A partnership is a group of people who work together to run a profitable business. In a partnership company, the partners are each other’s fiduciaries. Because of their partnership, they owe one another and the company certain basic responsibilities.
Fiduciary Duties in General Partnership
Partners have a fiduciary relationship with one another in all facets of the partnership. Truth, truthfulness, fairness, and loyalty characterize the partnership relationship. It imposes the highest standards of care on the partners, as well as the duty to act in the best interests of all partners in all business transactions, and the duty to avoid taking the opportunity of one another through any false representation, cover-up, risk, or detrimental strain on the partnership and its enterprise.
Duty of Good Faith and Fair Dealing
The duty of mutual trust and confidence commences with the initial negotiations that lead to the formation of the partnership and extends throughout the partnership’s life, culminating with the dissolution and final settlement of the partnership’s affairs. Even when relationships between partners are stressed, the partners must maintain the highest degree of good faith in all partnership business dealings.
Duty of Loyalty
Partners must always put the partnership’s interests ahead of their personal or professional interests. Partners must avoid conflicts of interest with their responsibilities as partners and their personal or corporate interests as part of their duty of loyalty. If a conflict emerges, partners must notify the other partners or either desist from the engagement or transaction or gain approval from the other partners before proceeding.
Because of a partner’s standing as an insider with the partnership, opportunities for partners to profit from partnership-related transactions may exist. Partners shouldn’t take advantage of their position by engaging in any partnership-related transaction that benefits them unless they fully disclose all necessary details to the other partners and acquire their approval to proceed.
Duty of Care
The business activities of a partnership are managed by the general partners. The duty of care obligates partners to exercise reasonable caution in carrying out their duties for the partnership’s business and operations. In general, this means that when making business choices for the partnership, the partners must act rationally, in good conscience, and without any conflicts of interest.
Duty of Full Disclosure
Any information about the partnership and its operations that could influence a partner’s interest in the partnership must be adequately disclosed to other partners. This includes information about possible business prospects, partnership contributions, contracts signed, and partnership funds and operations. In the case of a partnership sale, full and comprehensive disclosure is especially critical. If one or more partners stand to gain more from the sale of the partnership than the other partners, this information must be shared with all partners.
Changes in Duties
State statutes and case law govern partners’ fiduciary responsibilities. Partners can agree to amend their fiduciary duties as long as the adjustments are fair and permitted by state law. By agreement, certain key responsibilities cannot be changed or removed. Check your state law or consult an attorney to determine what is legal in your state before signing a contract that involves any modification or alteration to your fiduciary duties as a partner.
Hire the business lawyers at Ward K Johnson Law Firm to understand the legalities in partnerships.