Business Associations Outline

BUSINESS ASSOCIATIONS Outline
 
I.    BACKGROUND INFO: Basic Business Forms
A.   3 Historical Choices
1.   Sole Proprietorship     (SP) = unincorporated business owned by 1 person; there are more of these than General Partnership and corporations combined; could incorporate if they want to.
2.   General Partnership (GP) = association of 2+ persons to carry on a business as co-owners for profit.
3.   Corporation (Corp) = 2 kinds: (a) Closely-held (CHC) = small number of people, usually family and friends; (b) Publicly-held (PHC) = usually traded on stock exchange.
B.   Why Incorporate?
1.   Advantage: Limited Liability of shareholders and owners
a.   Sole proprietor is usually responsible for business debts
b.   All partners of GP are generally liable
2.   Disadvantage: Double Taxation
a.   GP has conduit tax treatment; no FIT
3.   RISK is the theme of the class.
C.   AB Furniture Hypothetical:   A puts in $100K, B puts in labor but no $. A wants veto power and ltd liab of $100K. B is pd $1500/wk and then rest of profits split 50/50
1.   What is legal relationship between A & B?
a.   General partnership is DEFAULT for business owned by > 1 person; to form anything else, they must take some other action (e.g. file w/ secretary of state‑ general partnership is the only one that doesn’t require a filing) (see requirements in II. A.)
b.   Are they Co-owners?
                      i    inconclusive whether B is an owner; depends on market rate of salary
                    ii    clear that A is an owner (Q is whether A is co-owner, which depends on B)
c.   Assume a general partnership was formed, have they achieved what they wanted to achieve? NO
                      i    Veto power? yes‑ trumped through agreement; but B could bind PARTNERSHIP despite this
                    ii    Limited liability? no, but A could be indemnified by B if B has money
A)   LLP Þ both A & B are safe from liability
B)   LLC Þ same, just as if A & B were Shareholders of a corporation
                   iii    Split profits 50/50? yes, unless they agree differently
                    iv    B’s salary? yes‑ trumped through agreement
                      v    Could have accomplished everything under corporation, LLP, LLC, so business form matters
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PARTNERSHIP (Formation)
 
I.    GENERAL PARTNERSHIP [UPA 1914/RUPA 1994; UPA applies in majority of jurisdictions] A.   Definition [§ 6(1)] = an association of 2 or more persons to carry-on as co-owners a business for profit. 5 elements:
1.   Association: suggests voluntariness or intent BUT courts may find PARTNERSHIP w/o intent (Martin v. Peyton).
2.   2+ Persons: § 2 defines it broadly to include individuals, partnerships, corporations, and others
3.   Carry On: suggests an on-going concern; governed by same law as JVs (although you see them contrasted)‑§ 31(1)(a) says PARTNERSHIP can be formed to have narrow scope & focus.
4.   Co-owners: How do you know who is an owner of a business? 2 KEYS:
a.   Sharing of profits
                      i    § 7(4): profit sharing is prima facie evidence of a partnership; i.e. it is a rebuttable presumption; no such inference when payment was debt, wages, annuity to a widow or representative of deceased partner, interest on debt, though amount will vary with the profits, or consideration for sale of good-will of a business or other property
                    ii    § 7(3): sharing of gross returns does not of itself establish a partnership
b.   Right to control the business
                      i    note: looking at right to control, not the exercise of control
                    ii    veto power is enough
c.   Other factors: names
                      i    Names of the business‑ this is not in the statute and may not be conclusive but courts will certainly look at it
                    ii    Names in which license is held, if required
                   iii    Names on other forms (e.g. tax returns, prop title)
5.   Business for Profit: very broad; excludes hobbies
B.   Veto Power
1.   § 18(e): all partners shall have equal rights in the management and conduct of the partnership business
a.   BUT the statute says that you can draft around this so if partners agree then one can have veto power
b.   UPA does not require agreement be in writing and statute of frauds is usually met because contract can usually theoretically be fully performed within one year (note: The question is not length contemplated; Gano was decided wrongly)
2.   § 9(1): every partner is an agent of partnership for purpose of its business practice (Þ – WTF does this mean?) this is important because it suggest that one partner may have ability to bind the partnership despite another’s veto power
C.   How to look at liability for a partnership
1.   Is the partnership liable?
2.   If so, are the partners liable to that partnership?
D.   Limited Liability
1.   Partner has bifurcated liability on a PARTNERSHIP obligation:
a.   § 15(a): partners are joint and severally liable for a partners torts and breaches of trust (§13, §14)
                      i    can sue only one partner individually for the full amount of the debt
A)   UPA favors tort partnership
B)   this is the worst aspect of general partnership operation
b.   § 15(b): partners are jointly liable for contracts
                      i    must “join” all the partners in the lawsuit if you want to go after them individually; can always sue just the partnership
                    ii    partner can seek contribution from other partners
                   iii    An agreement between the partners won’t affect a 3rd P’s recovery (i.e. § 15 can’t be overridden) but it does work as an indemnification agreement between the partners
2.   Texas/RUPA
a.   Partners are jointly and severally liable on ALL obligations [R §306(a)]                       i    this is even worse than UPA but evened out by exhaustion requirement
                    ii    favors 3rd parties
                   iii    BUT exhaustion requirement; i.e. must exhaust partnership assets before going after a partner individually [R §307(d)] Þ this essentially makes partners guarantors of the partnership, i.e. partnership is primarily liable, partners secondarily liable
3.   Incoming Partners [§ 17]: Liable for pre-existing things EXCEPT limited to partner’s stake in the partnership, not personally liable.
E.   Profits and Losses
1.   Default Profits Rule [§ 18(a)/R § 401(b)]: partners share equally in the profits
2.   Default Losses Rule: split according to share in profits; if there is no agreement on profits then losses follows the default rule.
a.   Bias in favor of capital partner (& might not meet expectations)
                      i    Every partner must contribute to losses, capital or otherwise, BUT contributor of services is not entitled to a return of his contribution (§ 18(f)).
                    ii    This is because capital is more important to the business than services (but service partner loses his time & time=money and lost opportunity)
                   iii    Lessons
A)   Service partners must make sure to override § 18(f) to be entitled to a salary (refer back to the subject to any agreement language in the beginning of § 18…they are only entitled to a salary if an agreement is made about receiving a salary…if they simply provide the services with no agreement then they are not by default entitled to a salary)
B)   Service partner must override § 18(a) so as not to liable for ½ capital contribution
                    iv    Other arguments that service provider can make: (Richert)
A)   implied agreement that they are not liable for capital contribution (court didn’t buy it but others have)
B)   service provider is not a partner, this was sole proprietorship & service provider was an employee
3.   Incoming Partners [§ 17]: Liable for pre-existing things EXCEPT limited to partner’s stake in the partnership, not personally liable.
                      i    RATIONALE: because they were not around when they obligation was incurred.
                    ii    After joining as a partner they have the same obligations and liabilities as the other partners.
4.   Distribution of Assets Upon Dissolution [§ 40: how to distribute; § 18: rights of partners]; § 40 (b): Priority
a.   3rd P Creditor
b.   Partners‑ other than capital & profit
                      i    includes:
A)   partner loans (not contributions) money to partnership
B)   partner lays out money on partnership’s behalf
C)   if partnership agrees to pay a partner compensation, it comes out of here (but not if it was already paid)
                    ii    18(b): a partner who must pay on a partnership obligation (e.g. C recovers from one partner individually for a partnership obligation) is entitled to indemnification from the partnership for any reasonably incurred payments made in the ordinary & proper conduct of the bus or for preservation of its business or property; must 1st dissolve partnership asset before going after another partner
A)   can be paid back without dissolution
B)   if partner could not get indemnification then it comes out of here
C)   UPA vs. RUPA: RUPA does away with dissolution and one partner can sue another partner under partnership matters without dissolving the partnership
                   iii    Partners‑ capital
                    iv    Partners‑ profit/losses
A)   agreement between the partners with respect to one partner’s limited liability operates as an indemnification clause (remember: has no effe