4.3 Partnership Formation, LLC Authority & Corporate Fiduciary Duties

🎯 Essential Doctrinal Takeaways

• Under RUPA § 202, sharing net business profits creates a presumption of a general partnership; partners are personally jointly and severally liable.
• In a manager-managed LLC, non-manager members possess no statutory agency authority to bind the company in contracts.
• The business judgment rule presumption is rebutted when directors act with gross negligence by failing to inform themselves (Smith v. Van Gorkom).
• Under DGCL § 144, an interested director transaction is validated by full disclosure and approval by a majority of disinterested directors.

Under the Revised Uniform Partnership Act (RUPA) § 202, the association of two or more persons to carry on as co-owners a business for profit forms a general partnership, regardless of subjective intent. Profit sharing creates a rebuttable statutory presumption of partnership. General partners are personal agents of the firm and are jointly and severally liable for all partnership debts and torts committed in the ordinary course of business.

In limited liability companies, RULLCA distinguishes between member-managed and manager-managed structures. In a manager-managed LLC, management authority is vested exclusively in designated managers; non-manager members lack agency power to bind the company to third-party agreements.

Corporate directors owe fiduciary duties of care and loyalty. Under the business judgment rule, courts presume directors acted on an informed basis, in good faith, and with the honest belief that their actions served the best interests of the corporation. This presumption is rebutted by gross negligence in failing to investigate material facts reasonably available (Smith v. Van Gorkom). The duty of loyalty bars self-dealing unless validated under DGCL § 144 safe harbors (disinterested director approval, shareholder ratification, or fairness).

⚠️ NextGen Bar Examination Traps & Pitfalls

• Believing a written partnership agreement or state filing is required to form a general partnership.
• Assuming all LLC members have inherent agency authority in a manager-managed LLC.
• Treating an interested director transaction as per se void without evaluating statutory safe harbors.