Business Associations Outline
Partnership Formation (RUPA § 202)
o Association of two or more persons
§ Must be voluntary
§ Not required to intend to form a partnership
§ RUPA § 202(c)(1) says that joint ownership by itself does not establish a partnership.
§ Judged by the degree of activity carried on or contemplated
· Example: The purchase of raw land for enhancement by external forces is probably the clearest example of gain-seeking co-ownership that is not a business. It is only an investment.
· Example 2: The acquisition of property for individual use by the several owners, such as farmers sharing a stallion for stud purposes or a threshing machine, does not alone make a partnership.
§ Because business seems to connote a profit objective, profit seems to fall into the business element.
§ Where the rubber meets the road; this is the element most likely to result in a partnership not being formed.
§ If there is a sharing of profits, this element is more likely to be met.
§ Sharing of Profits
· RUPA § 202(c)(3): “A person who receives a share of the profits of a business is presumed to be a partner in the business.”
· Sharing gross receipts counts less than sharing profits towards the element of co-ownership.
§ Sharing of Control
· There can be a lot of control without creating a partnership.
· Martin v. Peyton: Even though there was a great deal of control, it was negative control, and negative control does not itself create a partnership.
o No writing requirement
o No filing requirement with state
o No limits as to what can be done in a partnership.
§ Example: It is permissible to run a very high-risk business.
RUPA: Default vs. Mandatory Provisions
§ All of the provisions in RUPA are default rules that can be written around in the partnership agreement, except for those rules specifically set out in RUPA § 103(b), which says the partnership agreement may not:
o Eliminate duty of filings, etc.
o Unreasonably restrict access to books/records
o Eliminate duty of loyalty
§ Note: However, things can be specified as violative, if not unreasonable.
o Unreasonably reduce the duty of due care
o Eliminate the obligation of good faith and fair dealing, but may set reasonable standards for evaluating these
o Vary the power to dissociate, except to require notice in writing
o Vary the right of judicial partner expulsion
o Vary the requirement to wind up the partnership business under § 801
o Vary the law applicable to an LLP under § 106(b)
o Restrict the rights of third parties under the Act
§ “Entity Approach”
o RUPA § 201 defines a partnership as an entity distinct from its partners.
o Unlike the old UPA, a partnership can sue and be sued in its own name.
o RUPA § 401(h): No remuneration, except for reasonable compensation in winding up
o RUPA § 401(j): One partner, one vote
o RUPA § 401(f): Each partner has equal rights in the management and conduct of the partnership business.
§ Amending Partnership Agreement
o RUPA § 401(j): Amendment only with consent of all the partners
§ Profit Sharing
o RUPA § 401(a): Deals with allocation
o RUPA § 401(b): Partners are to share equally in profits
§ Single taxation
§ The partnership itself is not a tax-paying entity, but it may have to file an informational return.
§ Partners are taxed on their allocative share, and they are not taxed again at distribution.
o Note that this is unlike a corporation, which has double taxation.
§ RUPA § 104(a) says that, “Unless displaced by particular provisions of this Act, the principles of law and equity supplement this Act.”
o The comment to this section specifically mentions agency.
§ Actual Authority
o Manifestation of principal to agent that authorizes the agent to act on its behalf
§ There is a critical nexus between the principal’s words/conduct and the agent’s actions.
§ Can be express or implied
§ If a reasonable person would believe he had authority, it is actual.
o With respect to a partnership, actual authority would have to come from a majority of partners under default rules.
§ Apparent Authority
o Manifestation of principal to third party that leads third party to believe agent has authority
o Power of Position
§ Giving someone a job that traditionally has authority gives that person apparent authority.
§ Position as a Partner
o RUPA § 301(1): Each partner is an agent of the partnership for the purpose of its business.
§ This leads to partners having actual and apparent authority because there is a manifestation with respect to holding the position.
§ This provision applies unless the partner had no authority to act for the partnership in the particular matter, and the person to whom the partner was dealing had actual notice, meaning no actual and no apparent authority.
o RUPA § 301(2): If the partner was not carrying on business within the actual course, then it does not bind the partnership, unless the act was authorized by other partners.
o A dissociated partner can still bind the partnership for two years, so long as the third party had no actual notice, or constructive notice resulting from the lapse of 90 days after a statement of dissociation is filed with the Secretary of State.
Limited Liability Partnerships (LLPs)
§ RUPA § 306(c): “An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract
or transferee of interest
§ Participation in Winding Up
o RUPA § 803(a): Allows a dissociate in winding up, so long as dissociation is not wrongful
§ When Dissociation is Wrongful
o RUPA § 602(b)
§ Breach of express provision of partnership agreement
§ In a partnership of definite term or undertaking, before completion of term:
· By express will unless within 90 days of another partner’s dissociation due to death
· Expelled by judicial determination
· Dissociated by becoming a debtor in bankruptcy
§ Death of a Partner
o RUPA § 601(7)(ii): Dead partner dissociated
o RUPA § 801: Not an event of dissolution
§ “Settle Up” Provisions
o RUPA § 701(b): The buyout price is the greater of liquidation price or the price as a going concern less his share in liabilities.
§ Debtor in Bankruptcy
o RUPA § 601(6)(i): A partner becoming a debtor in bankruptcy causes the partner to be dissociated, but does not cause dissolution.
§ Liability of Dissociated Partner to Other Persons
o RUPA § 703(a): A partner’s dissociation by itself does not discharge the partner’s liability for a partnership liability incurred before dissolution.
o RUPA § 703(b): However, the partner’s liability is limited to two years, and the other party must have believed the dissociated partner was then still a party and did not know of dissociation.
§ Ability of Dissociated Partner to Bind Partnership
o RUPA § 702(a): A partner can bind the partnership for two years if the other party reasonably believed the dissociated partner was still a partner and did not have notice.
§ However, this is limited to 90 days after partnership files statement of dissociation with Secretary of State
§ Ability to Bind After Dissolution
o RUPA § 804(a): If deals with winding up
o RUPA § 804(b): would have bound under § 301 if other party did not have knowledge of dissolution
o RUPA § 805(c): Person is deemed to have notice of dissolution 90 days after filing of statement of dissolution with Secretary of State
§ New Partners
o RUPA § 306(b): Not bound for previous debts
§ Generally, these rules are default rules.
o However, in RUPA § 103, some of these are mandatory (e.g. a partnership is dissolved if it becomes illegal to run the business.