In today's Freedom Friday blog and email newsletter, I want to talk about a topic that comes up more with my transactional clients, especially those interested in forming a business with “partner(s),” and what business entity I will recommend.  This also comes up when certain clients have already determined the type of business entity they wish to form, and I'm asked to review their agreement, and that's the idea of a “general partnership.”  Oklahoma law recognizes several different kinds of partnerships, some which are created under statute (which means you have to register them with the Secretary of State), but some of which are not.  In fact, you can have a “general partnership,” even if you do not intend this, without a written agreement, and so that's the topic in today's Freedom Friday blog and email newsletter.  In today's Freedom Friday blog and email newsletter, I'm answering the question, “What is a general partnership in 2024?”

In Oklahoma, a general partnership is formed when two or more persons are associated to carry on a business for profit, whether or not the persons intend to form a partnership.  However, there are several rules that apply to determine whether or not a partnership was formed.  First, if there is a joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership, any of those do not by themselves establish a partnership, even if the co-owners share profits made by the use of the property.  Second, 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.  Third, a person who receives a share of the profits in the business is presumed to be a partner in the business, unless the profits were received in payment of a debt by installments or otherwise; for services as an independent contractor or of wages or other compensation to an employee; of rent; of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner; 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 for the sale of the goodwill of a business or other property by installments or otherwise.  Whew, that's a lot!

In addition, there are also several legal problems with general partnerships.  In fact, these problems can arise, especially if there is no written agreement for your general partnership, and there is no intent for you to engage in a partnership.  Here are three (3) legal problems with general partnerships:

1.  No Liability Protection

The first legal problem with general partnerships is that there is no liability protection.  In a general partnership, regardless of whether or not there is a partnership agreement, or if there is, regardless of what the partnership agreement provides, the personal assets of partners in a general partnership are subject to liquidation to meet the partnership's financial obligations if the business is sued.  Partners in a general partnership are personally liable for any court judgments or business debts.  There is no liability protection for individual partners.  If you want liability protection, you and your partners should form an LLC instead of a partnership.

2.  Additional Liabilities

The second legal problem with general partnerships is that partners in a general partnership agree to take on additional liabilities.  Not only do they not have any liability protection, but a general partnership will require additional duties of the partners that don't exist in an LLC.  Specifically, partners in a general partnership have fiduciary duties to the partnership itself, and to each other.  These fiduciary duties include the duty of loyalty, the duties of good faith and fair dealing, and duties of care and disclosure.  If something happens in the partnership, not only can a partner sue a fellow partner for breach of contract and dissolution, but also for breach of fiduciary duty, and if found liable, the breaching partner can face punitive damages.  All of these liabilities and risks can be avoided if the partners choose to form an LLC instead of a partnership.

3.  Instability and Difficulty in Transferring Interests

The third legal problem with general partnerships is that general partnerships are, in general, an unstable business entity structure, and it can be very difficult for a partner to transfer his or her ownership to a third party, if desired.  General partnerships are also not stable because if something happens to one of the partners, such as a death, bankruptcy, or some other tragic event, the partnership can suddenly end and stop the flow of business.  In addition, it can be difficult for a partner to transfer his or her interest to someone else because consent can be required from the other partner(s).  If just one partner refuses consent, the partner wanting to leave can be stuck.  Many partnership agreements also lack buy-sell provisions which can avoid these problems, and forming an LLC instead of a partnership can also avoid these problems.

Thinking about starting a small business?  Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth?  Please contact me at [email protected] to schedule a FREE strategy session.

For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/