Without a Written Partnership Agreement, a Partnership is Governed by the Default Rules of the State
Partnerships are a popular business structure for entrepreneurs and small business owners. This form of business entity offers many advantages, such as shared management and profits, as well as personal tax benefits. However, partnerships also come with certain legal responsibilities that must be addressed in order to ensure a successful venture. One of the most important aspects of a partnership is the partnership agreement.
A partnership agreement is a written document that outlines the terms and conditions of the partnership. It sets forth the rights and obligations of each partner, the distribution of profits and losses, the decision-making process, and the procedures for dissolving the partnership. Although not required by law, it is strongly recommended that all partnerships have a written partnership agreement.
If a partnership does not have a written partnership agreement, the partnership is subject to the default rules of the state where the partnership is formed. These default rules, known as the Uniform Partnership Act (UPA), dictate the rules for governing the partnership in the absence of a written agreement.
Under the UPA, a partnership is considered a separate legal entity from the partners. This means that the partnership can enter into contracts, own property, and sue or be sued in its own name. Each partner is considered an owner of the partnership and is entitled to an equal share of the profits and losses, unless otherwise agreed upon in writing. Partnerships under the UPA also operate under a “majority rule” for decision-making, meaning that a majority of partners must agree on any major decisions affecting the partnership.
While the UPA provides a basic framework for governing partnerships, it does not address all of the potential issues that may arise. A written partnership agreement allows partners to customize their partnership to meet their unique needs and circumstances. For example, a partnership agreement may include provisions for how to handle disputes between partners, what happens when a partner dies or becomes incapacitated, and how to allocate profits and losses based on individual contributions to the partnership.
Creating a written partnership agreement may seem like an unnecessary step for some partnerships, but it can provide a great deal of clarity and protection for the partners involved. It is recommended that all partnerships seek the advice of an experienced business attorney when drafting a partnership agreement.
In conclusion, without a written partnership agreement, a partnership is governed by the default rules of the state, as outlined in the Uniform Partnership Act. While this provides a basic framework for partnership governance, a written partnership agreement allows partners to customize their partnership to fit their specific needs and avoid potential conflicts. It is always advisable to seek legal counsel when drafting a partnership agreement to ensure that all legal requirements are met and the document is in the best interest of all partners involved.