When two or more people go into business together, it is important for them to agree to and enter into a formal written agreement for a partnership or partnership agreement. A corporation’s shareholders would be governed by its shareholders agreement and an LLC’s members by its operating agreement.
For partnerships, in particular, it is important to have some type of written agreement, whether it is a partnership agreement or a buy-sell agreement. Partnerships are one of two business entities in New Jersey (sole proprietorship being the other), which do not require a formal filing with the secretary of state in order to exist. The law recognizes a partnership based on the activities of the partners. If two or more people are in business together and are sharing in profits, New Jersey sees this business relationship as being a partnership.
Generally there are two types of partnerships, a general partnership and a limited partnership. A general partnership consists of two or more people who go into business together and share in the profits. The general partners are each involved in the business operations and share liability on the business obligations. A limited partnership consists of one or more general partners and at least one limited partner. The general partners handle the business operations and share in liability. The limited partners contribute capital to the business, but do not get involved in the everyday functions and have only a limited liability. A limited partnership requires a formal filing with state.
Where there is no formal written partnership agreement, the New Jersey statutes dictate how the partnership is run and/or dissolved. For instance, absent agreement, each partner has an equal say in the management of the partnership. As for business decisions, the statutes provide that ordinary decisions require a majority vote, whereas extraordinary business decisions require unanimous consent. On the other hand, with a written agreement, the partners can chose one or more individual partners as being authorized to handle day-to-day business affairs. Unless there is a written agreement that provides otherwise, no new partners can be added to the partnership without the consent of all of the existing partners. More troubling is the provision that if a partner dies or becomes bankrupt and there is no written agreement, the partnership is automatically dissolved. However, if there were a written agreement which addresses these situations, the partnership could be reconstituted on the death or bankruptcy of a partner. The agreement could also provide for situations where a partner becomes disabled or voluntarily or involuntarily withdraws from the partnership. Moreover, the agreement could also determine what amount of payment a departing partner (or deceased partner’s estate) receives from the partnership.
Although a written agreement is not a legal requirement, it has the advantage of allowing the partners to decide how business decisions are made, how profits and losses are shared and what happens to the partnership, should a partner become disabled, deceased, bankrupt or withdraw from the partnership.
Jill F. Rosenfeld is an Associate at WJ&L and practices in our Business, Corporate and Transactional areas.