __________________________ partners. Example 11: A law firm merges with another business and it eliminates all retirement plans. The retired former partners are not protected by fiduciary duties.
B. Profits and Loss •
Division of profits and losses is dictated by the __________________________. o o o
Division of profits can be different from division of losses Not required to correspond with contributions If there is no partnership agreement or the agreement does not address profits and losses:
Default rule: Profits are divided ____________________ and losses ______________________________________ Example 12: Partners agree to divide profits 60-40 but they do not agree on division of losses. The losses will also be 60-40.
•
Distributions: o o o
•
When money is paid out of the partnership to the constituent partners Default Rule: Partners do not have the right to demand a distribution. Can be changed by the partnership agreement
Transfer of Partnership Interests: o o o
Default Rule: A partner has the right to transfer a partnership interest to a third party. Old Rule: if any partner died or attempted to convey her interest, it would dissolve the partnership Current Rule: the partnership continues past the death of a partner or the transfer of a partnership interest
4 | © 2016 Themis Bar Review, LLC | TX Partnerships
o
The partners can change the default rule and restrict transfers Example 13: The partners might agree that the transfer of a partnership interest requires a majority vote of the partners.
•
New Partner o o
Default Rule: ___________________________________________________must consent to the new partner. Many partnerships change this rule to a majority or supermajority of partners
C. Managing/Governing Relationships •
Default Rule: Every partner has _______________________________ in the management and control of the partnership. o o
•
Can be changed by agreement A common division is to reflect the partners’ ____________________________ __________________________________, or some other contribution
Ordinary and Extraordinary Business Matters o
Ordinary business requires a vote of ______________________________________ __________________________________. Example 14: Declaring a distribution
o
Extraordinary business requires a vote of ________________________________________. Example 15: Amending the partnership agreement
o •
Can be changed by agreement
Access to records must be provided to the partners and their agents. o
Agreement cannot unreasonably restrict this right
D. Withdrawal (Dissociation) •
A partner can cease to be a partner ________________________ or ______________________________.
1. Voluntary Dissociation o
The partner may give ___________________ to the partnership that the partner wants to withdraw.
2. Involuntary Dissociation 1) There may be an event triggered in the ______________________________ _________________________________. Example 16: If you go bankrupt, you will be withdrawn.
TX Partnerships | © 2016 Themis Bar Review, LLC | 5
2) A partner can be _________________________ pursuant to the partnership agreement. Example 17: By a vote of the majority or supermajority of the partners
3) A ____________________________________ that a partner must be dissociated 4) A partner goes bankrupt 5) A partner dies 6) __________________________________ 7) One of the entities of the partnership dissolves •
Typically, the agreement cannot prevent a partner from withdrawing o
Can require certain procedures for withdrawing (notice, in writing, etc.)
3. Consequences of Dissociation •
If a partner withdraws, it does not terminate the partnership
•
Once a partner withdraws: o o
•
Former partner has no right to participate in the ________________________________ of the business Former partner no longer has any _______________________ to the partnership.
If the partnership continues, it must ____________________ the withdrawing partner’s interest.
CHAPTER 3:
FOREIGN AFFAIRS OF A PARTNERSHIP
•
Partners are _____________________ of the partnership.
•
Partnership will be bound by contracts entered into by partners with __________________________.
A. Contract Liability 1. Express Authority o o o
Might come from the partnership ______________________________________ Might file a statement of _____________________________ Partners could simply vote for authorization
2. Implied Authority o
Exists based on the partner’s _________________________________________ that an action is ___________________________________ to carry out express authority
6 | © 2016 Themis Bar Review, LLC | TX Partnerships
Example 18: A Hiring Partner, might be given express authority to hire a new associate. Part of that process could include taking the candidates to dinner. Is the partnership liable for paying the bill for these dinners? Answer: _______________, if that constitutes implied authority.
Ask whether the partner had a reasonable belief that he had authority Ask whether it is customary in the business Ask whether there is a pattern of prior practice Ask whether it is necessary to accomplish explicit goals
3. Apparent Authority o o
The partnership may be bound based on the partner acting in the __________________________________________________ of dealings. Communicated between the partnership and the third party Example 19: Junior Partner at a law firm uses the law firm’s letterhead to order supplies. The third party supplier sees the letterhead and that the partner is a member of the firm. The letterhead serves as apparent authority from the partnership to the third party that this partner is authorized to order supplies. Example 20: One partner tells another partner not to order more supplies and tells the supplier not to supply more. The second partner goes ahead and orders supplies anyway and the supplier delivers them. Will the partnership have to pay? Normally, if the partnership validly withdraws authority AND informs the third party that the partner has no authority, the partnership is relieved of liability. In Nabisco v. Stroud (1959), the partnership did not validly withdraw the partner's authority, because there was not a majority vote. So, apparent authority still existed.
B. Tort Liability •
A partnership is liable for torts committed by partners acting within the scope of their partnership. Example 21: If the partner commits malpractice, then the rest of the partnership is bound.
C. Consequences of Flow Liability •
Main consequence: partners are _____________________________________ for the debts or obligations of the partnership. o
A partner is ______________________________________________________for all partnership obligations.
TX Partnerships | © 2016 Themis Bar Review, LLC | 7
o •
An incoming partner is not personally liable for obligations incurred before becoming a partner o
•
You can go after any partner for the entire sum owed by the partnership.
Will be liable for his capital contribution.
An outgoing partner remains personally liable on obligations incurred before withdrawal and can also be liable for some partnership obligations after withdrawal.
CHAPTER 4:
TERMINATING A PARTNERSHIP; TYPES OF PARTNERSHIPS
A. Termination of Partnership •
Termination of a partnership is a two-step process: Triggering event and Winding Up
1. Triggering Event a. The winding up can be triggered by: 1) The partners 2) Operation of law Example 22: Partnership fails to pay taxes or file required documents
3) Court order Example 23: Partnership cannot function because the partners cannot agree on anything
b. Partnership at Will: An _______________________________ partnership with ____________________________________________ tied to time or undertaking
Generally, wound up when a partner chooses to withdraw or partners vote to wind up
c. Partnership for a Term or Undertaking:
Winding up occurs when the _______________________________ or when the undertaking is complete
d. Winding up can be triggered in any partnership by: 1) An event in the partnership agreement 2) An event that makes it unlawful to continue with the partnership 3) A judicial determination that the economic purpose is being frustrated 2. Winding Up (Settlement of accounts and liquidation of assets) a. Who may wind up?
Any _________________________ that has not previously withdrawn Legal representative of the __________________________________________ partner
8 | © 2016 Themis Bar Review, LLC | TX Partnerships
Any partner, legal representative, or transferee may seek ______________________ ______________________________ of winding up
b. What are the powers of the person doing the winding up?
May dispose of and transfer partnership property, and discharge partnership liabilities Goal: to preserve partnership business to maximize value as a growing concern
c. Priority of Distributions
Creditors have first priority (Bills, liabilities, etc.) Then partners
B. Other Types of Partnerships 1. Limited Liability Partnerships (LLPs) o
Definition: A partnership in which a partner’s ______________________________________ is eliminated
o
Authorized in Texas
o
Limited Liability Partnership, OR LLP
Liabilities:
o
Law firms take advantage of LLP status Also, professional consulting firms, accountancy firms, etc.
Name: Must include:
o
Must file with the state
A limited partner is NOT _______________________________________ for obligations of the LLP, whether in tort or contract A limited partner is personally responsible for his own __________________________ _________________________. Texas: a partner is not liable for negligent supervision
Terminating LLP Status:
Partners can __________________________________________ LLP status. The ______________ can revoke an LLP status.
2. Limited Partnerships (LPs) o
Definition: A partnership formed by ___________________________________________ that has at least ____________________________ partner and ___________________________ partner
The limited partners have limited liability (usually the amount of investment)
TX Partnerships | © 2016 Themis Bar Review, LLC | 9
o
Formation: File a ________________________________________________
o
Must contain: •
______________ of limited partnership (including the letters "LP")
•
Name and address of in-state agent for service of process
•
Name and address of each __________________________________
•
Address of principal office where the ________________________ are to be kept
•
Signed by all general partners
The general partner can be another entity, such as a corporation
o
Typically, one general partner runs the business and the limited partners are investors
General partner is personally liable for LP obligations Limited partners are not personally liable
Comes into existence upon filing the certificate
3. Partners a. Limited Partners
Admitted when partnership is created or by subsequent vote by the partners Voting is allowed only under the terms of the _________________________________ ______________________________________ Right to access records and demand information from the general partner Liability to Third Parties: •
A limited partner ______________________________________________________ for the obligations of the partnership unless: o o
Serves as a ____________________________________ or Becomes involved in the management of the business (acts as more than a mere investor)
Withdrawal is allowed only under the terms of the partnership agreement
b. General Partners
Admitted when partnership is created or by subsequent vote by the partners Rights and Powers: Same as in a general partnership Liability to Third Parties: •
________________________________________________ to third parties for obligations of the partnership
•
Liable to other partners
•
General partners are typically structured as corporations to provide protection from liability
10 | © 2016 Themis Bar Review, LLC | TX Partnerships
C. Limited Liability Companies (LLCs) •
Definition: Neither a corporation nor a partnership; it is a ________________________ concept featuring the best features of both
1. Formation a. Members
Similar to partners in a partnership or _________________________________________ in a corporation Not personally liable for the obligations of the LLC Must have at least one member, no upper limit on the number of members
b. Organizer
Similar to an incorporator in a corporate context The person who fills out the paperwork to form an LLC Can be any ______________________________________________ at least 18 years of age
c. Certificate of Formation 1) Name •
Must include "limited liability company," or "____________________________________________," or an abbreviation thereof
2) Duration •
Default duration is ________________________________
•
Can set a more limited duration
3) Purpose •
Most commonly "_____________________________________________________"
4) Address and Registered Office of Agent •
For service of process in Texas
5) Name and Address of Organizers 6) Management Structure •
An LLC may or may not have a ____________________________________
•
If the LLC has a manager, the manager's name must be in the certificate of formation
TX Partnerships | © 2016 Themis Bar Review, LLC | 11
7) Optional Provisions •
For example: provisions restricting particular rights, provisions regarding the transferability of interests
d. Company Agreement
Similar to a corporation's ________________________________ There is a broad collection of default rules that may be changed by the company agreement Company agreement cannot change the default rule regarding ________________________________________________________________________
2. Comparison to Other Entities a. S Corporation
S Corp.: a small corporation that allows _______________________________________ taxation Limited liability Difference: an S Corp. is a much older concept and has a lot of restrictions on the number of shareholders, who can be a shareholder, cannot issue different classes of stock
b. Partnership
Both partnerships and LLCs enjoy pass-through taxation Unlike a general partnership, an LLC enjoys ____________________________________
[END OF HANDOUT]
12 | © 2016 Themis Bar Review, LLC | TX Partnerships
CHAPTER 1:
FORMATION OF PARTNERSHIP
A. Forming a Partnership •
Definition: An association of ___________________________________________ who carry on a _______________________________________________ as __________________________
•
A partnership may be formed by an individual or a company. o
Persons: Anything that has legal _________________________ to contract
•
Humans who are not __________________________________ Includes ________________________________________, such as corporations, LLCs, trusts, etc.
Intent: No specific intent to form a partnership is required o
Simply requires the intent to carry on a ___________________________________ ___________________________ as _______________________________ Example 1:
A and B decide to sell flowers from A’s garden at the local fair. B
secures space at the fair, and A cuts the flowers. They verbally agreed to split the profits. Was there a partnership? Answer: _________, a partnership ________________ been formed.
o •
Corporation: By contrast, to form a corporation, you must file documents with the secretary of state, write a charter or bylaws, etc.
Co-Ownership: The sharing of profits, which creates a _________________________________ of a partnership o
These are NOT agreements to share profits:
•
_____________ payments Interest charges Rent Wages Goodwill
Sharing Control: Voting or areas of control
Example 2:
Refer to example 1. B was responsible for sales at the fair, and A
was responsible for cutting the flowers.
•
Divisions of ownership and control need not be equal, but both are required Example 3:
Fenwick v. The Unemployment Compensation Commission, 132
N.J.L. 185 (N.J. Sup. Ct. 1947). An employer did not want to pay unemployment, so it drew up a partnership agreement and split the profits 80/20, subject to employer's approval. This looked like a partnership; there was a division of profits, but there was no division of control—the employer had all of the control. He alone could decide whether or not to pay the profits.
o
Employee-employer relationships and borrower-lender relationships are not partnerships
B. Consequences of a Partnership 1. Separate Legal Entity o o
Distinct from each of the _______________________ who are part of the partnership The partnership can hold property and sue and be sued in its own name.
2. Partnership Liability o o
Partners ________________________________________ liable for partnership obligations No limited liability
3. No Entity-Level Taxation o o
A corporation is taxed as a business; investors are also taxed when money is paid out A partnership is not taxed as an entity; partners are taxed when money is paid out
C. Partnership Agreement •
The partnership agreement is the _________________________________________________. o o
A written partnership agreement is not required In the absence of an agreement, state partnership law will govern Example 4:
If the partners agree to divide profits and control, but not losses,
the state default rules will govern. If the agreement is silent, losses are divided the same as profits. Editor's Note 1: The state default rules are discussed more thoroughly in Chapter 2.
o •
When there is a written partnership agreement, the agreement _______________ ______________________.
Exception: When the agreement conflicts with state laws that are mandatory 1) Liability to ___________________________________
2 | © 2016 Themis Bar Review, LLC | TX Partnerships
2) Cannot deny partners access to books and _____________________ 3) ____________________________________ duties cannot be eliminated
CHAPTER 2:
INTERNAL AFFAIRS OF A PARTNERSHIP
A. Fiduciary Duties •
Every Partner is a fiduciary of the partnership
1. Duty of Loyalty o
Partners Must Not: 1) _______________________________ with partnership business Example 5:
A partner in a civil litigation law firm cannot also have his own
civil litigation solo practice. This would be in direct competition.
2) Advance an _______________________ that is ________________________ to the partnership Example 6:
A partner at a law firm cannot lobby Congress to outlaw law
firms.
3) Usurp a partnership _________________________________ Example 7:
If a client is considering hiring a law firm, a partner in the firm
cannot offer to represent the client on the side.
o
Limitations on the Duty of Loyalty
A partnership agreement cannot eliminate the duty of loyalty. The agreement can specify certain activities that do not violate the duty of loyalty, as long as it is not manifestly unreasonable. Example 8:
In a real-estate partnership, the agreement might permit certain
partners to retain commissions on property that they buy and sell.
There is a safe-harbor: •
If a partner makes full disclosure of all _____________________________________, a certain percentage of the other partners may __________________________ or ___________________ the transaction.
Example 9:
A partner discloses a business opportunity at the partnership
meeting. If the other partners vote to allow it, the partner may act on the opportunity without violating the duty of loyalty.
TX Partnerships | © 2016 Themis Bar Review, LLC | 3
2. Duty of Care o
Partners must not: 1) Engage in ______________________________________ or _____________________ conduct 2) Engage in ___________________________________________ 3) Engage in a ___________________________________________________ of the law Example 10: A partner cannot run a Ponzi scheme out of his office.
o
The partnership agreement may not unreasonably reduce the duty of care.
3. Timing of Duties o
Duties of loyalty and care apply only to partners, not to ________________________ partners or __________________________ partners. Example 11: A law firm merges with another business and it eliminates all retirement plans. The retired former partners are not protected by fiduciary duties.
B. Profits and Loss •
Division of profits and losses is dictated by the __________________________. o o o
Division of profits can be different from division of losses Not required to correspond with contributions If there is no partnership agreement or the agreement does not address profits and losses:
Default rule: Profits are divided ____________________ and losses ______________________________________ Example 12: Partners agree to divide profits 60-40 but they do not agree on division of losses. The losses will also be 60-40.
•
Distributions: o o o
•
When money is paid out of the partnership to the constituent partners Default Rule: Partners do not have the right to demand a distribution. Can be changed by the partnership agreement
Transfer of Partnership Interests: o o o
Default Rule: A partner has the right to transfer a partnership interest to a third party. Old Rule: if any partner died or attempted to convey her interest, it would dissolve the partnership Current Rule: the partnership continues past the death of a partner or the transfer of a partnership interest
4 | © 2016 Themis Bar Review, LLC | TX Partnerships
o
The partners can change the default rule and restrict transfers Example 13: The partners might agree that the transfer of a partnership interest requires a majority vote of the partners.
•
New Partner o o
Default Rule: ___________________________________________________must consent to the new partner. Many partnerships change this rule to a majority or supermajority of partners
C. Managing/Governing Relationships •
Default Rule: Every partner has _______________________________ in the management and control of the partnership. o o
•
Can be changed by agreement A common division is to reflect the partners’ ____________________________ __________________________________, or some other contribution
Ordinary and Extraordinary Business Matters o
Ordinary business requires a vote of ______________________________________ __________________________________. Example 14: Declaring a distribution
o
Extraordinary business requires a vote of ________________________________________. Example 15: Amending the partnership agreement
o •
Can be changed by agreement
Access to records must be provided to the partners and their agents. o
Agreement cannot unreasonably restrict this right
D. Withdrawal (Dissociation) •
A partner can cease to be a partner ________________________ or ______________________________.
1. Voluntary Dissociation o
The partner may give ___________________ to the partnership that the partner wants to withdraw.
2. Involuntary Dissociation 1) There may be an event triggered in the ______________________________ _________________________________. Example 16: If you go bankrupt, you will be withdrawn.
TX Partnerships | © 2016 Themis Bar Review, LLC | 5
2) A partner can be _________________________ pursuant to the partnership agreement. Example 17: By a vote of the majority or supermajority of the partners
3) A ____________________________________ that a partner must be dissociated 4) A partner goes bankrupt 5) A partner dies 6) __________________________________ 7) One of the entities of the partnership dissolves •
Typically, the agreement cannot prevent a partner from withdrawing o
Can require certain procedures for withdrawing (notice, in writing, etc.)
3. Consequences of Dissociation •
If a partner withdraws, it does not terminate the partnership
•
Once a partner withdraws: o o
•
Former partner has no right to participate in the ________________________________ of the business Former partner no longer has any _______________________ to the partnership.
If the partnership continues, it must ____________________ the withdrawing partner’s interest.
CHAPTER 3:
FOREIGN AFFAIRS OF A PARTNERSHIP
•
Partners are _____________________ of the partnership.
•
Partnership will be bound by contracts entered into by partners with __________________________.
A. Contract Liability 1. Express Authority o o o
Might come from the partnership ______________________________________ Might file a statement of _____________________________ Partners could simply vote for authorization
2. Implied Authority o
Exists based on the partner’s _________________________________________ that an action is ___________________________________ to carry out express authority
6 | © 2016 Themis Bar Review, LLC | TX Partnerships
Example 18: A Hiring Partner, might be given express authority to hire a new associate. Part of that process could include taking the candidates to dinner. Is the partnership liable for paying the bill for these dinners? Answer: _______________, if that constitutes implied authority.
Ask whether the partner had a reasonable belief that he had authority Ask whether it is customary in the business Ask whether there is a pattern of prior practice Ask whether it is necessary to accomplish explicit goals
3. Apparent Authority o o
The partnership may be bound based on the partner acting in the __________________________________________________ of dealings. Communicated between the partnership and the third party Example 19: Junior Partner at a law firm uses the law firm’s letterhead to order supplies. The third party supplier sees the letterhead and that the partner is a member of the firm. The letterhead serves as apparent authority from the partnership to the third party that this partner is authorized to order supplies. Example 20: One partner tells another partner not to order more supplies and tells the supplier not to supply more. The second partner goes ahead and orders supplies anyway and the supplier delivers them. Will the partnership have to pay? Normally, if the partnership validly withdraws authority AND informs the third party that the partner has no authority, the partnership is relieved of liability. In Nabisco v. Stroud (1959), the partnership did not validly withdraw the partner's authority, because there was not a majority vote. So, apparent authority still existed.
B. Tort Liability •
A partnership is liable for torts committed by partners acting within the scope of their partnership. Example 21: If the partner commits malpractice, then the rest of the partnership is bound.
C. Consequences of Flow Liability •
Main consequence: partners are _____________________________________ for the debts or obligations of the partnership. o
A partner is ______________________________________________________for all partnership obligations.
TX Partnerships | © 2016 Themis Bar Review, LLC | 7
o •
An incoming partner is not personally liable for obligations incurred before becoming a partner o
•
You can go after any partner for the entire sum owed by the partnership.
Will be liable for his capital contribution.
An outgoing partner remains personally liable on obligations incurred before withdrawal and can also be liable for some partnership obligations after withdrawal.
CHAPTER 4:
TERMINATING A PARTNERSHIP; TYPES OF PARTNERSHIPS
A. Termination of Partnership •
Termination of a partnership is a two-step process: Triggering event and Winding Up
1. Triggering Event a. The winding up can be triggered by: 1) The partners 2) Operation of law Example 22: Partnership fails to pay taxes or file required documents
3) Court order Example 23: Partnership cannot function because the partners cannot agree on anything
b. Partnership at Will: An _______________________________ partnership with ____________________________________________ tied to time or undertaking
Generally, wound up when a partner chooses to withdraw or partners vote to wind up
c. Partnership for a Term or Undertaking:
Winding up occurs when the _______________________________ or when the undertaking is complete
d. Winding up can be triggered in any partnership by: 1) An event in the partnership agreement 2) An event that makes it unlawful to continue with the partnership 3) A judicial determination that the economic purpose is being frustrated 2. Winding Up (Settlement of accounts and liquidation of assets) a. Who may wind up?
Any _________________________ that has not previously withdrawn Legal representative of the __________________________________________ partner
8 | © 2016 Themis Bar Review, LLC | TX Partnerships
Any partner, legal representative, or transferee may seek ______________________ ______________________________ of winding up
b. What are the powers of the person doing the winding up?
May dispose of and transfer partnership property, and discharge partnership liabilities Goal: to preserve partnership business to maximize value as a growing concern
c. Priority of Distributions
Creditors have first priority (Bills, liabilities, etc.) Then partners
B. Other Types of Partnerships 1. Limited Liability Partnerships (LLPs) o
Definition: A partnership in which a partner’s ______________________________________ is eliminated
o
Authorized in Texas
o
Limited Liability Partnership, OR LLP
Liabilities:
o
Law firms take advantage of LLP status Also, professional consulting firms, accountancy firms, etc.
Name: Must include:
o
Must file with the state
A limited partner is NOT _______________________________________ for obligations of the LLP, whether in tort or contract A limited partner is personally responsible for his own __________________________ _________________________. Texas: a partner is not liable for negligent supervision
Terminating LLP Status:
Partners can __________________________________________ LLP status. The ______________ can revoke an LLP status.
2. Limited Partnerships (LPs) o
Definition: A partnership formed by ___________________________________________ that has at least ____________________________ partner and ___________________________ partner
The limited partners have limited liability (usually the amount of investment)
TX Partnerships | © 2016 Themis Bar Review, LLC | 9
o
Formation: File a ________________________________________________
o
Must contain: •
______________ of limited partnership (including the letters "LP")
•
Name and address of in-state agent for service of process
•
Name and address of each __________________________________
•
Address of principal office where the ________________________ are to be kept
•
Signed by all general partners
The general partner can be another entity, such as a corporation
o
Typically, one general partner runs the business and the limited partners are investors
General partner is personally liable for LP obligations Limited partners are not personally liable
Comes into existence upon filing the certificate
3. Partners a. Limited Partners
Admitted when partnership is created or by subsequent vote by the partners Voting is allowed only under the terms of the _________________________________ ______________________________________ Right to access records and demand information from the general partner Liability to Third Parties: •
A limited partner ______________________________________________________ for the obligations of the partnership unless: o o
Serves as a ____________________________________ or Becomes involved in the management of the business (acts as more than a mere investor)
Withdrawal is allowed only under the terms of the partnership agreement
b. General Partners
Admitted when partnership is created or by subsequent vote by the partners Rights and Powers: Same as in a general partnership Liability to Third Parties: •
________________________________________________ to third parties for obligations of the partnership
•
Liable to other partners
•
General partners are typically structured as corporations to provide protection from liability
10 | © 2016 Themis Bar Review, LLC | TX Partnerships
C. Limited Liability Companies (LLCs) •
Definition: Neither a corporation nor a partnership; it is a ________________________ concept featuring the best features of both
1. Formation a. Members
Similar to partners in a partnership or _________________________________________ in a corporation Not personally liable for the obligations of the LLC Must have at least one member, no upper limit on the number of members
b. Organizer
Similar to an incorporator in a corporate context The person who fills out the paperwork to form an LLC Can be any ______________________________________________ at least 18 years of age
c. Certificate of Formation 1) Name •
Must include "limited liability company," or "____________________________________________," or an abbreviation thereof
2) Duration •
Default duration is ________________________________
•
Can set a more limited duration
3) Purpose •
Most commonly "_____________________________________________________"
4) Address and Registered Office of Agent •
For service of process in Texas
5) Name and Address of Organizers 6) Management Structure •
An LLC may or may not have a ____________________________________
•
If the LLC has a manager, the manager's name must be in the certificate of formation
TX Partnerships | © 2016 Themis Bar Review, LLC | 11
7) Optional Provisions •
For example: provisions restricting particular rights, provisions regarding the transferability of interests
d. Company Agreement
Similar to a corporation's ________________________________ There is a broad collection of default rules that may be changed by the company agreement Company agreement cannot change the default rule regarding ________________________________________________________________________
2. Comparison to Other Entities a. S Corporation
S Corp.: a small corporation that allows _______________________________________ taxation Limited liability Difference: an S Corp. is a much older concept and has a lot of restrictions on the number of shareholders, who can be a shareholder, cannot issue different classes of stock
b. Partnership
Both partnerships and LLCs enjoy pass-through taxation Unlike a general partnership, an LLC enjoys ____________________________________
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12 | © 2016 Themis Bar Review, LLC | TX Partnerships
