Partnership Law: Key Concepts, Roles, and Liability in Business Partnerships

partnership

A relationship where two or more people carry on business together with a view to profit; the key exam point is that this can arise even without a formal written agreement.

why profits matter

Sharing profits is strong evidence of a partnership, but it is not the only factor because courts also look at control, intention, and how the business is operated.

mutual agency

Each partner can bind the firm in the ordinary course of business, which means one partner's actions can create liability for all.

why mutual agency matters

This is the reason partnership is risky: a partner can make contracts or commitments that affect the whole firm and the other partners.

general partner

A partner with management rights and unlimited personal liability for partnership debts.

limited partner

A partner who invests capital and usually avoids management so liability stays limited if the statutory rules are followed.

why limited partners avoid management

If a limited partner acts like a general partner, they can risk losing limited liability protection.

partnership agreement

The contract that controls the partners' rights and duties; if it is silent, default partnership rules apply.

why a written agreement matters

It prevents disputes over profit sharing, authority, retirement, and dissolution, and it can override many default rules.

default rules

Rules that apply when the partnership agreement does not say otherwise, such as equal sharing of profits and losses.

duty of good faith

Partners must deal honestly with each other and put the firm's interests ahead of secret personal gain.

duty to disclose

Partners must reveal important information that affects the business or the other partners' interests.

duty not to compete

A partner cannot secretly compete with the firm or take a business opportunity belonging to the partnership.

duty to account

A partner must hand over partnership money or property received and keep proper records.

secret profit

Any personal gain a partner makes from partnership property or business opportunities that must usually be returned to the firm.

partnership property

Property owned for partnership purposes; the exam often tests whether an asset belongs to the firm or the individual partner.

why property classification matters

It affects who can use the asset, whether creditors can reach it, and what happens on dissolution.

liability for debts

Partners are personally exposed for partnership obligations, so creditors may look to partnership assets and partner assets.

joint and several liability

A creditor can sue one partner for the full amount of a partnership debt, not just that partner's share.

new partner liability

A new partner usually is not responsible for debts that existed before admission unless they agree to assume them.

retiring partner notice

A retiring partner should give notice of departure because failure to notify third parties can leave liability alive for later transactions.

dissolution

The legal ending of the partnership, which can happen by agreement, notice, death, bankruptcy, or illegality.

why dissolution matters

Once dissolution starts, the firm stops normal business and focuses on winding up debts, assets, and obligations.

winding up

The process of finishing the partnership's affairs by collecting assets, paying creditors, and distributing leftovers.

order of payment on winding up

Outside creditors are paid first, then partner loans or advances, then capital, and only then any remaining surplus is shared.

limited liability partnership

A partnership form used mainly by professionals that reduces liability for some partner negligence but not for each partner's own wrongdoing.

why LLPs are useful

They keep the partnership structure but reduce personal exposure for one partner's mistakes in some situations.