What Are the Duties of Partners in a General Partnership?
The duties of partners in a general partnership are intended to benefit the partnership and its members.3 min read
2. Duties of Good Faith, Fair Dealing, and Loyalty
3. Duties of Care and Disclosure
Updated October 29, 2020:
The duties of partners in a general partnership are intended to benefit the partnership and its members. Duties may pertain to loyalty, disclosure, care, and good faith.
Fiduciary Duties in General Partnerships
In a partnership, each partner has a legal duty to act in the partnership's best interests, as well as the best interest of the other partners. There's also the legal duty of individual personal liability for partnership obligations. General partners are liable for all contracts entered into by other partners. They may be found personally liable for breach of trust or fraud committed by other partners as well.
Your fiduciary duties in a partnership depend on your role in the business, as well as the type of partnership it is — limited or general. General partners in a partnership typically take part in daily business operations.
Partnerships are formed by people who want to operate a common business for profit. The partners are fiduciaries to each other, meaning they owe the business and each other certain basic duties.
Factors that determine fiduciary duties include the following:
- Judicial precedent
- State statutory law
- The terms in the partnership agreement
If a partner with fiduciary duties fails to live up to them, he or she may face substantial legal liability.
Partners in a partnership must be able to trust and rely on their fellow partners for promoting the success and best interests of the business. Their relationship is built on good faith, honesty, loyalty, and fairness.
They're held to high standards of care, and their duties include acting for the common benefit of all partners in business matters and refraining from taking advantage of other partners by using any of the following:
- Adverse pressure
Duties of Good Faith, Fair Dealing, and Loyalty
When partners start negotiations to form a partnership, their duties of good faith and fair dealing begin. These duties continue through the life of the business, and they extend to the dissolution and complete settlement of business affairs.
Partners are required to act honestly and show fairness and good faith to each other. Everything that partners do relies on keeping this obligation. Even if the relationship between partners becomes strained, they must continue acting in good faith in all of their business transactions.
The duty of loyalty means that partners must put the success and interests of the business above their own. Partners must avoid conflicts of interest and refrain from self-dealing.
If a conflict of interest arises, partners are obligated to disclose the conflict to the other partners. They must either get permission from the other partners before they can proceed or refrain from the transaction or activity.
Another part of the loyalty obligation is holding partnership property in trust and not using it to gain personal advantage. For instance, a general partnership may own an office building. A partner shouldn't dispose of that building as an asset for personal gain. It's considered a breach of loyalty for partners to make secret profits from partnership-related business.
When a partner leaves the business, the duty of loyalty ends unless the parties have an agreement that extends the time frame.
Duties of Care and Disclosure
Under the duty of care, partners must act in a reasonably prudent manner when managing and directing the business. For example, a partnership should keep complete and accurate records for the business. A reasonably prudent partner, therefore, would put appropriate controls and procedures in place for proper accounting and recordkeeping.
Partners are expected to follow a duty of disclosure or candor. They must make full disclosures about potential benefits and commonly known risks of a particular action so that their partners can make informed decisions.
Disclosures relate to all business activities covering the following:
Candor is especially important in business sales or potential conflicts of interest. Partners should always practice full and complete disclosure concerning the sale of the partnership.
Forming a business with other people comes with a set of duties and responsibilities. To keep a partnership running smoothly and with as little conflict as possible, all partners must practice open and honest communication. This extends through the life of the business.
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