Partnerships & LLCs Bar Exam Guide

Partnerships and LLCs: The Flexible Business Entities

Partnerships and LLCs are the most commonly tested unincorporated business entities on the bar exam. The rules governing their formation, management, and dissolution share many parallels, but the differences generate exam questions.

This guide is part of our Business Associations complete framework.

Partnership Formation

Under RUPA (Revised Uniform Partnership Act), a partnership is an association of two or more persons to carry on as co-owners a business for profit.

No filing required -- a partnership can be created by conduct alone. Key formation indicators:

Profit sharing: Receipt of a share of profits creates a presumption of partnership
Co-ownership: Shared control and management of the business
Intent: Objective intent to carry on a business together (no formal agreement required)

NOT evidence of partnership: Sharing gross receipts, receiving payment as a creditor, receiving rent, receiving wages.

Exam Trap: "Landlord receives 10% of tenant's revenue as rent." This is NOT a partnership -- rent payments based on revenue do not create the profit-sharing presumption.

Types of Partnerships

Type	Filing Required?	Liability	Key Feature
General Partnership (GP)	No	All partners have unlimited joint & several liability	Default entity -- no formalities needed
Limited Partnership (LP)	Yes (certificate)	General partners: unlimited. Limited partners: limited to investment	Must have at least one general partner
Limited Liability Partnership (LLP)	Yes (registration)	Partners not personally liable for other partners' negligence/misconduct	Popular for professional firms (law, accounting)

Partnership Management and Authority

Default Rules (can be changed by agreement)

Equal management rights: Each partner has an equal vote regardless of capital contribution
Ordinary matters: Majority vote of partners
Extraordinary matters: Unanimity required (amending partnership agreement, admitting new partners, selling all assets)
Authority: Each partner is an agent of the partnership -- can bind the partnership in the ordinary course of business

Exam Trap: In a 3-partner firm, Partner A negotiates a lease for office space (ordinary business). Even without specific authorization from B and C, A's act binds the partnership because each partner is an agent for ordinary business.

Partner Liability

Partners are jointly and severally liable for all partnership obligations (RUPA)
New partners: liable for obligations arising after admission; liable for pre-existing obligations only to the extent of partnership assets (no personal liability for old debts)
Exhaustion rule: In many states, partnership assets must be exhausted before going after individual partners

Fiduciary Duties in Partnerships

Duty	What It Requires	Can It Be Modified?
Duty of Loyalty	No competing, no self-dealing, no usurping partnership opportunities	Yes, if not manifestly unreasonable
Duty of Care	No grossly negligent or reckless conduct, no intentional misconduct	Yes, if not manifestly unreasonable
Good Faith and Fair Dealing	Cannot be eliminated by agreement	No -- this is the floor

Dissociation and Dissolution

Dissociation

A partner can dissociate from the partnership (leave) at any time, but dissociation may be wrongful if it violates the partnership agreement.

Rightful dissociation: Partner can leave at-will partnership at any time
Wrongful dissociation: Leaving before the agreed term -- partner is liable for damages

Dissolution

Dissolution ends the partnership business. Triggers include:

At-will partnership: Any partner's express will to dissolve
Term partnership: Expiration of term, or unanimous consent
Unlawful to continue
Judicial decree (impracticability, frustration of purpose)

After dissolution: winding up (completing existing business, paying debts, distributing assets).

LLCs: The Modern Hybrid

LLCs combine the limited liability of corporations with the flexibility of partnerships.

Formation

File articles of organization with the state. The operating agreement (like a partnership agreement) governs internal affairs.

Management

Member-managed (default): All members participate in management, similar to partnership
Manager-managed: Designated managers run the business, other members are passive investors

Liability

Members are generally NOT personally liable for LLC obligations. Piercing the LLC veil follows similar analysis to corporate veil piercing.

Fiduciary Duties in LLCs

Duty of loyalty and care apply (similar to partnerships), but the operating agreement can significantly modify these duties -- more flexibility than partnerships or corporations.

Practice Questions

Question 1

"Alice, Bob, and Carol form a partnership to operate a restaurant. Without consulting the others, Alice orders $50,000 worth of kitchen equipment from a supplier."

Analysis: Ordering equipment for a restaurant is within the ordinary course of business. As a partner, Alice is an agent of the partnership and can bind it for ordinary business acts. The partnership (and Bob and Carol personally) are liable for the $50,000.

Question 2

"Dan joins an existing partnership that has $100,000 in outstanding debts. The partnership later fails. Can creditors go after Dan's personal assets for the pre-existing debts?"

Analysis: No. Under RUPA, incoming partners are only liable for pre-existing obligations to the extent of their interest in partnership property. Dan's personal assets are not at risk for the $100,000 debt.

Key Takeaways

Partnerships can be created accidentally by conduct (no filing needed)
Profit sharing creates a presumption of partnership
Partners have joint and several liability for all partnership obligations
Every partner is an agent who can bind the partnership in ordinary course
LLCs offer liability protection with partnership-like flexibility
Good faith and fair dealing cannot be eliminated by agreement

Continue with Corporate Governance & Fiduciary Duties or return to the Business Associations complete framework.

Study with our Business Associations outline templates.