PARTNERSHIP OUTLINE General Definition an association of two or more persons to carry on as co-owners a business for profit.

t. Note intent to form a partnership is not a factor. o Is the business for profit; if not there is no partnership. o The parties have agreed to form a partnership. Remember that a writing is generally not requiredany agreement to run a for-profit business as coowners will suffice. The agreement need not even be verbal; it can arise from the conduct of the parties. If there is an agreement to share profits, it constitutes a presumption (prima facie evidence under the UPA) that the parties intended to form a partnership unless the sharing is to repay a loan, as payment of wages, constitutes rent, etc. o The parties have capacity to contract.

Statute v. Agreement Agreement generally controls (most provisions in the TBOC are default and can be modified). 152.002(b) states those provisions that cannot be modified: (i) unreasonably restrict right of access to books and records, (ii) eliminate the duties of loyalty and good faith and fair dealing, (iii) unreasonably reduce the duty of care, (iv) vary the right of a partner to dissociate at will, (v) vary the right of a court to expel a partner, (vi) vary the winding up requirement, (vii) restrict the rights of third parties, etc.

To establish a partnership determine if two or more parties are operating a business for profit. No need to determine they intended for a partnership to exist. Primary distinction w/ regard to Agency: partnership consists of co-owners. While an agent may sometimes receive a share of the profits of the Ps business as compensation for services, the agent is not an owner of the business. Joint venture formed for a single transaction whereas partnership engages in a continuing business for an indefinite or fixed period of time. Rights and liabilities of partners and joint venturers are the same in all important respects.

Partnership Property Under TBOC partners are not co-owners of partnership property. The UPA however provides that partners are co-owners (tenants-inpartnership) of specific partnership property, but this term is misleading b/c a partners rights in specific property are extremely limited and any one partner is limited in transferring or encumbering specific partnership property; e.g., a partners right in specific partnership property is not assignable unless all partners are assigning their rights.

Tax Purposes The income or losses incurred by a partnership are attributed to the partners individually. The partnership itself is not a tax-paying entity. IRC 701. 1

However the partnership is a tax-reporting entity. It must file an informational return to establish the amount of income or loss that partners must include on their individual tax returns. IRC 6031.

TBOC permits a partnership to sue or be sued in the name of the partnership.

Mazzuchelli v. Silberber S. Ct. NJ (p 556) It may be said in general terms that UPA is consistent w/ the entity approach for purposes of facilitating transfers of property, marshalling assets, and protecting the business operation against the immediate impact of personal involvements of the partners. (UPA 25-28, and 40) But w/ respect to liability for performances, contractual or other, including obligations to employees, the UPA plainly did not adopt an entity theory. On the contrary, partners are personally liable and immediately suable. (UPA 15 and 40) Therefore, under UPA, employees are employees of the partnership in a sense w/ respect to its assets, though are actually employees of the individual members.

A judgment against the partnership is not by itself a judgment against any partner; thus the judgment cannot be satisfied from a partners personal assets unless there is also a judgment against the partner (TBOC XXX). Thus, good practice dictates joinder of all partners individually. If the plaintiff sues both, any judgment rendered must be consistenti.e. the partnership cannot be held liable of the individual partners are not.

Bankruptcy Under federal bankruptcy law, the partnership is likewise treated as an entity, so that the adjudication of the partnership as bankrupt does not constitute an adjudication that the partners are bankrupt. Nor does an adjudication of a partner as bankrupt bring the partnership or its assets into bankruptcy. 11 USC 723

TBOC a partnership can hold and convey title to real or personal property as an entity (i.e., in the partnership name), w/o all partners joining in the conveyance.

Statute of Frauds Partnership agreement must be in writing in order to be effective if it is to continue for more than one year (mandatory continuance of the partnership for a period in excess of one year). If not it will be a partnership at will (rightfully dissolved by any partner at any time). Dealing in real property if 3rd person wishes to bind partnership to contract for real property, must be in writing.

Capacity Minors dont have it (K in which minor is one of the partners is voidable and subject to disaffirmance by the minor).

Definition of Person who may become a partner includes: natural persons, partnerships, corporations (whether becoming a partner is w/in the corporations powers is a question of corporations law), LLPs, LPs, and LLCs.

Consent Person may become a partner only w/ the consent of all of the partners. UPA 18(g), TBOC XXXXX

Indicators of existence of partnership: joint ownership of property (suggestive but not dispositive), contribution of capital (though not essential that all partners contribute capital), sharing of gross income (suggestive but not dispositive), sharing profits from business (TBOC raises a presumption of partnership CITE, under UPA sharing of profits is prima facie evidence that a partnership exists. Legal effect of both is the same). [Evidence sufficient to prove a particular fact unless contradicted and overcome by other evidence.] Check exceptions for special relationships.

Parties cannot avoid partnership liability, even by express stipulation negating the relation, if the evidence establishes the essential elements of a partnership.

Partnership by Estoppel Liability of Purported Partner: a person who represents herself as a partner or consents to a representation that she is a partner is liable to a third person who extends credit to the partnership in reliance on the representation. If the holding out is in a public manner, plaintiff need not prove that the purported partner specifically consented to having the communication made to the plaintiff. Liability of Partners who Represent a Third Person to be a Partner: If an actual partner represents a nonpartner to be a member of the partnership, she constitutes that person as her agent with the power to bind her as though the person were in fact a partner. However, any resultant liability binds only those partners who made or consented to the representation. UPA 16(2), TBOC 151.002-3, 151.054 &.037.

Partners as Among Themselves Partners are fiduciaries and owe each other the duties of loyalty and due care and must act in good faith and with fair dealing. They must account to the partnership for any profits made from partnership-related activities. They may not compete w/ the partnership. Unless otherwise agreed, each partner has an equal right to participate in the management and profits but is not

entitled to any salary. The TBOC allows a partner to sue another partner at law or in equity to enforce certain rights, such as those under the partnership agreement or arising independent of the partnership relationship. Under the UPA, partners cannot sue each other at law for damages during the term of the partnership but can only seek an equitable accounting to determine what monies are owing to each partner.

Partners Authority to Bind Partnership to Third Persons Each partner is an agent for the partnership and has apparent authority to bind the partnership whenever apparently carrying on the business of the partnership in the usual way. A partners actual authority can be granted in the partnership agreement or by a vote of the partners (majority for ordinary matters; unanimous for extraordinary matters).

Notice and Knowledge Similar rules to those of agency. Under RUPA/TBOC, a partnership has notice or knowledge of a fact if an individual conducting the transaction has notice or knowledge or would have had it had reasonable diligence been exercised. 151.003 Under UPA, the partnership is deemed to have notice whenever it is communicated to any partner. See UPA 3 & 12.

Partners Liability to Third Persons Under TBOC, partners are jointly and severally liable for all partnership obligations. 152.304-.306 Under UPA, partners are jointly liable for all contract obligations to partnership creditors and jointly and severally liable for all other obligations owed by the partnership to third parties (e.g., tort liabilities). An incoming partner is not liable for partnership obligations incurred before the partner joined the partnership (or the incoming partner is limited to partnership assets under UPA). A retiring partner remains liable on all partnership obligations incurred before giving notice of withdrawal.

Under TBOC, a partner owes to the partnership and other partners the fiduciary duties of loyalty and care and must exercise those duties in good faith and with fair dealing.

Duty of Loyalty: A partner must (i) account to the partnership and hold as a trustee for it any property, profit, or benefit derived by him in the conduct of or winding up of the partnership business or by his use of partnership property, including the appropriation of a partnership opportunity; (ii) refrain from dealing w/ the partnership on behalf of an adverse party; and (iii) not compete with the partnership before dissolution.

Duty of Care: requires that partners refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law in the conduct or winding up of partnership business.

Partner who purchases or holds partnership assets in his own name does so as trustee and can be compelled to account for the assets or their value. Its immaterial that partner used his own funds if it was the partners intention that the assets would belong to the partnership.

Partner may transact business w/ the partnership (loans, etc.) w/o violating fiduciary duties; they are not violated merely b/c a partners actions further his own interests.

Most rights and obligations are governed by the partnership agreement.

Books, Records, Information TBOC partners must be given information necessary for them to carry on their duties (or exercise their rights) as partners, even if they do not demand the information. Under UPA, partners only obligated to furnish information on demand. 20. Upon death of a partner, her personal representative has the same rights with respect to access and inspection of partnership books and records as the partner herself would have had. TBOC XXXX

Each partner will share in the partnership profits and losses according to the partnership agreement. In the absence of an agreement, each partner is entitled to an equal share of the partnership profits, and must contribute to the partnership losses according to her share of the profits. UPA 18(a)

TBOC 152.210 partner may be liable to partnership or other partners for (1) a breach of the partnership agreement, or (2) a violation of a duty to the partnership or other partners that causes harm to the partnership or the other partners.

UPA Principal remedy of partner against co-partners is a suit in equity for dissolution of the partnership and an accounting of its assets. Exceptions where action at law is permitted: partnership dealt w/ one partner as a 3rd person, suit not related to partnership business, wrongful acts of one partner constitute conversion of assets or fraud, one partner is wrongfully excluded, one partner negligently injures person or

property of another, and injury to a partner is caused by the negligence of an employee.

Management

Inspection Distributions

Indemnification

Remuneration

SUMMARY OF RIGHTS OF PARTNERS Each partner has an equal right to participate in the management of the partnership unless the partnership agreement provides otherwise. A partner has a right to inspect and copy the partnership books and records and receive information concerning the partnership. Partners have whatever rights are granted in the partnership agreement as to distribution of profits. If the agreement is silent, partners share profits equally; upon dissolution, partners have a right to the return of their capital contributions. A partner has a right to be indemnified by fellow partners for expenses and personal liabilities incurred on behalf of the partnership. Partners generally have no right to remuneration for their services to the partnership except for winding up the partnership business.

Approach to Whether Partners Act Binds the Partnership

Was the partners act apparently related to the partnership business? o NO Did the partner nevertheless have actual authority to act on behalf of the partnership? YES Partnerships Bound NO Partnership Not Bound o YES Did the partner nevertheless have actual authority to act on behalf of the partnership? YES Partnerships Bound NO Did the third person know that the partner had no authority to act on behalf of the partnership? o YES Partnership Not Bound o NO Partnership Bound

Partners Actual Authority granted in partnership agreement or granted by vote of the partners. Majority vote of the partners is sufficient to give a partner actual authority to carry on ordinary business. UPA 18(h) TBOC 152.209 If act to be done by partner is outside the ordinary scope of business, actually authority can be granted only by unanimous vote, unless partnership agreement provides otherwise.

UPA 9(3) Unanimous vote required for enumerated extraordinary acts: submitting the partnership to arbitration; assigning partnership assets for the benefit of creditors; confessing judgment against the partnership; disposing of the goodwill of the partnership; doing any act that would make it impossible to carry on partnership business.

Notice to or knowledge of a partner will not be imputed to the partnership if the partner is acting fraudulently or adversely to the partnership. RUPA 102(f), UPA 12.

A partnership is liable to third persons for the wrongful acts of a partner committed w/in the scope of the partnership business or other wise committed with authority. UPA 13 & 14, TBOC 152.303

Joint & Several Liability Under TBOC, all partners are J&S liable for all partnership debts and obligations. Under UPA, partners are J&S liable only for torts and breaches of trust injuring third parties. 15(a). When liability is both joint and several, an action may be brought against any single partner without joining the others. Note that if an action is brought against any single partner, any judgment obtained against him is not res judicata against the other partners in subsequent suits against them. A partnership relationship does not establish the requisite privity to invoke res judicata, b/c the liability is several.

Liability of partners for the torts of their co-partners is analogous to the rules of agency. Instead of a respondeat superior theory, however, each partner is deemed to assume liability for any tortuous act committed by a co-partner. Exception for torts requiring malice or intent (must show each partner sought to be held liable possessed such intent). Partners can be held liable for co-partners fraud on third persons only if the co-partner was acting w/in the scope of partnership business.

TBOC Exhaustion Requirement See RUPA 307(d)

UPA Joint Liability a contract creditor may not proceed against any single partner, or else the partner sued can force a joinder of all other partners as necessary parties w/in the rules of compulsory joinder.

If creditor sues partnership as entity and in its name alone and obtains a judgment against the partnership, the judgment may be enforced only against the partnership assets; creditor cannot reach the individual partners assets unless he obtains a judgment against that partner (ie partner named and served).

Under RUPA/TBOC a new partner is liable only for partnership obligations incurred after admission as partner. Under UPA, new partner is liable for all debts of the partnership incurred before or after his admission. However, it can only be satisfied by partnership assets (17) thus, in effect, the incoming partners liability is limited to his partnership contribution.

A PARTNERS LIABILITY TO THIRD PERSONS TBOC UPA RUPA-LLC For Contracts Joint and Several Joint Not Liable For Torts Joint and Several Joint and Several Not liable except for own misconduct For Co-Partners Not Liable Not Liable Not Liable Crimes Partnership Property Indicia: o Was the property acquired in the name of the partnership? o Was the property acquired in the name of a partner w/ any indication of partnership? o Was the property purchased w/ partnership funds?

Distinguish a partners interest in partnership property from his interest in the partnership, which is his right to his share in the partnerships profits, losses, and distributions. The latter is assignable however the assignee receives only the right to receive distributions the partner would have received; no right to participate in the management of the partnership. TBOC 154.001(a)-(c) & .002.

Property Acquired in Name of Partnership deemed to be partnership property, also if in name of one or more partners in their capacity as partners and the instrument that transferred title indicates the name of the partnership.

Acquired in Name of Partner w/ Indication of Partnership deemed to be partnership property. In name of partner and instrument transferring title indicates the named persons capacity as a partner or the existence of the partnership but not its name.

Purchased with partnership assets presumed to be partnership property. Rebuttable presumption.

Separate property presumption if property acquired in the name of one or more partners and the instrument indicates neither the persons capacity as partner nor the existence of the partnership, and the property is purchased w/o the use of partnership assets, there is a rebuttable presumption that the property is the separate property of the named partner even if it is used for partnership purposes.

UPA 8(1) all property originally brought into the partnership stock or subsequently acquired, by purchase or otherwise, on account of the partnership is partnership property. Parties intent controls it must appear that the property was acquired with the intention that it be a partnership asset.

UPA Indicia of Intention [No factor alone will be conclusive.] Title (may be simply be in partnership name for convenience), Purchase w/ partnership funds (unless contrary intention appears, property acquired w/ partnership funds is partnership property 8(2)), Improvements by partnership (fact that partnership funds have been used to improve the asset is entitled to weight, but is not determinative, particularly where improvements are easily severable from the asset), Relation of property to business, use of property, status in partnership books.

Rights in Specific Partnership Property TBOC: Partner has no transferable interest in partnership property; he cannot voluntarily or involuntarily transfer partnership property.

UPA 25(1) Tenant in partnership.

Partners individual creditor may not attach partnership property, but may obtain a charging order against the partners interest in the partnership.

Dissociation when one partner leaves, does not necessarily terminate the partnership. Dissolution process of terminating and winding up the partnership.

TBOC 152.501 Events of Withdrawal partnerships receipt of the partners notice of withdrawal, happening of a trigger event, expulsion pursuant to partnership agreement, by unanimous vote of the partners, judicial determination, death, etc.

TBOC 152.503 Wrongful Withdrawal (Dissociation) partner who wrongfully withdraws is liable for damages caused. Deemed wrongful if it breaches an express provision of the partnership agreement or partnership is for a definite term or particular undertaking and partner withdraws, is expelled, or becomes bankrupt before the end of the term of the accomplishment of the undertaking.

TBOC 152.601-.602 Redemption of Withdrawing Partners Interest Partnership interest of withdrawn partner automatically is redeemed by the partnership as of date of withdrawal. Price is fair value for the interest. If wrongfully withdrawn, lesser of the fair value or amount withdrawn partner would have recd if an event requiring a winding up of partnership business had occurred at the time of withdrawal; this means the lesser of: the value if partnership sold as a going concern or, on the date of withdrawal, partnership assets were sold at their liquidation value. Interest must be paid on the buyout price from the date of withdrawal to date of payment.

TBOC 152.701 After event triggering winding up, partnership continues until the winding up is completed.

In distribution of assets under RUPA, there is no distinction between creditors and partner creditors all get paid first. Under UPA, assets go first to non-partner creditors, and then to creditor partners.

Every partner has the power to dissolve the partnership by express will at any time even if dissolution is in violation of partnership agreement. However, if he does so in contravention of agreement, that partner will be liable to the partnership for any losses that result b/c of the dissolution.

A dissolution of a partnership under UPA must have a winding up of the partnership business, absent a contrary agreement.

A limited partnership is a hybrid business organization that offers a management and tax structure similar to that of a partnership, but allows some investors (i.e., the 10

limited partners) to have limited liability like shareholders of a corporation. Developed to facilitate commercial investments by those who wanted a financial interest in a business but did not want the liabilities/responsibilities of partners. They allow profits and losses to flow directly to partners (avoiding the double taxation on corporate profits) and are not limited in size like subchapter S corporations.

Rationale: At least one person in the limited partnership is personally liable for all partnership debtsthe general partner. Also, b/c it is difficult to justify debt immunity for persons who actively create debt, limited partners are not allowed to participate in management or control of the LP.

LP is a partnership formed by two or more persons, having as its members one or more general partners and one or more limited partners. General partner is jointly and severally liable, assumes the management responsibilities of the partnership. Limited partner is one who makes a contribution (e.g. cash) to the partnership and obtains an interest in the partnerships returns, but who is not active in the partnerships management and is not liable for partnerships debts beyond her contribution.

Formation of LP requires certain formalities certificate of limited partnership must be signed by all the general partners and filed w/ the secretary of state. The LP comes into existence at the moment of filing if there has been substantial compliance with the requirements regarding the content and execution of the certificate. Absent substantial compliance, all partners may be held liable as general partners for partnership obligations.

Texas Certificate of Formation - TBOC 1.002(6), 3.001(a), 3.011(a), Signed by all general partners - 3.004(b)(1), 153.553(a)(1)

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