What Is The Contraction Relationship Of The Law Of Partnership

CONTRACTION RELATIONSHIP OF THE LAW OF PARTNERSHIP

Partnership is an association of two or more persons engaged in a business enterprise in which the profits and losses are shared proportionally.

The formation of a partnership requires a voluntary "association" of persons who "co-own" the business and intend to conduct the business for profit. Persons can form a partnership by written or oral agreement, and a partnership agreement often governs the partners` relations to each other and to the partnership. The term persons generally includes individuals, corporations, and other partnerships and business associations. Accordingly, some partner-ships may contain individuals as well as large corporations. Family members may also form and operate a partnership, but courts generally look closely at the structure of a family business before recognizing it as a partnership for the benefit of the firm`s creditors.

Relationship of Partners to Each Other

Each partner has a right to share in the profits of the partnership. Unless the partnership agreement states otherwise, partners share profits equally. Moreover, partners must contribute equally to partnership losses unless a partnership agreement provides for another arrangement. In addition to sharing in the profits, each partner also has a right to participate equally in the management of the partnership. In many partnerships a majority vote resolves disputes relating to management of the partnership. Nevertheless, some decisions, such as admitting a new partner or expelling a partner, require the partners` unanimous consent. Each partner owes a fiduciary duty to the partnership and to co-partners. This duty requires that a partner deal with co-partners in Good Faith, and it also requires a partner to account to co-partners for any benefit that he or she receives while engaged in partnership business. If a partner generates profits for the partnership, for example, that partner must hold the profits as a trustee for the partnership. Each partner also has a duty of loyalty to the partnership. Unless co-partners consent, a partner`s duty of loyalty restricts the partner from using partnership property for personal benefit and restricts the partner from competing with the partnership, engaging in self-dealing, or usurping partnership opportunities.

Relationship of Partners to Third Persons

A partner is an agent of the partnership. When a partner has the apparent or actual authority and acts on behalf of the business, the partner binds the partnership and each of the partners for the resulting obligations. Similarly, a partner`s admission concerning the partnership`s affairs is considered an admission of the partnership. A partner may only bind the partnership, however, if the partner has the authority to do so and undertakes transactions while conducting the usual partnership business. If a third person, however, knows that the partner is not authorized to act on behalf of the partnership, the partnership is generally not liable for the partner`s unauthorized acts. Moreover, a partnership is not responsible for a partner`s wrongful acts or omissions committed after the dissolution of the partnership or after the dissociation of the partner. A partner who is new to the partnership is not liable for the obligations of the partnership that occurred prior to the partner`s admission.

Liability

Generally, each partner is jointly liable with the partnership for the obligations of the partnership. In many states each partner is jointly and severally liable for the wrongful acts or omissions of a co-partner. Although a partner may be sued individually for all the damages associated with a wrongful act, partnership agreements generally provide for indemnification of the partner for the portion of damages in excess of her or his own proportional share.

Partnership Property

A partner may contribute personal property to the partnership, but the contributed property becomes partnership property unless some other arrangement has been negotiated. Similarly, if the partnership purchases property with partnership assets, such property is presumed to be partnership property and is held in the partnership`s name. The partnership may convey or transfer the property but only in the name of the partnership. Without the consent of all the partners, individual partners may not sell or assign partnership property.

Partnership Interests

A partner`s interest in a partnership is considered personal property that may be assigned to other persons. If assigned, however, the person receiving the assigned interest does not become a partner. Rather, the assignee only receives the economic rights of the partner, such as the right to receive partnership profits. In addition, an assignment of the partner`s interest does not give the assignee any right to participate in the management of the partnership. Such a right is a separate interest and remains with the partner.

Dissolution

A dissolution of a partnership generally occurs when one of the partners ceases to be a partner in the firm. Dissolution is distinct from the termination of a partnership and the "winding up" of partnership business. Although the term dissolution implies termination, dissolution is actually the beginning of the process that ultimately terminates a partnership. It is, in essence, a change in the relationship between the partners. Accordingly, if a partner resigns or if a partnership expels a partner, the partnership is considered legally dissolved. Other causes of dissolution are the bankruptcy or death of a partner, an agreement of all partners to dissolve, or an event that makes the partnership business illegal. For instance, if a partnership operates a gambling casino and gambling subsequently becomes illegal, the partnership will be considered legally dissolved. In addition, a partner may withdraw from the partnership and thereby cause a dissolution. If, however, the partner withdraws in violation of a partnership agreement, the partner may be liable for damages as a result of the untimely or unauthorized withdrawal.

After dissolution, the remaining partners may carry on the partnership business, but the partnership is legally a new and different partnership. A partnership agreement may provide for a partner to leave the partnership without dissolving the partnership but only if the departing partner`s interests are bought by the continuing partnership. Nevertheless, unless the partnership agreement states otherwise, dissolution begins the process whereby the partnership`s business will ultimately be wound up and terminated.

Winding Up

Winding up refers to the procedure followed for distributing or liquidating any remaining partnership assets after dissolution. Winding up also provides a priority-based method for discharging the obligations of the partnership, such as making payments to non-partner creditors or to remaining partners. Only partners who have not wrongfully caused dissolution or have not wrongfully dissociated may participate in winding up the partnership`s affairs.

State partnership statutes set the procedure to be used to wind up partnership business. In addition, the partnership agreement may alter the order of payment and the method of liquidating the assets of the partnership. Generally, however, the liquidators of a partnership pay non-partner creditors first, followed by partners who are also creditors of the partnership. If any assets remain after satisfying these obligations, then partners who have contributed capital to the partnership are entitled to their capital contributions. Any remaining assets are then divided among the remaining partners in accordance with their respective share of partnership profits.