Partnership Illegal Transactions

Before discussing illegal transactions in a partnership, it is helpful to have a basic understanding of partnerships. A partnership is an association of two or more people who co-own and operate their partnership business for profit.

It does not matter whether the partners were intentionally trying to create a partnership. It only matters that the partners intended to carry on a business for profit as co-owners. This can be determined by two main factors: whether they share in the profits and whether each one has a right to control the business.

There are three main kinds of partnerships, the general partnership, the limited partnership, and the limited liability partnership.

The degree of exposure to liability that a partner may have in a partnership is directly related to the type of partnership involved. It is important to understand the differences among the three kinds of partnership.

In a general partnership, each one of the partners is fully and jointly liable for the debts and other legal obligations of the partnership. This means that creditors of the partnership can access the partners’ personal assets to an unlimited extent.

A limited partner only invests money in exchange for shares in a limited partnership. A limited partner only has a restricted ability to vote on company business and no involvement in the day-to-day operation of it. A limited partner’s liability for the partnership’s debts and other legal obligations is limited to the amount they invested in the partnership. However, general partners of a limited partnership have the same liability as partners in a regular partnership.

The main point of a limited liability partnership is to protect each partner from the potential liability of the other partners. There are no general partners. Rather, each partner owns only their share. Responsibility is distributed among the limited partners. One partner’s assets cannot be accessed to pay the liability of another partner at all. So, for example, if one limited partner is sued for malpractice, only that partner’s assets are at stake.

The limited liability partnership may have its own assets. Of course, these assets can be accessed to satisfy the partnership’s debts. If the partnership is named in a lawsuit, then the partnership’s assets are targets but not the individual partners’ assets.

What Are Illegal Transactions in a Partnership?

Illegal transactions in a partnership can occur in two mainways. The first type arises when a partnership participates in transactions that are specifically prohibited by law, such as the sale of illegal goods, i.e., controlled substances or other types of contraband. The second happens when the partner in a partnership enters into a transaction without the legal authority they must have from the other managing partners.

In general and limited partnerships, each partner has a certain amount of control and influence when making decisions. All the general partners must be informed and usually have some say when an important decision is being made. Any authority must be given in the manner required by the partnership agreement.

Or, in a limited or limited liability partnership, only the partners to whom the other partners have delegated responsibility for making decisions are authorized to incur debts and other obligations on behalf of the partnership.

Therefore, if one of the partners enters into a transaction on behalf of the partnership without the proper authority, it is considered a violation of the partnership and can be regarded as illegal.

What Are Some Examples of Illegal Transactions in a Partnership?

Transactions involving the following matters may be considered illegal under partnership law when they are made without the approval of the partnership:

• Surety Agreements: A “surety” is an express promise to be responsible for the debts of another person or entity. Partners are not allowed to use the partnership’s name or assets as surety for personal loans or other obligations. For example, a partner may not use the assets of their partnership as collateral for any personal loan.
  • They also may not use the partnership as surety on behalf of another person who is not a partner in the partnership;
• Termination or Cessation of Business: A partner may not bind the partnership by signing a contract that would result in the termination of the partnership. And a partner cannot do anything that would make it impossible for the partnership to continue its business activities. Actions of this type can only be taken by the general partners or the partnership as a whole in the manner authorized by the partnership agreement;
• Debt or Personal Obligations: In addition to not being allowed to use partnership funds as collateral or otherwise for obtaining a personal loan, a partner is also not permitted to satisfy their own personal debt or financial obligations by commingling them with partnership debt or activities.
  • For example, if a partner owes a business debt unrelated to the partnership’s business to another company, e.g., a bank, they cannot satisfy that debt by using an account the partnership has with that bank. This could amount to conversion.

Thus, any transaction in which a partner exceeds the scope of their authority as a partner could be considered an illegal activity. A partner is also prohibited from entering into transactions for their gain if it means that it will harm the partnership.

Are There Any Remedies for Illegal Transactions in a Partnership?

If a partner has participated in what might amount to an illegal transaction in a partnership, it may result in certain legal consequences, such as:

• A transaction may be voided, i.e., canceled, upon the discovery that it was illegal;
• The partner may be liable to the partnership for any financial losses that have been caused to the partnership, damage to its reputation, or other harm that was done to the partnership;
• Any profits that the partner made may have to be paid over to the partnership as damages in a lawsuit;
• The partnership may discipline the partner or per business and criminal laws. So if the partnership has done something that violates the state’s criminal laws or federal criminal law, the partner may be prosecuted and, if convicted, subject to criminal penalties.

It is essential for all of the partners in a partnership to have a clear understanding of their legal rights and duties with respect to the partnership and each of its partners. This will help prevent any disputes or illegal transactions from arising during the business’s life.

Finally, in many instances, the remedies for illegal partnership transactions can be included in the initial partnership agreement. This is a contract that is created between the partners at the formation stage of the business. So, for example, the partnership agreement may provide that a partner can be ejected from the partnership for engaging in certain types of illegal or otherwise impermissible conduct.

Do I Need a Lawyer If I Have Issues Regarding Illegal Transactions in a Partnership?

Illegal transactions by the partners to a partnership can have serious consequences for both the individual partner and the entire organization. Therefore, you should contact a local corporate attorney if you have issues regarding potential illegal transactions.

A qualified partnership attorney will be able to help you to determine if any violations have occurred. If so, they can provide legal advice concerning how this might affect the partnership and the best options for resolving the issue.

Additionally, if a lawsuit arises, an attorney can assist you in defending your interests or the interests of your partnership in court.