Business Organizations Outline

Subject: Business Organizations

Professor: Susan Hamill

Semester: Fall 2013

1. General Partnerships

A. Forming a General Partnership

1. Std- ACTING as Co-OWNERS for Profit (“Mutual manifestation of itent”) (§202(a))

a. NO formal or written Requirements (§202(c)3)

b. Person who receives profits presumed partner (§202)

2. GR1- Look at how ACTED ….NOT need specific INTENT to form partnership OR Partner Agreement (although can be evidence/important)

a. Intent- GR1a- Subjective Intent to “carry on business for profit” NOT need specific intent “to form partnership” (Byker v. Mannes)

ex1. FORMED GP (Byker)- B & M operating marina for profit, involved other businesses, no explicit partner agree, M not pay loss, claim not partner

ex1a. B can collect share of losses form M for marina b/c act together for profit EVEN THOUGH never explicitly agree to be partners

ex1b. GR- Focus on whether parties intended to and did “carry on as co-owners a business for profit” NOT if subjective intent to for partnership

b. Partner Agreement- GR1b- unambiguous agree to form partnership NOT establish on own (Hynansky v. Vietri)

ex1. NOT PARTNER- (Hynansky)- H & V sign agree land deal says “partners” but one claims not intend be partner only one claims tax losses (other not)

ex2. PARTNERS- (Byker)- b/c intent carry on bus for profit NOT matter that no explicit partner agree

ex2a. REAS1- existence of a partnership agreement is evidence of a GP but not conclusive

c. Look for:

i. intent to make profit (ex. Agreement)

ii. Sharing of Profits/losses

iii. equal right to manage

iv. specific purpose/goal (for joint ventures)

3. When GP Formed

a. Separate Entity- Partnership is entity separate from its partners (AL RUPA §201)

b. Separate Property-Property acquired by partnership is property of the partnership and not the partners individually (AL RUPA §203)

c. Partnership’s Prop- when: (i) acquired in name of partnership OR (ii) by partner w/ indication on instrument to partner (AL RUPA §204)

d. Unlimited Liability- Partners are Jointly & Severally liable for one another (AL RUPA §306(a))

e. Past Liability- Partners are J&S liable BUT person admitted as partner NOT liable for partnership oblig from b/f admitted as partner (§306(b))

f. Profits = Partner- Person who receives profits presumed partner (AL RUPA §202(3))

4. Effect of Partnership Agreement

a. GR1- Agreement govern Relationship b/t Partners AND Partners 3rd parties (AL RUPA §104a)

i. GR1a- BUT Agreement NOT affect RIGHTS of 3rd parties

ex1. P1 defrauds 3rd party, they can still hold P2 liable for all, BUT then agree would govern P2 v. P1

ii. GR1b- Partner Agree can be ORAL (AL RUPA §105(6))

b. Excepts- Immutable/CANT “write out” (§104b)

1. Cant Eliminate Duty of Loyalty

a. BUT CAN limit the duty- “identify types of activities that don’t violate duty”

2. Cant Unreasonably Reduce duty of care

3. Cant Eliminate Obligation of good faith and fair dealing

4. Cant Unreasonably restrict access to books

5. Cant Vary GP’s power dissociate OR court’s power to expel

a. Except to require notice

B. Sharing Profits & Losses

1. Defaults (AL RUPA §401b)

a. Profits- GR1- shared EQUALLY, regardless of contribution

b. Losses- GR2- shared SAME AS PROFITS

i. if no agreement on both, would mean share losses equally since profits default is equal

c. Capital Account- (AL RUPA §401a)-credited by

i. Positive- each P credited w/ NET value of property contributed (can be intangible) to partnership + partner’s share of profits

ii. Charging-each P charged w/ NET value of property transferred to partner (from partnership) + partner’s share of losses

d. Practically (Hamill Approach)

i. Negotiate how PROFITS will be split/allocated, and put in writing

ii. Negotiate how LOSSES will be split/allocated, and put in writing

iii. Negotiate how CAPITAL will be allocated (especially if one partner is SWEAT EQUITY) and put in writing

2. Partnership Agreement- can DEFINE Profit/Loss share (can be ORAL, if prove exists…not advised)

3. ISSUE1- “Secret Profits”

a. GR1- Partnership entitled to profits P made in secret/while breaching Fiduc Duty (Storch Engineers)

ex1. Must share (Storch Engineers) P1 runs secret side bus., dealing w/ own partnership (violated fiduc. loyalty), must share profits/disclose

ex1a. Even Though, employment contract NOT explicitly forbid P going out and stealing business for self

ex1b. REAS1- was working as an architect, in the same “general business” as partnership, had duty to disclose

4. ISSUE2- “Sweat Equity” Partner- P1 contributes only work, P2 contributes only $…no agree on share losses

a. (Kovacik)/Fairness GR- “sweat equity” P NOT liable for share of losses

ex1. NOT Liable (Kovacik) K puts in 10k, R puts in work, K&R agree to share profits 50/50 not agree on losses, K wants $ from R

ex1a. REAS- Ct. created exception to RUPA §4.01 (AL not follow) when one party all $, other all sweat equity…sweat not liable for losses

ex1b. GR- in Joint Venture where one contributes property and other $, NEITHER liable to each other for losses

b. AL/ Law & Econ GR-“sweat equity” P IS liable for share of losses

i. REAS- if you don’t like it, come up with your own agreement, have no sympathy for not using a contract

c. Possible Alternatives

1. Form an LLC or LLP

2. Losses 100% to K up to $10K

3. Income first restores previous losses- up to $10k

5. ISSUE2- Partner Compensation (for “Sweat Equity P”/for services provided to Partnership)

a. GR1- ANY compensation for partner (beyond profits) must be Unanimously approved by OTHER partners

b. GR2- at dissolution, Partner NOT entitled to compensation for services/”Sweat-Equity” (AL RUPA §401h)/(Shamloo)

i. GR1a- Absent agreement, sweat equity partner ONLY gets share PROFITS at dissolution, if no profits sweat equity was all for free (Shamloo)

ex1. NO Compensation