Partnerships

The short version

A partnership is a business owned by two or more people who agree to share profits, losses, and management. You need a written partnership agreement to define everyone's roles and responsibilities. Understanding how partnerships work is crucial to prevent disagreements and protect your interests, as you can be held responsible for the partnership's debts and actions.

The law this is built on

Every point below comes from the authority named next to it. Verify the current text before relying on it.

State Business Partnership Acts (e.g., Uniform Partnership Act or Revised Uniform Partnership Act)
These state laws define what a partnership is, how it's formed, the duties partners owe each other, and how partnerships can be dissolved. They often state that a partnership is an association of two or more persons to carry on as co-owners a business for profit.
Why it matters: These laws are the default rules for your partnership if you don't have a written agreement, or if your agreement doesn't cover a specific issue. They establish the basic legal framework for all partnerships in a state.
15 U.S.C. § 1 (Sherman Act)
This federal law makes it illegal for businesses to enter into agreements that unreasonably restrict trade or competition. It states that 'Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.'
Why it matters: Even as partners, you cannot agree to illegal actions like price-fixing or dividing markets with competitors, as this could lead to serious penalties for the partnership and individual partners.

Words you need to know

General Partnership: A business structure where two or more partners share in all profits, losses, and management duties, and each partner has unlimited personal liability for the partnership's debts and obligations.
Limited Partnership (LP): A partnership with at least one general partner (who has unlimited liability) and at least one limited partner (whose liability is limited to their investment). Limited partners typically don't participate in management.
Limited Liability Partnership (LLP): A partnership where all partners have limited liability for the actions of other partners, often used by professionals like lawyers or accountants. Partners are usually still liable for their own professional malpractice.
Partnership Agreement: A legal contract that outlines the rights, responsibilities, and duties of each partner, including how profits and losses are shared, decision-making, and how to resolve disputes or dissolve the partnership.
Fiduciary Duty: A legal obligation that partners owe to each other and to the partnership, requiring them to act in good faith and in the best interests of the partnership, not just their own.
Joint and Several Liability: In a general partnership, each partner can be held responsible for the entire amount of the partnership's debts and obligations, even if another partner was more directly at fault.

Your rights

✓To participate in managing the partnership's business, unless otherwise agreed.
✓To access and inspect the partnership's books and records.
✓To share in the partnership's profits as defined in your agreement or state law.
✓To be repaid for contributions you make beyond your agreed-upon capital.
✓To be indemnified (reimbursed) by the partnership for personal liabilities incurred in the ordinary course of business.
✓To dissolve the partnership under certain conditions as outlined in your agreement or state law.

How the process actually works

1
Forming the Partnership
When you start the business and agree to co-own it.
Two or more people decide to carry on a business together for profit. While often informal, formal registration may be required depending on the type of partnership and state rules. A written agreement is highly recommended.
2
Drafting a Partnership Agreement
Ideally, before or as soon as the partnership begins operations.
Partners write a legal document defining roles, responsibilities, capital contributions, profit/loss sharing, decision-making processes, dispute resolution, and exit strategies.
3
Operating the Business
Continuously throughout the life of the partnership.
Partners manage the business according to their agreement and state law. Each partner has the authority to act for the partnership, which binds the partnership to contracts and obligations.
4
Sharing Profits and Losses
Typically on an annual basis or as agreed upon by partners.
Profits and losses are allocated to partners based on the partnership agreement. If no agreement exists, state law (e.g., the Uniform Partnership Act) often defaults to equal shares.
5
Resolving Disputes
When disagreements arise among partners.
Disagreements are handled according to the partnership agreement's dispute resolution clause, which might include mediation or arbitration. If no clause exists, partners must negotiate or seek legal intervention.
6
Dissolving the Partnership
When partners decide to cease operations or an event triggers dissolution.
The partnership ends due to an event specified in the agreement, a partner's departure, or by mutual consent. The assets are liquidated, debts are paid, and any remaining funds are distributed to partners.

Deadlines that can end your case

Filing Partnership Agreement (if required)
Varies by state and partnership type
Some states require filing documents for LPs or LLPs to establish limited liability. Missing this can result in partners having unlimited liability, or the partnership not being recognized.
Annual Reports/Renewals
Varies by state
Many states require annual reports or renewals for LPs and LLPs. Missing these can lead to fines, loss of good standing, or even administrative dissolution of the partnership.
Tax Filings
Generally March 15th for calendar year partnerships (Form 1065)
Partnerships must file informational tax returns (though partners pay taxes on their share of income). Missing this can result in penalties for the partnership and partners.

Costly mistakes

✕Not having a written partnership agreement. This leaves critical aspects of the business, like profit sharing or dispute resolution, to default state laws which may not match your intentions.
✕Failing to define clear roles and responsibilities. This can lead to confusion, duplicated efforts, or important tasks falling through the cracks.
✕Ignoring the personal liability aspect of general partnerships. Partners can be personally responsible for all partnership debts, even those incurred by another partner.
✕Not planning for partner exit or death. Without a 'buy-sell' agreement, the departure of a partner can force the dissolution of the entire business.
✕Making major decisions without clear agreement from all partners. This can cause significant conflict and legal challenges.
✕Not understanding fiduciary duties. Failing to act in the best interest of the partnership, or acting in self-interest, can lead to lawsuits from other partners.

Your checklist

Discuss and agree on business goals, roles, responsibilities, and capital contributions with your potential partners.
Draft a comprehensive written partnership agreement covering all aspects of the business, including profit/loss distribution, decision-making, dispute resolution, and exit strategies.
Consult a lawyer to review your partnership agreement and ensure it complies with your state's partnership laws.
If forming a Limited Partnership or Limited Liability Partnership, file the necessary documents with your state's Secretary of State or equivalent office.
Obtain an Employer Identification Number (EIN) from the IRS for your partnership.
Open a separate bank account for the partnership's finances.
Keep accurate financial records and maintain open communication with your partners.

Common questions

Do I need a written partnership agreement?

While state laws often allow oral partnership agreements, a written agreement is highly recommended. It clearly defines rights, duties, and responsibilities, helping to prevent misunderstandings and disputes, and overriding default rules from state law (like the Uniform Partnership Act) that might not suit your business.

What happens if a partner wants to leave?

A well-drafted partnership agreement will outline a process for a partner's departure, such as a buy-sell clause defining how their interest will be valued and purchased. If there's no agreement, state law dictates the process, which could lead to dissolution of the partnership or complex negotiations.

Can partners be held personally liable for partnership debts?

Yes, in a general partnership, partners have joint and several unlimited personal liability for the partnership's debts and obligations. This means creditors can pursue individual partners' assets. Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs) offer some liability protection, but usually with specific conditions, as per State Business Partnership Acts.

Are partnerships subject to anti-trust laws?

Yes. While partners typically collaborate, actions taken by the partnership that restrain trade with *other* businesses, such as price-fixing or market allocation with competitors, can violate federal laws like 15 U.S.C. § 1 (Sherman Act) and state anti-trust laws.

How this changes by state

Partnership laws vary significantly from state to state. While many states have adopted versions of the Uniform Partnership Act (UPA) or the Revised Uniform Partnership Act (RUPA), specific rules regarding formation, liability, partner duties, and dissolution can differ. For example, the exact requirements for forming a Limited Liability Partnership (LLP) or a Limited Partnership (LP), including filing requirements and annual reporting, are set by each state's business statutes. To find your state's specific rules, you would typically look at your state's business or corporate code, often available on your state's legislative website or Secretary of State's office website.

When you need a lawyer

You should hire a lawyer when forming any type of partnership to draft or review your partnership agreement. A lawyer is also crucial if you face significant disputes with partners, need to negotiate a partner's exit or entry, or plan to dissolve the partnership. If you receive legal threats or are sued due to partnership actions, you should immediately consult an attorney.

Do this today

→Research the different types of partnerships (General, LP, LLP) to determine which best fits your business goals and liability preferences.
→Find sample partnership agreement templates, but remember these are just starting points.
→Schedule a consultation with a business attorney to discuss forming your partnership and drafting a strong partnership agreement that protects your interests.

This lesson is legal information for educational purposes only, based on State business corporation & LLC acts; 15 U.S.C. § 1 (Sherman Act). It is not legal advice and does not create an attorney-client relationship.