THE GENERAL PARTNERSHIP (“partnership”) form of business has existed for many years. In its simplest form, a partnership is an association of two or more individuals to operate a business for profit. All states have enacted partnership laws. New Jersey’s partnership law was significantly revised in 2000.
In absence of an agreement among the partners, partnership laws establish a set of “default rules” that will govern the internal affairs of the partnership. In almost all situations, the law allows partners to replace these rules by having a “partnership agreement.” Although partnership agreements are not usually required, it may be advisable to have one because the default rules may not adequately address, or be contrary to, the goals of the partners. Partnership agreements need not be written, but having a written partnership agreement will reduce the possibility costly misunderstandings. The following is a partial list of important internal affairs to consider.
OWNERSHIP & COMPENSATION
How will profits and losses be allocated?
Without a partnership agreement, a partner is entitled to an equal share of the partnership profits and is chargeable with a share of losses in proportion to the partner’s share of the profits.
How are new partners admitted to the partnership?
Without a partnership agreement, a person may become a partner only with the consent of all of the partners.
Can a partner be expelled from the partnership?
Without a partnership agreement, a partner can be expelled upon the unanimous vote of the other partners, but only in specific circumstances.
How will the partners be compensated for their services?
Without a partnership agreement, a partner is not entitled to remuneration for services performed for the partnership.
Who has authority to bind the partnership?
Without a partnership agreement, each partner is an agent of the partnership for the purpose of its business (i.e., an act by a partner in the ordinary course of partnership business binds the partnership).
Who will manage the partnership?
Without a partnership agreement, each partner has equal rights in the management and conduct of the partnership business.
Who will make business decisions?
Without a partnership agreement, matters in the ordinary course of business will be controlled by a simple majority and acts outside the ordinary course of business will require unanimous consent of the partners.
May partnership interests be transferred to third parties?
Without a partnership agreement, a partnership interest is not freely transferrable.
What rights does a dissociating (e.g., withdrawing) partner have?
Without a partnership agreement, the partnership must cause the dissociated partner’s interest in the partnership to be purchased (i.e., “bought-out”).
In conclusion, partners should carefully consider how a partnership agreement can protect and advance their business goals and objectives. Also, it is important to note that a general partnership does not afford a liability shield— all partners are liable jointly and severally for all obligations of the partnership. Thus, partners may want to consider “converting” their partnership to a limited liability partnership or utilizing a different business structure.
This article is provided solely for the general interest of the reader. The article and its contents are neither intended as, nor should be construed as, legal advice or opinion. Legal advice and opinion are provided by the firm only upon engagement with respect to specific factual situations.
Barry F. Gartenberg, L.L.C.
Attorney at Law
505 Morris Avenue, 1st Floor
Springfield, New Jersey 07081