Partnerships
| Author | Jeffrey Wilson |
| Pages | 173-179 |
Page 173
When two or more people carry on a business for profit, the law recognizes the existence of a general partnership. Unlike corporations, limited liability companies, limited partnerships, and limited liability partnerships, owners of a business do not need to follow specific formalities to form a general partnership. At the same time, however, partners are not protected from liability for the business' debts. Sole proprietorships and general partnerships are considered the "default" forms of business when an individual or more than one individual establish a business, since one form of business entity or the other is generally established if the parties do not choose an alternate form.
Partnerships are governed in the vast majority of states by one of the versions of the Uniform Partnership Act (UPA), which was originally drafted by the Uniform Law Commissioners in 1914. Prior to 1994, every state, with the exception of Louisiana, adopted the UPA. The National Conference of Commissioners on Uniform State Laws significantly revised the UPA in 1994, with subsequent modifications in 1995, 1996, and 1997. The majority of states have adopted the 1997 version of the act, which is generally referred to as the Revised Uniform Partnership Act (RUPA). The RUPA revised the UPA in several key areas, though many of the basic rules governing partnerships did not change from the older law to the new law.
The UPA and RUPA, in many ways, provide "de-fault" rules that govern general partnerships. That is, the rules in the UPA and RUPA govern the partnership, unless the partners agree otherwise. Thus, each partner generally has a right to manage the partnership that is equal to the rights of other partners. Similarly, partners can agree how they will share profits, how they will contribute to pay for losses, how they will divide the labor, and how the partnership will
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dissolve when the partnership ends. Parties cannot, however, agree to shield personal liability from one or more of the partners. If a partner or partners want to avoid personal liability for the debts of the partnership, they will need to form one of the business entities that provide limited liability.
Several of the rules related to general partnerships vary between the UPA and the RUPA. Individuals who are forming a general partnership or are concerned about management issues should consult their state statutes to determine which law is in effect in that state.
A general partnership must consist of two or more individuals or entities, including another partnership or corporation. Thus, it is possible that two very large corporations could form a partnership between the two entities, though in the modern business world, when large entities agree to form a new business entity between them, they most often form some kind of limited liability entity. In order to form a general partnership, the business must be unincorporated and intended to make a profit. The "unincorporat-ed" requirement is obvious; an entity that has complied with the formalities to form a corporation cannot be a partnership. Partnership law is limited to entities organized to make a profit, since partnership law is a subcategory of commercial law. Other business entities, such as corporations, do not need to be formed to seek a profit. Agreeing to share a profit creates a rebuttable presumption under the RUPA that a partnership exists.
Generally, each partner in a partnership has something to offer the business, including labor, ideas, money, and/or property. Each of the partners in a general partnership co-owns the business and has a right to manage the business with other partners. This right, however, can be modified by agreement of the partners. Similarly, partners have a general right to share profits and contribute to pay for losses, though either of these can be modified by agreement of the parties.
Many partnerships are formed when one or more partners agree to provide money, property, and other types of capital to the business ("capital partners"), while one or more of the other partners agree to provide work and other labor expertise ("labor partners"). For example, assume that two people agree to form a business to build custom furniture. One partner agrees to provide the work facility and office and also agrees to supply $100,000 to finance the business. The other partner, who is an expert in building furniture, agrees to build all of the furniture and manage the business. The first partner is the capital partner, while the latter is the labor partner. This general partnership can be beneficial to both parties if the business is successful but can cause significant problems if the business fails. Many of these problems are cause for disputes over which party should bear the burden of the losses suffered by the partnership.
Partnerships are generally categorized in three types, which are defined by the agreement of the partners. In a partnership at will, every partner has the right to end the partnership, subject to some restrictions. In a partnership for a term, the partners' agreement determines the time when a partnership will end. In a partnership for a particular undertaking, the partners' agreement indicates that completion of a particular task or goal will cause the partnership to end.
As noted above, forming a partnership requires few specific formalities, such as a written agreement or registration with a state agency. Nevertheless, all parties that are considered partners must consent to be such. The consent may be express, such as signing a written partnership agreement or implied by the conduct of the parties. Parties do not need to agree specifically to form a "partnership;" rather, their agreement or conduct must be such that they agree to run a business for profit. Even if the parties agree that their business will not be labeled a partnership, the business may be found to be one if it meets the definition of a partnership.
If two or more individuals enter a partnership without a partnership agreement, problems are likely to arise. The default rules found in the UPA and the RUPA may not be...
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