A partnership is an association of two or more persons to carry on as co-owners a business for profit. Partnerships are governed by state law. However, many state legislatures have looked to the Uniform Partnership Act, originally adopted by the National Conference of Commissioners of Uniform State Laws, for guidance. The act was adopted in forty-six states, the District of Columbia, and the U.S. Virgin Islands. The 1990s witnessed major changes to the act, which was originally adopted in the form of the 1992 Uniform Partnership Act. The 1992 act has undergone several amendments, and it currently exists as the Uniform Partnership Act (1997), which had been adopted in approximately half of the states as of the close of the twentieth century. This article will generally follow the Uniform Partnership Act (1997) with an effort to identify those provisions that are less widely accepted, but the reader must keep in mind that state law, not the Uniform Act, will govern in a court of law.

PARTNERSHIP AS DISTINGUISHED FROM OTHER ENTITIES

General partnerships, which are referred to in this article simply as "partnerships," are to be distinguished from other types of entities, including for-profit and nonprofit corporations nonprofit as sociations, and limited liability companies (LLCs). Partnerships are like for-profit corporations and most limited liability companies in that they are intended to operate for profit. However, corporations and limited liability companies are creatures of statute, created and able to exist only by following specific statutory procedures. Partnerships, on the other hand, may exist on a far more informal basis; they can even be based on a hand shake agreement. Perhaps the single most significant distinction between corporations and limited liability companies on one hand, and partnerships on the other, is that the former offer liability protection to those who invest in, own, and operate the entities, while general partnerships offer no such protection.

The majority of this article will focus on general partnerships, which are the traditional form of partnerships. However, some discussion will be given below to limited partnerships and limited liability partnerships, both of which offer at least some liability protection in exchange for conformity with statutory procedures.

PARTNERSHIP ELEMENTS AND FORMATION

As stated earlier, a partnership is an association of two or more persons to carry on as co-owners a business for profit. From this definition, it follows that the essential elements of a partnership are: It is (1) a voluntary agreement (2) to associate for the purpose of sharing profits and losses arising from (3) a common business enterprise and (4) the intention of the principals to form a partnership for those purposes.

The first element of a partnership is a contract among the partners. Any person or entity, so long as that person or entity has the legal capacity to contract, may become a partner. However, because a partnership is a voluntary contractual relationship, no person may become a partner without the consent of all other partners. This contract may be either express or implied and may be written or oral. Of course, the careful planner would favor an express written partnership agreement to provide for the creation, operation, management, and dissolution of the partnership, but this is not a required element. Two individuals who begin making furniture in their garage, selling the furniture to others, and splitting the profits and expenses have formed a partnership, even if neither has ever uttered the word partnership.

Unlike the other for-profit entities discussed earlier, there are no organizational documents that must be filed with a public office, and the partnership agreement, even if written, is not a public document. To further illustrate this, to form a corporation the incorporators must execute articles of incorporation and file those articles with the secretary of state in the state in which the corporation will exist. A corporation is also required to have written bylaws, which are the rules of management, operation, and existence of the corporation. Similarly, an LLC does not exist until the articles of organization have been filed with the secretary of state, and most state statutes require a limited liability company to have a written operating agreement to govern its conduct. There are no such prerequisites to the existence of a partnership. Generally, the only public documents that must be filed by a partnership are those documents necessary to register the business name of the partnership, and this requirement only applies if the partnership is using a name other than the real names of the partners.

PARTNERSHIP AS A DISTINCT ENTITY

An important issue in partnership law is whether the partnership is an entity distinct from the partners in their individual capacity. By way of comparison, it is a fundamental tenet of the law of corporations and of LLCs that those entities are separate and distinct from their shareholders and members, respectively. The issue is not so clear in the case of partnerships. At common law, a partnership was clearly not a legal entity distinct from, or independent of, the partners and had no legal existence apart from the partners themselves. With the adoption of the Uniform Partnership Act (1914), a school of thought emerged a partnership was, at least for some limited purposes, an entity distinct from its partners. However, this issue remained largely unresolved throughout much of the twentieth century. Even the adoption of the 1992 Uniform Partnership Act did not resolve the issue. Finally, the 1997 Uniform Partnership Act stated unequivocally that "[A] partnership is an entity distinct from its partners." [Uniform Partnership Act (1997) (U.L.A.) 201(a).]

The concept of the partnership as a distinct entity remains a difficult issue. In most states, a partnership is a distinct entity for some purposes but not for others. For example, generally a partnership may sue or be sued and may own, hold, or convey real or personal property on its own behalf. The U.S. Bankruptcy code also treats partnerships as distinct entities. However, for purposes of federal income tax, the partnership is not a distinct entity. Although the partnership is required to file a federal tax return, that return is an informational return only, and the partnership has no federal tax liability. All profits and losses of the partnership flow directly to the partners in their individual capacity.

PARTNERSHIP PROPERTY

As mentioned above, a partnership is recognized as a distinct entity for purposes of owning, holding, or conveying real estate. Property contributed to the partnership by the partners, as well as property purchased or otherwise acquired by the partnership, is partnership property, while the property of the partners, such as a partner's personal home and banking account, is not considered partnership property.

LIABILITY OF PARTNERS

Despite the fact that the partnership is an entity distinct from its partners, each partner, in his or her personal capacity, is liable for the debts, obligations, acts, or omissions of the other partners. Therefore, an individual who is owed money by a partnership, is the victim of a breach of contract by the partnership, or is harmed by any act or omission of the partnership, any employee or agent of the partnership, or of any partner acting in his or her capacity as partner has the right to bring suit and collect compensation or damages from the partnership or any of the partners individually. This individual liability is probably the single most important characteristic of a partnership, and it is essential to the consideration of any group of individuals about to embark on a partnership.

The distinction between partnership property and the personal property of partners is of critical importance with regard to creditors of a partnership. In bringing action to collect debts, a partnership creditor must first attach the property of the partnership. Only after all partnership property is exhausted may the partnership creditor become the creditor of the individual partners.

Liability for partnership debts must be distinguished from liability for the personal debts of a partner. A creditor of a partner in his or her individual capacity must collect that debt from the property owned by the partner personally, not from the partnership property. Such a creditor, after exhausting the partner's property, may acquire a charging order against the partnership, which entitles the creditor only to the debtor partner's future profits and distributions from the partnership.

PARTNER'S RIGHTS

The partner's right to partnership property is described as a tenancy in partnership. The partner is co-owner of this property with his or her partners but has no right to possess, sell, transfer, or assign specific partnership property in any capacity other than on behalf of the partnership. When a partner dies, his or her ownership of specific partnership property automatically vests in the surviving partners.

A partner's interest in the partnership itself is a personal property interest in the profits and surplus of the partnership. While a partner is prevented from transferring an interest in individual partnership property, the partner may transfer an interest in the partnership itself. Of course, this right to transfer is subject to the consent of all existing partners to the admission of a new partner, and it may be restricted by a partnership agreement.

Unless a partnership agreement provides otherwise, each partner has the right (1) to be repaid the partner's capital investment in the partnership, (2) to share equally in the profits and losses of the partnership, (3) to share equally in the management and conduct of the partnership business, and (4) to inspect the books and records of the partnership. A partner does not have the right to be compensated for services performed for the partnership. Any dispute among the partners regarding the conduct of the partnership's business is to be decided by a majority of the partners.

DUTIES AND LIABILITY OF PARTNERS

In conduct among partners, each partner owes the other partners an obligation to act with the utmost good faith and loyalty. Partners are not considered to be merely individuals transacting with one another at arm's length, but rather to be fiduciaries of one another. Therefore, the duty among partners involves a very high standard of conduct. A partner may not take advantage of a partnership opportunity, compete with the partnership, or engage in conduct that is detrimental to the best interest of the partnership. In conducting business with individuals who are not partners, every partner is an agent of the partnership. Therefore, the acts and words of a partner may be imputed to the partnership.

DISSOLUTION AND WINDING UP

Dissolution is the triggering event that begins the winding up of a partnership. Unless the partnership agreement specifically provides otherwise, a dissolution may be caused by the termination of a definite term or the partnership as specified in the partnership agreement, the express will of any partner, the agreement of all partners, the expulsion of a partner, the unlawfulness of the partnership's business, the death or retirement of a partner, or the bankruptcy of any partner or the partnership. These triggering events are further evidence in support of the assertion that a written partnership agreement is essential to a successful partnership. For example, a viable partnership may have many partners, but without an express provision in the partnership agreement to the contrary, the retirement of any one of those partners would trigger the dissolution of the partnership, despite the desires of the remaining partners to continue the partnership. During the winding up process, the remaining partners may complete unfinished transactions, cease the conduct of the partnership's business, pay the debts of the partnership, and distribute any remaining assets to the partners.

LIMITED PARTNERSHIPS

As opposed to general partnerships, limited partnerships (LPs) are creatures of statute. In most states, it is necessary to file a certificate of limited partnership with the secretary of state to receive approval and to file annual reports. It is also necessary to have a partnership agreement. LPs consist of one general partner and one or more limited partners. The general partner possesses all management and decision-making power and is afforded no liability protection. The limited partners may not participate in the management of the LP, but in return they receive limited liability protection.

LIMITED LIABILITY PARTNERSHIPS

Like LPs, it is necessary to file a statement of qualification and annual reports to form an LLP. Unlike an LP, all partners in an LLP may participate in the management and control and receive limited liability protection.