Authority of Partners in Partnership: What You Need to Know
The authority of partners in a partnership is an issue that comes up when those involved wonder how much authority they hold, as well as their partner(s).3 min read
The authority of partners in a partnership is an issue that comes up when those involved in this type of business arrangement wonder how much authority they hold, as well as their partner(s).
What Is a Partnership?
When two or more individuals conduct business together with a shared goal to profit, this is referred to as a partnership under the S1 Partnership Act of 1890. Partnerships can be small businesses or massive firms with hundreds of partners. A partnership can be used as the formation entity for a business in just about any industry.
When a partner is described as the managing partner of the organization, the implied authority is that he or she can bind the firm without any legal limits. If a partner in a partnership is making a deal with a third-party entity, that entity has the right to believe that a managing partner is legally authorized to enter into an agreement that binds the partnership.
Types of Partners
There are several main types of partners:
- A general partner is involved in the daily operations of the business.
- A sleeping partner is not actively involved in running the business but is jointly and severally liable for business contracts and debts.
- A limited partner contributes a certain amount of capital to the business and has limited liability for any business debts up and equal to that amount. This type of partner is not allowed to be part of the management of the business.
- A salaried partner receives a set amount of money but isn't truly considered a partner unless a share of the profits is provided in addition to the salary.
Types of Partnerships
Under the Partnership Act of 1890, a standard partnership is called an ordinary or general partnership. Unless the partners involved in the business choose to form the partnership differently, a general partnership is the default formation.
One of the other options is to form a limited partnership. The other option is a limited liability partnership (LLP), which is legal under the Limited Liability Partnerships Act of 2000. When a partnership is formed as this type of entity, it exists as a separate legal entity from the owners, who are called members.
Characteristics of a Partnership
For a partnership to legally exist, the business must exist with a goal of earning a profit. All individuals in the partnership must have a shared intent for the company to yield profit, as well as share in the profit.
Some examples of situations that aren't necessarily partnerships include:
- Expense sharing
- Joint property ownership
- Sharing gross returns
When two or more individuals start a business, the partnership begins. A legal agreement can be entered into before or after that date, but that is the date on which the partnership legally begins. Forming a general partnership doesn't require registration or submission of documentation. The Partnership Act of 1890 applies to any partnership with no required formalities, whether the partners entered into the business on an oral or written basis.
The Partnership Act of 1890's provisions will apply to every general partnership unless certain provisions are excluded under the agreement signed by the partners. By default, partners will share the profits of the business equally. However, some partnership agreements outline that each partner will receive a portion based on their investment in the business. As long as all partners agree to the profit-sharing terms, it is legal to split profits differently.
A partnership agreement is legally enforceable. It is similar to a contract in that it can be implied or express, which means it can be in writing, by deed, or orally. In a partnership, all partners are bound to one another based on the contractual terms, even if those terms go against the regulations under the Partnership Act of 1890.
Liability for Partnership Debts
If one of the partners in a business acts within their apparent or actual authority, all partners are legally liable for the terms to which were agreed upon by that partner. However, certain limitations do apply. The apparent authority doesn't bind the business if:
- The partner doesn't have actual authority, and the third party doesn't believe them to be a partner.
- A third party is aware that the partner making the agreement holds no real authority.
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