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Partnership Illegal Transactions

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What are Illegal Transactions in a Partnership?

Illegal transactions in a partnership are not just those transactions that are prohibited by laws, such as the sale of illegal goods, drugs, or other contraband.  Instead, “illegal transactions” in a partnership can also refer to transactions that are conducted by a partner without the authorization of the other partners.

In any partnership, each partner has a certain amount of control and influence when it comes to decision making.  All the partners should be informed and should have some say when important decisions are to be made.  Thus, if one of the partners enters into a transaction on behalf of the partnership without their authorization, it is considered a violation of the partnership and thus considered to be illegal.

What are Some Examples of Illegal Transactions in a Partnership?

Transactions involving the following matters may be considered illegal under partnership laws, when done without the approval of the partnership:

  • Surety Agreements:  Partners may not use the name or assets of the partnership as surety for personal agreements.  For example, they cannot back up a personal loan using funds from a partnership trust.  They also may not use the partnership as surety on behalf of other persons
  • Termination/ Cessation of Business: A partner may not bind the partnership through a contract that would result in the partnership being terminated, or that would make it impossible for the partnership to continue its business activities
  • Debt or Personal Obligations: A partner may not satisfy their own personal debt or obligations by intermingling them with partnership activities.  For example, if a partner owes a business debt to another company, they cannot satisfy that debt by using an account that the partnership has with that company. 

Thus, any transaction where a partner exceeds their scope of authority with regards to the partnership may be considered illegal.  The partners are also prohibited from entering into transactions for personal gain, if it is to the determent of the partnership.

What are the Remedies for Illegal Transactions in a Partnership?

If a transaction has been illegally conducted in relation to a partnership, there may be several legal consequences, such as:

  • The transaction may be voided upon discovery that it was illegal
  • Any profits that the partner made may be “disgorged”, or taken away from the partner and distributed to the partnership
  • The partner may be liable to the partnership for any monetary losses, damage to reputation, or other violations against the partnership
  • The partner may be disciplined by the partnership or according to business and criminal laws (paying fines, removal from decision-making boards, etc.)

Thus, it is important for all partners to have a good understanding of their legal rights and duties to the partnership and to each partner.  This will help to avoid any disputes or illegal transactions as the business is conducted. 

In many cases, the remedies for illegal partnership transactions can be stated in a partnership agreement that is formed between the partners during the business formation stage.

Do I Need a Lawyer if I Have Issues with Illegal Transactions in a Partnership?

Illegal transactions in a partnership can have very serious consequences for both the individual partner and for the entire organization.  If you suspect that you have issues with illegal transactions, you may wish to contact a lawyer in your area.  A qualified business attorney can help you determine if any violations have occurred and how they might affect the partnership.  Your lawyer can also help defend your interests in court if a lawsuit arises.

Photo of page author Ken LaMance

, LegalMatch Law Library Managing Editor and Attorney at Law

Last Modified: 05-05-2014 03:03 PM PDT

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