Partnership liability

It may be a familiar scenario: you and a family member decide to work together on the farm.  You both own some land, some equipment, and find it is easier to just work together indefinitely.  You soon begin to combine some accounts — it is easier and less expensive to buy all the seed and fertilizer you both need rather than make two separate orders.  And you discover that your family member is better at marketing the grain while you prefer the day-to-day work with the cattle herd.  Eventually, without even realizing it, the business assets are tied together with each person having decision-making authority.

What has happened here?  In short, you have created a partnership.  A partnership is a when two or more individuals come together and cooperate to advance their mutual interests.  A partnership does not have to directly or explicitly be formed; it can happen informally like in the above example.  And when informal partnerships occur, it means there is no agreed-upon mechanism by the parties to the extent of each person’s authority, the type(s) of activity the partnership can engage, and should each person wish to dissolve the partnership, how the partnership will be dissolved.

What makes many lawyers cringe about partnerships like the above is the lack of a formal agreement and the potential liability for all individuals in the partnership.  Let’s talk about each issue.

Partnerships can have, and many do, formal agreements on how the partnership is to organized, managed, and operated.  But that does not mean every partnership has a formal agreement and in fact, there is no requirement for such an agreement.  If there is no agreement, the State will step in with “default provisions” which govern any problems the parties may have.  You may not like these default provisions; it is worth a trip to your lawyer to understand the consequences of an informal partnership agreement.

The other concern is liability; specifically, individual, personal liability for actions undertaken for the purpose of advancing the interests of the partnership by other members of the partnership.  For example, if the partnership can no longer pay its debts, the creditor can come after your personal assets to satisfy the debt.  This is true even if it your partner who made the deal the incurred the debt.  In short, you can become responsible for another person’s bad behavior by virtue of a partnership.

Tread carefully if you are considering a formal partnership or if you may have inadvertently created one.  The advice of a lawyer is a good idea in these situations to learn the risks and rewards of a partnership.  If you would like more information for your particular situation, you are free to contact us.

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