The formation of a partnership requires a voluntary "association" of persons who "coown" 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 person 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.
Certain conduct may lead to the creation of an implied partnership. Generally, if a person receives a portion of the profits from
a business enterprise, the receipt of the profits is evidence of a partnership. If, however, a person receives a share of profits
as repayment of a debt, wages, rent, or an Annuity, such transactions are considered "protected relationships" and do not lead
to a legal inference that a partnership exists.
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 some jurisdictions a partner is entitled to the return of her or his capital contributions. In
jurisdictions that have adopted the RUPA, however, the partner is not entitled to such a return.
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 copartners. This duty requires that a partner deal with copartners
in Good Faith, and it also requires a partner to
account to copartners for any benefit that he or she receives while engaged in partnership business. If a partner generates
profits for the part-nership, 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 copartners 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
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 copartner. 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.
Some states that have adopted the RUPA provide that a partner is jointly and severally liable for the debts and obligations of
the partnership. Nevertheless, before a partnership's creditor can levy a judgment against an individual partner, certain
conditions must be met, including the return of an unsatisfied writ of execution against the partnership. A partner may also
agree that the creditor need not exhaust partnership assets before proceeding to collect against that partner. Finally, a court
may allow a partnership creditor to proceed against an individual partner in an attempt to satisfy the partnership's obligations.
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.
In some jurisdictions the partnership property is considered personal property that each partner owns as a "tenant in
partnership," but other jurisdictions expressly state that the partnership may own property. The tenant in partnership concept,
which is the approach contained in the UPA, is the result of adopting an aggregate approach to partnerships. Because the
aggregate theory is that the partnership is not a separate entity, it was thought that the partnership could not own property but
that the individual partners must actually own it. This approach has led to considerable confusion, and the RUPA has
expressly stated that the partnership may own partnership property.
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.
Generally, a partnership maintains separate books of account, which typically include records of the partnership's financial
transactions and each partner's capital contributions. The books must be kept at the partnership's principal place of business,
and each partner must have access to the books and be allowed to inspect and copy them upon demand. If a partnership
denies a partner access to the books, he or she usually has a right to obtain an Injunction from a court to compel the
partnership to allow him or her to inspect and copy the books.
Under certain circumstances a partner has a right to demand an accounting of the partnership's affairs. The partnership
agreement, if any, usually sets forth a partner's right to a predissolution accounting. State law also generally allows for an
accounting if copartners exclude a partner from the partnership business or if copartners wrongfully possess partnership
property. In a court action for an accounting, the partners must provide a report of the partnership business and detail any
transactions dealing with partnership property. In addition, the partners who bring a court action for an accounting may
examine whether any partners have breached their duties to copartners or the partnership.
One of the primary reasons to form a partnership is to obtain its favorable tax treatment. Because partnerships are generally
considered an association of co-owners, each of the partners is taxed on her or his proportional share of partnership profits.
Such taxation is considered "pass-through" taxation in which only the indimvidual partners are taxed. Although a partnership is
required to file annual tax returns, it is not taxed as a separate entity. Rather, the profits of the partnership "pass through" to
the individual partners, who must then pay individual taxes on such income.
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
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.
Under the RUPA, events that would otherwise cause dissolution are instead classified as the dissociation of a partner. The
causes of dissociation are generally the same as those of dis-solution. Thus, dissociation occurs upon receipt of a notice from
a partner to withdraw, by expulsion of a partner, or by bankruptcy-related events such as the bankruptcy of a partner.
Dissociation does not immediately lead to the winding down of the partnership business. Instead, if the partnership carries on
the business and does not dissolve, it must buy back the former partner's interest. If, however, the partnership is dissolved
under the RUPA, then its affairs must be wound up and terminated.
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.
Under the RUPA, creditors are paid first, including any partners who are also creditors. Any excess funds are then distributed
according to the partnership's distribution of profits and losses. If profits or losses result from a liquidation, such profits and
losses are charged to the partners' capital accounts. Accordingly, if a partner has a negative balance upon winding up the
partnership, that partner must pay the amount necessary to bring his or her account to zero.
A limited partnership is similar in many respects to a general partnership, with one essential difference. Unlike a general
partnership, a limited partnership has one or more partners who cannot participate in the management and control of the
partnership's business. A partner who has such limited participation is considered a "limited partner" and does not generally
incur personal liability for the partnership's obligations. Generally, the extent of liability for a limited partner is the limited
partner's capital contributions to the partnership. For this reason, limited partnerships are often used to provide capital to a
partnership through the capital contributions of its limited partners. Limited partnerships are frequently used in real estate and
The limited partnership did not exist at Common Law. Like a general partnership, however, a limited partnership may govern
its affairs according to a limited partnership agreement. Such an agreement, however, will be subject to applicable state law.
States have for the most part relied on the Uniform Limited Partnership Act in adopting their limited partnership legislation. The
Uniform Limited Partnership Act was revised in 1976 and 1985. Accordingly, a few states have retained the old uniform act,
and other states have relied on either revision to the uniform act or on both revisions to the uniform act.
A limited partnership must have one or more general partners who manage the business and who are personally liable for
partnership debts. Although one partner may be both a limited and a general partner, at all times there must be at least two
different partners in a limited partnership. A limited partner may lose protection against personal liability if she or he
participates in the management and control of the partnership, contributes services to the partnership, acts as a general
partner, or knowingly allows her or his name to be used in partnership business. However, "safe harbors" exist in which a
limited partner will not be found to have participated in the "control" of the partnership business. Safe harbors include
consulting with the general partner with respect to partnership business, being a contractor or employee of a general partner,
or winding up the limited partnership. If a limited partner is engaged solely in one of the activities defined as a safe harbor,
then he or she is not considered a general partner with the accompanying potential liability.
Except where a conflict exists, the law of general partnerships applies equally to limited partnerships. Unlike general
partnerships, however, limited partnerships must file a certificate with the appropriate state authority to form and carry on as a
limited partnership. Generally, a certificate of limited partnership includes the limited partnership's name, the character of the
limited partnership's business, and the names and addresses of general partners and limited partners. In addition, and
because the limited partnership has a set term of duration, the certificate must state the date on which the limited partnership
will dissolve. The contents of the certificate, however, will vary from state to state, depending on which uniform limited
partnership act the state has adopted