A partnership is where two or more individuals contribute their property, skills, money, and labor to create a business. In general, the partnership can own property just like any individual person can. There are different rules regarding ownership and property distribution in a partnership.
Generally speaking, partnership property is comprised of:
- All property contributed by partners during the formation stage
- Any property acquired by the partnership using the business’ funds
Partnership property can include both real property (such as buildings or offices) and personal property (items not attached to the land). It may also include intangible assets like monetary funds and benefits.
Laws governing general and limited partnerships require that partnership property be classified as company property and kept separate from the property of individual partners. This is to avoid confusion over ownership of the property.
In a partnership, the partners hold title to partnership properties as “tenants in common” or “tenants in partnership”. This means that each respective partner has equal rights to usage in the property, so long as use is restricted to partnership purposes. The property must be used according to the terms set out in a partnership agreement, if one exists between the partners.
Again, the laws governing property distribution in a partnership will vary slightly according to whether the business is a general partnership or a limited liability partnership. The laws may also vary according to local jurisdictional rules.
While the laws may vary, some general guidelines for property distribution of property in a partnership include:
- Partners usually don’t own any property interests in any one specific piece of partnership property. For example, a partner does not own a “15% interest” in a personal computer used by their secretary. Instead, they own percentages for the overall total value of the partnership property
- Creditors of partners may also not take action to acquire specific items of partnership property—they may only initiate action against the partner’s interest in the overall properties
The actual property distribution will most likely occur when dissolving a partnership. Upon dissolution (also known as termination or “wind-up”), each partner is allowed to have their partnership applied toward the payment of their partnership debts. Once the debts are paid to creditors, any surplus from the property will be distributed to each partner according to their ownership interest in the partnership.
Thus, if a partner has a 20% interest in the firm, they are entitled to 20% of any surplus that is left over after the partnership debts have been paid. This rule is often called the “partner’s lien” rule.
In most cases, the distribution of property, including sharing of profits, will be specifically outlined in the partnership agreement. In the partnership agreement, the partners are free to distribute partnership property as they see fit, so long as it is not illegal or unfair.
If such an agreement was formed, the partnership agreement will be controlling. Also, property distribution in a partnership cannot be such that the partners avoid liability to creditors to whom they owe debt.
The laws governing property distribution in a partnership may be different according to the type of partnership as well as its geographic location. If you have any questions regarding partnership property, you may wish to contact a business lawyer for advice. Your lawyer will be able to assist with tasks like drafting a partnership agreement, identifying partnership property, and filing a lawsuit in court. You will want to protect your property interests as a partner, and a lawyer can assist you in doing so.