Pursuant to the model statute, The Revised Uniform Partnership Act (RUPA), a partnership is an association of two or more individuals who carry on as co-owners in a business for profit. It does not matter whether or not the individuals intended to create a partnership.
Instead, there is only one requirement for a partnership to be formed, which is that the parties intend to run a business for profit as co-owners. There are two main elements that are considered to determine the status of a partnership: whether the individuals share in profits and control the company.
For example, suppose that Individual X and Individual Y open a bakery. At the bakery, the profits are split between the individuals, and the decisions about the bakery are made jointly.
Even though the individuals may not refer to themselves as partners, their relationship does meet the requirements of a partnership. Even though there are no other legal formalities required to create a partnership, the majority of partnerships do have a partnership agreement.
What Are Requirements for Partnerships?
Partnerships are business ventures between two or more individuals who make money. In contrast to other types of businesses, a partnership is relatively easier to form and has fewer requirements for formation.
A partnership may be formed in three main ways, including:
- Formally: The partnership is formed through written partnership agreement documents and registering with the appropriate state entities;
- Informally: The partnership is formed through an oral agreement;
- By default: The partnership is inferred from the parties’ conduct with one another.
Any individual who is legally competent to make decisions may become a partner in a partnership. The partners must also be of legal age, which is typically 18 but may vary by state.
In many situations, corporations may be considered business partners, as a corporation is granted the status of an individual under state and federal laws.
How Do You Make a Successful Partnership Agreement?
A partnership agreement between the parties outlines the rights and responsibilities of each of the partners to the partnership as well as the rights and responsibilities each partner has with the business. A partnership agreement may include several provisions, including:
- Each partner’s share of the partnership;
- Which partners have the authority to make business decisions on behalf of the partnership;
- How the partners will resolve disputes that arise among themselves;
- Dissolution or transfer of the partnership;
- How to add new partners; and
- The policies or procedures that will be used to make major decisions or to handle important aspects of the partnership.
Partnership agreements that are clear and detailed are more likely to be helpful and successful, especially if a dispute arises between the partners. A partnership agreement should address every possible foreseeable issue that may arise and cause harm to the business.
If this occurs, the partnership itself will also be strengthened. A partnership agreement should be in writing, although it may be formed orally or by implication based on the conduct of the partners.
If a dispute arises related to the business, the written partnership agreement can serve as a reference for resolving the issue quickly. It can also be used as evidence to resolve legal issues that arise in the future.
Who Has Control in a Partnership?
There are three primary factors that determine who has control in a partnership, including ownership, management, and authority.
It is important to define these concepts and which of the partners they apply to in the written partnership agreement. Unless the partnership agreement provides otherwise, all of the partners have equal rights to control the partnership.
The partners are required to vote on issues, such as ordinary day-to-day business operations, with a majority. For issues that fall outside the scope of daily business decisions, such as selling the partnership, all of the partners have to provide their consent.
Control can also be determined by the type of partnership that is formed as well as the state laws that apply to the partnership.
Can I Face Liability in a Partnership?
An individual may face different liability in a partnership depending on how it was formed. There are three different types of partnership, each with different liabilities, discussed below:
- General partnership: General partnerships are formed by the association of two or more individuals intending to be co-owners of a business for profit;
- Liability: General partners are individually and jointly liable for any losses or debts incurred by the general partnership to third parties;
- This liability applies in contract or tort law claims against the partnership as well as to the other partners in the event of a breach of the partner’s fiduciary duties to the partnership;
- Limited liability partnership (LLP): An LLP allows individuals to be free from the debts and liabilities of all the other partners as well as from certain debts and liabilities of the partnership itself;
- Liability: Partners in an LLP will not be held liable for partnership obligations of any kind. However, every partner will remain liable for their own acts or any acts they supervise or direct;
- In other words, unlike general partners, they are not exposed to unlimited legal liability; and
- Limited partnership: In limited partnerships, there must be at least one general partner and limited partners, regardless of how many types of partners there are. General partners make management decisions, while limited partners do not;
- Liability: General partners will be held individually and jointly liable for any liabilities or debts incurred by the limited partnership;
- In contrast, a limited partner is only liable up to the extent of their investment.
What Is the Difference Between a General Partnership and a Limited Partnership?
A general partnership is the most common type of partnership. All of the general partners share in the partnership’s profits and have joint liability in its debts, losses, and liabilities.
With a limited partnership, there must be limited and general partners. The limited partnership may have one or more of each type of partner, but there must be at least one general partner.
Typically, the day-to-day operations and management decisions are the responsibility of the general partner. In contrast, a limited partner has limited authority over the partnership.
Additionally, a limited partner will only be liable only up to the amount they contributed to the limited partnership, in contrast to a general partner, who will be liable for all debts and liabilities.
How Long Do Partnerships Last?
A partnership lasts as long as all of the partners are capable of performing their duties and are competent. This means that partnerships may be dissolved if one of the partners passes away or becomes incapable or ill.
Partnerships may also be terminated if all of the partners agree or by operation of law, such as if the partners were found to be violating business laws. It is important to note, however, that not all partnerships will be immediately dissolved upon losing a partner.
For example, in an LP, the withdrawal of a limited partner does not result in the immediate dissolution of the partnership. This is due to the fact that a limited partner does not participate in the overall management of the partnership.
If, however, a general partner can no longer continue in the partners, it may result in the dissolution of the partnership arrangement.
What Is Personal Liability in a Partnership?
The partners in a partnership will be personally liable for all obligations, losses, and debts associated with the partnership. Each of the partners is responsible for their share of the debts and losses, not the partnership itself.
Lenders may be able to pursue one or more partners’ personal assets if the partnership is not able to repay a loan. The liability may be different for the limited partners in an LLP or an LP.
Do I Need a Lawyer for Help with Partnership Requirements?
If you are considering entering into a partnership or if you have already done so and have questions about your potential liability, it is important to consult with a corporate lawyer. Your liability can vary depending on the type of partnership that is formed.
Your lawyer can explain the partnership laws in your state and how they apply to your partnership, assist you in drafting or reviewing your partnership agreement, and help ensure that your business is protected. If an issue or dispute does arise related to your partnership, your lawyer can represent you in court.
