What ethical responsibilities do general partners have to one another? why?

A general partner is one of two or more investors who jointly own a business that is structured as a partnership, and who assumes a day-to-day role in managing it.

Key Takeaways

• A general partner is a part-owner of a partnership business and is involved with its operations and shares in its profits.
• A general partner is often a doctor, lawyer, or another professional who has joined a partnership in order to remain independent while being part of a larger business.
• The general partner may be held personally liable for the debts of the business.

Understanding General Partner

A general partner has the authority to act on behalf of the business without the knowledge or permission of the other partners. Unlike a limited or silent partner, the general partner may have unlimited liability for the debts of the business.

General partners typically bring specialized knowledge and skills to the partnership and contribute to its pool of contacts and clients. Since they share management responsibilities, each has more time to devote to their respective professional duties.

The main benefit of a partnership is that it isn't taxed separately. In other words, the IRS (Internal Revenue Service) doesn't require partnerships to pay corporate taxes on profits. Instead, each partner receives their share of the profits as income and file and pay their own taxes.

On the flip side, a general partner may be held personally responsible for the liabilities of the partnership. For example, a patient might sue a doctor for medical malpractice. In some cases, courts have allowed the client to proceed against all of the general partners in the medical practice.

If the court enters a judgment in favor of the client, all the general partners would be financially responsible. In fact, the general partner with the most money invested in the business could bear a larger proportion of the penalty than the general partner whose alleged malpractice caused the suit.

If a general partner is ever required to meet the partnership's financial obligations, their personal assets may be subject to liquidation.

The general partner shares the expenses and responsibilities of operating the business and shares in the profits if it is successful.

Partnership Vs. Limited Partnership

A partnership is any business entity that is formed by at least two people who agree to create a company and share in its expenses and profits. This type of arrangement is particularly appealing to legal, medical, and creative professionals who prefer to be their own bosses but want to expand their business reach.

A partnership also offers a pool of investment for building and maintaining a business on a scale that might be beyond the resources of a single individual. In such cases, each professional becomes a general partner under the terms of the partnership agreement. They share the expenses and responsibilities of operating the business and share in the profits if it is successful.

The rights and duties of general partners are defined by the law of the state in which the partnership has been formed and registered. There is a Revised Uniform Partnership Act (RUPA), which is a kind of model statute that does not have the force of law unless it has been adopted as law by the government of a state in the U.S.. It is a product of the National Conference of Commissioners on Uniform State Laws (NCCUSL), which recommends its adoption by states for the regulation of business partnerships by the states in the U.S.

The most recent revision of the RUPA has been adopted as the law regarding partnerships by 37 states according to the NCCUSL. However, it is important to keep in mind that a state may have changed the RUPA before adopting it, so it is important to consult the law in the state in which a partnership does business to define the rights and duties of general partners in that state.

The NCCUSL website claims that the following states and territories have adopted the 1997 version of the RUPA: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Texas, U.S. Virgin Islands, Utah, Vermont, Virginia, Washington, West Virginia, and Wyoming. But again, each state’s law must be consulted as any particular state may have modified and amended the RUPA before adopting it.

In addition, there are rights and duties of a general partner that can be defined by the partnership agreement of the partnership for which the general partner works. So, in other words, some provisions of a state’s law regarding the rights and duties of a general partner can be modified by agreement of the partners. On the other hand, there are rights and duties that a partnership agreement cannot change.

As a general partner, a person is entitled to an equal share of a partnership‘s profits, unless otherwise specified in the partnership’s partnership agreement. A general partner is also entitled to full disclosure by each of their partners of anything they do on behalf of the partnership. A general partner also has the right to withhold their consent to any of the planned dealings of their partners. Again, a partnership agreement might delegate certain duties to a specific partner and allow that partner to operate without the specific consent of all the partners.

Each partner In a general partnership has a legal duty to act in the best interest of the partnership at all times. Additionally, the general partners may choose to include a variety of specific duties to one another in their partnership agreement. These agreements often provide that the partners should:

• Keep all profits in trust for eventual distribution in equal shares to the partners;
• Not divert partnership funds into their own personal accounts;
• Obtain the consent of the other general partners before acting on behalf of the partnership;
• Disclose to the other partners any and all actions they take on behalf of the partnership;
• Personally reimburse a partner who has been held financially responsible for a debt or action of the partnership.

Again, general partners are personally liable for all of the contractual obligations of the partnership and for torts committed by other partners within the course and scope of the business of the general partnership. This is why partnerships of licensed professionals who are subject to lawsuits for professional malpractice often prefer limited liability partnerships.

General partners can also be held personally liable for fraud or breach of trust committed by another partner within the course scope of their business dealings on behalf of the general partnership. Liability of each general partner is joint and several:

The liability of all general partners is both joint and several whether the liability or legal obligation arises from a contract or a tort. “Joint and several liability” is a legal term that means that each partner is personally and individually liable for the entire amount incurred by another partner if it relates to the business of the partnership. So, if the assets of the partner whose conduct gave rise to the liability are not sufficient to pay it, then the other partners would have to pay it out of their own assets.

A managing partner has a fiduciary duty to a partnership. Typically, the general partners in both general partnerships and limited partnerships participate in the day-to-day management of the partnership’s operations. General partners are viewed as owing a fiduciary duty to a partnership in both general and limited partnerships. The fact that a general partner has a fiduciary duty to the partnership is something that a partnership agreement probably cannot alter.

Generally, in most states, partners must demonstrate honesty and show good faith and fairness to each other in their actions with respect to a partnership. This duty starts upon the formation of the partnership, and continues through the partnership’s ongoing daily operations. It would persist even through the sale or dissolution of the partnership.

The law of a state would probably not recognize a provision in a partnership agreement that would dispense with either the duty of good faith and fair dealing or with a fiduciary duty. And it is difficult to see why partners would want to dispense with these important obligations in a partnership agreement. However, if it is an issue in a certain partnership, the partners should consult an experienced business lawyer for guidance in dealing with fiduciary duties and advice as to whether they can be modified or done away with.

Of course, a general partnership owns whatever properties have been contributed to the partnership by the partners or whatever the partnership has acquired through its business operations. The general partners do not have the right individually to own or use any specific asset of the partnership property. These are for the sole use of the partnership in its business operations only and not for use by individual partners.

Even a general partner cannot assign or transfer away their rights in a specific item of partnership property. Furthermore, no partner, general or limited, can mortgage the partnership property without obtaining the authority to do so from the entire general partnership or all individual partners.

When it comes to a general partner’s interest in the profits of the partnership, this can be transferred or assigned to another person or entity. Upon assignment of a partner’s interest in the partnership, the assignee acquires the rights to the profit and surplus originally owned by the partner.

The partnership and other partners would be protected to the extent that the assignee has no management rights because the transfer of interest in a general partnership does not confer managerial rights and duties held by the individual general partner.

The assignee would only be able to acquire such rights if they became a partner with the approval of all the other partners. The assignee could, however, ask a court for the dissolution of the partnership if the need arose, but only with the consent of the general partnership as a whole, or in the case that the term of the partnership had expired.

Also, a creditor may go after partnership interest to satisfy a debt This can happen when the creditor of an individual partner obtains a “charging order” from a court in order to satisfy some judgment from a partner’s share of profits or surplus from a partnership. A charging order is a type of lien authorized by a court placed on distributions made from a business, such as a partnership.

The fact that a creditor might obtain a charging order would not result in the dissolution of the general partnership and would not make a creditor a partner or provide them with any other rights and duties.

The limited partners In limited partnerships provide investment resources and are not involved in management of the business. They leave management of day-to-day operations to the general partners instead. Non-managing limited partners generally do not owe a fiduciary duty to the limited partnership. Keep in mind, however, that limited partners who participate in directing or operating a limited partnership could end up being viewed as general partners by a court. In that case, they might be considered to have a fiduciary duty to the limited partnership.

Can I Ignore Some of the Duties that the RUPA Imposes on a General Partner?

There are certain duties that a partnership can revise or even eliminate with their partnership agreement and still remain in compliance with their state’s law. Again, the RUPA does not have the force of law unless it has been adopted by the government of the state, i.e. passed by a state legislature and signed into law by the governor of the state.

Again, certain duties that state laws, modeled on the RUPA, impose on general partners cannot be done away with, even if the partnership agreement says otherwise. The most important of these duties is the duty of loyalty to the partnership. The duty of loyalty restricts partners from the following acts:

• Dealing with a party who has interests that conflict with those of the partnership;
• Taking personal profit from any money that should be held in trust for the partnership:
• Competing with the partnership or acting against the partnership in any way.

There may be others and again, if a particular right or duty is of concern to the partners in a partnership, they would be well-advised to seek the guidance of an experienced lawyer who can inform them of the law in the state in which they operate.

Should I Contact an Attorney?

Partnership disputes can be costly and detrimental to a partnership’s business. A corporate attorney can inform you about your rights and duties as a general partner. The best step might be to have an experienced business attorney draft a comprehensive partnership agreement at the beginning of a partnership. It can be tailored to meet the requirements of the law in the state in which you operate and the wishes of the partners.

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