A partnership is formed when two or more individuals carry on a business for profit as co-owners. The Revised Uniform Partnership Act (RUPA) is a model statute that outlines how a partnership should be set up and organized. It also outlines what the rights and duties of each of partners should be. Every state has adopted a revision of RUPA.
It is not relevant whether or not the individuals were attempting to create a partnership on purpose. The only relevant information is that the individuals intended to carry on as co-owners for profit.
Whether or not a partnership was formed may be determined by two main factors. These factors are whether the individuals share in the profits of the business and whether or not they have a right to control the business.
For example, suppose Person Y and Person Z decided to open a bagel shop. These individuals split the profits and make joint decisions regarding the bagel shop. Even though they do not refer to themselves as partners, their relationship satisfies the definition required to form a partnership.
The type of partnership that is formed determines the amount of liability that a partner may face due to being a part of the partnership. There are three different types of partnerships than may be formed, including:
- A general partnership;
- A limited liability partnership (LLP); and
- A limited partnership (LP).
Even though there are no other legal formalities that must be satisfied in order to create a partnership, there are other steps that partners should take. This includes drafting a partnership agreement.
What is a General Partnership?
General partnerships are the most basic and the most common types of partnerships. General partnerships are an association of two or more individuals who intend to be co-owners of a business for profit.
Partnerships are typically a business wherein the partners have not filed any paperwork with their state to become a corporation or LLP. In general partnerships, each partner is responsible for the losses, profits, and violations of any business activities of the partnership.
What is a Limited Liability Partnership?
Limited liability partnerships are business arrangements that allow individual partners to be free from liabilities and debts of the other partners as well as from liabilities and debts of the partnership. If an action is brought against the partnership, no single partner will be personally liable. This is in contrast to a general partnership, wherein all partners are liable for the obligations and debts of the partnership.
There are certain states that restrict what individuals are permitted to structure their partnerships as LLPs. Only individuals licensed to practice public accounting, law, or architecture are permitted to form LLPs in the following states:
- California;
- New York;
- Oregon; and
- Nevada.
What is a Limited Partnership?
Limited partnerships are partnerships that allow limited partners to receive certain legal rights. These rights shield limited partners from liability claims arising from losses, debts, or violations of the partnership.
Limited partnerships require at least one general partner and at least one limited partner. A general partner is responsible for day-to-day operations of the business and for management decisions.
Limited partners only have limited powers over a partnership and may only be held liable to the extent of the investment they made in the partnership. Limited partners are mostly responsible for investment duties that relate to the LP.
What is Winding up a Partnership Business?
In some cases, a partnership may require winding up. Winding up a partnership business is a procedure that distributes, or liquidates, any remaining property of the partnership and any assets that remain after the dissolution of the partnership business. Only those partners that remain with the partnership have the right to partnership assets in the wind up process.
Winding up a partnership business involves:
- Collecting any remaining business assets;
- Settling any remaining debts that are owed to non-partner creditors; and
- Distributing the remaining assets to the remaining partners.
When Does Winding up a Partnership Business Occur?
Winding up a partnership business occurs following the dissolution of a partnership. It is similar to the liquidation of a partnership. Generally, when partners determine that there is no sustainable future for the partnership to continue business, then the winding up occurs.
There are two main ways of winding up a partnership business. These include a creditor petition and a partner petition.
In some cases, a creditor may petition for the winding up of a partnership. If the creditor is owed a debt by the partnership, it may petition to wind up the insolvent partnership in order to satisfy the debt that the partnership owes.
The partners may also petition to wind up a partnership if they believe it does not have a sustainable future. This is only permitted if there are not pending bankruptcy petitions.
What are the Laws Governing Property Distribution in a Partnership?
In partnerships, the partners hold title to partnership property as tenants in common, or tenants in partnership. This means that each partner has equal rights to all of the partnership property so long as the use of that property is restricted to partnership purposes. The property must be used in accordance with the terms of the partnership agreement, if one exists.
The laws that govern property distribution in partnerships are determined based on whether the partnership is a general partnership or a limited liability partnership. These laws may vary according to jurisdiction.
How is Property Distributed in a Partnership?
The actual distribution of property will likely occur when dissolving the partnership. Upon the dissolution, also called termination or wind-up, each partner is permitted to have their partnership applied toward the payment of their partnership debts. Once the debts owed to all creditors are satisfied, the partnership property will be distributed to each partner according to their ownership interest in the partnership.
If there was a partnership agreement, then that document controls the distribution. If there was no partnership agreement, the partnership’s liabilities must be paid in the following order:
- Debts owed to non-partner creditors for partnership debt;
- Those who owe to partners other than for capital and profits;
- Those owing to partners for capital; and
- Those owing to partners for profits.
How is Property Distributed in a Limited Partnership?
Laws governing the distribution of property and winding up in limited partnerships are very similar to general partnerships. However, in limited partnerships, the limited partners have priority in getting paid.
A limited partner has the same rights as a general creditor with respect to debts that are owed by the partnership which exceed the limited partner’s liability contribution. For example, if the limited partner contributed $50,000, they are only liable up to that amount. Any loans or advances made by the limited partner which exceed that amount must be reimbursed by general partners.
Do I Need a Business Lawyer?
It is important to have the assistance of an experienced corporate lawyer for any partnership issues you may have. If you are winding up your partnership, an attorney can help ensure the process is done completely and accurately.
If you are starting a partnership, an attorney can assist you with drafting a partnership agreement, identifying partnership property, and represent you in court should any issues arise regarding the partnership. Having a lawyer involved in your partnership sets it up for success.
