One of the most common means of starting a business is the formation of a partnership. Whether it is two friends coming up with an idea at a summer outing, or former colleagues joining together to start a new business, the partnership is often the two-person version of a sole proprietorship. Two people working together, maybe with nothing more than handshake, agreeing to split the work and the profits fifty-fifty. While this scenario is one that plays out all over Vermont, there are many issues to consider when thinking about forming a partnership.
Vermont's Partnership Law. Vermont has a very modern and up-to-date partnership law. Codified at Title 11, Chapter 22, this law provides basic definitions and rules about partnerships, some of which can be varied by a partnership agreement, some of which cannot. Here are some of the law's basic definitions:
"Partnership" means an association of two or more persons to carry on as co-owners a business for profit formed under Vermont's partnership law, Vermont's prior partnership law, or comparable law of another state.
"Partnership agreement" means the agreement, whether written, oral, or implied, among the partners concerning the partnership, including amendments to the partnership agreement.
"Partnership at will" means a partnership in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking.
"Partnership interest" or "partner's interest in the partnership" means all of a partner's interests in the partnership, including the partner's transferable interest and all management and other rights.
Partnership by Default. Based on the above definitions, a partnership can be formed by two or more people simply agreeing to work together, sharing the liabilities and profits of their collective efforts. While it is advisable to have a written agreement before you begin, there is no legal requirement that there ever be a written agreement. Two people can easily find themselves buying property, incurring liabilities, and establishing obligations to each other as a partnership without having a written agreement. Because "partnerships can happen", it is vitally important to consult with an attorney to understand the benefits and risks of operating as a partnership. In determining whether a partnership is formed, the following rules apply:
Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property.
The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived.
A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment: (a) of a debt by installments or otherwise; (b) for services as an independent contractor or of wages or other compensation to an employee; (c) of rent; (d) of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner; (e) of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or (f) for the sale of the goodwill of a business or other property by installments or otherwise.
Sometimes, based on the rules above, a court may decide that a partnership existed even if there is no written partnership agreement, and even if the people involved never believed they were partners.
Filing a Trade Name Registration. It might come as a surprise, but there is no need to file a document with the Corporations Division to give "birth" to a partnership. This is different from the rules governing corporations which require the Corporations Division to issue a certificate of incorporation after the filing of the articles of incorporation before a corporation exists. While Vermont's partnership law treats the partnership as a separate entity apart from its partners, the partnership is no more than partners conducting business under a name other than their own. When a person does business in Vermont with a name other than one's own, that person is required to file a trade name registration. For example, the partnership of "Smith and Jones" is really Ann Smith and Kathy Jones individually and collectively doing business as "Smith and Jones". The trade name registration filed by Ann Smith and Kathy Jones on behalf of their partnership gives you that information.
Partnership Agreement. Generally, the partnership agreement tells you how the partners and partnership relate. For example, the partnership agreement can specify how the business profits are to be shared or who has the authority to convey partnership property. Unless the partnership agreement says otherwise, general partnership law will govern the relations among the partners and between the partners and the partnership. However, in no case may the partnership:
Vary a partner's right to file a "statement." A partner files a statement with the Corporations Division to create a public record regarding how the partnership is being operated or how the partners relate to each other. There is a statement of partnership authority, partnership denial, partnership dissociation, partnership dissolution, partnership merger, partnership qualification, or an amendment or cancellation of any of the foregoing.
Unreasonably restrict the right of access to partnership books and records; eliminate the duty of partnership loyalty, although the partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable, or all of the partners or a number or percentage specified in the partnership agreement authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty.
Unreasonably reduce the duty of care, or eliminate the obligation of good faith and fair dealing, although the partnership agreement may set the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable.
Vary the power to dissociate as a partner, except to require the notice; vary the right of a court to expel a partner under certain circumstances; vary the requirement to wind up the partnership business under certain circumstances; or the restrict rights of third parties such as debtors and creditors such third parties have agreed to be bound by such restrictions.
The partnership agreement is an extremely significant document. It includes information as to how the people in the partnership have agreed to share the benefits and burdens of their business. There is no one way of writing a partnership agreement and, therefore, any serious business as a partnership should begin with careful thought and planning. It is always advisable to consult with an attorney and an accountant before starting a partnership.
Partnership Property. Property acquired by a partnership is property of the partnership and not of the partners individually.
Property is partnership property if it is acquired in the name of: (1) the partnership; or (2) one or more partners with an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership but without an indication of the name of the partnership.
Property is acquired in the name of the partnership by a transfer to: (1) the partnership in its name; or (2) one or more partners in their capacity as partners in the partnership, if the name of the partnership is indicated in the instrument transferring title to the property.
Property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name of the partnership or of one or more partners with an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership.
Property acquired in the name of one or more of the partners, without an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership and without use of partnership assets, is presumed to be separate property, even if used for partnership purposes.
Actions of a Partner. Each partner is an agent of the partnership for the purpose of its business. This means that one partner, acting in the ordinary course of the partnership's business, binds the entire partnership. For example, if a partnership buys and sells real estate, then a single partner can bind the partnership to a particular real estate transaction even if the other partners did not know of the transaction. The exception to this rule is where the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority. Therefore, when doing business with a partnership, people must ask whether the partnership really owns the property it claims to own, and does the partner who is conducting the business really have the authority to do so. To address this issue, the partnership law allows for a document entitled "Statement of partnership authority".
A statement of authority allows the partnership to create a public record about itself. By creating this public record, people make sure that the partnership is who it is, and that the partner has the authority to do what the partner claims he or she can do.
If a partnership files a statement of partnership authority, the statement must include the name of the partnership; the street address of its chief executive office and of one office in this state, if there is one; the names and mailing addresses of all of the partners or of an agent appointed and maintained by the partnership; and the names of the partners authorized to execute an instrument transferring real estate held in the name of the partnership.
A partnership may file a statement of partnership authority which may state the authority, or limitations on the authority, of some or all of the partners to enter into other transactions on behalf of the partnership and any other matter.
Partner's liability. Generally, all partners are liable jointly and severally for all obligations of the partnership. Because of this, it is very important to know and trust the people with whom you are forming the partnership. Joint and several liability means that each partner can be forced to pay an obligation of the partnership, regardless of whether the paying partner received any specific benefit from the transaction in question or whether the paying partner even knew about the transaction. The law does allow that a person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person's admission as a partner.
A partnership may sue and be sued in the name of the partnership. An action may be brought against the partnership and, generally, against any or all of the partners in the same action or in separate actions. A judgment against a partnership is not by itself a judgment against a partner.
A judgment against a partnership may not be satisfied from a partner's assets unless there is also a judgment against the partner. A judgment creditor of a partner may not seize and collect against the assets of the partner to satisfy a judgment based on a claim against the partnership unless the partner is personally liable for the claim and either: (1) a judgment based on the same claim has been obtained against the partnership and a writ of execution on the judgment has been returned unsatisfied in whole or in part; (2) the partnership is a debtor in bankruptcy; (3) the partner has agreed that the creditor need not exhaust partnership assets; (4) a court grants permission to the judgment creditor to levy execution against the assets of a partner based on a finding that partnership assets subject to execution are clearly insufficient to satisfy the judgment, that exhaustion of partnership assets is excessively burdensome, or that the grant of permission is an appropriate exercise of the court's equitable powers; or (5) liability is imposed on the partner by law or contract independent of the existence of the partnership.
The legal rules become very complicated when the issue turns to whether an individual partner's assets may be used to satisfy an obligation of the partnership. Because the issue of liability is extremely important, it is vital to consult with an attorney about the formation of a partnership. Probably, the attorney will discuss the advantages of the Limited Liability Partnership.