Why Your Partnership Needs a Formal Agreement

If you are in business with a partner or partners, you need a formal agreement for the following reasons:

Your business may already be a partnership
Unlike other types of business entities, such as a corporation or a limited-liability company, a partnership can be formed without any written agreement or filing with the government. New York law defines a partnership as an association of two or more people formed to carry out business for profit as co-owners. Courts have looked to the conduct, intentions, and relationship between parties in determining whether a partnership existed. As this determination depends highly on the individual facts and circumstances of a relationship, it is a frequent source of litigation.

The default rules may not be what you expect 
If your partnership lacks a formal agreement, the New York Partnership Law provides for many of the key provisions that are typically included in such an agreement. However, much of this law represents an attempt by the state legislature in 1919 to create a set of rules for every partnership, whether it had two members or 100. Many of these 100-year-old, one-size-fits-all provisions may not be desirable for your particular business.

Unless modified by a partnership agreement, the Partnership Law provides that:
- the partnership automatically enters dissolution upon the death or personal bankruptcy of a partner

- the partnership can be dissolved by any partner

- every partner has an equal right in the management of the business

- each partner shares in the profits and losses equally

Benefits of a written partnership agreement
In addition to modifying the default rules set by the Partnership Law, a written partnership agreement can help prevent a falling out with your business partners by clearly outlining individual partners’ rights and obligations. If your partnership does face litigation from a displeased partner or former partner, a written agreement can help bring closure to any action more quickly and at less cost than if there was no such agreement. Additionally, as many disputes arise after the death or disability of a partner, a written agreement can be critical to ensure a fair and equitable resolution for all parties.

Partners can have unlimited liability
Unlike other types of business entities, an ordinary partnership does not provide for limited liability. The Partnership Law provides that the individual partners potentially can be personally and entirely liable for the wrongful acts of another partner that were performed in the ordinary course of business or for another partner’s misappropriation of a third party’s money or property. Additionally, partners can also face liability for the ordinary debts and obligations of the partnership.

Options to limit liability
The Partnership Law allows partnerships to limit individual partners’ liability through the formation of either a limited partnership or a limited-liability partnership. Other options include organizing your business under a different entity such as a business corporation or a limited-liability company. However, in order to take advantage of these limited-liability entities, your business must comply with strict procedural requirements, including making a written filing with either the county clerk or the Secretary of State’s office among other actions.        

John J. Sierotnik is an attorney with Mackenzie Hughes LLP in Syracuse. His practice areas include business, intellectual property and technology, litigation, and mergers and acquisitions. This viewpoint article was drawn from the Mackenzie Hughes blog, called “Plan Talk.” Contact him at (315) 233-8210 or email: jsierotnik@mackenziehughes.com