What Is A General Partnership?
North Carolina law defines a partnership as “an association of two or more persons to carry on as co-owners a business for profit,” as long as the association is not formed as any other type of statutory entity, such as a corporation, limited liability company, limited partnership, etc. This means that if you co-own a business together with another person or people and you aren’t one of these other types of entities (which require filing with the Secretary of State), then your business is almost certainly a general partnership.
Imagine two college students, Tim and John, who decide on a whim to put their skills to use to make a little extra money. Tim is an engineering major and likes to fix broken widgets. John is a business major and likes to buy and sell things. They decide that John will buy the broken widgets. Tim will fix the widgets and then John will sell them at a profit. They agree to this verbally and make no further agreement beyond that.
Without even realizing it, Tim and John have created a general partnership.
Now imagine that Tim and John had a little more foresight about the kinds of issues that might arise during the operation of their business and entered into a written agreement that would lay out the rules their business would abide by. This document defines each person’s responsibilities within the business, what capital contributions each person will make to the business, how they will split any profits or losses from the business, what will happen to the business if either of them decides they don’t want to continue operating the business, etc.
Despite the time and effort spent planning in the second scenario and the existence of a written agreement, Tim and John’s business is still a general partnership. So what is the difference?
Do I Need A Partnership Agreement?
In the second scenario, Tim and John’s agreement as to the various partnership issues will define the rules of the business. But what happens to Tim and John in the first scenario in which they didn’t draft a partnership agreement and never contemplated the various issues that can arise in the course of operating a business? Enter the North Carolina Uniform Partnership Act (NCUPA), located in Chapter 59 of the North Carolina General Statutes.
The NCUPA establishes the default rules for general partnerships. In most cases, these rules are optional and any conflicting term written in a Partnership Agreement will override the statutory rule. The rules created by the NCUPA are there for the situations in which there is no Partnership Agreement or for which the Partnership Agreement is silent.
For example, in the first scenario, the NCUPA would govern every aspect of the partnership. If the business turns a profit, Tim and John will share it equally, regardless of the actual value of each person’s contribution to the business. Similarly, they will be equally responsible for any loss if the business fails, even if one made the entire capital investment into the business.
There is a whole host of issues in addition to how partners will share profits or losses in the business. If you are considering starting a business, you should consider how the law may affect your business relationship with your co-owners. We highly recommend that anyone starting a general partnership should enter into a written partnership agreement to cover all of the most common business issues that may arise.
We offer written General Partnership Agreements through our Virtual Law Office platform at a fixed fee of $150. This service is appropriate for typical to moderately-complex partnership formations. For more information about this service, please check out our General Partnership Agreement page. If you need more information about whether this service is appropriate for you, please contact our office by telephone at (704) 288-4700 or using the contact form to the right.