A partnership is a group of two or more individuals or entities operating a business for profit. A Partnership Agreement is the written document that provides the rules and details for how the partnership should be run.
Under California law, a partnership can also be formed in the absence of a written agreement through the actions of the parties, even if the parties do not wish or intend to form a partnership. The danger of forming a partnership without a written agreement is that is that in the absence of a Partnership Agreement, California’s default rules regarding partnerships will be used, as contained in the Revised Uniform Partnership Act (RUPA). These default rules determine important aspects of the governance of the partnership such as who has control of the partnership, who has power to act on behalf of the partnership, who can enter into contracts on behalf of the partnership, who can incur liabilities against the partnership, and how and when the profits will be distributed. The default partnership rules also detail what happens when one of the partners wants to exit the partnership or the limited circumstances that allow for the removal of a partner, including whether the partnership will survive the departure and to what share of the value of the partnership the departing partner is entitled. Not only might these default rules not accurately reflect the parties’ intentions, California law permits oral partnership agreements, which could lead to disputes as to the partnership terms upon which the partners originally agreed. The Partnership Agreement allows the partners to resolve ahead of time what rules will apply to the governance of the partnership to avoid any uncertainty and the costs of unnecessary litigation.
Partnership Agreements are particularly important due to the increased risk that partners of a partnership bear. Unlike corporations or limited liability companies, a partnership is not a separate legal entity apart from its owners. Consequently, the partnership business form does not shield partners from the debts and liabilities of the partnership. In legal terms, each partner has “joint and several” liability for all acts of the partnership that occur during the individual’s participation in the partnership. In practical terms, this means that each partner of a partnership is personally liable for the entirety of the debts and actions the other partners incur on behalf of or associated with the partnership, subject only to a right of contribution against the other partners. Each partner will continue to remain liable for those acts of the partnership that occurred while they were a partner even after the partner leaves the partnership or after the partnership is dissolved.
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