Business Law (part 37)

Creation and Operation of a Partnership

(part B)

by

 Charles Lamson

Duties of Partners

Five common duties that one partner owes to the others include:

1. Duty to exercise loyalty and good faith
2. Duty to work for the partnership
3. Duty to abide by majority vote
4. Duty to keep records
5. Duty to inform

Exercise Loyalty and Good Faith

Partners owe each other and the firm the utmost loyalty and good faith. As an agent of the firm, each partner has a fiduciary duty to the firm, so strict fidelity to the interests of the firm must be observed at all times. No partner may take advantage of the copartners. Any personal profit earned directly as a result of one's connection with the partnership must be considered profits of the firm. If the personal interest or advantage of the partner conflicts with the advantage of the partnership, the partner has a duty to put the firm's interests above personal advantage. This duty lasts as long as the enterprise exists.

The partnership contract must be observed scrupulously. Each partner has the power to do irreparable damage to the copartners by betraying their trust. For this reason, the law holds each partner to the utmost fidelity to the partnership agreement. Any violation of this agreement gives the other partners at least two rights: First, they can sue the offending partner for any loss resulting from the failure to abide by the partnership agreement; second, they may elect also to ask a court to decree a dissolution of the partnership. A trivial breach of the partnership agreement will not justify dissolution, however. 

Work for the Partnership

Unless provided otherwise in the partnership agreement, each partner has a duty to work on behalf of the partnership. In working for the partnership, partners must use reasonable care and skill in conducting the firm's business. Each partner has liability for partnership debts, but a partner must reimburse any loss resulting to the firm because of the partners failure to use adequate care and skill in transacting business. If the partnership supplies expert services such as accounting or engineering services, then each partner must perform these services in the manner that will free the firm from liability for damages for improper services. However, honest mistakes and errors of judgment do not render a partner liable individually nor the partnership liable collectively.

Abide by Majority Vote

A partnership operates on the basis of a majority vote. Unless the partnership agreement provides otherwise, the majority of the partners buying the firm on any ordinary matters in the scope of the partnership business. A decision involving a basic change in the character of the enterprise or the partnership agreement requires the unanimous consent of the partners. Therefore, the majority rule does not apply to such actions as an assignment for the benefit of creditors, disposition of the firm's goodwill, actions that would make carrying on the firm's business impossible, confession of a judgment, or the submission of a firm claim to arbitration.

Keep Records

Each partner must keep such records of partnership transactions as required for an adequate accounting. If the partnership agreement provides for the type of records to be kept, a partner fulfills this duty when such records are kept, even though they may not be fully adequate. Since each partner must account to the partnership for all business transactions, including purchases, sales, commission payments, and receipt, this accounting should be based upon written records.

Inform

Each partner has the duty to inform the other partners about matters relating to the partnership. On demand, true and full information of all things affecting the partnership must be rendered to any partner or the legal representative of any deceased partner or partner under legal disability. 

Rights of Partners

Every partner, in the absence of an agreement to the contrary, has five well-defined rights:

1. Right to participate in management
2. Right to inspect the books at all times
3. Right of contribution
4. Right to withdraw advances
5. Right to withdraw profits

Participate in Management

In the absence of a contract limiting these rights, each partner has the right by law to participate equally with the others in the management of the partnership business. The exercise of this right often leads to disharmony. It is a prime advantage, however, because the investor maintains control over the investment. The right of each partner to a voice in management does not mean a dominant voice. With respect to the management decisions, regardless of importance, the majority vote of the individual partners is controlling. 

Inspect the Books

Each partner must keep a clear record of all transactions performed for the firm. The firm's books must be available to all partners, and each partner must explain on request the significance of any record made that is not clear. All checks written must show the purpose for which they are written. There may be no business secrets among the partners.

Contribution

A partner who pays a firm debt or liability from personal funds has a right to contribution from each of the other partners.

The Uniform Partnership Act states that "the partnership must indemnify every partner in respect of payments made and personal liabilities reasonably incurred by him in the ordinary and proper conduct of its business or for the preservation of its business or property." The partner has no right, however, to Indemnity or reimbursement when (1) acting in bad faith, (2) negligently causing the necessity for payment, or (3) previously agreeing to bear the expense alone.

Withdrawal Advances

A partner has no right to withdraw any part of the original investment without the consent of the other partners. One partner, however, who makes additional advances in the form of a loan, has a right to withdraw this loan at anytime after the due date. Also, a partner has a right to interest on a loan unless there is an agreement to the contrary. A partner has no right to interest on the capital account. Therefore, the firm should keep each partner's capital account separate from that partners loan account.

Withdraw Profits

Each partner has the right to withdraw a share of the profits from the partnership at such time as specified by the partnership agreement. Withdrawal of profits could be by express authorization by vote of the majority of the partners in the absence of a controlling provision in the partnership agreement.

*SOURCE: LAW FOR BUSINESS, 15TH ED., 2005, JANET E. ASHCROFT, J.D., PGS. 389-393*

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