Business Associations: Partnerships

Partnerships sit at the core of business associations law because they are both common in the real world and deceptively powerful in their legal consequences. A partnership can arise from a written agreement drafted by counsel, but it can also form informally when people start doing business together. That flexibility is attractive. The tradeoff is that partnerships allocate authority, risk, and responsibility in ways that can surprise owners who have not planned carefully.

This article explains how general and limited partnerships are formed, how authority works, what liability looks like, the fiduciary duties partners owe, how partnerships end, and why modern variants like LLPs and LLCs often replace the traditional partnership model.

What a Partnership Is (and Why It Matters)

At its core, a partnership is an association of two or more persons carrying on as co-owners of a business for profit. The label the parties use is not controlling. If the facts show co-ownership and profit motive, a partnership may exist even without a formal filing.

That matters because partnership status triggers default rules on:

• Management authority: who can bind the business
• Liability: who is personally on the hook for business obligations
• Fiduciary duties: standards of loyalty and care between owners
• Dissolution and winding up: what happens when relationships or economics break down

Many partnership disputes start the same way: friends or colleagues begin working together, share revenues, and make informal promises. The law often supplies the missing terms, and those defaults may not match anyone’s expectations.

Formation: When a Partnership Begins

Express formation

An express partnership forms by agreement, often called a partnership agreement. A well-drafted agreement addresses capital contributions, profit and loss allocations, management rights, limits on authority, buyout provisions, dispute resolution, and dissolution triggers.

Implied formation

A partnership can also form by conduct. Courts look to indicators such as:

• Sharing profits (a strong signal, though not always conclusive)
• Joint control or right to participate in management
• Contributions of money, labor, or property
• Holding out to third parties as co-owners

Profit sharing is significant because it reflects ownership rather than mere compensation. Still, not every profit-based payment creates a partnership. The overall relationship controls.

Partnership by estoppel (holding out)

Even if no partnership exists between the parties, liability can arise when someone represents that a partnership exists and a third party reasonably relies on that representation. In practice, this doctrine protects outsiders who were led to believe they were dealing with partners.

Authority: Who Can Bind the Partnership

A central feature of general partnerships is agency power. Each general partner typically acts as an agent of the partnership for business purposes. That means:

• A partner’s act in the ordinary course of business can bind the partnership.
• Restrictions in a private partnership agreement may not protect the partnership against third parties who lacked notice of the restriction.

This is where internal governance and external risk diverge. Partners may agree internally that one partner cannot sign contracts above a certain dollar amount, but if that partner signs anyway and the counterparty reasonably believes the partner had authority, the partnership can still be bound. The remedy then becomes internal, such as indemnification or breach of the partnership agreement.

Management default rules

Unless the agreement provides otherwise, partnership management often operates on a “one partner, one vote” concept for ordinary matters, while extraordinary actions may require unanimous consent. Because the default is not always intuitive, many partnerships adopt clear voting thresholds and define what counts as ordinary versus extraordinary.

Liability: The Defining Risk of General Partnerships

General partnerships

In a general partnership, partners are typically personally liable for partnership obligations. The business may have its own assets, but if those are insufficient, creditors may pursue partners’ personal assets. Liability is often joint and several, meaning a creditor can seek full recovery from one partner, leaving that partner to seek contribution from the others.

This risk is not limited to contracts. It also extends to torts committed in the ordinary course of partnership business. If a partner or employee causes harm while acting for the business, the partnership can be liable, and so can the partners personally.

Limited partnerships

Limited partnerships divide owners into:

• General partners, who manage and bear personal liability (similar to general partnership liability)
• Limited partners, who contribute capital and usually enjoy limited liability, but traditionally do not control day-to-day management

Limited partnerships are commonly used for investment structures where passive investors want liability protection and predictable governance.

Fiduciary Duties: Loyalty, Care, and Good Faith

Partnership law imposes fiduciary duties because partners share power and vulnerability. Even sophisticated parties can be harmed by undisclosed conflicts, self-dealing, or opportunistic behavior.

Duty of loyalty

The duty of loyalty generally requires partners to:

• Account for benefits derived from partnership opportunities
• Avoid competing with the partnership
• Refrain from self-dealing without proper disclosure and consent

A common flashpoint is the “business opportunity” problem: one partner learns of a lucrative deal through the partnership and takes it personally. Loyalty principles typically require disclosure and an opportunity for the partnership to pursue it first.

Duty of care

The duty of care generally limits partners from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowing violations of law. It does not require perfection; business judgment and reasonable risk-taking remain permitted.

Good faith and fair dealing

Partnership relationships also carry an expectation of good faith in exercising rights and performing obligations. Even where the agreement grants broad discretion, that discretion cannot be used purely to sabotage the partnership or extract unfair advantage.

Dissolution and Winding Up: How Partnerships End

Partnerships can end because of success, failure, or personal friction. Legally, it helps to separate:

• Dissociation: a partner leaves (voluntarily or involuntarily)
• Dissolution: the partnership begins the process of ending
• Winding up: settling accounts, liquidating assets, paying creditors, and distributing remaining value

Some partnerships dissolve automatically upon key events, while others continue with remaining partners, often with a buyout of the departing partner’s interest. The outcome depends heavily on the partnership agreement and the governing statute.

Practical consequences during winding up

During winding up, authority narrows. The goal becomes preserving value and paying obligations, not launching new lines of business. Partners must also provide accounting, resolve creditor claims, and distribute remaining assets according to the priority rules that apply.

LLPs and LLCs: Modern Alternatives That Change the Risk Profile

Limited Liability Partnerships (LLPs)

An LLP is a partnership that provides a liability shield, commonly used by professional firms. While rules vary by jurisdiction, the basic concept is that partners are not personally liable for certain partnership obligations, especially those arising from others’ misconduct. LLP status is typically obtained through registration and compliance steps that signal to the public that the entity carries limited liability features.

LLPs aim to preserve partnership-like taxation and management flexibility while reducing the harshness of unlimited personal liability.

Limited Liability Companies (LLCs)

LLCs have become the default choice for many closely held businesses because they blend:

• Limited liability for owners (members)
• Flexible governance through an operating agreement
• Partnership-style tax options in many cases

From a business associations perspective, LLCs often function like “contractual entities.” The operating agreement can tailor economic rights, management structures, transfer restrictions, and dissolution triggers with far more precision than many traditional partnership defaults.

Choosing the Right Form: A Practical Framework

When evaluating a general partnership, limited partnership, LLP, or LLC, focus on a few concrete questions:

1. Who will manage? If all owners will manage, a general partnership or member-managed LLC may fit. If investors want to be passive, consider a limited partnership or manager-managed LLC.
2. How much personal liability is acceptable? If the answer is “none,” a general partnership is usually the wrong tool.
3. How will disputes and exits be handled? Deadlock, buyouts, and valuation terms are not afterthoughts. They are the difference between a workable venture and litigation.
4. What fiduciary standards do the owners want? Some entities and agreements allow more tailoring of duties and decision-making constraints.

Conclusion

Partnership law rewards clarity and punishes assumptions. Formation can be informal, authority can be broad, liability can be personal, and fiduciary duties can be demanding. Dissolution can be orderly when planned or destructive when ignored. For many businesses, LLPs and LLCs offer a better balance of flexibility and protection, but they still require thoughtful agreements and a clear understanding of who can bind the enterprise and who bears the risk.

A partnership is not just a way to split profits. It is a legal relationship that governs power, responsibility, and trust.