Partnership Law in General
All states, except Louisiana, have adopted what is called either the Revised Uniform Partnership Act (RUPA) or the Uniform Partnership Act (UPA). The RUPA was designed as an improvement over the original UPA. The RUPA and UPA were written by a group of lawyers with the idea of standardizing the laws regarding general partnerships throughout the United States.
The RUPA and UPA define the basic legal rights and obligations of partnerships and their partners. The following information about the law is based on the RUPA and UPA. Many of these are general rules of law that apply unless your partnership agreement provides for something different. On some matters, however, the law cannot be changed by a partnership agreement. These matters usually relate to dealings with third parties, not to dealings between the partners.
Partnership laws basically cover the following areas:
- definition of terms;
- when a partnership exists;
- registration of the partnership with a state agency;
- the relationship of the partners with each other;
- the relationship between the partnership and third parties; and
- changing and terminating the partnership.
When a Partnership Exists
A general partnership is an association of two or more persons to carry on a business for profit as co-owners. Of course, if these people take the necessary legal steps to form a limited partnership, corporation or limited liability company, then they no longer have a general partnership.
Relationship of Partners
The relationship of the partners includes matters such as decision-making; how property is titled and transferred; how a partner may sell his or her interest in the business; how new partners may join the partnership; what happens if a partner dies; how the partnership may be ended; and, what a partner may or may not do without the agreement of the other partners.
Relationship of a General Partnership to Third Parties
As a co-owner, each partner has the authority to act for the general partnership. Each is responsible for the acts of the other partners. This means that your partner can enter into contracts, open bank accounts, buy and sell partnership property, create partnership debts, file lawsuits, and generally conduct business for the partnership.
You, as a partner, will be personally obligated for the actions of your partners the same as if you had done them yourself To be personally obligated means that your personal possessions (such as your bank accounts, house, car, etc.) may be taken to satisfy the obligations.
Example: Suppose you have a wholesale ping pong table manufacturing business. Your partner buys on credit a large amount of plywood from a supplier, which is used to make ping pong tables for a department store chain. Sales to the department store chain are 80% of your business.
The department store chain sells most of your tables, uses the money to pay its employees, and then declares bankruptcy. You do not get paid, so you cannot pay your plywood supplier. The plywood supplier sues your business, but your business does not have enough money or other property to satisfy the debt. After taking the partnership's bank accounts and other property, the plywood supplier can come after your personal bank accounts, boat, second car, etc.
There are some limits on what can be done without the agreement of all of the partners. Third parties are assumed to know these limits (so you will not be liable if a partner acts alone in one of these matters). The agreement of all of the partners is required, unless the partnership agreement provides otherwise, to do any of the following:
- assign partnership property in trust for a creditor;
- assign partnership property to someone in return for that person's promise to pay debts of the partnership;
- sell or transfer the goodwill of the business;
- do anything that would make it impossible to carry on normal business;
- confess a judgment (this means admitting to liability in a lawsuit); or,
- submit a partnership claim or liability to arbitration.
Also, no partner can act in violation of a restriction on his or her authority. If such a restriction is violated, the partnership is not liable for the act as to third persons who know about the restriction.
More about the law of partnerships will be discussed in later sections.