What are My Legal Duties to a Partner in a Business Partnership?

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What are My Legal Duties to a Partner in a Business Partnership?

In business, choosing the right partner can be essential for the success of your endeavor. However, when there is more than one person running a business and making important decisions, it is imperative that certain issues be addressed, preferably in a partnership agreement that can help you avoid costly litigation.

Partners also need to understand that the law requires that you fulfill certain obligations to each other. The Revised Uniform Partnership Act (RUPA) applies to general partnerships and limited liability partnerships; under Section 404(b) and (c), partnership obligations include:

Duty of loyalty. A partner’s duty of loyalty to the partnership and the other partners is limited to the following:

  1. To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;
  2. To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and
  3. To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.

Duty of care. A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

Under RUPA, a partnership agreement establishes the duties and rights of each partner and partners may tailor an agreement to suit their purposes. However, a partnership agreement cannot eliminate either of the duties of loyalty or care. Issues that should be addressed in your partnership agreement include:

Contributions. Clarify how much each partner will contribute to start the business as well as what each partner’s responsibilities will be for making future contributions to the business – both financially and otherwise.

Ownership. Determine who gets what if the business ownership changes in any way.

Decision Making. Clarify how decisions will be made on both a day-to-day and long-term basis, including what kinds of decisions need to be agreed upon by both partners, and which decisions can be made by one partner alone.

Distributions. Your partnership agreement should very clearly state how each partner will split the business profits.

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