A partnership is defined under the model statute known as The Revised Uniform Partnership Act (RUPA) as an association of two or more individuals to carry on as co-owners in a business for profit. The individuals are not required to intend to create a partnership on purpose.
The only requirement to form a partnership is that the individuals intended to carry on as co-workers in a business for profit. Whether or not this is true can be determined by examining two factors, whether the individuals share in the profits and whether the individuals have a right to control the business.
For example, suppose Individual A and Individual B open a coffee shop. They split the profits of the coffee shop as well as make joint decisions about the coffee shop. Although they do not specifically refer to themselves as partners, their business venture meets the definition required to form a partnership.
Although there are no other required legal formalities that must be met in order to create a partnership, most partnerships have a partnership agreement. A partnership agreement is a documented agreement between the individuals that outlines the relationship each partner has with the business as well as the rights and obligations each has to the partnership.
A partnership agreement may also contain the following information:
- The amount or portion of the partnership owned by each partner;
- Which partners have authority to make business decisions on behalf of the partnership and which do not;
- The method the partners will use to resolve any business disputes that arise among the partners;
- How the partnership can be dissolved or transferred;
- The process for adding a new partner; and
- Any other policies or procedures that the partners have in place to make major decisions or handle important aspects of the partnership.
The clearer the terms of the partnership agreement and the more detailed the agreement is, the more likely it is to be successful. It should provide solutions for each and every foreseeable or potential issue that may arise and harm the business. This also helps strengthen the partnership itself.
A partnership agreement may be formed orally, impliedly, by the partners’ actions, or in written form. It is always best to have the agreement in writing. If in writing, the agreement can act as a reference to quickly resolve disputes and can be used to solve any future legal issues, should they arise.
What is the Difference Between a Limited Partnership and a General Partnership?
There are several differences between limited partnerships and general partnerships. A general partnership is the most common form of partnership. It is formed by the association of two or more individuals intending to be the co-owners of a business for profit. All general partners share in the profits, losses, or liabilities of the partnership.
The main difference between limited partnerships and general partnerships is that all partners in a general partnership can be held individually and jointly responsible for any debts or liabilities incurred by the partnership. This is not the case for limited partners in a limited partnership.
Limited partnerships have two kinds of partners, limited partners and general partners. While the partnership may have one or more of either type of partner, at least one general partner is required. The general partner is usually responsible for management decisions and day-to-day operations of the business.
In contrast to general partners, limited partners are only responsible for investment duties and have limited authority over the partnership. In addition, a limited partner is only liable for any debts up to the amount that they contributed to the partnership. As noted above, general partners may be responsible for all debts or liabilities of the partnership.
What are Fiduciary Duties in Partnerships?
In a partnership, each partner owes the other partners a fiduciary duty. A fiduciary duty is a form of trust. The fiduciary duty owed may vary depending on the nature of the partnership and what was agreed to in the partnership agreement.
Who Owes a Fiduciary Duty?
The individual who owes a fiduciary duty differs depending on the setup of the business partnership. In both general and limited partnerships, each general partner owes a duty of fiduciary duty. This duty is owed because in both general and limited partnerships, any individual who manages the partnership has a direct impact on the best interests and goals of the partnership.
In a limited partnership, a limited partner merely contributed capital for the partnership’s formation. Therefore, the limited partner does not have any management capabilities. In this setup, the limited partners leave any and all management duties with the general partners.
In these situations, the limited partner does not owe a fiduciary duty. However, if a limited partner begins to have any sort of management control, the court may view that partner as a general partner with fiduciary duties.
What are the Fiduciary Duties?
A fiduciary is an individual who has a legal or ethical relationship of trust to another individual. When an individual has a fiduciary duty to another, they must conduct themselves according to the benefit of the other individual.
The individual to whom a fiduciary duty is owed may be referred to as the principal or the beneficiary. A fiduciary often handles assets or money for another individual.
This type of relationship also applies in partnerships. The partners have a fiduciary duty to their partnership to act in its best interest.
The fiduciary duties that are owed by partners include:
- The duty of good faith and fair dealing;
- The duty of loyalty;
- The duty of care; and
- The duty of disclosure.
The duty of food faith and fair dealing requires a partner to act honestly and fairly in their dealings pertaining to the partnership. This includes any and all actions related to reaching the partnership’s mission statement or goals as well as daily operation. This duty begins at the formation of the partnership and ends and the dissolution of the partnership.
The duty of loyalty requires a partner to place the partnership’s best interests above their own personal interests. A partner is required to avoid all conflicts of interest between the partnership and their personal dealings. In other words, a partner may not act in such a way that harms the partnership’s goal for their own personal gain.
The duty of care requires a partner to act prudently and competently in all actions of managing the partnership. The standard for these actions is based on the reasonable person standard, or what a reasonable person in the same situation would do. In addition, pursuant to the business judgment rule, if a partner acts with good faith and reasonable care, they will not be liable even if their actions end unfavorably for the partnership.
The duty of disclosure requires a partner to inform all other partners of all material facts. A partner must inform other partners regarding the consequences of their acts and the overall health of the business. In addition, if their decision has a conflict of interest, they must disclose that as well.
Do I Need an Attorney For Partnership Issues?
It is crucial to have the assistance of an experienced corporate lawyer for any partnership issues you may face. A lawyer will be able to review your situation and determine if a partner has breached their fiduciary duty to the partnership. The breaching partner may be personally liable for any harm they caused the partnership.
An attorney can also help avoid partnership issues by being involved from the formation of the partnership. They can draft or review partnership agreements and determine if there are any potential issues. Your attorney can also represent you in court should any disputes arise.
