Partnership

An association of two or more persons engaged in a business enterprise in which the profits and losses a
re shared proportionally. The legal definition of a partnership is generallystated as "an association of two
or more persons to carry on as co-owners a business for profit" (Revised Uniform Partnership Act 101 [
1994]).Early English mercantile courtsrecognized a business form known as the societas. The societas pr
ovided for an accounting between its business partners, an agency relationship between partners in whic
hindividual partners could legally bind the partnership, and individual partner liability for the partnership's
debts and obligations. As the regular English courts gradually recognized thesocietas, the business form
eventually developed into the common-law partnership. England enacted its Partner-ship Act in 1890, and
legal experts in the United States drafted aUniform Partnership Act (UPA) in 1914. Every state has adopt
ed some form of the UPA as its partnership statute; some states, however, have made revisions to the UP
A or haveadopted the Revised Uniform Partnership Act (RUPA), which legal scholars issued in 1994.
The authors of the initial UPA debated whether in theory a partnership should be treated as an aggregate
of individual partners or as a corporate-like entity separate from its partners.The UPA generally opted for t
he aggregate theory in which individual partners ("an association") comprised the partnership. Under an a
ggregate theory, partners are co-owners of thebusiness; the partnership is not a distinct legal entity. This l
ed to the creation of a new property interest known as a "tenancy in partnership," a legal construct by whi
ch each partnerco-owned partnership property. An aggregate approach nevertheless led to confusion as t
o whether a partnership could be sued or whether it could sue on its own behalf. Some courtstook a techn
ical approach to the aggregate theory and did not allow a partnership to sue on its own behalf. In addition,
some courts would not allow a suit to go forward against apartnership unless the claimant named each pa
rtner in the complaint or added each partner as an "indispensable party."
The RUPA generally adopted the entity approach, which treats the partnership as a separate legal entity t
hat may own property and sue on its own behalf. The RUPA neverthelesstreats the partnership in some in
stances as an aggregate of co-owners; for example, it retains the joint liability of partners for partnership o
bligations. As a practical matter, therefore,the present-day partnership has both aggregate and entity attri
butes. The partnership, for instance, is considered an association of co-owners for tax purposes, and eac
h co-owner istaxed on his or her proportional share of the partnership profits.

Formation
The formation of a partnership requires a voluntary "association" of persons who "coown" the business an
d intend to conduct the business for profit. Persons can form a partnershipby written or oral agreement, a
nd a partnership agreement often governs the partners' relations to each other and to the partnership. Th
e term person generally includes individuals,corporations, and other partnerships and business associatio
ns. Accordingly, some partner-ships may contain individuals as well as large corporations. Family membe
rs may alsoform and operate a partnership, but courts generally look closely at the structure of a family bu
siness 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 porti
on of the profits from a business enterprise, the receipt of the profits isevidence of a partnership. If, howev
er, a person receives a share of profits as repayment of a debt, wages, rent, or an Annuity, such transacti
ons are considered "protectedrelationships" 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 state
s otherwise, partners share profits equally. Moreover, partners mustcontribute equally to partnership losse
s unless a partnership agreement provides for another arrangement. In some jurisdictions a partner is enti

tled to the return of her or his capitalcontributions. In jurisdictions that have adopted the RUPA, however, t
he 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 disputesrelating to management of the p
artnership. 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 accountto copartners for any benefit that he or she receives while e
ngaged in partnership business. If a partner generates profits for the part-nership, for example, that partn
er must hold theprofits as a trustee for the partnership. Each partner also has a duty of loyalty to the partn
ership. Unless copartners consent, a partner's duty of loyalty restricts the partner from usingpartnership pr
operty for personal benefit and restricts the partner from competing with the partnership, engaging in selfdealing, 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 thepartners for the resulting obligatio
ns. Similarly, a partner's admission concerning the partnership's affairs is considered an admission of the
partnership. A partner may only bind thepartnership, however, if the partner has the authority to do so and
undertakes transactions while conducting the usual partnership business. If a third person, however, kno
ws that thepartner is not authorized to act on behalf of the partnership, the partnership is generally not lia
ble for the partner's unauthorized acts. Moreover, a partnership is not responsible for apartner'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 forthe obligations of the partnership that occurred prio
r to the partner's admission.

Liability
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 oromissions of a copartner. Althoug
h a partner may be sued individually for all the damages associated with a wrongful act, partnership agre
ements generally provide for indemnificationof the partner for the portion of damages in excess of her or h
is 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'screditor can levy a judgment again
st an individual partner, certain conditions must be met, including the return of an unsatisfied writ of execu
tion against the partnership. A partnermay also agree that the creditor need not exhaust partnership asset
s before proceeding to collect against that partner. Finally, a court may allow a partnership creditor to proc
eedagainst an individual partner in an attempt to satisfy the partnership's obligations.

Partnership Property
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 partners

hipmay 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 thepartnership may own property. The
tenant in partnership concept, which is the approach contained in the UPA, is the result of adopting an ag
gregate 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 actu
allyown it. This approach has led to considerable confusion, and the RUPA has expressly stated that the
partnership may own partnership property.

Partnership Interests
A partner's interest in a partnership is considered personal property that may be assigned to other person
s. If assigned, however, the person receiving the assigned interest does notbecome 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'sinterest does not give the assignee any right to participate in th
e management of the partnership. Such a right is a separate interest and remains with the partner.

Partnership Books
Generally, a partnership maintains separate books of account, which typically include records of the partn
ership's financial transactions and each partner's capital contributions. Thebooks must be kept at the part
nership's principal place of business, and each partner must have access to the books and be allowed to i
nspect and copy them upon demand. If apartnership denies a partner access to the books, he or she usu
ally has a right to obtain an Injunction from a court to compel the partnership to allow him or her to inspect
and copythe books.

Partnership Accounting
Under certain circumstances a partner has a right to demand an accounting of the partnership's affairs. T
he partnership agreement, if any, usually sets forth a partner's right to apredissolution accounting. State la
w also generally allows for an accounting if copartners exclude a partner from the partnership business or
if copartners wrongfully possesspartnership property. In a court action for an accounting, the partners mu
st provide a report of the partnership business and detail any transactions dealing with partnership proper
ty. Inaddition, the partners who bring a court action for an accounting may examine whether any partners
have breached their duties to copartners or the partnership.

Taxation
One of the primary reasons to form a partnership is to obtain its favorable tax treatment. Because partner
ships are generally considered an association of co-owners, each of thepartners is taxed on her or his pro
portional share of partnership profits. Such taxation is considered "pass-through" taxation in which only th
e indimvidual partners are taxed. Althougha partnership is required to file annual tax returns, it is not taxe
d as a separate entity. Rather, the profits of the partnership "pass through" to the individual partners, who
must thenpay individual taxes on such income.

Dissolution

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 "windingup" of partnership business.
Although the term dissolution implies termination, dissolution is actually the beginning of the process that
ultimately terminates a partnership. It is, inessence, a change in the relationship between the partners. Ac
cordingly, if a partner resigns or if a partnership expels a partner, the partnership is considered legally dis
solved. Othercauses 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 apartnership operates
a gambling casino and gambling subsequently becomes illegal, the partnership will be considered legally
dissolved. In addition, a partner may withdraw from thepartnership and thereby cause a dissolution. If, ho
wever, the partner withdraws in violation of a partnership agreement, the partner may be liable for damag
es as a result of theuntimely or unauthorized withdrawal.
After dissolution, the remaining partners may carry on the partnership business, but the partnership is leg
ally a new and different partnership. A partnership agreement may provide fora partner to leave the partn
ership without dissolving the partnership but only if the departing partner's interests are bought by the con
tinuing partnership. Nevertheless, unless thepartnership agreement states otherwise, dissolution begins t
he process whereby the partnership's business will ultimately be wound up and terminated.

Dissociation
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 ofdis-solution. Thus, dissociation
occurs upon receipt of a notice from a partner to withdraw, by expulsion of a partner, or by bankruptcyrelated events such as the bankruptcy of apartner. Dissociation does not immediately lead to the winding
down of the partnership business. Instead, if the partnership carries on the business and does not dissolv
e, it must buyback 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
Winding up refers to the procedure followed for distributing or liquidating any remaining partnership asset
s after dissolution. Winding up also provides a priority-based method fordischarging the obligations of the
partnership, such as making payments to non-partner creditors or to remaining partners. Only partners w
ho have not wrongfully caused dissolution orhave 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 p
artnership agreement may alter the order of payment and the method ofliquidating the assets of the partn
ership. Generally, however, the liquidators of a partnership pay non-partner creditors first, followed by part
ners who are also creditors of thepartnership. If any assets remain after satisfying these obligations, then
partners who have contributed capital to the partnership are entitled to their capital contributions. Anyrem
aining 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 andlosses. If profits or losses resu
lt from a liquidation, such profits and losses are charged to the partners' capital accounts. Accordingly, if a
partner has a negative balance upon windingup the partnership, that partner must pay the amount necess
ary to bring his or her account to zero.

Limited Partnerships

A limited partnership is similar in many respects to a general partnership, with one essential difference. U
nlike a general partnership, a limited partnership has one or more partnerswho cannot participate in the m
anagement and control of the partnership's business. A partner who has such limited participation is consi
dered a "limited partner" and does notgenerally incur personal liability for the partnership's obligations. Ge
nerally, the extent of liability for a limited partner is the limited partner's capital contributions to the partner
ship. Forthis reason, limited partnerships are often used to provide capital to a partnership through the ca
pital contributions of its limited partners. Limited partnerships are frequently used inreal estate and enterta
inment-related transactions.
The limited partnership did not exist at Common
Law. Like a general partnership, however, a limited partnership may govern its affairs according to a limite
d partnership agreement.Such an agreement, however, will be subject to applicable state law. States hav
e for the most part relied on the Uniform Limited Partnership Act in adopting their limited partnershiplegisl
ation. 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 eitherrevision to the uniform act or on both re
visions to the uniform act.
A limited partnership must have one or more general partners who manage the business and who are per
sonally liable for partnership debts. Although one partner may be both alimited and a general partner, at a
ll times there must be at least two different partners in a limited partnership. A limited partner may lose pr
otection against personal liability if she orhe participates in the management and control of the partnershi
p, contributes services to the partnership, acts as a general partner, or knowingly allows her or his name t
o be used inpartnership business. However, "safe harbors" exist in which a limited partner will not be foun
d to have participated in the "control" of the partnership business. Safe harbors includeconsulting 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 partneris engaged solely in one of the activities defined a
s a safe harbor, then he or she is not considered a general partner with the accompanying potential liabilit
y.
Except where a conflict exists, the law of general partnerships applies equally to limited partnerships. Unli
ke general partnerships, however, limited partnerships must file a certificatewith the appropriate state aut
hority to form and carry on as a limited partnership. Generally, a certificate of limited partnership includes
the limited partnership's name, the character ofthe limited partnership's business, and the names and add
resses 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 cont
ents of the certificate, however, will vary from state to state, depending on which uniformlimited partnershi
p act the state has adopted.

Further readings
Gow, Niel. 2000. A Practical Treatise on the Law of Partnership. Buffalo, N.Y.: W.S. Hein.
Gregory, William A. 2001. The Law of Agency and Partnership. 3d ed. St. Paul, Minn.: West Group.
Hamilton, Robert W., and Jonathan R. Macey. 2003. Cases and Materials on Corporations, Including Part
nerships and Limited Liability Companies. 8th ed. St. Paul, Minn.: WestGroup.
Hynes, J. Dennis. 2001. Agency, Partnership, and the LLC in a Nutshell. 2d ed. St. Paul, Minn.: West Gro
up.
Moye, John E., ed. 1999. The Law of Business Organizations. 5th ed. Albany, N.Y.: West Legal Studies.

Partnerships, LLCs, and LLPs: Uniform Acts, Taxation, Drafting, Securities, and Bankruptcy. 12th ed. Vol.
1. 1996. Philadelphia: American Law InstituteAmerican Bar AssociationCommittee on Continuing Profes
sional Education.

Cross-references
Joint and Several Liability; Limited Liability Partnership.
West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.

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winding
up n. liquidating the assets of a corporation or partnership, settling accounts, paying bills, distributing rem
aining assets to shareholders or partners, and then dissolving thebusiness. Winding up a non-profit corpo
ration requires a plan for distribution of assets to some charitable or other non-profit entity under the "cy p
res" doctrine. (See: corporation,partnership)