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 business and share rights, responsibilities and the risks of a new start-up. Let’s examine why.
Why a Partnership Agreement is So Important
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 which cannot be forced on anyone without his or her consent.
It is always (and I mean always) preferable to place in writing the terms of the partnership agreement in the event of dispute. Some of the most vicious business disputes involve verbal agreements between partners, shareholders and LLC members when the business relationship deteriorates.
The day-to-day business of a partnership is determined by the terms of the partnership agreement which is binding upon all of the partners. Decisions affecting the partnership under a partnership agreement are generally made by a majority vote, but among the partners they can agree to decisions being made by more than a simple majority vote. However, all partners must agree (unless provided for otherwise in the partnership agreement) to certain partnership actions. For example, if partnership property is to be sold, or made subject to a bank lien, or subject to claims of creditors, etc. Any action by an individual partner which makes it impossible to continue the purpose for which the partnership was formed requires unanimous approval of all the partners.
When a written partnership agreement exists, the terms and conditions of the agreement will control the rights and 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 an agreement fails to address an issue in dispute among the partners. Unless spelled out clearly to the contrary, all partners are entitled to equally manage and direct partnership business. And absent a written agreement between the partners, a partner is ordinarily not entitled to compensation for his or her services on behalf of the partnership, but again the partners are free to agree among themselves (written or verbal) that one or more partners will receive a salary or other compensation for their services on behalf of the partnership.
Under New Jersey law, there are some things that partners may not waive in their partnership agreement. New Jersey law requires that between partners and their relationship to each other and to the partnership each owes a duty of loyalty and fair dealing to each other.
Additional obligations include: 1) account for any profits and benefits involving partnership business; 2) refrain from self-dealing with the partnership in a materially adverse way to the economic interests of the partnership; and 3) refrain from competing with the partnership. Each partner must also abide by a duty of care to the partnership that requires that a partner refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, and knowing violations of the law.
Partners who take advantage and/or misappropriate opportunities available to the partnership without the consent of their co-partners will be held accountable for any 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 the partner of another and that person’s belief and reliance is reasonable, a partnership can exist. Of course, there must be proof by way of evidence to find 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 exist.
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, including legal counsel to examine all of the relevant documents, communication 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 between the parties over time that may be relevant to 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 of their enterprise; 2) their intent to share in the losses of their enterprise; 3) evidence of legal title, ownership and control of partnership property; 4) decision making authority in the administration, management and operation of partnership business; 5) the language, wording and terms used in any communication (written or oral) that evidences a partnership; and 6) the conduct of individual members toward third persons and each other.
Involved in a Partnership based on a verbal agreement or a poorly written partnership document? If so, contact me personally today to discuss your NJ partnership matter. I am easy to talk to, very approachable and can offer you years of practical, and legal ways to handle your concerns.
Thinking About Joining an Existing Partnership?
Worried about legal liability? Concerned that the partnership and its partners can 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. 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 which 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, 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 toll free at (855) 376-5291 or e-mail me at email@example.com.
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