As a starting point, a PARTNERSHIP may arise when two or more individuals become associated in a common venture for the purpose of making money. This association of individuals would NOT be a partnership if appropriate documents are signed which provide that the joint owners instead intended to create a different business structure – like a Corporation or a Limited Liability Corporation (LL C).
Basically, in the absence of any documentation to the contrary, two or more associated individuals may be considered partners in the eyes of the law. Since the individuals are considered Partners in the business venture, they each have the ability to legally bind the business venture and the other Partner (or Partners).
Since the individuals are considered Partners in the business venture, they each have the ability to subject the other Partner (or Partners) to liability for their business negligence or improper actions in connection with the business venture.
According to the Revised Uniform Partnership Act (the “Partnership Act”), each partner is considered an agent of the partnership for the purpose of the partnership’s business. The Partnership Act focuses on a partner’s “apparent authority.” Apparent authority is authority that an outsider would reasonably believe an individual has to speak for the business – based on that “partner” being held out by the business as a partner.
If one of the individuals (partners) deals with an individual not associated with or a part of the business structure (called a “third party” in legalese) – can the actions of one partner bind the entire partnership? Under established Agency law, the individual Partner’s representations to a “third party” could become the responsibility of the partnership as a whole.
In making the determination of a business’ responsibility, the courts may consider whether the action was undertaken in the ordinary course of the partnership business and whether the action was within the scope of business ordinarily carried out by the partnership.
Generally, a partnership will not be bound if the individual “partner” had no apparent authority to act for the partnership in the specific matter or if the person with whom the “partner” was dealing knew that individual had no authority to bind the business — or should have reasonably known that the individual lacked the authority to bind the business.
The concept of APPARENT AUTHORITY is a pitfall for unwary business co-owners. It permits the creation of obligations through the absence of action. A better business practice is the creation of a formal partnership by the negotiation and formal signing of a written Partnership Agreement.
A formal Partnership Agreement should describe the co-owners’ designation of “signing authority” to the correct person. In addition, the Partnership Agreement will define the percentage of ownership each Partner has obtained and how that partnership interest may be transferred in the event of a Partner’s death, divorce or termination of interest in the business venture.
A carefully negotiated Partnership Agreement can offer co-owners a clear business pathway to create, grow and operate the business venture and to sell or acquire co-owners’ interests in the event of future partner retirements, divorces, second marriages, deaths or personal financial stresses which could impact the business.