Overview of General Partnerships
A General Partnership is an association of two or more persons to pool their money, skills, and other resources, and share profit and loss in accordance with terms of the partnership agreement.
Unlike business corporations, formation of partnerships are easy and there is no state filing involves. They can be formed with an oral agreement but often the oral agreements between partners lead to misunderstandings and eventual disputes. Thus, the terms of the partnership should be memorialized with a written partnership agreement. Preferably, partners should consult with an attorney.
Management rights between partners
Absent an agreement, each partner entitled to EQUAL control (vote).
For example, A, B, and C agree to become partners, contribute money and share profits as 60%, 30%, and 10% basis.
How do they vote?
Absent an agreement, they control the business or vote equally meaning 1 partner 1 vote.
Generally, ordinary business affairs requires majority vote of the partners but for the fundamental affairs such as admitting new partner, selling substantial portion of partnership assets, amending partnership agreement etc. requires unanimous consent of all partners.
Absent an agreement, partners get NO SALARY.
For example, A and B are partners. A works 80 hours. B sleeps all day.
Does A get any salary from the partnership?
No, absent an agreement between partners, there is no salary.
There is one exception to this general rule. A partner who helps in winding up the partnerships assets entitles to a reasonable salary.
Partner’s share of profit and losses
Absent an agreement that controls the percentage of share of profits between partners, profits shared equally.
Absent an agreement that controls the percentage of share of losses between partners, losses are also shared equally.
What if the agreement spells out the percentage of profits that each partner entitles but silent on losses?
For example, the partnership agreement states that profits shall be shared %60/%40 basis but doesn’t mention about losses. In this instance how are the losses shared?
If the agreement is silent on losses, then losses shall be share like profits. So, partners shall also share the losses on %60/%40 scale.
But the reverse is not true for profits. For instance, if partnership agreement states that losses shall be shared %60/%40 but is silent on profit. In this scenario, how are the profits shared?
In this situation, without an agreement as to the percentage for profits, profits shall be shared equally even though losses are not shared equally.
Another point of the partnerships is that event partners put different type of contributions to the partnership, they entitled to equal share of profits if there is no agreement between partners as to how they will share the profits.
For example. A, B, C and D are the partners of the XYZ partnership. A puts up all of the money, Partner B does all of the partnership work. Partner C gives the partnership its fine name and partner D does nothing. How are profits shared among them?
Absent an agreement, they share profits equally.
Liabilities of general partners to the third parties
The general partnership is liable for each partner’s wrong doings and torts in the scope of partnership business and authorized contracts that was entered by each partner in the course of partnership business.
Also, each general partner is personally liable for all debts of the partnership and for each partner’s torts and wrong doings to third parties.
This is one of the main drawback of general partnerships compare to corporations as the shareholders of the corporation are not personally responsible what the corporation does to the third parties.
Incoming partner’s liability for pre-existing partnership debts.
As a rule, an incoming partner is not liable for prior debts but any money paid in to the partnership by an incoming partner can be used by the partnership to satisfy those prior debts.
Dissociating (withdrawing) partner’s liability for future debts.
Dissociating (withdrawing) partners retain liability on future debts until actual notice of their dissociation is given to known creditors and until publication notice is given to all potential creditors.
Published by Metin Caglar, Esq. Partnership and Agency Law Articles