Verbal partnerships have profit-sharing trap

• Published in: McClatchy - Tribune Business News p. 1
• Main Author: Segal, Martin E
• Format: Newsletter
• Language: English
• Published: Washington Tribune Content Agency LLC 04.09.2006
• Subjects: Agreements; Friendship; General partners; Law; Liability; Limited liability companies; Limited partnerships; Litigation; Profits; Startups

Your verbal partnership was validly formed, but your problem is in the lack of mutual agreement about your profit share. You assumed it would be in the same proportion as your capital contribution, but that's not the law. The partnership act provides that profits (and losses) in a general partnership are shared equally in the absence of an agreement between the partners to the contrary. The opposite is true if you were involved in a limited partnership since it defaults to profit-sharing in the same proportion as capital contribution -- if not spelled out in the written formation documents. You unfortunately fall in the general partnership category. Since you didn't protect yourself by agreeing that you and [Ted] would share profits the same way you both paid the start-up capital, you must now share equally. Limited partnerships are creatures of state statutory law, designed to use the business advantages of a general partnership operation while at the same time eliminating its main disadvantage of potential unlimited personal liability of its members for partnership debts. Unlike the general partnership, a properly formed and operated limited partnership shields its limited partners from liability beyond the amount of their investment. Limited partnerships are often used for speculative, high-risk but high-reward ventures, such as oil and gas exploration. Formation requires filing of written articles that comply with state law. The limited partner investors are usually repaid first, according to their capital contributions and agreed profit participations, before distributions are made to the general partners. The general partners manage the business on a daily basis and are exposed to legal responsibility for disputes. That's why the general partners are usually corporations, so that liability for business debts is limited to contributed capital. Individual limited partners aren't usually at liability risk beyond the amount they pay to buy their participations.