Partnership Property Distribution

In general, a partnership can be described as a type of business structure in which two or more individuals contribute their skills, resources, property, and/or money to establish and operate a business for profit. There are different kinds of partnerships, including general partnerships, limited partnerships, and limited liability partnerships.

What Type of Property Can a Partnership Own?

A partnership is permitted to own the same types of property that an individual person or other business entity can own. It can own real property, personal property, intellectual property, cash, bonds, stock, and any other type of property. However, the rules that govern the ownership and distribution of property in a partnership may differ in some ways from those that regulate real property transactions involving individuals.

In most instances, the property of a partnership consists of two main types:

• All the property and/or funds contributed by the partners when the partnership is formed;
• Any property and/or funds that are acquired by the partnership using the existing assets of the established business (e.g., money from business checking accounts).

Property in a partnership business may consist of both real property, such as an office building, and personal property, such as equipment, stocks of supplies, and inventory used in the operation of the business. In some cases, the property in a partnership may even include intangible assets, such as accrued income, securities, and intellectual property rights.

In addition, the laws governing different types of business partnerships state that the property in a partnership must be labeled as partnership property and kept separate from the property of each individual partner. This general obligation is part of the fiduciary duty of partners involved in a partnership. It also helps to avoid confusion over whether the business or one of the partners as an individual owns the property in question.

What Are the Laws Governing Property Distribution in a Partnership?

Ideally, a partnership would have a written partnership agreement that would detail how the assets owned by the partnership are to be distributed in the event of partnership dissolution. It would also specify the rights and obligations that each partner has.

In addition, the partnership agreement would have terms and provisions that lay out how property is to be held and used while the partnership is actively engaged in business. If this is the case, then how property is held and used would be deemed proper if it complies with the terms of the partnership agreement and the law of the state in which the partnership operates.

In some instances, the laws and provisions governing property distribution in a partnership may depend on whether the partnership is a general partnership, a limited partnership, or a limited liability partnership. The rules regarding each of these types of property then vary by state.

Although these laws may be different based on the state as well as on the type of partnership, there are some general guidelines for how to distribute property among partners in a basic partnership. Some examples of those guidelines may include the following:

• Tenancy in Partnership: Real property can be owned by a partnership in a number of ways. One option is the tenancy in partnership. Title to the property is held in the name of the partnership or in the name of one of the partners on behalf of the partnership. This means that none of the individual partners owns a specific interest in the real property. Instead, it is the partnership that owns the real estate.
  • When a property is held as a tenancy in partnership, each partner’s interest in the property is equal to their interest in the partnership. This is because the real estate is owned by and belongs to the partnership. It is not an individual asset of any of the partners. Thus, an individual partner cannot transfer their interest in property that is held as a tenancy in partnership to someone outside of the partnership;
• Other Options for Holding Real Property: There are other options for a partnership when it comes to owning real property. The partners might hold property as tenants in common, joint tenants, or tenants of the entirety;
• Granting Authority to One Partner: Partners and partnerships have the option of filing and recording a statement indicating the partners’ authority to transfer real property in the name of the partnership.

If a partnership dissolves, the property owned by the partnership may only be distributed to partners after all debts, liabilities, and taxes of the partnership are paid off in full.

A single partner may have entered into an illegal transaction on behalf of the partnership and without the consent of the other partners. If so, they are required to remedy the situation by replacing any property and profits that were lost or stolen from the partnership from their own personal resources. Thus, it is possible that the partner would receive any share of the partnership property when the business is terminated.

How Is Property Distributed in a Partnership?

In general, partnership property is typically only distributed when the partnership has ended or the partners have filed a statement of dissolution with the appropriate government agency in their state. Dissolution happens when a business ends its operations and winds up its affairs.

Property in a partnership may only be distributed to partners after all debts, liabilities, and tax obligations of the partnership are paid in full. After the debts and other liabilities of a partnership have been completely settled, any remaining funds are divided and distributed among the partners of the partnership. This distribution is based on the percentage of ownership that each of them had.

A partner’s lien is a legal right that allows a partner to use property owned by the partnership to pay the debts and other liabilities of the partnership. This means that if the partnership owes money to creditors, a partner can use the partnership’s assets to pay off those debts.

Additionally, with a partner’s lien, a partner is able to deduct any money owed to the partnership by other partners from their share of the profits. For example, if one partner owes the partnership money, that amount can be deducted from their share of the profits before profits are distributed to all partners.

So long as the manner in which the partnership agreement distributes property in a partnership is legal per the law of the state in which the partnership was formed, the partners can use this document as an instruction manual for distributing partnership property and profits.

As noted above, in the majority of cases that involve a valid partnership agreement, the document is the controlling factor in determining how the property of the partnership is owned and distributed to the partners.

Do I Need a Lawyer for Assistance With Property Distribution in a Partnership?

You may be in a partnership and have questions about how it should take title to property or distribute property if it is going to dissolve. If so, you want to consult an experienced corporate lawyer. Your lawyer can review your partnership agreement and tell you what its provisions require. Or, if you do not have a written agreement, your lawyer can advise you of the requirements of the law of your state and other factors that you may want to consider.

If you are in the process of setting up a partnership, it is the best time to talk to a partnership lawyer about drafting a comprehensive partnership agreement. You can tailor your agreement to the unique needs of your partnership’s business and make sure that partnership assets are managed properly.