Partnerships as legal entities go back to the early American legal system. Beginning case-law explained that business partners have what are called “fiduciary duties” toward one another that basically guarantee that the partners will not compete or interfere with one another’s business practices. A Georgia partnership agreements lawyer can help you establish these duties a execute a legally binging contract.
For example, let’s say that Bob’s business partner, L. Jenkins, gets a profitable offer to construct a building, but Jenkins decides against telling Bob about it. Jenkins hires his own construction company to do the work. When Bob asks Jenkins about the project, Jenkins says he’s taking all the profit. In legal terms, this would be a breach of Jenkins’s fiduciary duty to share all business normally conducted by the partnership with his business partner Bob.
Other examples of fiduciary duty breaches include stolen profits or clients, failing to perform your duties as they are normally or reasonably expected of you, partnering or colluding with a competing business against your partner(s), doing any action in the name of the business that goes against an expressed or implied agreement between partner(s), etc.
Due to the high standards that fiduciary duties impose, any action taken by any partner is considered an action of the entire partnership and every partner of the partnership. At first glance, this appears to help ensure that everyone will act honorably, but it often ends up being a trap. It can cause you to be liable, (you pay for any successful lawsuit against any of your partners, for all actions that your partners take).
Working from our initial example, if Jenkins rushed into his contract for the building and failed to acquire the necessary permits to build it, Jenkins would likely be unable to build within the time given him in his contract. The buyer then sues Jenkins and Jenkins’s partnership company. As Jenkins’s partner, Bob now has to pay for all damages from Jenkins’s breach of contract with the buyer, even though Bob had no idea that a contract existed in the first place.
This results because partners in partnerships have “joint and several liability,” meaning every partner pays for the mistakes made by all partners. Partners don’t just have to pay their “fair share;” each partner can be forced to pay for the entire damages awarded by a court against the partnership.
Furthermore, in the above scenario, the buyer would be able to go after Bob’s personal assets, if his lawsuit against the partnership was successful. Specifically, the buyer could get the local sheriff to take possession of all of Bob’s assets, no matter how priceless they might be, and sell them at a public auction, in an effort to get the damages awarded in court. In these situations, it is best to hire a lawyer you can help you litigate any breach in the partnership agreement.
Notwithstanding these extreme risks, there are many benefits to partnerships, too. First, you can create a partnership in any way, shape, or form, because it’s strictly just a contract. These agreements are flexible, in part because the freedom to contract is protected by the United States Constitution. That means that partnerships can utilize whatever business model(s) they want to; they are not limited by other, more stringent, business forms—like corporations, LLCs, and so on.
The fact that a partnership is merely a contract means that creating this type of business is quick and easy. All you have to do is make an agreement. For all intents and purposes, this contract, even if only vocalized, creates the partnership by itself. (I would not recommend doing this by verbal agreement, because creating partnership papers makes your agreement much more clear to everyone involved.)
Finally, unlike traditional corporations, partnerships allow for what’s called “pass through tax.” As discussed below, corporations require “double-taxation” on all of their profits. Unlike corporations, however, partners are only taxed once. The business’s profits go directly to the partners, who are then taxed on whatever money they get. The partnership itself is not taxed. Speak to a lawyer to learn more about the benefits of forming a partnership.
All things considered, it’s almost always best to start your legal entity as a partnership, get all of your partnership agreements solidified in writing, preferably with a little help from a Georgia partnership agreements lawyer. When and if you are more successful, replace the partnership with a stronger legal entity that protects your personal assets and avoids the risks created by fiduciary duties and the acts of your partners.