PARTNERSHIPS - Santa Clara Law



PARTNERSHIPS

I. Definition and Theories

a. An association of two or more persons to carry on as co-owners of a business for profit

i. What is co-ownership

1. Receipt by a person of a share of profits is prima facie evidence of a partner (subject to exceptions)

2. Co-management of the business as an important factor

3. Access to inspect the books

4. Equal rights in management and conduct as a default rule

ii. Matter of degree with no bright-line rule – Must assign weight to the various factors

iii. Situation of mutual agency (see the partnership triangle)

b. Entity Theory v. Aggregate Theory of partnership (UPA is both)

i. Entity

1. The partnership is separate as apart from the partners themselves (Dean Ames; also the theory of RUPA)

2. Every partner is an agent of the principal

ii. Aggregate

1. The partnership is an aggregate of the individual partners by whom it is made (Dean Lewis)

2. Dissolution occurs by removal of one of the partners

c. Default Rules v. Mandatory Rules

i. Default Rules/Inter Se

1. May draft around the default rules via agreement (that is not necessarily in writing)

2. Includes rules regarding the relations of partners to one another

ii. Mandatory Rules/Third Party

1. Liability to third parties

II. Management/Binding the Parnership to Third Parties

a. The partnership is bound by the acts of a partner when he acts within the scope or apparent scope of his authority – Smith v. Dixon

i. Apparent scope of authority is determined by past transactions indicating a custom or course of dealing particular to the firm in question

ii. If partner acts with apparent authority but exceeds actually authority – the partnership is bound as to third parties but the other partners have a remedy against the partner who exceeded the scope of authority

iii. Thus partner as agent of partnership

b. Each partner is, by virtue of the partnership relation, authorized to act as the general agent for his copartners in all matters coming within the scope of the business of the firm, in the same manner and to the same extent as if he had full power of attorney from his co-partners – Rouse v. Pollard

i. Determine if within the scope of the business of the firm by looking to:

1. the usually and ordinary course of business in the locality, or

2. to the course and conduct of the business partnership itself

c. Partners are jointly and severally liable for the tortious acts of other partners if they have authorized those acts or if the wrongful acts are committed in the ordinary course of the business of the partnership – Roach v. Mead

i. Determine what is in the ordinary course of business by looking to the reasonable beliefs of the third parties

ii. Focus on ethical duties and client expectations as a modern trend

d. Partners are liable:

i. Jointly and severally for a partner’s wrongful act;

ii. Jointly for all other debts and obligations of the partnership

III. Duties of Partners to Each Other

a. Duty of loyalty

i. “A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”

ii. Partners in a joint venture required to tell one another of a new opportunity so as not to deprive the other of the opportunity to compete – Meinhard v. Salmon

1. Question of the scope of the partnership – based on K alone, or more broad?

b. RUPA has limited the duty of loyalty and gives partners the option to contractually limit the duty of loyalty

c. Default rules, subject to agreement re rights and duties of partners:

i. Equal profits and losses and repayment of contribution

ii. Partnership must indemnify partner re ordinary conduct of business

iii. Interest paid for advances

iv. Equal right of management

v. No compensation except in winding up

vi. Consent of all required for new partner

vii. Need for majority re decisions except need consent of all partners re matters in contravention of the agreement

d. Other rights and duties

i. Right to inspect books; duty to render information; partner accountable as a fiduciary to the partnership; and

ii. right to an account if:

1. wrongful exclusion, per agreement, as provided based on fiduciary relationship, or whenever other circumstances render it just and reasonable

IV. Dissolution

a. Definition

i. Change in relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business

ii. Partnership is not terminated by dissolution but continues until winding up is completed

b. Types of dissolution

i. Without violation of the agreement

1. By termination of term or purpose

2. By express will of any partner

3. By expulsion of a partner

ii. In contravention of the agreement

1. Still have inherent power to terminate

a. Partners may still terminate, but if it is contravention of the agreement, then the wronged partner can seek remedy from dissolving partner

i. Expectation damages of profits that would have accrued over the course of the remaining term under the contract

iii. If business of partnership is unlawful

iv. Death of partner

v. Bankruptcy of partner

vi. By court decree

1. Court will not dissolve the partnership, however, when partner seeking dissolution has violated his contractual obligations – Collins v. Lewis

2. Court can decree dissolution for willful breach of contract by partner, for lunacy/incapacity, prejudicial conduct, when business is operating at a loss or other circumstances

c. Right of partner to Contribution

i. Each partner is liable to his copartners for his share of any liability created by any partner acting for the partnership as if there had been no dissolution unless (1) the acting partner knew of the dissolution; or (2) the acting partner had knowledge or notice of the death or bankruptcy

d. Lingering Authority

i. Binding authority had regarding winding up

ii. Binding authority if third party extended credit to partnership and had no knowledge or notice of the dissolution

e. Liability not discharged

f. Winding Up – non-wrongfully dissolving partners have the right and authority to wind up the affairs of the partnership business

g. Partnership Property

i. Default rule allowing for liquidation and distribution

1. Only applies UNLESS OTHERWISE AGREED – Adams v. Jarvis

ii. Can contract around the default rule so that the day-to-day operations of the business are not interrupted by dissolution

1. Still have fiduciary duty of loyalty

a. If breached, exiting partner to pay continuing business a share of the profits as damages for breach

V. Expulsion

a. Agreement had to expel partner based upon majority vote

i. Covenant not to compete subject to reasonableness analysis based on an implied covenant of good faith – Gelder v. Webber

b. Expulsion is a rightful dissolution as long as it is accordance with the partnership agreement

i. Thus default rule allows liquidation for cash out of expelled partner

c. RUPA default rules

i. Partnership and business will continue

ii. Disassociation rather than dissolution with 90 days to eliminate lingering apparent authority

VI. Inadvertent Partnerships – Oops

a. Partnership Implied in Fact

i. Look to conduct of partners as to each other

ii. Whether or not a partnership exists is a matter of degree

1. Distinguish as to measures one would take in order to safeguard a loan – Martin v. Peyton

2. Even when partners don’t intend a partnership, their conduct can infer a partnership

iii. The conduct of the parties over a three year period confirms the conclusion that, though appellant was held out to the public as a partner, between themselves a partnership relationship was not intended to be and was not created – Smith v. Kelley

1. No control nor management authority

b. Partnership Implied in Law - Partner by Estoppel

i. Look to conduct of partners as to third parties

1. Legal fiction established based on rights of third parties

2. Representation to third party + reliance = liability

VII. Other Business Forms and Tax Considerations

a. General Partnerships

i. General partners with unlimited liability

ii. Default status

b. Limited Partnerships

i. General partner with unlimited liability and Limited partner with limited liability re management responsibility

ii. Limited partners are a different class from General partners

1. Only liable as to contributions rather than as to all assets, including personal assets

2. Lose limited status if exercise control over the business if third parties reasonably believe that limited partner is a general partner

iii. Must file for limited partnership status at the Sec. of State’s office

c. Limited Liability Partnerships (LLP)

i. General partners who have elected limited liability

1. Thus still have two classes of partners but with an additional shield against liability for General partner

2. Still liable for negligence and misconduct

d. Limited Liability Limited Partnerships (LLLP)

i. General partners with elected limited liability and Limited partners with limited liability

1. Thus still have two classes of partners but with an additional shield against liability for General partner

e. Limited Liability Companies (LLC)

i. Hybrid – limited liability for all participants

1. Partnership taxation with no personal liability

f. Corporation Taxation

i. Profits taxed right off the bat, then taxed again as income after distributed to shareholders as dividends

VIII. Limited Liability Companies

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