Key Takeaways

  • Partners have extensive rights involving business management, profit-sharing, and property use, guided by the partnership agreement or state law.
  • Equal rights in management and access to financial records are common unless otherwise stated in the partnership agreement.
  • Partners must act in the best interest of the partnership under fiduciary and loyalty duties.
  • Additional partner rights include participation in daily operations, introduction of new partners, and post-retirement benefits.
  • Restrictions also exist, such as limitations on competition, profit misuse, or unauthorized acts.
  • Legal assistance can clarify complex rights and partnership disputes.

The rights of partners in a partnership business are dictated in the partnership agreement for the business. A partnership is any group of two or more individuals who have agreed to form a business together and share equally in its profits, losses, and duties. In effect, partners are treated as joint proprietors by the law and are equally liable for the debts and obligations of the partnership. However, the partnership agreement can spell out specific rights and responsibilities beyond those dictated by the laws of the state where it is formed.

Common Partnership Rights

  • Partners share planning, decision making, operation, and management rights and responsibilities for the business. Partners can also waive this right.
  • Partners have the right to give feedback and express ideas during the decision-making process and have these ideas discussed by the group.
  • Each partner can inspect and maintain a copy of financial statements and records, including but not limited to balance and profit and loss sheets.
  • Each partner claims a share of the business's profits and losses based on the percentage of his or her investment.
  • Each partner has the right to indemnification, or compensation for losses and expenses he or she pays on behalf of the business.
  • Partners may use business property to grow the partnership but not to satisfy personal means.
  • Partners share ownership of all business property and this property cannot be sold unless all partners consent.
  • Partners may retire from the partnership with the consent of co-owners.
  • Partners can demand compensation for damage or loss suffered by the business from other partners who are responsible due to negligence.
  • Any partner can dissolve the business at any time.
  • Partners who have contributed capital above the shares of others can collect interest at an agreed-upon rate.
  • Partners can act on behalf of the firm in an emergency but must take only reasonable action.
  • Introduction of new partners requires the consent of existing partners.
  • All partners may remain in the partnership if they choose to do so.
  • If a partner retires or dies, the partner or his or her descendants can share in profits at an agreed-upon rate.
  • Partners are not liable for events that took place before they joined the partnership.
  • Partners who leave the partnership can start or join a competing business provided they do not solicit customers or infringe on intellectual property. However, an existing partner cannot start a competing business while still involved in the partnership.
  • Partners who leave the partnership must be reimbursed for their original capital contributions.
  • Partners will act with mutual understanding and confidence regarding the partnership agreement.
  • Partners will act only within their scope of authority.
  • Partners will not demand remuneration that is not dictated in the partnership agreement.
  • Partners must provide updated financial statements as agreed.
  • Partners must act in a way that supports the greater good of the firm and advantage of all partners.
  • Partners will be faithful to the partnership.
  • Partners will keep accurate records of the partnership and share those with other partners as requested.
  • Partners will work for the firm unless other arrangements have been made.

Restrictions and Limitations on Partner Rights

While partners enjoy numerous rights, these rights come with important limitations:

  • No Remuneration for Routine Work: Unless the agreement specifies otherwise, a partner is not entitled to a salary or payment for participating in the routine management of the business.
  • Limited Authority to Bind the Firm: A partner must act within the scope of their authority. Unauthorized acts may not bind the partnership and could result in personal liability.
  • Duty Not to Compete: A current partner is prohibited from engaging in a competing business. Any profits made from such activity must be surrendered to the firm.
  • No Misuse of Partnership Property: Use of firm property for personal gain violates the duty of loyalty and can result in reimbursement to the partnership.

Additional Legal Rights of Partners

Beyond general rights, partners in a partnership are legally entitled to the following under most state laws or default provisions when no agreement exists:

  • Equal Participation in Business: Every partner has the right to actively participate in the business’s day-to-day operations, regardless of capital contribution, unless the partnership agreement provides otherwise.
  • Right to Be Consulted: No change in the nature of the business can occur without the consent of all partners. This protects each partner's investment and interest in the original business model.
  • Right to Access Books of Accounts: Partners may inspect and copy the partnership's books at any reasonable time. Transparency in records is a key right that supports accountability.
  • Right to Share Profits Equally: If not stated otherwise in the partnership agreement, profits (and losses) are shared equally among partners, regardless of contribution.
  • Right Against Expulsion: A partner cannot be expelled by the other partners unless such a process is explicitly provided for in the partnership agreement and is exercised in good faith.

Fiduciary and Loyalty Duties

When entering a partnership, partners are expected to put the firm's best interests higher than their own best interest, acting with fiduciary duty to both the firm and the other partners.

Owners of a partnership are also bound to a duty of care. This means they will do their best to act in good faith and avoid reckless or negligent actions, legal violations, and willful misconduct.

The duty of loyalty means that partners will abide by the partnership agreement and decisions of the partners. They will inform the other partners of information of interest that arises. Responsibilities covered under the duty of loyalty include:

  • Acting as a trustee for benefits, profits, or property that arise from conducting business on behalf of the partnership and/or using its property
  • Fair dealings while acting on behalf of the partnership or when wrapping it up, even if these dealings are in contrast with your best personal interests
  • Not competing with the partnership before it dissolves or using partnership property to serve your own purposes

Legal Remedies Available to Partners

Partners have several legal remedies to protect their rights when conflicts arise:

  • Accounting and Inspection Actions: Partners can file legal actions to obtain full financial accounting and transparency.
  • Dissolution Suits: A partner may sue to dissolve the partnership if the business purpose is no longer viable or if the other partners violate terms.
  • Injunctions: Courts can prevent a partner from acting beyond their authority or misusing firm assets.
  • Claims for Indemnity or Contribution: If a partner suffers losses due to others' negligence or misconduct, they may seek compensation.

If you’re unsure of your rights as a partner or need help resolving a dispute, consider consulting an experienced attorney. You can post your legal need on UpCounsel to connect with top business lawyers.

Rights Upon Dissolution or Exit

When a partner retires, resigns, or dies, specific rights come into play:

  • Right to Share in Post-Dissolution Profits: A retiring partner or their legal representative has the right to claim their share of profits derived from the use of their share of the firm’s property.
  • Right to Return of Capital: Departing partners are entitled to the return of their original capital contributions unless reinvested by agreement.
  • Right to Compensation for Loss: If loss results from breach of duty by other partners, the aggrieved partner may claim damages or seek equitable remedies.

Frequently Asked Questions

1. Can a partner be removed from a partnership without consent? Generally, no. A partner can only be expelled in accordance with a valid provision in the partnership agreement and with proper cause.

2. What rights does a new partner have upon joining? A new partner gains access to profit-sharing, decision-making, and information rights, but typically is not liable for past debts unless otherwise agreed.

3. Are partners entitled to a salary? Not by default. Partners are usually not entitled to remuneration for management duties unless stated in the agreement.

4. Can a partner act independently on behalf of the firm? Yes, but only within the authority granted by the partnership agreement or customary practice. Unauthorized actions may not bind the firm.

5. What happens to a partner’s rights if they leave the firm? They retain rights to any due profits and capital contributions and may be entitled to a share of ongoing profits generated from their capital.

If you need help with the rights of partners in a partnership business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.