A partnership is based on a voluntary agreement between two or more competent persons who agree to place money, labor, and skill in a business with the understanding that profits and losses will be shared.
Definition of Partnership
Partnership Status
In resolving disputes over whether partnership status exists, courts will usually look for the following three essential elements of partnership implicit in the UPA’s definition of the term:
If the evidence in a particular case is insufficient to establish all three factors, the UPA provides a set of guidelines to be used.
The sharing of profits and losses from a business are considered prima facie ("on the face of it") evidence that a partnership has been created.
The Partnership Agreement
Agreements to form a partnership can be oral, written, or implied by conduct.
A partnership agreement, called articles of partnership, usually specifies:
Duties and Liabilities of Partners
Each partner is an agent of every other partner and acts as both a principal and an agent in any business transaction within the scope of the partnership agreement.
Fiduciary Duties
Each partner has a fiduciary duty to act in good faith and for the benefit of the partnership.
Each partner must also subordinate his or her personal interest to those of the partnership if a conflict of interests arises.
A partner must account to the partnership for personal profits or benefits derived from any partnership transaction that is undertaken without the consent of all of the partners.
Authority of Partners
Agency concepts relating to actual authority (express or implied), apparent authority, and ratification are also applicable to partnerships.
Some customarily implied powers include
the authority to make warranties on goods in the sales business
the power to convey real property in the firm’s name when such conveyances are part of the ordinary course of partnership business
the power to make admissions and representations concerning partnership affairs [UPA 11]
Joint Liability
If a third party sues a partner on, for example, a partnership debt, the partner has the right to insist that the other partners be sued with him or her.
When one partner pays the entire amount, the partnership is required to indemnify that partner [UPA 18(b)].
If the partnership cannot do so, the obligation falls on the other parties.
Joint and Several Liability
third party may sue any one or more of the partners without suing all of them or the partnership itself.
If the third party is successful, he of she may collect on the judgment only against the assets of those named as defendants.
The partner who committed the tort is required to indemnify the partnership for any damages it pays.
Liability of Incoming Partner
Has limited liability for whatever debts and obligations the partnership incurred prior to the new partner’s admission.
The new partner’s liability can be satisfied only from partnership assets [UPA 17].
Partnership Termination
The partnership can be dissolved by the partnership any time.
If anyone of the partner dies, the partnership is dissolved by operation of law.
One situation occurs when a partner is adjudicated mentally incompetent or is shown to be of unsound mind.
Another situation arises when a partner appears incapable of performing his of her duties under the partnership agreement.
The intent to dissolve or to withdraw from a firm must be communicated clearly to each partner.
Collecting and preserving assets, discharging liabilities, and accounting to each partner for the value of his or her interest in the partnership.
The priorities in the distribution of a partnership’ s assets are as follows:
For more details about this topic, see an attorney.