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Protecting Yourself and Your Business When Forming a New York Business Partnership

Business partners not only have strict legal obligations to one another but can legally be on the hook for one another’s legal obligations to others – which is why you must understand how to protect yourself and your business in New York.

February 15, 2019

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The term “partner” has come into more frequent use in recent decades to describe an ongoing romantic relationship between unmarried persons with perhaps a nod to the world of business arrangements, but an actual business partnership is far more similar to a marriage with its legal benefits and obligations than it is to two people who can simply decide to go their own way without legal complications when the romance has fizzled.

Quite the opposite, business partners not only have strict legal obligations to one another but can legally be on the hook for one another’s legal obligations to others – which can include a business deal gone bad entered into by one partner or a sexual harassment suit against one partner for actions the other partner was oblivious to – and simply trying to walk away from the partnership when things go south may not be an option (or at least not a simple option).

To complicate matters even further, unlike a married couple who knows that that wedding they both participated in means that they are married, business partners sometimes do not even realize they are partners in the eyes of the law. In New York, a General Partnership is legally formed whenever two or more people agree to do business together for profit, even if they never created a partnership agreement or even thought of one another as partners.

Thus, effort should be taken by business partners and potential partners to ensure they understand their rights and obligations with regard to New York partnership law and take steps to protect both themselves and their business.

Determine What Type of Partnership Entity You Should Form

If ever there was a business law application of the maxim/Rush-lyric “If you choose not to decide, you still have made a choice,” it’s in partnership law. Again, if you and at least one other person are conducting business together in New York and sharing profits, the state will see you as a General Partnership.

What does this mean? It can mean that your partner – whether you have ever used that term or not – could be entitled to half of the business’ profits, regardless of how much labor, effort, or capital was input, if you did not create a partnership agreement saying otherwise. More starkly, general partners are personally liable for their actions as well as the actions of other partners taken in pursuit of the partnership. For example, if your partner runs over a bicyclist while driving to pick up office supplies for the business, you could potentially be personally liable for that bicyclist’s medical bills, lost wages, and pain and suffering for life.

Because of this, many partnerships decide to form a different type of partnership entity such as a Limited Partnership, in which there is one or more limited partners who have a financial stake but not an active role in the business and, as a result, enjoy limited liability, meaning only their investment in the partnership is at risk (general partners have personal liability, however). In addition, many partnerships choose to operate as Limited Liability Companies – or LLCs – which provide limited liability for all partners.

Creating a Limited Partnership or LLC requires that specific formalities take place, including filings with the state, and a partnership attorney can guide you through what type of partnership entity is right for you as well as executing all necessary actions for the state to properly recognize your entity.

Create a Partnership Agreement That Covers All Critical Issues

No matter what type of partnership entity that you decide to form, it is important to create a partnership agreement which clearly and comprehensively covers the issues that will be important to protecting your own personal interests while also creating procedures and internal rules that will best contribute to your partnership’s ongoing success.

A partnership agreement, especially for a new business, does not have to be unworkably complex or expensive to create – and partnership agreements can be amended as the business evolves and grows – but here are a few types of issues you will want to strongly consider including in your partnership agreement:

  • How business profits will be divided among partners
  • How business losses will be divided among partners
  • What capital, equipment, inventory, and other assets each partner will be expected to contribute to the partnership
  • What types of decisions will be left to the partnership and what might be delegated to officers, managers, employees, etc.
  • How important decisions will be decided by the partnership (e.g. majority or unanimous vote)
  • Whether partners are covered by noncompete agreements and similar provisions
  • What types of business activities the partnership will enter into and will not enter into
  • The duties and responsibilities of each partner
  • The ability of partners to sell their stakes in the partnership, and the mechanism for doing so
  • Any issues relating to the dissolution of the partnership (e.g. what events might result in the dissolution)
  • Procedures for the involuntary expulsion of partners
  • Procedures for amending the partnership agreement

While the above might seem like an unwieldy list, an experienced partnership attorney should be able to create a partnership agreement in consultation with you and your fellow partners which meets your needs.

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Work With Partners You Can Trust and Work to Maintain That Trust

Obviously, while having a solid partnership agreement is supremely important, it may be of limited comfort and use if another partner has egregiously bankrupted the company and himself while ruining the goodwill and reputation of the business in the process. It may go without saying that you want to work with partners you can trust, but it can be easy for anyone to place questions of trust aside when faced with a potential partner who seems to display eagerness, talent, vision, and resources.

Thus, as difficult as it may be in the moment with stars and dollar signs in your eyes, it is important to take common-sense due diligence steps with a potential partner to determine that that person is trustworthy, responsible, and reasonably prudent. And it is equally if not more important to maintain that level of trust throughout the partnership relationship with the knowledge that good or bad fortune can quickly change relationships.

While every business and human relationship is different, open communication, active involvement, and ongoing transparency regarding finances and operations between partners are good places to start in promoting both individual and business-wide prosperity and success.

Working With a New York Partnership Attorney

Working with an experienced partnership attorney can help grow and protect your business throughout its lifecycle, from initial formation through dissolution. Contact a partnership attorney at The Fried Firm to determine the best course of action for your partnership.