In this lesson, we continue our discussion of partnerships by focusing
on the rights and duties of partners in a general partnership.
Okay, in the last lesson we learned a little bit about general partnerships.
There's unlimited personal liability,
which is a big con.
But in a future lesson,
we're going to learn about some other forms of
partnerships that can help with that liability problem.
And in this lesson,
we're going to talk about rights and duties of partners.
Now, these rights and duties apply to general partnerships,
but also these other forms of partnerships that we'll see in a future lesson.
And also to a lot of other types of business entities beyond partnerships.
So, this is a good foundation for our future discussion.
Remember we said more owners equals more complexity.
So, as partnerships grow from two to more owners,
things get more complicated.
Now, in a partnership,
every partner has certain rights and those rights are usually given by
the whatever statute the state in which your partnership is organized has adopted.
So, UPA, RUPA, we talked about those in the last lesson,
they give partner certain rights.
And partners also have certain duties.
Now, oftentimes a partner's rights can be altered by the agreement of the partners.
So, you say you know I have this right, I don't need it.
We can agree to alter it by the partnership through the partnership agreement.
That's usually okay. Most of the time your duties cannot be altered by the parties.
And as we go through the list of rights and duties,
it will probably become more clear why this is.
So, let's start with rights.
As a partner in a partnership,
you have some rights.
You have the right to manage the partnership.
The right to manage is one of the foundational rights that partners have.
Why would you be in a partnership if you didn't have the right to manage?
Now, again, this you can modify this.
So, say your partnership gets huge.
You have a law firm or an accounting firm with 100 partners.
You don't want every single one of those 100 partners to be
able to write checks on behalf of the organization.
So, you can modify the right to manage such that
only a small group or one person has the right to do certain management activities.
But, as a general rule, partners have the right to manage,
they have the right to profits and losses.
This again, very, very important.
Why would you be an owner of a partnership if you didn't want to share in the profits?
Now, you can modify the share of profits and losses you get.
So, the default rule is that all partners share equally in all profits and losses
regardless of your capital contributions or the amount
of work you do on behalf of the partnership or anything like that.
Default rule is everybody splits equally
pro-rata share based on the number of partners there are. Now, you can modify that.
So, if there's three partners and you say well
this one partner should get half of the profits
because he or she invested half of
the capital and the other two partners should each get 25 each.
You can do that.
You can modify that. Next right is the right to information.
All partners have the right to inspect the books and records of the partnership
to be privy to contractual negotiations and all sorts of things like that.
Again, the right to information can be modified.
Say you have a giant partnership.
It's just not feasible sometimes for
every partner to be involved in every contract negotiation, and that's fine.
But every partner still does have the right
to inspect the books and records of the partnership.
That's pretty foundational and usually can't be modified.
A couple of other rights.
The right to be repaid.
If you spend your own money on behalf of the partnership,
whether that's through actual expenses or
like you get sued in your capacity as a partner and you had to
pay attorney's fees or you had to pay out a judgment or
you made a loan to the partnership or you invested capital in the partnership.
All of those things,
you have the right to be repaid for either immediately or when you leave the partnership.
Now, the one time you don't have the right to be paid is for your labor.
Partners have no right to compensation.
So, it doesn't matter how many hours you work,
how much blood sweat and tears you pour into a partnership,
you don't get paid for that.
You don't have a right to a salary or
an hourly wage as a partner because you own the business.
Your compensation for your hard work is your right
to share in the profits that hopefully will come down the road.
So, you have the right to be repaid when you pay your own money out,
but not just for your hard work.
So, those are most of the important rights that partners have.
Now, let's shift over and talk about duties a little bit.
Now again, most of these you can't modify.
So, for instance, the first one is called the duty of loyalty.
Even if your partnership agreement says partners in
this partnership will not have the duty of loyalty, that's invalid.
You can't do that because it's
a foundational idea that partners owe each other a duty of loyalty.
We call these duties fiduciary duties,
and this is a term that we use in a lot of different contexts in the legal world.
That basically means, a fiduciary duty is a duty owed to somebody because
you have some heightened expectation of trust.
So, family members often are fiduciaries duties,
healthcare providers have fiduciary duties to their patients,
lawyers have fiduciary duties to their clients, things like this.
Partners owe fiduciary duties to one
another because we expect them to have a heightened obligation of trust.
So, what are these duties. First, I already mentioned the duty of loyalty.
This means that you are not allowed to enrich
yourself at the expense of your partnership.
There's a lot of ways that this can be manifested, so self-dealing,
say you cause your partnership to engage in a deal with some third party,
but you have an interest in that third party.
So, you are benefited by your partnerships dealings
with the third party, that's self-dealing.
And that's a violation of a duty of loyalty, usurping partnership opportunities.
That's one of my favorite words, usurping.
Say,you become aware of an opportunity that would
be a great business investment for your partnership,
but instead of telling the partnership you do it yourself.
That's usurping partnership opportunities,
that's a violation of a duty of loyalty.
You can't enrich yourself at the expense of your partnership.
Next duty is the duty of care.
This basically just means you have the right to manage this partnership,
but your co-partners are counting on you to act in a reasonable way when you do that.
You know, not just take out crazy loans,
not sign contracts on behalf of the partnership that are unreasonable.
These types of things. This is the duty of care.
You have the obligation to manage the partnership in a reasonable manner.
Third duty, the duty of obedience.
This is a little more specific than the others,
but if you have a partnership agreement it's going
to say some things and give you some obligations, right?
So, it might say that
only people in this group of
partners have the authority to enter into contracts on behalf of the partnership.
Well, if you're not in that group of partners,
you don't have that authority and you have a duty to obey that.
You can't go out and misrepresent that you have some authority.
If the partnership agreement says something,
you have the duty to obey what the partnership agreement says.
Then finally, you have the duty to inform.
This just means that as a partner you have the duty,
the obligation to inform your other partners of
any material information that
you come across that would impact your partnerships business.
Because in a court of law if you ever get to that point,
all of your other partners will be held to know something if you know it as well.
This is called the doctrine of imputed knowledge.
All partners are held to,
in a court of law to know anything material that one partner knows.
So, you have to inform your other partners in
anything relevant that comes across your desk.
