by Mario Remedios on November 24, 2009
As you might know by now a General Partnership is mainly influenced by the RUPA (Revised Uniform Partnership Act). RUPA takes the form of a contract and provides default rules of operations and establishment.
Starting a partnership should be easy. Yes indeed, it’s the easiest form of business entity. Simply go ahead and agree with your friend to start a business together. No official filing would be required. But if you’d like, RUPA makes available a voluntary Statement of Partnership Authority in the Secretary of State’s Office. Overall though, there is no need of the formal steps required for a corporation, and LLC, LLP, or a LP.
Generally speaking a written partnership agreement is not required unless the partnership is to last longer than a year. However, I strongly suggest that you have a contract in place regardless of the timeframe of your business venture. In my opinion, it is better to have the game’s rules from the beginning and avoid future misunderstanding or wasteful arguments. We all know better than that, don’t we?
The two main characteristics of a General Partnership are unlimited liability and pass-through taxation. Additionally, to determine that a legitimate partnership exists there must be an association, legal capacity, business for profit, and co-ownership interest.
by Mario Remedios on November 24, 2009
Now you are in business with your new partnership venture (great!). But, how do you ensure that you have a partnership in fact? How do you know that you have met all the factors necessary for a partnership to exist? You might not know, but trust me after this post you will.
There are four elements that must be met in order for a partnership to exist: Association, Legal Capacity, Business for Profit, and Co-ownership.
Association is made up of Voluntariness and Intent. When thinking of voluntariness “Delectus Personae” comes to mind. This refers to the right partners have to choose who they want to become associated with assuming there is an intent to enter into a partnership type relationship from a prospective a business associate. However, all partners must agree in order for the association to take place.
Legal Capacity Involves two or more persons that obviously have legal capacity to be part of the business. This does not necessary mean they have to be adults. In fact, a minor can become a partner as long as there is an agreement between his guardian and the partners.
The minor in this case will not be personally liable for the partnership’s obligations but will benefit from its profits. As a minor, you’ll be able to inspect the books and records of the entity but will not be involved in its management. Yeah, that’s a good thing to leave up to the adults, just concentrate in collecting the profits and save up for college (Just an extra tip).
There must be a business for profit in a legitimate partnership. This pretty much includes trade occupations or professions and excludes unincorporated associations such as chartable, religious, and fraternal groups.
Lastly, all partners must share co-ownership rights to capital and control of the entity as well as its profits and losses. So there you have it, now answer yourself if you really have a partnership in place.
by Mario Remedios on November 24, 2009
Are you a partner by Estoppel? “What exactly is that?” you might be asking. Basically, when you think about a partnership, a partner that’s not accepted as a business associate by the other partners is not a partner to anyone. There is an exception to this rule and this takes place when according to the estoppel theory a person who’s not a partner is treated like one.
The Revised Uniform Partnership Act (RUPA) refers to these so called partners as purported partners. Obviously, these are not real partners and there is no formal partnership agreement in place, but since they have allowed themselves to be called or perceived (verbally or implied) as partners, they could be treated and be liable like if they were.
For instance, you have two friends who are partners in a small business. Your friends are in a bad financial situation and will be in need of a loan from a rich investor. However, due to the fact that they are broke and their company is not producing enough income, they go and tell this investor with you present that you are a partner and that you have enough assets to cover the loan payments if for some reason things don’t work out. Assuming that you don’t deny your now presumed title, if the partners default on the loan payments, the investor could go after you to claim what’s owed to him even if you are not a real partner.
by Mario Remedios on November 24, 2009
Acting as a partner in the ordinary course of business binds the partnership unless there is no particular authority given to the partner to act on behalf of the partnership and proper notification has been given to the person with whom the partner is supposed to be dealing with.
This notification serves as a warning notice that this partner lacks the proper authority to bind the partnership and you should take proper caution when dealing with him.
However, an act of a partner who’s not supposed to make deals for the partnership is legitimate and fully supported by the partnership if this act was previously authorized by the other partners. Ratifying the action of this partner whether he acted without actual or apparent authority makes the partnership liable for any damages.
Generally, a partner will bind the partnership and the other partners if his acts exhibit actual, express, implied and apparent authority.
Obviously, there is no apparent authority when the third party is aware that this person’s action lacks authority or that it requires the unanimous consent from all partners.
Determining the scope of authority requires some common sense by studying how the partnership has functioned in the past as well as other similar businesses in the same niche.
Click here for “Agency Law” concepts from Wikipedia. It might help you understand better what I’m talking about.
by Mario Remedios on November 24, 2009
Before we go in depth about tort liability, let’s first understand exactly what is “Tort.” According to Wikipedia, “Tort law is a body of law that addresses, and provides remedies for, civil wrongs not arising out of contractual obligations. A person who suffers legal damages may be able to use tort law to receive compensation from someone who is legally responsible, or liable, for those injuries.”
When dealing with a partnership, tort law principles could be applied to it. In other words, a partnership is liable for the torts of its partners only if the partners were acting within the scope of the partnership business.
As an example, let’s assume that you are an employee of ABC, LLP, a regional public accounting firm that requires you to travel to your client’s location for the year-end audit. After work, you realize that your car has been crashed into and badly damaged. Who do you think will be liable for your car’s repair? In this case, due to the fact that the accident took place while working for ABC, LLP, the firm should be able to reimburse you for any damages incurred.
In the above example, we are not including an insurance claim to make things simple. But obviously your insurance is your primary source to repair your car and your firm should be able to reimburse you or pay you upfront for any damages.
Something similar to this happened to us when I worked for E&Y and the partner took the audit team out for lunch. When we were done, we realized his car had been hit by a guy with a pickup truck that was trying to back into the spot in front of us. Luckily for this partner, the guy waited for us to finish and told us what had happened and that he would pay. But not everyone that hits your car would do the same.
The below “car wrecked” example should be helpful to you in determining negligence:
|
Scenario
|
Negligence Prediction
|
| Personal car + Personal duties |
Partnership is not liable |
| Partnership car + Personal duties |
Partnership is not liable |
| Partnership car + Partnership duties |
Partnership is liable |
| Personal car + Partnership duties |
Partnership is liable if the damages take place while doing what’s required of you by the partnership as your regular course of business. |
Additionally, a partnership would be liable for intentional torts and misapplication of funds. If you knowingly commit a tort, you’ll be held accountable as well as if you use a firm’s funds the wrong way for the wrong reasons.
According to RUPA, a partner may be sued by a creditor and held completely responsible without suing the other partners. Also, contract and tort liability are normally joint and several. Therefore, a partnership’s assets must be exhausted before the creditor digs into the personal assets of an individual partner or partners.
When someone joins a partnership, the new partner will be liable for subsequent incurred debts. However, she will only be responsible for preexisting debts up to her partner contribution amount.
