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General Partnerships Part IV: Relationship Between Partners

On Behalf of | Aug 21, 2017 | Partnerships, Personal Liability

Partners in a general partnership owe a fiduciary duty to the partnership, just like in the context of LLCs.  Partners must act as an ordinarily prudent person, refraining from competing with the partnership, and generally act in good faith.  Moreover, they must put the best interests of the partnership ahead of their own.  So, in the farming partnership case from the previous blogs, the parties owe fiduciary duties to the partnership, which they would not otherwise owe if it was just a farming agreement.  Partners can enter into a partnership agreement to govern the relations of the partners, although such agreement generally may not eliminate fiduciary duties of partners.

Just like LLC members, partners have a great deal of flexibility in setting the terms of the partnership agreement.  If there is no such agreement, the law fills the gap.  For example, all partners have equal rights in the management of the partnership business, unless otherwise agreed upon.  In addition, each partner shares equally in the profits after all liabilities are satisfied, unless otherwise agreed.

In terms of compensation, partners are generally not paid for their work, even when one partner is required to assume more work than others, except in unusual circumstances, such as winding up of the partnership business.  Each partner, however, is expected to devote his or her entire time and energies to the partnership business, or he or she may be charged with an accounting for damages caused to the partnership, including the amount spent to replace the services he or she should have performed.

Most importantly, partners may want to consider situations where dissolution, winding-up, or withdrawal of partners may occur and document their understanding in a partnership agreement, just as LLC members would set forth their buyout terms in an LLC agreement.

So, let’s go back to the two brothers’ story discussed in Post 1. Did the brothers form a general partnership?  Yes, definitely.  This was actually a recent court case, not a hypothetical one. [1] When the administrator brother failed to pay property taxes and a number of tax authorities initiated foreclosure proceedings, the other brother sued, claiming, among other things, that his brother breached his fiduciary duty based on their partnership agreement by risking the ownership of the properties.  The court agreed and held that the brothers formed a general partnership and that the administrator brother breached his fiduciary duty to the other brother in relation to their partnership.

The takeaway here is that, even though the LLCs are popular, general partnerships are here to stay, and it is much easier than most people think to form a general partnership without even realizing.  We recommend that business owners consult a lawyer early on regarding their choice of business form(s) and proactively set the terms of such business in a written agreement.  And they should strongly consider using a limited liability entity, such as a corporation or LLC, unless extreme circumstances exist.

[1] Flores v. Flores, No. 04-10-00118-CV, 2011 WL 3610428 (Tex. App.—San Antonio Aug. 17, 2011, pet. denied) (mem. op.).

This posting is intended to be a tool to familiarize readers with some of the issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity. Michelle Kwajafa.

About the Author

Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride or call 407-517-0064.

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