New York law defines a partnership as “an association of two or more persons to carry on as co-owners of a business for profit.” While a partnership conducts a business as a distinct entity, it is not the same thing as a corporation. New York and federal law disregard the partnership structure for tax purposes, meaning any profits earned by the partnership pass through to the individual partners.
When forming a partnership, it is always a good idea to have a written partnership agreement signed by all of the partners. The partnership agreement is a contract that spells out each partner's contributions, duties, and responsibilities to the partnership as a whole. At a minimum, the partnership agreement should address the following subjects:
*The name of the partnership and its business;
*The specific contributions of each partner to start the business (this includes cash and equipment or services);
*How the partnership will allocate any profits and losses, and how and when individual partners may take a regular “draw” from the partnership's profits;
*The relative authority of each partner in running the business—that is, whether one partner will act as the sole manager, or whether the partners will vote on major decisions;
*Allocating specific managerial functions, such as bookkeeping, hiring and firing employees, dealing with regulatory issues, et cetera;
*The process for admitting new partners, as well as dealing with the withdrawal or termination of an existing partner;
*Establishing a process for resolving disputes among the partners; and
*Making provisions for winding up the business.
The Dangers of “Oral” Partnership Agreements
You might think a partnership agreement is unnecessary paperwork. Technically, New York does not require a written agreement to prove the existence of a partnership. But a simple “handshake deal” may not be enough in the event something goes wrong. The following is a recent illustration from a decision by the Appellate Division, Fourth Department, on this point.
The plaintiff accused the defendant of violating an “oral partnership agreement” between the two of them. The subject of the dispute was a piece of property owned by the plaintiff. The plaintiff said he and the defendant agreed to develop and sell the property in partnership. The defendant denied such an agreement existed.
The Fourth Department agreed with the defendant. Beyond the absence of any written partnership agreement, the appellate judges noted the defendant had “no legal interest in the property” that was the subject of the alleged partnership. Normally, a partnership would acquire business property in its own name, not just that of one partner. The plaintiff also admitted the defendant never agreed to share in any losses from the property development. In fact, the Fourth Department concluded, although the two men occasionally used “partnership terminology,” they actually ran separate businesses and “periodically collaborated on projects for their mutual benefit.” That does not equal a partnership.
The key lesson from this case is, if you and other persons wish to form a business partnership, you should do so expressly through a written partnership agreement. A qualified New York business transaction attorney can advise you on the best way to get your partnership going on the right foot. Contact our office today if you have any questions.