Key Takeaways

  • Partnership authority can be actual, apparent, or express, and determines whether a partner’s actions can bind the business.
  • Statements of partnership authority clarify limits and powers of partners and can be filed publicly for notice.
  • Third parties can hold the partnership liable for a partner’s actions, even if the other partners were unaware.
  • Creating a partnership agreement with defined authority provisions reduces ambiguity and risk.
  • Not all actions by a partner are authorized, and “safe harbors” exist to protect the business when appropriate steps are taken.

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.

Statement of Partnership Authority

To avoid ambiguity regarding a partner’s ability to act on behalf of the partnership, many states allow partnerships to file a Statement of Partnership Authority. This public document specifies:

  • Which partners are authorized to execute specific transactions
  • The extent of a partner’s authority
  • Limitations on authority to bind the partnership in certain areas

Filing this statement can provide legal protection for the partnership by giving notice to third parties. However, it's important to note that limitations in the statement may not affect third parties who are unaware of them unless the statement is properly filed with the appropriate state office and indexed by the partnership’s real property.

Understanding Partnership Authority

In a partnership, the authority of each partner is a key consideration in determining who can legally bind the business in contracts, transactions, and other obligations. There are three primary forms of authority that partners may hold:

  • Actual Authority: Given explicitly in the partnership agreement or through consistent business practice.
  • Apparent (or Ostensible) Authority: Exists when a partner appears to have authority due to their position or past behavior, and a third party reasonably relies on that appearance.
  • Express Authority: Clearly outlined and documented, often in the form of a written agreement.

Apparent authority is particularly important in general partnerships because even if a partner acts without permission, the partnership may still be bound if the third party reasonably believed the partner had authority.

Courts often assess whether the act was in the ordinary course of partnership business. For example, signing routine contracts might fall within apparent authority, but selling major assets may not.

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.

When Partners Act Without Authority

Even when a partner lacks actual authority, the partnership may still be held liable if:

  • The partner had apparent authority and acted in the ordinary course of business
  • The third party had no knowledge of the lack of authority
  • The partnership did not take steps to limit that authority publicly or contractually

This liability risk is why it is crucial to define authority limits in a partnership agreement and, where appropriate, in a filed statement of authority.

Common unauthorized actions that can expose the partnership include:

  • Entering into large contracts without notice
  • Taking on new debt or liabilities
  • Selling partnership property without consent

How to Limit and Protect Against Unauthorized Acts

To minimize risk from unauthorized partner actions, partnerships can take the following protective steps:

  1. Draft a detailed partnership agreement that outlines the scope of each partner’s authority.
  2. Use a Statement of Partnership Authority to publicly document and limit authority.
  3. Regularly communicate with third parties about who is authorized to act on the partnership’s behalf.
  4. Create internal approval processes for major business decisions.
  5. Train partners and employees on the legal boundaries of their roles.

Additionally, under some state laws and the Uniform Partnership Act (UPA), certain “safe harbor” provisions may protect partnerships from liability if reasonable measures were taken to prevent unauthorized conduct.

Frequently Asked Questions

  1. What is partnership authority?
    Partnership authority refers to the legal ability of a partner to act on behalf of the partnership and bind it to agreements or obligations.
  2. Can a partner bind the business without permission?
    Yes, under apparent authority, if a partner appears to have the authority and a third party reasonably relies on that appearance, the partnership may be bound.
  3. What is a Statement of Partnership Authority?
    It’s a legal document filed with the state that specifies which partners have authority to perform certain acts and can limit a partner’s ability to bind the business.
  4. How can a partnership protect itself from unauthorized actions?
    Through a detailed partnership agreement, filing a statement of authority, and maintaining strong internal controls and communication with third parties.
  5. Is a partnership liable if a partner acts outside their authority?
    Potentially yes, especially if the partner had apparent authority and the third party was unaware of any limitations.

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