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Partnerships - Coggle Diagram
Partnerships
Creation
General Partnership: An association of two or more persons to carry on as co-owners a business for profit
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Key test - intent of the parties, no matter what it is called
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Sharing of profits is prima facie evidence of a partnership, but buying property as tenants in common or taking out a loan together is not
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Limited Partnership
Types of partners
General partners - manage the business and are personally liable without limitation for partnership obligations
Limited partners - contribute capital and share in profits but take no part in the control or management of the business, and their liability is limited to their contributions
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Dissociation/Dissolution
Dissociation refers generally to a partner's separation from the partnership, including death, withdrawal, bankruptcy, or expulsion. The partnership is technically still alive at that point, as the law wants businesses to continue
Once a partner wants out, the next question is whether the partner has a right to dissociate. A partner always has the power to dissociate. That does not mean, however, that the partner may not be liable to the partnership for wrongful dissociation
After a partner dissociates from the partnership, the next issue is whether the partnership is dissolved. Before 1995, dissociation always caused dissolution. Now, the remaining partners have the ability to carry on without dissolution if they dissociation was wrongful and the remaining partners choose to continue
Usually on the bar exam, very few partners are involved - sometimes only 2. On the exam, partnerships tend to be on a handshake and thus more frequently dissolve.
Thus, the dissociation of a partner often means a race immediately to dissolution of the partnership. The partnership continues after dissolution only for the purposes of winding up the business
Working Life
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Authority
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Restrictions - third party must know about restrictions on authority or the partnership will be bound
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Liability
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Partner is entitled to indemnification by the partnership for any payments made on the partnership's behalf
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Partner may seek contribution from other partners when paying more than the partner's share of liability
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Incoming partner is not personally liable for any partnership obligation incurred prior to becoming a partner
Winding Up/Termination
Every dissolved partnership must go through winding up before the partnership is terminated. Winding up includes reducing the partnership assets to cash and then distributing that cash to the entitled parties. There may be an issue as to whether a specific asset is actually partnership property or whether it is the individual partner's property:
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Once property distribution is resolved, the assets are sold and the cash is distributed in a specific order:
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Issues arise when assets are insufficient to cover the partnership's obligations. Partners must contribute the amount necessary to cover liabilities. If a partner fails to contribute, the other partners must make up the difference and then seek contribution from that partner
Watch for "advances" given by a partner to keep a failing business afloat. These are not capital contributions, but an inside creditor loan. If the cash comes up short and does not cover everything, add up the loans and capital contributions. Subtract from the available cash. Then divide the losses equally between the partners
If math is not your strong suit, then describe what needs to be done and make an attempt. Do not worry about getting the math right. You will get the points for having described the process accurately.
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Definition: An association of two or more persons to carry on as co-owners of a business for profit.