BUSINESS ASSOCIATIONS OUTLINE
Campbell – Fall 2015
PARTNERSHIPS
Formation
§ RUPA § 202: Formation of Partnership
o Partnership: (1) association of two or more people (2) to carry on as co-owners (3) a business (4) for profit (whether or not there was a subjective intent to form it)
§ They can inadvertently create one despite expressed subjective intent not to
§ MUST have all four elements. If missing one then DON’T have a partnership
§ Co-ownership attribute distinguishes this from mere agency relationship
§ To say that partners are co-owners of a business is to state that they each have the power of ultimate control
§ Partners in a partnership do NOT enjoy limited liability.
§ Partnerships are governed by the revised uniform partnership act (RUPA). RUPA does NOT apply to a corporation or LLC or the sale of goods.
§ If you are in a partnership there is unlimited liability if the partnership cannot meet its obligations.
§ General partnerships do not need a written K and don’t need to file anything with the state. Also, no minimum capital requirements. The only thing you may need is when a partnership name does NOT use a last name of a partner file the assumed name with secretary of state saying who the partners are.
o An association formed under a statute other than RUPA, a predecessor statute or a comparable statute of another jurisdiction is not a partnership
§ Business associations organized under other statutes are not partnerships. This includes corporations, limited partnerships, and LLC
§ Joint ventures are not themselves partnerships but may be one if all of the above elements are present
§ An unincorporated nonprofit organization cannot be a partnership
o Keep in mind when determining if partnership is formed: 3 rules of construction
§ Joint tenancy, tenancy in common, tenancy by the entirety, joint property, common property, or part ownership does not by itself establish a partnership – even if the co-owners share profits made by the use of the property
· Passive co-ownership of property by itself is not a partnership
§ Sharing of gross returns does not by itself establish a partnership – even if the people sharing them have a joint/common right or interest in property from which the returns are derived
§ Person who receives a share of the profits of business is presumed a partner, unless the profits were received in payment:
· Of a debt by installments or otherwise
· For services as an independent contractor or of wages of other compensation of an employee
· Of rent
· Of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner
· Of interest or other charge on a loan – even if the amount of payment varies w/ the profits of the business, including a direct/indirect present/future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral, OR
· For the sale of the goodwill of a business or other property by installments or otherwise
· RUPA makes no attempt to answer in every case whether a partnership is formed. Whether a relationship is more properly characterized as that of borrower/lender, employer/employee, or landlord/tenant is left to trier of fact
§ Under RUPA § 1006, RUPA applies to all partnerships formed after RUPA is adopted in any given state and, after a transition period, to partnerships formed even before RUPA was adopted
o Majority of states have adopted RUPA, but significant minority including important commercial states (NY, PA, TX) have not. Those states still follow the UPA
§ RUPA default rule: you can opt out of a default rule through an agreement but if you don’t have a partnership agreement RUPA is going to apply
§ RUPA §103
o RUPA is a highly default statute almost everything is a default and you can choose to opt out of ANY RUPA provisions unless they are listed in §103 as the exception to the general rue.
o §103(b) lists the provisions that you CANNOT opt out of.
o § 103(a) except as otherwise provided in subsection (b) relations among the partner and between the partners and the partnerships are governed by the partnership agreement. To the extent the partnership agreement does NOT otherwise provide this act governs relations among the partners and between the partner and the partnership.
o §103(b)
§ The partnership agreement may not 103(b)(3) eliminate the duty of loyalty
§ Unreasonably reduce the duty of care
§ Eliminate the obligation of good faith and fair dealing
§ Vary the right of the court to expel a partner
§ Vary the power to disassociate as a partner
§ Restrict the rights of 3rd parties under RUPA
§ Martin v. Peyton (NY COA 1927):
o KNK firm was having financial difficulties. Hall was one of the partners. He executed agreement wherein respondents were to loan KNK liquid securities that were to be returned to them by a certain date. As compensation, respondents were to receive 40% of the profits of the firm until the return was made. Respondents were also given option to join firm up until a certain date.
o Did KNK and the respondents form a partnership to which Peyton was partner?
§ Court said no. Even though Peyton was a trustee that could inspect and veto and even though they shared in the profits under certain limitations
o Partnerships result from express/implied contracts
§ If as a whole a contract contemplates an association of two or more people to carry on as co-owners a business for profit a partnership exists. If it is less than that, however, then there is no partnership
§ An existing contract can be modified by subsequent agreement (oral/written) – partnership can be created where there wasn’t one before
o Profit sharing and Control sharing.
§ There was a sharing of profits. Peyton did have some control but not enough to say there was co-ownership.
· Peyton had control over CEO. This is no insignificant amount of control. He had the right to information about the company. He had negative control over speculative investments. He had the control to take away from partners the ability to make loans to themselves and the ability to pay themselves. He had the options to kick out other partners and become partners at anytime.
· Peyton had negative control meaning that he could stop them from investing in things and giving out money BUT could not make them give money or decide when to give out dividends or loan
§ Control was not extensive enough along with profit sharing to be considered co-ownership
o RULE: Control and profit-sharing are not dispositive of co-ownership
§ Lupien v. Malsbenden (Maine 1984):
o L entered into written agreement w/ C for the construction of a car. P paid deposit and first payment that C signed – both orders identified YMM as seller. L mainly did business w/ M b/c C wasn’t around. M told L to sign over ownership of his truck to constitute the balance of consideration under the contract. M provided L w/ rental car and then model of car he purchased. Model actually belonged to 3rd person who had entrusted it to YMM for resale. So M purchased the model for L’s use. L never got the car he had contracted to purchase.
o Were M and C partners in the pertinent part of YMM’s business? Yes.
§ M argues that his interest in car operation of YMM wa
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o Profit:
§ Non-profits (like patriotic/civil societies, religious communities, sports clubs, and beneficial/fraternal orders) are NOT partnerships nor joint ventures
§ Joint maintenance of public service for the benefit of associations is NOT
§ Trade associations and unions are generally NOT partnerships because they don’t generate profits in the associations themselves, although they are intended to achieve economic benefits for their members
§ Promoters of a proposed corporation are generally NOT partners b/c they contemplate profit through the corporation rather than through their personal association
§ NOTES:
o RUPA doesn’t have any filing requirements (unlike w/ corporations, LP, LLP, LLC)
§ Absence reflects in part conception that partnership status depends on the factual characteristics of a relationship between two or more people, not on whether they think of themselves as having entered into one
§ Consequence: Not always clear whether they are or are not partners
o Old four element test to determine partnership formation:
§ Agreement to share profits
§ Agreement to share losses
§ Mutual right of control/management of business
§ Community of interest in the venture
o That test is flawed b/c even explicit partnership agreements frequently do not involve either ultimate control or loss-sharing for every partner
§ Better approach: Presence/absence of those factors is evidence not requirement of a partnership
Operation
§ RUPA § 201: Partnership as Entity
o Partnership is an entity distinct from its partners.
§ Embraces the entity nature to relieve concern that there would be a need to convey a new deed from an old to new partnership every time membership changed – there is no “new” partnership
o A limited liability partnership continues to be the same entity that existing before the filing of a statement of qualification under § 1001
§ Explicit entity theory above applies to a partnership both before and after it files a statement of qualification to become an LLP – so the filing does not create a “new partnership”
§ Taxation of partnerships
o Partners do NOT have double taxation in investments in a partnership. They are NOT taxed at the partnership level and then the individual level as well. All earnings of the partnership are treated as personal earning. This is the opposite of corporations, which are, taxed at corporate level and then SH are taxed as well. This is a huge driver at the entity level when choosing to be a partnership or corporation.
o Partner is taxed based on allocation and NOT distribution. If there is not distribution partner’s adjusted gross income will still go up.
o Partner can opt out of default rule and chose to allocate according to capital contributions. Parent can reallocate and legally opt out and into sharing as a function of capital contribution and the IRS will respect their adjusted gross income.
