The ABCs of: Partnerships and Limited Liability Companies
Here is a collection of 26 important concepts, from A to Z, you need to know about Partnerships and Limited Liability Companies for the bar exam:
A – Agency Principles: Agency principles govern the relationship between partners, the partnership, and third parties. A partner acts as an agent of the partnership when conducting business within the scope of partnership authority, creating binding obligations for the partnership.
BONUS: A – Authority of Partners: Partners have actual authority arising from the partnership agreement or a vote by partners, and apparent authority based on the partnership’s ordinary course of business. This authority allows partners to bind the partnership in transactions with third parties.
BONUS: A – Actual Authority: Actual authority refers to the express or implied power given to a partner by the partnership agreement or other partners’ consent. It is enforceable even if third parties are unaware of it.
BONUS: A – Apparent Authority: Apparent authority arises when a partner’s actions lead third parties to reasonably believe that the partner is authorized to act on behalf of the partnership, even if such authority was not expressly granted. This binds the partnership to obligations incurred by the partner within the ordinary course of business.
B – Books and Records: Partners have the right to access partnership books and records. This includes the ability to inspect and copy financial documents to ensure transparency and accountability in partnership management.
BONUS: B – Business Decisions: Ordinary business decisions generally require a majority vote, while decisions outside the ordinary course of business require unanimous consent.
C – Capital Contributions: Capital contributions are the funds or assets provided by partners to establish or operate the partnership. These contributions determine the partners’ ownership interests but are separate from personal liability.
D – Dissolution: Dissolution occurs when a partnership ceases to operate as a business entity. Events causing dissolution include the expiration of a term, the achievement of a specific purpose, or the withdrawal of a partner.
BONUS: D – Dissociation: Dissociation refers to a partner leaving the partnership. While dissociation does not always lead to dissolution, it may trigger winding up if the partnership cannot continue.
BONUS: D – Duty of Care: Partners owe the duty of care, which requires them to avoid grossly negligent or reckless conduct, intentional misconduct, or knowing violations of the law in the conduct of partnership business.
BONUS: D – Duty of Loyalty: Partners owe the duty of loyalty, which includes refraining from competing with the partnership, avoiding conflicts of interest, and accounting for any benefit derived from partnership property or opportunities.
E – Equal Rights: In the absence of an agreement to the contrary, all partners have equal rights in managing the partnership and sharing in profits and losses.
F – Fiduciary Duties: Partners owe fiduciary duties to the partnership and each other. These duties include the duty of loyalty (acting in the partnership’s best interest) and the duty of care (avoiding negligence or reckless conduct).
G – General Partnerships: A general partnership is formed when two or more persons associate to carry on as co-owners of a business for profit, regardless of intent. All partners have equal management rights and unlimited personal liability for partnership debts.
H – Hostile Acts: Partners engaging in activities that harm the partnership or violate fiduciary duties may face claims from other partners for damages or injunctive relief.
I – Indemnification: A partnership must indemnify partners for liabilities incurred in the ordinary course of business or to preserve partnership property.
J – Joint Liability: Partners in a general partnership are jointly liable for contracts and jointly and severally liable for torts committed within the scope of the partnership’s business.
K – Knowledge of Partners: The knowledge of one partner regarding partnership matters is generally imputed to all partners. This principle ensures collective accountability and consistent decision-making.
L – Limited Partnerships: A limited partnership consists of at least one general partner with unlimited liability and one or more limited partners whose liability is restricted to their investment. Limited partners typically have no management rights.
BONUS: L – Limited Liability Partnerships: Limited liability partnerships (LLPs) shield all partners from personal liability for partnership obligations, except for their own wrongful acts or omissions.
BONUS: L – Limited Liability Limited Partnerships: A limited liability limited partnership (LLLP) is a limited partnership where both general and limited partners have limited liability. This structure provides an additional layer of liability protection for general partners, similar to that of limited partners, while retaining the tax advantages and flexibility of a limited partnership.
BONUS: L – Limited Liability Company: A limited liability company (LLC) is a hybrid entity combining features of a partnership and corporation. Members are shielded from personal liability for the LLC’s debts and obligations, and it is important to note that LLC stands for Limited Liability Company, not Corporation.
M – Management Rights: Partners have equal rights in managing the partnership unless otherwise agreed. However, significant decisions outside the ordinary course of business typically require unanimous consent.
N – Notice: Notice given to one partner about partnership matters is considered notice to the entire partnership, provided the partner receiving notice has authority to act on behalf of the partnership.
O – Ordinary Course of Business: Actions taken in the ordinary course of business bind the partnership unless a partner lacked authority and the third party knew of the lack of authority.
P – Profits and Losses: Unless the partnership agreement provides otherwise, profits and losses are shared equally among partners, regardless of their capital contributions.
Q – Quorum Requirements: Quorum requirements ensure that a minimum number of partners participate in decision-making processes. Partnerships may specify quorum rules in their agreement.
R – Right to Information: Partners have a right to information about the partnership’s business and financial condition. This promotes informed decision-making and accountability.
S – Statement of Authority: A partnership may file a statement of authority to clarify which partners have authority to enter transactions on behalf of the partnership. This limits disputes with third parties.
T – Transfer of Partnership Interest: A partner may transfer their partnership interest, but the transferee does not become a partner without the consent of the remaining partners. The transferee is entitled to the transferring partner’s share of profits and distributions.
U – Unlimited Liability: In a general partnership, all partners have unlimited personal liability for the partnership’s debts and obligations.
V – Voting Rights: Each partner generally has one vote, regardless of their capital contribution or profit share, unless the partnership agreement specifies otherwise.
W – Winding Up: Winding up is the process of settling the partnership’s affairs after dissolution. This includes paying debts, distributing assets, and completing unfinished business.
X – Expulsion of a Partner: A partner may be expelled from the partnership pursuant to the partnership agreement or by unanimous vote if their actions harm the partnership or breach fiduciary duties.
Y – Yearly Accounting: Partners are entitled to a yearly accounting of the partnership’s finances, ensuring transparency and compliance with fiduciary duties.
Z – Zoning Compliance: Partnerships holding real property must comply with zoning regulations. Failure to comply may lead to fines, penalties, or restrictions on property use.
