In general, a partnership can be described as a type of business structure wherein two or more individuals contribute their skills, resources, property, and/or money to establish a business for profit.
Despite being a business entity, a partnership is permitted to own property as if it were an individual person. However, the rules that govern the distribution of property and ownership in a partnership are different from those that regulate real property transactions involving persons.
In most instances, the property of a partnership consists of two main elements:
- All the property and/or funds contributed by the partners at the formation stage of the partnership; and
- Any property and/or funds that are acquired by the partnership upon using the money or resources of the established business (e.g., money from business checking accounts).
Property in a partnership business may consist of both real property, such as office space or office buildings, and personal property like equipment or inventory to help operate the business. In some cases, the property in a partnership may even include intangible assets, such as benefits, profits, securities, and intellectual property rights.
In addition, the laws governing different types of business partnerships state that the property in a partnership must be labeled as company property and therefore must be kept separate from the property of each individual partner. This general rule is not only a fiduciary duty of partners involved in a partnership, but also helps to avoid confusion over whether the business or the partners have ownership of the property in question.
To learn more about partnership formation and how to distribute property in a partnership, you should speak to a local business law attorney as soon as possible. If not, at least before you follow through with establishing a partnership business.
What are the Laws Governing Property Distribution in a Partnership?
The partners in a partnership hold title over property in a partnership business as if they were “tenants in common.” Under business law principles, this name will change from tenants in common to “tenants in a partnership.” What these terms mean is that each separate partner will retain equal rights to use the property in a partnership, as long as the use is for the purposes of running the partnership.
The use of partnership property will be deemed to be proper if it complies with the terms laid out in the partners’ partnership agreement. That is assuming of course that such an agreement exists.
In some instances, the laws and provisions governing property distribution in a partnership may depend on whether the partners assembled themselves as a general partnership, a limited partnership, or a limited liability partnership. Such rules tend to vary by state.
Although these laws may change based on the state as well as on the type of partnership that was formed between the partners, there are some general guidelines for how to distribute property to partners in a basic partnership. Some examples of those guidelines may include the following:
- A creditor or lender who is owed money from a partnership business may not take legal action to acquire specific items of property in the partnership. Instead, a creditor or lender who is owed money may only initiate legal action against a partner’s interest in the property of the overall partnership.
- However, the partners in a partnership typically do not own a specific item of property, but rather purchase a certain percentage of the partnership. For instance, a partner does not own a 15% stake in a single piece of equipment used by one of their employees in a partnership.
- Instead, the partner owns a 15% stake in the total value of the entire partnership. Thus, partnership property will be distributed as such.
- Property in a partnership may only be distributed to partners after all debts, liabilities, and taxes of the partnership are paid off in full.
- In the event that a single partner entered into an illegal transaction on behalf of and without the consent of the other partners in a partnership, they will be required to remedy the situation by replacing any property and profits that were lost or stolen from the partnership from their own personal finances. Thus, it is very unlikely that they will receive any partnership property when the business is terminated.
How is Property Distributed in a Partnership?
In general, property is typically only distributed in a partnership when the partnership has ended or the partners have filed a statement of dissolution with the appropriate government agency in their jurisdiction. Dissolution, also sometimes referred to as winding up a business, is when a business stops all operations for the purposes of shutting down.
When a partnership is dissolved, each partner may have their partnership shares distributed and applied towards the balance of any remaining or overdue debts associated with the partnership. After the debts of a partnership have been completely settled, any remaining funds will be divided and distributed among the partners of the partnership based on the percentage of ownership that each of them contributed to the business.
For example, if a partner had a twenty percent stake in the partnership, then they will be entitled to whatever property or assets remain after the debts of the partnership have been paid. This concept stems from a principle known as the “partner’s lien” rule.
In addition, a partnership agreement may also provide guidance on how the property in a partnership is to be distributed among the partners, including the apportioning of company profits. So long as the manner in which the partnership agreement distributes property in a partnership is both fair and legal, the partners can use this document as an instruction manual for distributing partnership property and profits.
In the majority of cases that involve a valid partnership agreement, the document will be the controlling factor in determining how property of the partnership is distributed to the partners. Again, the property and assets of a partnership will only be distributed to partners after all creditors and debts of the partnership have been fully paid. Partners cannot avoid liabilities or debts simply because they signed a partnership agreement. Laws must be complied with first.
Do I Need a Lawyer for Assistance With Property Distribution in a Partnership?
As discussed above, the laws that regulate property distribution in a partnership may vary based on where the partnership is located as well as on the type of partnership that was formed (e.g., a limited liability partnership versus a general or limited partnership).
These variables can sometimes make it difficult to resolve issues involving property distribution in a partnership. Therefore, you may want to consider hiring a local corporate lawyer for further legal guidance on property distribution requirements and partnership laws in your area that may affect your business.
An experienced business lawyer will be able to provide numerous legal services, such as drafting or reviewing your partnership agreement and identifying the different kinds of property in a partnership. Your lawyer can also assist you in preparing and filing a lawsuit against a partner who may have violated your partnership agreement.
In addition, your lawyer will be able to provide legal representation in civil court on business-related matters and thus may be able to help you to secure any legal remedies that you may be entitled to as well. Finally, your lawyer can also ensure that your legal rights and interests are protected under the relevant laws in your jurisdiction.