(I) The Essentials: Partnerships

Q1: How is a partnership formed?

A1: A partnership is formed whenever two or more people associate to carry on as

co-owners of a business for profit. Importantly, no writing is required to form a
partnership, though the Statute of Frauds does apply so that if the relationship is
intended to last for more than a year then a writing is generally required to
evidence that intent. A partnership may not be formed for an illegal purpose.

Q2: Who may enter into a partnership?

A2: Anyone who is capable of entering into a contract may enter into a
partnership. Any person who lacks capacity will be liable only to the extent of his
capital contributions. Unless otherwise agreed upon, no one can become a partner
without the express or implied consent of all partners.

Q3: What will form a basis for evidence that a partnership was in fact formed?

A3: Because no writing is required to form a partnership, other evidence may be

needed to prove intent. Sharing of profits raises a presumption of partnership
unless the share was received as payment for a debt, for services rendered, as rent
payment, etc. In addition, property held in joint tenancy may indicate the existence
of a partnership, as will sharing of gross returns in the business.

Q4: What type of property is deemed to be partnership property?

A4: First, there is partnership capital. This is the property or money contributed
by each partner for the purposes of carrying on the business. In a broader sense,
partnership property is everything the partnership owns, including capital and
property subsequently acquired.

Q5: What types of titled property will be considered partnership property?

A5: Titled property is deemed to be partnership property if it is either titled in the

partnership name or if it is titled in the name of one or more partners and the
instrument transferring title notes the titleholder’s capacity as a partner or the
existence of a partnership. Titled property will be presumed to be partnership
property if it was purchased with partnership funds regardless of in whose name
title is held. Titled property will be presumed to be separate property of the
partners if the property is held in the name of the partner(s), the instrument
transferring title does not indicate the person’s capacity as a partner or mention the
existence of the partnership, and partnership funds were not used to acquire the
property.

Q6: What types of untitled property will be considered partnership property?

A6: When analyzing untitled property, a variety of factors will be considered in

determining the status of the property. The following will all lead to a likelihood
of the property being deemed partnership property: the property is acquired with
partnership funds; the property is used by the partnership in conducting its
business; the partnership has entered into its books the property as a partnership
asset; the partnership has improved the property with partnership funds; or the
partnership has maintained the property with partnership funds.

Q7: Is a partner’s interest in the partnership transferrable?

A7: Yes, a partner’s interest is both transferable and attachable. It should be noted
that if a partner transfers his interest in the partnership, the transferee receives no
rights as to the operation of the partnership. Rather, the transferee receives profits,
losses and distributions to which the transferring partner would otherwise be
entitled.

Q8: What are the management rights of each partner in the partnership?

A8: All partners have equal rights in the management of partnership business
absent an agreement to the contrary. Certain management decisions that are
considered ordinary business can be controlled by a majority vote, but matters
outside the ordinary course of business of the partnership require the unanimous
consent of all partners.

Q9: What are the fiduciary duties of each partner?

A9: Each partner owes a duty of loyalty to account for all profits or other benefits
derived by the partner in connection with the business of the partnership. The duty
of loyalty also requires that each partner not deal with the partnership as one with
an adverse interest and that each partner refrain from competing with the
partnership. Further, each partner has a duty of care which requires that the
partner refrain from engaging in negligent, reckless or unlawful intentional
misconduct.

Q10: What are the rights of remuneration for each partner?

A10: Absent an agreement to the contrary, a partner has no right to remuneration

for services rendered to the partnership except for reasonable compensation for
services performed in winding up the partnership business.

Q11: Is a partner entitled to indemnification from other partners for expenses

incurred in operating the partnership business?

A11: Yes, a partnership must indemnify every partner in regard to payments made
and obligations incurred in carrying on the partnership business. Note also that if a
partner makes a payment or advance on behalf of the partnership beyond the
contribution the partner agreed to make, then that contribution is treated as a loan
to be re-paid with interest.

Q12: May a partnership sue a partner, and may a partner sue the partnership?

A12: Yes, this is allowable. A partnership may sue a partner for breach of the
partnership agreement or for breach of a duty that the partner owed to the
partnership. Note also that a partner may sue the partnership to enforce a right
created by the partnership agreement.

Q13: What is apparent authority?

A13: Each partner is an agent of the partnership for the purposes of carrying out
the business of the partnership and as such the partner has authority to bind the
partnership when dealing with third parties. Specifically, the act of any partner for
apparently carrying on in the ordinary course the partnership business binds the
partnership unless the partner had no authority to act for the partnership in the
particular matter and the person with whom the partner was dealing knew or had
reason to know that the partner lacked authority to act.

Q14: Does a partner have apparent authority to transfer partnership property?

A14: Yes, any partner may transfer property held in the name of the partnership.
If property is held in the name of one or more partners but the partnership itself is
not named, then the named partners may transfer the property. If property is
transferred without the authority to do so to a bona fide purchaser, the purchaser
will take the property free of the partnership interest.

Q15: What is actual authority?

A15: Actual authority is the authority a partner reasonably believes he has based
on the communications between the partnership and the partner.

Q16: To what extent may a partner be held civilly liable for acts committed in
furtherance of the partnership business?

A16: Partners are liable for all contracts entered into by a partner in the scope of
partnership business or with the authority of the partnership. Partners are also
liable for all torts committed by any partner or employee of the partnership within
the ordinary course of partnership business or with the authority of the partnership.
Liability is joint and several.

Q17: Is an incoming partner liable for obligations incurred by the partnership

before the person became a partner?

A17: An incoming partner is not liable for such obligations, but an outgoing
partner remains liable unless there has been a payment, release or a novation.

Q18: What is dissociation?

A18: Dissociation is a change in the relationship of the partners caused by any

partner ceasing to be associated in the carrying on of the partnership. A partner
becomes dissociated from the partnership by notice of the partner’s express will to
withdraw, or the happening of an agreed event. Further, dissociation may occur by
expulsion of the partner pursuant to agreement by unanimous vote, or by a
partner’s bankruptcy. Note also that death or incapacity of a partner is reason for
dissociation. It is not the case that dissociation will automatically cause the
dissolution and winding up of a partnership (except in a partnership at will).

Q19: What are the consequences of dissociation?

A19: Upon dissociation, a partner’s right to manage the partnership ends. The
partnership must then purchase the dissociating partner’s interest and must
indemnify that partner against known predissociation liabilities as well as
postdissociation liabilities not incurred by the dissociating partner’s acts. A
partner who wrongfully dissociates (in violation of the partnership agreement, or
before the completion of the partnership term) is liable to the remaining partners
for damages caused by the wrongful dissociation. A partner who wrongfully
dissociates before the expiration of the partnership term will not be entitled to the
buyout price (the price paid by the other partners to the dissociating partner) until
the term expires unless the dissociating partner can establish that an earlier
payment will not cause undue hardship to the partnership.

Q20: May a partner be bound by the acts of a dissociated partner?

A20: A partnership can be bound by an act of a dissociated partner undertaken

within two years after the dissociation if the act would have bound the partnership
before dissociation and the other party to the transaction reasonably believed the
dissociated party was still a partner and did not have notice of the dissociation.

Q21: Will the dissociated party after dissociation be liable for obligations incurred
by the partnership with third parties?

A21: A dissociated partner can be liable for obligations incurred by the

partnership within two years after the partner dissociates if when entering into the
transaction the other party reasonably believed the dissociated partner was still a
partner and did not have notice of the partner’s dissociation. Note that a
dissociated partner can reduce the two-year period to ninety days if the dissociated
partner files a notice of dissociation with the secretary of state.

Q22: What is meant by dissolution of a partnership?

A22: Unlike with dissociation above, dissolution of the partnership generally

requires the partnership business to be wound up. There are quite a few events that
might cause the dissolution of a partnership, and they are as follows: (1): in a
partnership at will, notification by any partner of an intent to withdraw; (2): in a
partnership for a definite term or for a specific purpose, expiration of that term or
completion of the purpose or consent of all the partners to dissolve; (3) within 90
days after a partner’s death, bankruptcy, or wrongful dissociation, if at least half of
the remaining partners wish to dissolve; (4) the happening of an event agreed to in
the partnership agreement that requires the partnership to dissolve; (5) issuance of
a judicial decree requiring the partnership to dissolve.
Q23: May a partner bind the partnership after dissolution?

A23: Yes, a partnership can be bound after the partnership has dissolved. The
partnership will be bound by any act of the partner necessary for winding up the
partnership’s business. In addition, the partnership will be bound by other acts if
the party with whom a partner dealt did not have notice that the partnership had
dissolved. Such liability can, however, be limited by the filing of a statement of
dissolution with the secretary of state; all persons are deemed to have notice 90
days after such a filing.

Q24: Will the partnership continue to exist after dissolution?

A24: The partnership will continue to exist until the partnership is wound up. All
have the right to wind up the partnership except for partners who have wrongfully
dissolved the partnership and bankrupt partners.

Q25: May dissolution be waived?

A25: Yes, any time prior to the winding up of partnership business, the partners
may decide to waive the dissolution and continue the business of the partnership.
This requires unanimous vote by the partners who have not wrongfully dissolved
the partnership. Such waiver, however, will not affect the rights of those who have
reasonably relied on the dissolution before receiving notice of the waiver.

Q26: After dissolution, how will partnership assets and liabilities be distributed?

A26: Partnership assets are reduced to cash and liabilities are distributed in the
following order: first to creditors including partners who are creditors, and then to
partners’ accounts. A partner who is forced to pay more than his share of
partnership debts is entitled to contribution from the others partners.

Q27: What is a limited liability partnership?

A27: The major advantage of a limited liability partnership (“L.L.P”) is that the
partners are not personally liable for the obligations of the L.L.P.
Q28: How is an L.L.P formed?

A28: Two components to keep in mind are voting and filing. The terms on which a
partnership becomes an L.L.P must be approved by whatever vote is necessary to
amend the partnership agreement. If the partnership is silent in this regard, then all
partners must approve the terms and conditions of the partnership becoming an
L.L.P. As to filing, the partnership must file a statement of qualification with the
secretary of state. The partnership becomes an L.L.P at the time of filing the
statement or on the date specified in the statement, whichever is later.

Q29: What is the extent of liability of each partner in an L.L.P?

A29: A partner in an L.L.P is not personally liable for the obligations of the
partnership whether arising in contract, tort, or otherwise. Note, however, that
even in an L.L.P, a partner will remain personally liable for his own wrongful acts.

Q30: What is a limited partnership?

A30: A limited partnership is a partnership that is comprised of one or more

general partners and one or more limited partners. The general partners are
personally liable for partnership obligations while the limited partners generally
are absolved from all obligations other than the obligations associated with their
agreed-upon contributions to the partnership. Importantly, unlike that of a general
partnership, a limited partnership can be created only by filing a certificate of
formation with the state.

Q31: What is the process for adding additional partners to a limited partnership?

A31: A person may be admitted to a limited partnership as a general partner or as

a limited partner as provided in the partnership agreement, as a result of merger or
on the consent of all partners.

Q32: Are all partners in a limited partnership entitled to partnership distributions?

A32: A partner has no right to distributions unless that partner has made a
contribution to the partnership, and the contribution can be in the form of money,
property, services, or promises to make such a contribution.
Q33: What are the liabilities of a general partner in a limited partnership?

A33: A general partner of a limited partnership is jointly and severally liable for
all obligations of the limited partnership. Note that it’s possible for a general
partner to also be a limited partner but that dual status will not absolve the partner
of the liability of a general partner. A person who becomes a general partner of an
existing limited partnership is not personally liable for any obligation that the
limited partnership incurred before that person became a partner

Q34: What are the duties of a general partner in a limited partnership?

A34: A general partner owes the limited partnership limited fiduciary duties of
care and loyalty similar to those owed by a partner in a general partnership. But
note that a general partner of a limited partnership does not automatically violate
this duty merely because his conduct furthers his own interest.

Q35: What are the liabilities of a limited partner in a limited partnership?

A35: A limited partner is not personally liable for any obligation of the limited
partnership.

Q36: What are the duties of a limited partner in a limited partnership?

A36: Generally, a limited partner owes no fiduciary duty to the partnership and is
therefore free to compete with the partnership unless the partnership agreement
provides otherwise.

Q37: What are the rights of all partners as to distributions in a limited partnership?

A37: All partners are entitled to distributions, and distributions must be made on
the basis of the partners’ contributions. Note also that a limited partnership must
not make a distribution to partners if making such distribution would render the
limited partnership unable to pay its debts as they become due or the limited
partnership’s total assets would be less than the sum of its total liabilities. A
general partner who consents to an improper distribution is personally liable to the
partnership for the amount of the distribution that exceeds the amount that could
properly have been distributed. In addition, a partner who receives an improper
distribution may be forced to return the amount to the partnership.
Q38: May a partner in a limited partnership transfer the right to distributions?

A38: A partner’s right to distributions is personal property and may therefore be

transferred. Importantly, the transferee only receives the right to receive the
distributions. The transfer does not make the transferee a partner. The partner
transferring the interest will remain a partner but if a partner transfers his entire
transferable interest then such will be ground for expulsion of that partner.

Q39: What are some other rights that are common to all partners in a limited
partnership?

A39: All partners may lend money to and transact other business with the limited
partnership. Further, all partners may apply for a decree of dissolution of the
limited partnership whenever it is not reasonably practicable to carry on business.
All partners may also maintain direct actions against the limited partnership or
another partner for legal or equitable relief.

Q40: What is a derivative action?

A40: A partner may maintain a derivative action to enforce a right of a limited

partnership if the partner first makes a demand on the general partners to bring an
action to enforce the right and the general partners fail to take such action in a
reasonable amount of time. An action may likewise be brought if such demand
would be futile. A derivative action may be maintained only by a person who is a
partner at the time the action is commenced and who was a partner when the
conduct giving rise to the action occurred or whose status as a partner devolved
upon him by operation of law or pursuant to the terms of the partnership agreement
from a person who was a partner at the time of the conduct.

Q41: What are the rights specific to the general partners in a limited partnership?

A41: Each general partner has equal rights in the management and conduct of the
limited partnership’s activities. Note, however that certain acts require the
approval of both all general and limited partners. Such approval is required to
amend the partnership agreement, convert the partnership to a limited liability
limited partnership, dispose of all or substantially all of the limited partnership’s
property outside the usual course of business, admit a new partner, and
compromise a partner’s obligation to make a contribution or to return an improper
distribution. All general partners are entitled to information about the partnership
when requested, and indemnification for liabilities that are incurred in the ordinary
course of carrying out the business of the partnership.

Q42: What are the rights specific to the limited partners in a limited partnership.

A42: Limited partners, like general partners, may participate in the management
and control of the limited partnership. Such participation does not cause a limited
partner to become a general partner. In addition, limited partners have the right to
inspect and copy any partnership records required to be maintained.

Q43: What is the process for dissociation of a partner in a limited partnership?

A43: The same events that will cause dissociation of a partner in a general
partnership will cause dissociation of a partner (general or limited partner) in a
limited partnership. A limited partner has no right to disassociate before
termination of a limited partnership, but a general partner may do so in accordance
to the rules for a general partnership.

Q44: What events will cause a limited partnership to dissolve?

A44: A limited partnership may be dissolved upon application of a partner if it is

no longer reasonably practicable to carry on the business of the partnership. In
addition, a limited partnership may be dissolved by the secretary of state for failure
to pay fees or for failure to file an annual report. Otherwise, the partnership will
dissolve upon the happening of an event specified in the partnership agreement.
Dissolution will also occur after a general partner dissociates if at least one general
partners remains and all partners owning a majority in interest consent to the
dissolution. If, on the other hand, a general partner disassociates and no general
partner remains thereafter, then the partnership will dissolve after 90 days unless a
new general partner is admitted. Finally, dissolution will occur 90 days after the
dissociation of the last limited partner unless a new limited partner is admitted to
the partnership within that 90-day period.

Q45: What occurs after dissolution of the limited partnership?

A45: A limited partnership continues after dissolution only for the purpose of
winding up its activities. After dissolution, a limited partnership will be bound by
any acts of a general partner that are appropriate for winding up the partnership. In
addition, a general partner may bind the partnership by performing acts that go
beyond winding up the business of the partnership if the person with whom
the general partner has dealt did not have notice of the dissolution.

Q46: How are the assets of a limited partnership distributed after dissolution?

A46: Assets are distributed as follows: first to creditors, and then the surplus is
paid in cash as distributions. If assets are insufficient, then each person who was
a general partner when the obligation was incurred must contribute to the
partnership to satisfy the obligations. The contributions due from each partner are
in proportion to the right to receive distributions when the obligation was
incurred.