Partnership formation, management and authority

Agreement as the Control Map: Formation Terms and Internal Power

A general partnership’s formation and internal control turn on the partners’ agreement, including terms inferred from conduct, and on the difference between a partner’s internal power and the firm’s external obligations. The agreement need not be a formal document or even written. It may establish contributions, profit allocations, management roles, voting thresholds, limits on borrowing, and procedures for authorizing unusual transactions. A document’s label-“joint venture,” “co-ownership,” or “business arrangement”-does not by itself answer what agreement the parties made.

Start by separating three questions. First, what did the partners agree to? Second, what does the governing default rule supply because the agreement is silent? Third, did a particular partner have authority to take the challenged action? A profit-sharing provision is not automatically a management provision. A clause giving one partner responsibility for sales is not necessarily a grant of power to sell the partnership’s only building. A one-time vote authorizing a transaction may give actual authority for that transaction without amending the continuing agreement.

The RUPA defaults govern only to the extent the agreement does not displace them. Thus, if the agreement changes voting or assigns management to particular partners, that arrangement ordinarily controls. If it is silent, use the management and voting defaults already covered in the topic lesson. Do not infer extra voting power from greater capital, a larger profit percentage, or the title “managing partner” unless the agreement or the partners’ conduct supports it.

The agreement’s freedom is not unlimited. RUPA permits variation of many default rules but does not permit partners simply to erase core statutory protections, including access to partnership information and the duties of loyalty, care, and good faith and fair dealing. The agreement may define permitted activities or standards within the statutory limits, but a purported waiver must be tested against those limits rather than accepted because every partner signed it.

The practical near miss is management control versus authority to bind. A partner can violate an internal management rule and still bind the partnership to an outside person under the ordinary-course authority rule. The partnership may then have an internal claim against that partner. Conversely, a partner may have internal authorization for an extraordinary act, making the act binding even though the transaction was not ordinary. Never use the internal vote as a substitute for the external authority analysis.

This topic is not starred: legal resources may be supplied when it is tested, and where they are not, you need only demonstrate recognition that the topic is at issue. You are not required to hold this topic cold; because you will not know whether resources are coming, the floor you must hold in memory is agreement versus default, management consent versus partner authority, ordinary-course versus outside-ordinary acts, and no authority plus dealer knowledge or notification.

The Floor for a Fast Read: Vocabulary, Triggers, and Question Order

The floor is the usable framework, not a demand to recall every subsection. Hold these terms and their relationships:

Partnership agreement: the partners’ written, oral, or implied contract governing their relations and the firm’s business.
Default management rule: the statutory answer when the agreement is silent; the lesson’s ordinary-matter and unanimous-change rules fit here.
Actual authority: power the agreement, a valid partner vote, or the partnership’s manifestations give the partner internally.
Ordinary-course authority: the RUPA external rule for an act apparently carrying on the partnership’s ordinary business or the kind of business it carries on.
Extraordinary act: an act not apparently in that ordinary course; the external rule requires authorization by the other partners.
Notification: a person receives notification of a fact when the fact is brought to the person’s attention or when the notification is duly delivered to the person’s place of business or another designated place for receiving communications; a restriction known only to another partner is not enough for the ordinary-course exception.

Run the questions in this order:

Identify the agreement and any specific authority or limitation it creates.
Classify the act objectively: is it apparently carrying on the partnership’s ordinary business or the kind of business it carries on?
If ordinary, ask whether the partner lacked authority and the person dealing with the partner knew or had received a notification of that lack of authority.
If not apparently ordinary, ask whether the other partners authorized the act.
Keep the result separate from internal consequences. A binding act may still breach the agreement; an unbound act may still be ratified later under ordinary agency principles.

Authority at the Boundary: Ordinary Acts, Restrictions, and Supplied Text

RUPA’s ordinary-course rule is objective. The question is not whether the partner personally thought the deal was useful, but whether the act apparently carried on the partnership’s business or the kind of business it carried on. A retailer’s ordinary inventory purchase usually fits. A partner’s sale of the entire enterprise, transfer of its only real estate, or commitment to a fundamentally different business ordinarily does not.

The two neighboring rules can be compared this way:

Question	Apparently ordinary act	Not apparently ordinary act
Trigger	Act carries on the partnership’s business or its kind of business	Act does not apparently carry on that business
Internal restriction	Restriction defeats binding effect only if the partner lacked authority and the dealer knew or had received a notification	Other partners’ authorization is required
Dealer’s ignorance	Ignorance generally leaves the partnership bound despite the internal restriction	Ignorance does not create authority
Result without authorization	Partnership is bound unless the conjunctive exception applies	Partnership is not bound unless the other partners authorized it

Read a supplied provision for its operative consequence first. In RUPA § 301, the operative word is binds. The ordinary-course trigger comes next. Then isolate the exception: “unless” introduces two requirements joined by and-lack of authority plus the dealing person’s knowledge or received notification. The second paragraph is a separate route for acts outside the ordinary course.

Once a partner has acted for the firm, the sequence is:

Loading diagram…

A dealer’s actual knowledge and a notification received by the dealer are alternative ways to satisfy the notice part of the ordinary-course exception. A private warning given only to a dissenting partner does not establish that the dealer knew or had received a notification. Nor does the dealer’s failure to investigate ordinarily equal knowledge. By contrast, a restriction delivered to the dealer before contracting is precisely the kind of fact that can defeat ordinary-course binding when the partner also lacked authority.

The supplied provision is:

RUPA § 301

(1) Each partner is an agent of the partnership for the purpose of its business. An act of a partner, including, but not limited to, the execution of an instrument in the partnership name, for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority.

(2) An act of a partner which is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership only if the act was authorized by the other partners.

A bicycle-repair partnership operates one shop and routinely purchases inventory from wholesalers. Its written agreement provides that neither partner may borrow more than $10,000 without the other partner’s consent. Dana, who regularly orders inventory, signs a $60,000 six-month loan with First Bank to purchase bicycles and parts for the shop. Dana did not obtain the other partner’s consent. First Bank had never received the partnership agreement or any notice that Dana lacked authority to borrow.

The partnership refuses to repay, arguing that Dana violated the agreement.

Practice

Is the partnership bound to First Bank by the loan?

Common errors are concrete, not merely verbal:

Treating the 60% profit share as two votes confuses economic allocation with management control.
Treating an internal $10,000 borrowing limit as automatically effective against a bank ignores the requirement that the bank knew or had received a notification.
Calling a sale of a firm’s only building “ordinary” because the partner signed a contract confuses the form of the act with the business it apparently carries on.
Assuming an outsider’s ignorance cures an extraordinary act overlooks § 301(2), which requires authorization by the other partners.

Three Fast Applications: Agreement, Ordinary Authority, and Extraordinary Power

Practice

Nia and Pavel operate a two-person graphic-design partnership under a written agreement allocating profits 70% to Nia and 30% to Pavel. The agreement says nothing about management, and Pavel objects when Nia seeks to accept a routine client contract. Which statement is most accurate?

A two-partner retail partnership’s agreement says neither partner may sign a supplier contract exceeding $5,000 without the other’s consent. Mia signs a $20,000 order for ordinary inventory without consent. The supplier never saw the agreement and received no notice of the restriction. Is the partnership bound?

A partner in a small architecture partnership signs a contract selling the partnership’s only office building. The other partner did not authorize the sale, and the partnership agreement gives no partner unilateral power to sell firm property. The buyer did not know about the internal agreement. Is the partnership bound?

High-Yield Points - ⚡ Biggest Takeaways

Separate the agreement’s internal limits from the partner’s external ordinary-course authority. For an ordinary act, lack of authority defeats binding only with dealer knowledge or received notification. For an extraordinary act, outsider ignorance does not replace authorization by the other partners.

Unlock the full lesson and continue reading

Signup to continue reading this lesson and unlimited access questions, flashcards, AI notes, and more

Scan to download app

UNLOCK FREE ACCESS

Practice Questions: Partnership formation, management and authority

1. Two architects agreed orally to operate a design business as co-owners, divide profits equally, and share project decisions. They did not form another entity or address authority in their agreement. One architect, without consulting the other, signed a contract in the firm's name to purchase standard drafting software used in its projects. The vendor knew the signer was one of the firm's two co-owners but did not know of any disagreement between them. When the other architect learned of the purchase, she objected and told the vendor that the firm would not pay. The vendor seeks payment from the business and both architects. Which of the following is the vendor's strongest argument?

A. The purchase binds the partnership because a partner ordinarily may bind it through an apparently ordinary-course transaction.
B. The purchase binds only the signing architect because every partnership decision requires advance approval from all partners.
C. The purchase binds the partnership only if the objecting architect later ratifies the contract with full knowledge of its terms.
D. The purchase binds neither architect because an oral agreement cannot create a partnership with authority to contract.

Show answer

Answer: A. The purchase binds the partnership because a partner ordinarily may bind it through an apparently ordinary-course transaction.

The purchase binds the partnership because a partner ordinarily may bind it through an apparently ordinary-course transaction. - Operating the design business as co-owners for profit created a general partnership, and each architect is ordinarily its agent for business transactions. - Standard drafting software used in the firm’s projects is an ordinary-course purchase; the vendor had no notice of a restriction on the signer’s authority, so the partnership and its partners are liable. The purchase binds only the signing architect because every partnership decision requires advance approval from all partners. - Sharing project decisions does not mean every contract needs both architects’ advance approval. - Even if the architects disagreed internally, the vendor had no notice of a restriction when the partner signed an ordinary-course purchase contract. The purchase binds the partnership only if the objecting architect later ratifies the contract with full knowledge of its terms. - Ratification is unnecessary when a partner’s ordinary-course authority already binds the partnership at signing. - The other architect’s later objection does not undo the contract with a vendor that lacked notice of any authority dispute. The purchase binds neither architect because an oral agreement cannot create a partnership with authority to contract. - A written agreement is ordinarily unnecessary to form a general partnership; the architects’ co-ownership and profit sharing support one here. - Because the oral agreement formed a partnership, its partner could bind it by purchasing standard software for its projects.

2. Two architects formed a general partnership without filing any organizational document. Acting within the partnership's ordinary business, both partners signed a five-year lease for studio space. One year later, the partners unanimously admitted a third architect as a partner. The third architect contributed cash, began voting on partnership matters, and received an equal share of profits. The third architect did not sign the lease or agree to assume existing partnership debts. Six months after the admission, the partnership stopped paying rent because it lost a major client. The landlord obtained a judgment against the partnership and now seeks to collect the unpaid rent directly from the third architect's personal assets. The jurisdiction follows the generally accepted rule governing an incoming general partner's liability for obligations incurred before admission. Is the landlord likely to succeed against the third architect personally?

A. The new partner is personally liable because every partner is personally liable for all partnership obligations whenever enforcement occurs.
B. The new partner is personally liable because admission as a partner constitutes an implied assumption of the partnership's existing debts.
C. The new partner is personally liable because participating in management eliminates the liability protection otherwise available to incoming partners.
D. The new partner is not personally liable because the lease obligation arose before that partner's admission to the partnership.

Show answer

Answer: D. The new partner is not personally liable because the lease obligation arose before that partner's admission to the partnership.

The new partner is not personally liable because the lease obligation arose before that partner's admission to the partnership. - The original partners signed the five-year lease before admission, so the lease obligation was incurred before the third architect became a partner, even though rent went unpaid later. - Under the rule for incoming general partners, the landlord cannot collect that prior obligation from the third architect’s personal assets without a separate assumption of liability. The new partner is personally liable because every partner is personally liable for all partnership obligations whenever enforcement occurs. - General partners ordinarily face personal liability for partnership obligations, but the rule for an incoming partner excludes obligations incurred before admission. - The landlord’s later judgment and the timing of enforcement do not change when the lease obligation arose. The new partner is personally liable because admission as a partner constitutes an implied assumption of the partnership's existing debts. - Admission, a cash contribution, and an equal profit share establish the architect’s partner status, not an assumption of existing debts. - The third architect neither signed the lease nor agreed to assume it. The new partner is personally liable because participating in management eliminates the liability protection otherwise available to incoming partners. - Voting on partnership matters confirms the architect participated as a partner, but management participation does not remove the protection for pre-admission obligations. - The controlling fact is that the lease was signed before the third architect joined.

3. A manufacturing company appointed an employee as purchasing manager and informed a longtime supplier that the manager would handle equipment purchases. During the next year, the manager placed several orders of up to $80,000, which the company accepted and paid. The company then privately instructed the manager not to place any order exceeding $25,000 without the president's approval, but it did not notify the supplier. One week later, the manager ordered a $60,000 machine from the supplier using the same company email account and purchase-order form used for prior orders. The supplier had no notice of the private limitation. The president promptly rejected the machine when it arrived. Which of the following is the supplier's strongest argument that the company is bound?

A. The company is not bound because the purchasing manager lacked actual authority for orders exceeding $25,000.
B. The company is bound because the purchasing manager's own assurances established authority to place the order.
C. The company is not bound because apparent authority cannot continue after actual authority has been privately limited.
D. The company is bound because its communications and prior conduct reasonably indicated continuing authority to the supplier.

Show answer

Answer: D. The company is bound because its communications and prior conduct reasonably indicated continuing authority to the supplier.

The company is bound because its communications and prior conduct reasonably indicated continuing authority to the supplier. - The company identified the employee as purchasing manager to the supplier and accepted and paid for prior orders of up to $80,000, creating apparent authority for the $60,000 order. - The supplier had no notice of the new $25,000 limit, and the manager used the same company email account and purchase-order form as before. The company is not bound because the purchasing manager lacked actual authority for orders exceeding $25,000. - The private instruction removed actual authority to place the $60,000 order without the president’s approval. - It did not remove the manager’s apparent authority as to a supplier that had not been told of the limit. The company is bound because the purchasing manager's own assurances established authority to place the order. - An agent’s own assurances, standing alone, cannot establish apparent authority. - The supplier’s stronger basis is the company’s notice of the manager’s role and its payment of earlier, larger orders. The company is not bound because apparent authority cannot continue after actual authority has been privately limited. - Apparent authority can continue after a private restriction when the supplier has no notice of it. - The president’s rejection when the machine arrived does not undo the company’s earlier manifestations to the supplier.

4. Two architects orally agreed to operate a design studio as co-owners, share profits equally, and participate equally in management. They did not form a limited-liability entity. One architect, acting without consulting the other, signed a three-year office lease in the studio's name. Leasing suitable office space was ordinary for an architectural practice, and the landlord had no notice of any restriction on the architect's authority. The studio occupied the space for eight months but then stopped paying rent. The landlord sued the studio and both architects for the unpaid rent. The nonsigning architect argues that she cannot be personally liable because she neither signed nor approved the lease. Under generally accepted partnership principles, which of the following is the strongest conclusion?

A. Only the partner who signed the lease is liable because the other partner did not participate in the transaction.
B. Neither partner is liable because the partnership, rather than its partners, is exclusively responsible for partnership obligations.
C. Both partners are liable only if the landlord first obtains and unsuccessfully executes a judgment against the partnership.
D. Both partners are personally liable because the lease is a partnership obligation incurred in the ordinary course of its business.

Show answer

Answer: D. Both partners are personally liable because the lease is a partnership obligation incurred in the ordinary course of its business.

Both partners are personally liable because the lease is a partnership obligation incurred in the ordinary course of its business. - Operating the studio as co-owners for profit created a general partnership, even though the architects made only an oral agreement. - Leasing suitable office space was ordinary for the practice, so the signing partner bound the partnership; both partners are personally liable for its unpaid rent. Only the partner who signed the lease is liable because the other partner did not participate in the transaction. - A partner’s personal liability for a partnership obligation does not depend on signing or approving the contract. - The landlord had no notice of an authority restriction, and the office lease was an ordinary-course transaction that bound the partnership. Neither partner is liable because the partnership, rather than its partners, is exclusively responsible for partnership obligations. - A general partnership does not give its partners the liability shield associated with a limited-liability entity. - Because the studio incurred the rent obligation, both architects are personally liable for it. Both partners are liable only if the landlord first obtains and unsuccessfully executes a judgment against the partnership. - Prior unsuccessful execution is not a condition of personal liability: both partners are liable for the partnership’s lease obligation. - Rules governing when a creditor may collect from a partner’s assets are distinct from whether that partner owes the debt.

5. Two architects formed a general partnership to operate a design practice, sharing profits and losses equally. Their partnership agreement was silent on outside business activities. While working on a joint project, one architect was approached by a wealthy client seeking a lucrative commission for a museum expansion, a matter closely related to the partnership's ongoing work. Without disclosing the opportunity to her partner, she accepted the commission for herself and completed it using her own time and resources, keeping all the fees. When her partner discovered this, he demanded that she turn over the profits from the museum project to the partnership. She refused, arguing that she completed the project on her own time and that the partnership agreement did not restrict outside business activities. Is the partner likely to prevail in requiring her to account for the profits?

A. Yes, because a partner owes a duty of loyalty to account to the partnership for any property, profit, or benefit derived from an opportunity related to the partnership's business, even without an express agreement.
B. No, because a partner may pursue any business opportunity that arises outside partnership office hours.
C. No, because the partnership agreement did not expressly prohibit outside business activities.
D. Yes, but only if the partner can show that partnership funds or resources were used to secure the commission.

Show answer

Answer: A. Yes, because a partner owes a duty of loyalty to account to the partnership for any property, profit, or benefit derived from an opportunity related to the partnership's business, even without an express agreement.

Yes, because a partner owes a duty of loyalty to account to the partnership for any property, profit, or benefit derived from an opportunity related to the partnership's business, even without an express agreement. - The museum expansion was closely related to the architects’ ongoing partnership work, so taking the commission without disclosure implicated the partner’s duty of loyalty. - That duty applies even though the agreement is silent on outside work, and she must account to the partnership for the fees from this opportunity. No, because a partner may pursue any business opportunity that arises outside partnership office hours. - Completing the museum project on her own time does not make a partnership-related opportunity hers to keep. - The relevant facts are how the commission arose and its connection to the practice, not the hours she spent completing it. No, because the partnership agreement did not expressly prohibit outside business activities. - A partner’s duty of loyalty applies by default; the agreement need not expressly forbid outside commissions. - Silence about outside work did not authorize her to take this closely related commission without disclosing it to her partner. Yes, but only if the partner can show that partnership funds or resources were used to secure the commission. - Using partnership funds or resources is not required when a partner appropriates an opportunity connected to the partnership’s business. - Her use of personal resources to complete the museum project therefore does not defeat the demand that she account for its profits.

6. Before a corporation was formed, its promoter signed a six-month equipment lease that expressly stated, “Landlord agrees to look solely to the corporation, once formed, for performance of this lease, and Jordan Lee shall have no personal liability.” After articles of incorporation were filed, the board learned all material terms of the lease, approved use of the equipment, and authorized corporate payments of rent. The corporation used the equipment and paid rent for three months before becoming insolvent. The landlord now seeks the remaining rent from both the corporation and the promoter. No later agreement altered the lease's disclaimer language. Under generally accepted rules governing preformation contracts, which of the following best states the parties' liability?

A. The promoter remains liable despite the disclaimer because filing the articles does not automatically release him from a preformation contract.
B. Only the corporation is liable because the lease's express disclaimer of personal liability relieved the promoter once the corporation adopted the contract.
C. Neither party is liable because a clause disclaiming the promoter's personal liability voids the entire preformation contract.
D. Only the promoter is liable because a corporation cannot be bound by a contract that predates its existence, even with adoption.

Show answer

Answer: B. Only the corporation is liable because the lease's express disclaimer of personal liability relieved the promoter once the corporation adopted the contract.

Only the corporation is liable because the lease's express disclaimer of personal liability relieved the promoter once the corporation adopted the contract. - The corporation adopted the lease when its board, knowing the material terms, approved use of the equipment and authorized rent payments; the corporation then used the equipment and paid rent. - The lease expressly directs the landlord to look solely to the corporation and states that Jordan Lee has no personal liability, so the landlord cannot recover the remaining rent from him. The promoter remains liable despite the disclaimer because filing the articles does not automatically release him from a preformation contract. - Filing articles alone does not release a promoter from the usual personal liability on a preformation contract. - Here, however, the lease’s express disclaimer removes Jordan Lee’s personal liability; the conclusion does not rest on incorporation alone. Neither party is liable because a clause disclaiming the promoter's personal liability voids the entire preformation contract. - The disclaimer addresses who is liable, not whether the lease is valid. - The corporation became liable by adopting the lease through informed board approval, equipment use, and rent payments. Only the promoter is liable because a corporation cannot be bound by a contract that predates its existence, even with adoption. - A corporation can become bound by adopting a preformation contract after it is formed. - The board’s approval and the corporation’s performance established adoption, while the lease expressly excluded Jordan Lee’s personal liability.

7. An architect owned a design studio as a sole proprietor. She hired a marketing consultant under a one-year agreement stating, “Consultant is an independent contractor and receives 8% of the studio’s monthly gross revenue.” The consultant could recommend advertising strategies but could not sign contracts, hire workers, set project prices, access bank accounts, or bind the studio. The architect retained all final decision-making authority and bore all business losses. After the studio failed to pay a supplier, the supplier argued that the consultant was a general partner and therefore personally liable for the studio’s debt. No partnership filing had been made. The supplier has no evidence that the consultant represented himself as a partner. Which of the following is the consultant’s strongest argument that no general partnership existed?

A. The consultant was not a partner because the parties never filed a partnership certificate.
B. The consultant was a partner because participating in management necessarily creates a partnership.
C. The consultant was not a partner because receiving gross-revenue compensation alone does not establish co-ownership.
D. The consultant was a partner because any compensation tied to business revenue is treated as profit sharing.

Show answer

Answer: C. The consultant was not a partner because receiving gross-revenue compensation alone does not establish co-ownership.

The consultant was not a partner because receiving gross-revenue compensation alone does not establish co-ownership. - A general partnership requires carrying on a business as co-owners, and the consultant’s 8% of monthly gross revenue was compensation for marketing services. - The architect retained final decisions and bore all losses, while the consultant could only recommend strategies and could not bind the studio. The consultant was not a partner because the parties never filed a partnership certificate. - A general partnership can arise without a filing, so the absence of a certificate does not resolve whether the parties were co-owners. - The consultant’s limited authority and gross-revenue compensation, rather than the lack of paperwork, support his argument. The consultant was a partner because participating in management necessarily creates a partnership. - Recommending advertising strategies is advisory, not necessarily participation as a co-owner in managing the studio. - The architect kept final authority, and the consultant could not set prices, hire workers, or bind the studio. The consultant was a partner because any compensation tied to business revenue is treated as profit sharing. - A percentage of gross revenue is not a share of profits, which account for expenses. - Even profit sharing is not conclusive of partnership, and this consultant received revenue-based compensation without bearing business losses.

8. Two architects operated a design business as equal general partners under a written agreement. The agreement required both partners' approval before the firm borrowed more than $50,000. Without the other partner's approval, one partner obtained a $70,000 loan in the partnership's name from a bank to purchase ordinary design equipment. The bank had previously made smaller equipment loans to that partner on the firm's behalf, but it had received a copy of the partnership agreement before making this loan. The partnership used the equipment but defaulted on the loan. The bank sued the partnership and both partners. Which of the following is the strongest conclusion?

A. The partnership and both partners are liable because every partner can bind the partnership despite a third party's knowledge of an authority restriction.
B. The partnership is not bound because the bank knew that the partner lacked authority for this loan, although adoption could create liability.
C. Only the borrowing partner is liable because general partners have limited liability for obligations incurred in the partnership's name.
D. Only the partnership is liable because partners are not personally liable for contractual debts arising from ordinary partnership business.

Show answer

Answer: B. The partnership is not bound because the bank knew that the partner lacked authority for this loan, although adoption could create liability.

The partnership is not bound because the bank knew that the partner lacked authority for this loan, although adoption could create liability. - The $70,000 loan exceeded the agreement’s $50,000 limit, and the bank had received the agreement before lending, so the partner’s ordinary-course authority does not bind the partnership on these facts. - The partnership’s use of the equipment does not by itself establish that it knowingly adopted the unauthorized loan, though adoption could make it liable. The partnership and both partners are liable because every partner can bind the partnership despite a third party's knowledge of an authority restriction. - A partner generally can bind the firm in ordinary business, but that rule does not override the bank’s knowledge of the agreement’s approval requirement. - The bank’s earlier, smaller equipment loans do not supply authority for this loan above $50,000. Only the borrowing partner is liable because general partners have limited liability for obligations incurred in the partnership's name. - General partners do not have limited liability merely because an obligation was incurred in the partnership’s name. - Whether the non-borrowing partner owes this contractual debt depends first on whether the partnership became bound. Only the partnership is liable because partners are not personally liable for contractual debts arising from ordinary partnership business. - General partners can be personally liable for partnership contractual obligations, including debts incurred in ordinary business. - Here, the threshold issue is the bank’s knowledge of the restriction on a loan exceeding $50,000, not an exemption for the partners.

Flashcards: Partnership formation, management and authority

1. When is a partnership bound by a partner’s apparent authority?

Show answer

Under RUPA, an act apparently carrying on the partnership’s ordinary business binds the partnership unless the partner had no authority and the third party knew or had notice of that lack of authority. An act outside the ordinary course generally requires actual authority, such as authorization by all partners.

2. What are partners’ default rights to participate in management and vote?

Show answer

Each partner has equal rights in the management and conduct of the partnership business, regardless of capital contribution. Ordinary-course matters are decided by a majority of partners; acts outside the ordinary course require unanimous consent under RUPA.

3. What is a general partnership, and how is it formed under the majority rule?

Show answer

A general partnership is an association of two or more persons to carry on a business as co-owners for profit. Under the majority RUPA rule, it is formed by agreement or conduct and requires no filing or written agreement.

4. What facts create a presumption that a partnership exists?

Show answer

A person’s receipt of a share of business profits creates a presumption of partnership, subject to exceptions such as payment of a debt, wages, rent, interest, or a sale-related payment. Profit sharing alone is not conclusive if the parties did not intend to co-own the business.

5. When is a partner’s dissociation wrongful?

Show answer

A dissociation is wrongful if it breaches an express term of the partnership agreement or, in a partnership at will, occurs before the expiration of the partnership term or completion of the undertaking after a partner has wrongfully withdrawn. A wrongful dissociating partner may owe damages to the partnership.

6. When does a partner have actual authority to bind the partnership?

Show answer

A partner has actual authority when the partnership agreement or the partners’ vote authorizes the act, or when the act is apparently authorized as part of the ordinary course of partnership business. The partnership is bound if the partner acts with actual authority, subject to limits in the agreement.

7. How are partnership assets distributed during winding up?

Show answer

After partnership assets are collected and creditors are paid, remaining assets are distributed first to repay partner loans, then capital contributions, and then according to the partners’ profit-sharing percentages. Partners share losses in the same proportion as profits unless the agreement provides otherwise.

8. What events cause a partner’s dissociation under RUPA?

Show answer

Dissociation occurs when a partner gives express notice of withdrawal, an agreed event occurs, the partner’s death or bankruptcy occurs, or another statutory or court-ordered event applies. Dissociation ends the partner’s right to participate in management but does not necessarily dissolve the partnership.