AN OVERVIEW OF NJ PARTNERSHIP LAW
A partnership can be a great way to do business with someone who shares your interests, passion, and work ethic. It’s also an easy way to do the actual business of your partnership by sharing the responsibilities, risks, and rewards of the new enterprise. Let’s examine why.
Why a Partnership Agreement is So Important for Each Partner
What is a Partnership and How Does it Work?
A partnership is simply a contractual relationship between two or more persons to conduct a business (or other lawful activity), as co-owners or co-partners. It is a voluntary association that cannot be forced on anyone without their consent.
It is always (and I mean always) preferable to set out the terms of the partnership agreement in writing in the event of a disagreement. Some of the most vicious business disputes that are difficult to resolve or predict the outcome involve verbal agreements between partners when the partnership relationship deteriorates.
The day-to-day business of a partnership is to be governed by the terms of the partners’ mutual agreement. This agreement is binding on all partners and will remain so until the partnership is dissolved. Decisions under a partnership agreement are (generally) made by majority vote, but the partners can agree to decisions by a greater than majority vote. But remember, the partners must agree (unless otherwise provided in the partnership agreement) to certain partnership decisions, such as the sale of partnership property or taking out a loan. The partnership agreement can also specify which actions of the partnership require the unanimous approval of all the partners.
When a written partnership agreement exists, its terms govern the obligations of the partner(s). The New Jersey Uniform Partnership Act governs the rights and obligations of partners when there is no written agreement, or when a written agreement fails to address the issue in dispute. Unless otherwise clearly stated, partners are entitled to equally manage and direct partnership business, including, for example, compensation for partner services rendered on behalf of the partnership. Let me repeat again: partners are free to agree among themselves on whatever they want, or not agree to anything.
Non-Negotiable Partner Obligations
Under New Jersey law, certain matters may not be waived in a partnership agreement. New Jersey law requires that partners owe each other and the partnership itself a duty of loyalty and fair dealing.
Additional obligations between partners and their partnership are 1) accounting for any profits and losses involving partnership business; 2) prohibition against self-dealing in a materially adverse way to the economic interests of the partnership; 3) not competing against the partnership while a member of the partnership; and 4) upholding a duty of care to the partnership by not engaging in grossly negligent or reckless conduct, intentional misconduct, and knowing violations of the law.
Partner(s) who take advantage and/or misappropriate opportunities available to the partnership without disclosure and the consent of their co-partners can be held liable and accountable for the economic profits gained by their actions.
Proving the Existence and Terms of a Verbal Partnership Agreement Under NJ Law
As previously stated, a NJ partnership can exist even in the absence of a written partnership agreement. You may ask how that can be. Here’s an example. When a person or persons act together in such a way that another person(s) reasonably believes that he or she is a partner of the other and that person’s belief is reasonable, and he or she relies on that belief, then a partnership can exist. Of course, there must be proof and evidence to establish a partnership (by estoppel), but if such a partnership is found to exist, efforts to deny this relationship may not be successful, and if a lawsuit is brought for damages, financial responsibility may attach to all partners.
If there is no written partnership agreement or the existence of a partnership is disputed or if the partnership agreement has been poorly written, it is important for all concerned to examine all of the relevant documents, communication(s) and circumstances, surrounding its alleged creation including such evidence as, the existence of any writings, e-mails, memo’s, correspondence, communication(s) of the parties evidencing the formation of a partnership and the terms of any such agreement(s). A court will do just this. A court will also consider the conduct of the parties over a relevant period for the establishment of a partnership relationship or the terms of a Partnership Agreement. Additional factors that will also be considered by a court include 1) whether the parties intended to share in the profits and in the losses of their enterprise; 2) evidence of legal title, ownership and control of partnership property; 3) decision making authority in the administration, management and operation of partnership business; 4) the language, wording, and terms used in any communication (written or oral) that evidences a partnership; and 5) the conduct of individual members toward third persons and each other.
Thinking About Joining an Existing Partnership?
Worried about legal liability if you join an existing partnership? Concerned that the partnership and its partners (including you) can and/or will be held individually liable for any contract, obligation, liability, and commitment made by the partnership? Before you join an existing partnership here’s the bottom line:
The liability of a new partner who joins an established partnership is limited in New Jersey. A new partner is liable only for the preexisting debts of the partnership, equal to the value of the partnership assets at the time of his or her admission to the partnership. In other words, an incoming partner is not personally liable for preexisting partnership debts that he or she did not specifically assume and/or guarantee, absent an agreement to assume partnership debts. In a reported case, a New Jersey court held that an attempt by a bank lender to hold a new incoming partner liable for a preexisting debt of the partnership was unenforceable where the lender claimed that interest on a bank loan that had accrued after the incoming partner joined the partnership was a new debt and could be asserted against him. This position of the creditor was explicitly rejected. The Court held that the partnership obligation to pay interest on its promissory note arose at the time the promissory note was executed and was not an ongoing obligation each time the interest payment was due.
If you’re concerned about a creditor’s claim or liability against you or the partnership, or are involved in a partnership based on a verbal agreement or a poorly written partnership document, contact me personally today to discuss your partnership matter. I am easy to talk to, very approachable, and can offer you practical, legal ways to handle your concerns. You can reach me at (732) 863-9900 or e-mail me at fniemann@hnlawfirm.com.
Fredrick P. Niemann Esq.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Partnership Attorney
Partnership Agreement Attorney serving these New Jersey Counties:
Monmouth County, Ocean County, Essex County, Cape May County, Mercer County, Middlesex County,
Bergen County, Morris County, Burlington County, Union County, Somerset County, Hudson County, Passaic County