Partnerships and Law

Partnership Rights and Liabilities

General Rights and Liabilities for Every Partner

General partners share rights to an interest in the partnership and are jointly and severally liable for the obligations of the partnership. They also have a duty to act within the scope of their authority and to pass to the partnership all business that is within the scope of the partnership.

Each partner in a general partnership has specific rights and responsibilities with respect to the partnership. Though partners may have different percentage interests in the partnership and, therefore, claims to different percentages of the profits and the losses of the partnership, each partner has unlimited liability for the legal obligations of the partnership and the right to be involved in the operation and management of the partnership business.

In addition to general partnerships, there are also limited partnerships. In a limited partnership, there are two categories of partners: general partners and limited partners. Every limited partnership must have at least one general partner whose rights and liabilities are the same as a partner in a general partnership. Also, in every limited partnership, there must be at least one limited partner whose liability for the partnership's legal obligations is limited to the amount of money that they contributed to the partnership to purchase the partnership interest and who is prohibited from being involved in the operation and management of the partnership business.

Concerning rights, partners are co-owners, and each partner in a general partnership has an equal right to be involved in managing the partnership business. However, the partners can formally or informally designate the management obligations that each partner will exercise. Then each partner must act within the scope of those obligations.

Partnership Debt

Partners have unlimited liability for the debts of the partnership in a general partnership. They are jointly and severally liable for those debts, to creditors of the partnership and to each other.
Each partner has the right to an interest in the partnership. There are two aspects to a partner's interest, which have to be distinguished carefully because they can seem to overlap.
  • Each partner has the right to share the profits and losses of the partnership.
  • A partnership can own property in its own name rather than in the partners' names.

The second aspect means the partnership itself owns the actual assets. Ownership interest in the partnership does not give a partner the right to take partnership property for personal use or to sell that property individually. But if the partnership uses the property to generate income or sells the property, then the partner benefits.

Concerning liability, each partner in a general partnership has unlimited liability; that is, each partner is liable for all the legal debts of the partnership. If the partnership cannot pay a debt that it incurred, then the person who is owed the debt can collect that debt from any partner—even if that means requiring a partner to pay the debt from personal, nonpartnership assets.

This unlimited liability is also classified as joint and several liability, which means a creditor of the partnership can collect from any partner all or part of the debt owed by the partnership. Then the partner from whom the debt is collected can recover from the other partners their portion of the debt that was paid. This means that a third party doing business with a partnership is well protected under the law. The third party does not need to expend time, effort, or resources pursuing all the partners to have a debt paid. Instead, the third party can collect from just one partner. Usually, this is the partner who is likely to be the richest or the easiest to collect from.

Partner's Liability to Other Partners

Partners may be liable to other partners for actions that exceeded their authority arising from the partnership. They may also be liable for actions that interfere with another partner's rights in management and control of the partnership.

Each partner is an agent of the partnership. As an agent, they owe specific fiduciary duties to the partnership and each of the other partners. Those fiduciary duties include loyalty and care. Fiduciary duties arise in situations in which one person acts or can act on behalf of another person, so the person who is acting owes the other person a duty to act in the best interest of the other person. In a partnership, because each partner can act on behalf of the partnership, each partner owes certain fiduciary duties to the partnership to act in the best interest of the partnership. Also, because each general partner has unlimited liability for the legal obligations of the partnership and because each partner can act on behalf of the partnership, each partner owes each other partner certain fiduciary duties to act in the best interest of the partner.

For instance, examine the fictional AustinMark Construction Company partnership, where both Mark and Austin can act on behalf of the partnership and make the partnership legally responsible for their actions. If Austin orders $10,000 of steel for a project, the partnership is responsible to pay for that steel, so Austin owes certain fiduciary duties to the partnership to act in the best interest of the partnership. Also, since both Austin and Mark are general partners in AustinMark Construction Company and have unlimited liability for the legal obligations of the partnership, Austin also owes certain fiduciary duties to his partner, Mark, to act in the best interest of Mark. This is because if Austin orders the steel for the partnership and the partnership cannot pay the bill for the steel, Mark along with Austin will be responsible for paying for the steel.

The fiduciary duty of loyalty means that a partner must account to the other partners and to the partnership anything of value the partner acquires while acting as an agent for the partnership and the other partners. For instance, a partner, while acting on behalf of the partnership, might receive a gift from a supplier of materials for the partnership business. That partner must inform the other partners and the partnership of the gift. If the gift is substantial, then the partner receiving the gift might be expected to share the gift with the other partners.

The fiduciary duty of loyalty also means that a partner cannot take for themselves an opportunity that belongs to the partnership. For instance, a partnership might be involved in acquiring real property to develop and sell new home sites. A partner who discovers a piece of real property appropriate for the use the partnership is pursuing cannot acquire that piece of real estate for themselves and resell the real estate to the partnership for an excessive profit. Doing so would deprive the partnership of the opportunity to acquire and profit from that real property.

Partnership Fiduciary Duties

Each partner owes the partnership and the other partners the fiduciary duties of loyalty and care.
The partnership is responsible for anything that a partner does while acting on behalf of the partnership. The fiduciary duty of care simply requires that a partner exercise reasonable caution in acting on behalf of the partnership so as not to make the partnership liable.

If a partner violates a fiduciary duty and that violation damages the partnership, then that partner is liable to the other partners. Such a violation can result in a range of ramifications for the violating partner. They might owe the other partners damages, or the other partners might terminate the violating partner's interest in the partnership.

Partner's Liability to Third Parties

Partners have rights of management and control in the partnership, in accordance with their respective bargaining power in the partnership. Every partner may look to the other partners for their appropriate contribution after satisfying a judgment.
As an agent of a partnership, a partner deals with third parties on behalf of the partnership rather than on their own behalf. Therefore, when a partner makes a contract with a third party on behalf of the partnership, that contract is between the partnership and the third party—not between the partner and the third party. In agency law such a contract is considered a fully disclosed agency because the third party knows it is contracting with the partnership.

How a Fully Disclosed Agency Works

A partner is an agent of the partnership. Though the partner deals with a third party, the resulting transaction is between the partnership and the third party.
If a partner, though dealing with a third party on behalf of the partnership, does not disclose to the third party that they are acting on behalf of the partnership, then an undisclosed agency exists. In that situation, the partner and the partnership are liable to the third party if any claims for damages by the third party arise under the contract.

A partner acting on behalf of the partnership could commit a negligent act that results in damages or injuries. In that case, both the partner committing the negligent act and the partnership are jointly liable to a third party who suffers damages or injuries as a result of the negligence of the partner.

If a partner acting on behalf of the partnership causes intentional damage or injury to a third party, then the partner is liable to a third party who suffers damage or injury as a result of that intentional act. The partnership is usually not liable for the damages or injuries suffered by the third party. However, courts will make an exception to this rule if the intentional act of the partner that caused the damages or injuries was somehow authorized by the partnership or done in the usual course of business of the partnership.

What if someone asserts a valid claim against the partnership and the partnership cannot pay the claim? Then the liability of the partners for that claim is both unlimited and joint and several. This means that the claimant can recover the claim from any partner, even if the partner has to use their personal assets to pay the claim. The partner who pays the claim then has a right to recover from the other partners their portion of the claim that was paid. The risk of nonpayment by one of the partners then shifts from the injured party to the other partners themselves.