Introduction

Partnership law in the United States has been derived from one source, the Uniform Partnership Act, since it was originally promulgated by the Uniform Law Commissioners in 1914. The Uniform Act is the law of partnership in the United States.

But 78 years is a long time in the reckonings of the law, and in 1992 the Uniform Law Commissioners promulgated the first revision of the Uniform Partnership Act. Some clarifying amendments were added in 1993 and 1994. The new Act reflects both continuity and change. On the one hand, it refurbishes a venerable form. Partnership as a form of business organization precedes corporations, limited partnerships, business trusts, and just about everything else except the most basic business organization of all, the sole proprietorship. And, in UPA (1994), a partnership retains its basic, historic character.

But, at the same time, the partnership form has to be adapted to the changes in the way business is done and the way it is expected to be done far into the next century. The change reflected in UPA (1994) is of an evolutionary sort. The distilled experience of the past 80 years is the basis for the new text.

A partnership is a form of business organization. It exists whenever more than one person associates for the purpose of doing business for profit. The notion is that the partners join their capital and share accordingly in profits and losses. They also share control over the enterprise and subsequent liabilities. Historically, every partner is equally able to transact business on behalf of the partnership. Creditors of the partnership are entitled to rely upon the assets of the partnership and those of every partner in the satisfaction of the partnership's debts. The character of any partnership depends upon the agreement of the partners.

A partnership may be as simple as two people meeting on a street corner and deciding to conduct some business together, arising from no more than verbal agreement and a handshake. A partnership may also be as complex as a large law firm, with tiers of partners and varying rights and obligations, memorialized in extensive written agreements. Partnership law must accommodate them all.

UPA governs the creation of a partnership, establishes what the nature of this business organization is, and provides some rules respecting the rights and obligations of partners among themselves, and those between partners and other parties that do business with the partnership and the partners. It provides the rules that govern the dissolution of a partnership when the appropriate time comes to dissolve it. The original Act did this, and UPA (1994) is designed to do the essential task much better. UPA (1994) adds, as well, concepts not ever contemplated in the 1914 Act, the concepts of merger and conversion.

This summary is an effort to highlight the essential differences between the 1914 Act and UPA (1994). It cannot be a comprehensive review, but is designed to point out to the reader the progress of 1994 over 1914.

Nature of a Partnership

The first essential change in UPA (1994) over the 1914 Act that must be discussed as a prelude to the rest of the revision concerns the nature of a partnership. There is age-long conflict in partnership law over the nature of the organization. Should a partnership be considered merely an aggregation of individuals or should it be regarded as an entity by itself? The answer to these questions considerably affects such matters as a partner's capacity to do business for the partnership, how property is to be held and treated in the partnership, and what constitutes dissolution of the partnership. The 1914 Act made no effort to settle the controversy by express language, and has rightly been characterized as a hybrid, encompassing aspects of both theories.

It is not necessary to go into the dispute with much detail here, because UPA (1994) makes a very clear choice that settles the controversy. To quote Section 201: "A partnership is an entity." All outcomes in UPA (1994) must be evaluated in light of that clearly articulated language.

What are some of the outcomes of this decision to treat a partnership as an entity in UPA (1994) that are not part of the hybrid 1914 Act? The 1914 Act expressly permits a partnership to hold property as a partnership. The difference is the interest that each partner holds. In the 1914 Act, a partner is treated "as a co-owner with his partners of specific partnership property holding as a tenant in partnership." In UPA (1994), a partner has his or her partnership interest, but is not a co-owner of specific partnership property. The entity holds the specific property. The partners have their interest in the entity.

The 1914 Act approach, which reflects the retention of aggregate theory in that hybrid Act, constitutes a serious impediment to transferring property to and from the partnership. The 1914 Act has to provide rules that carefully limit and restrict the transfer powers of partners so that individual partners cannot convey their ownership rights in ways to injure and inevitably defeat the partnership. Even so, subsequent cases have revealed the co-ownership aspect of partnership to be a serious weakness in partnership structure. That serious weakness is not continued into UPA (1994).
Dissolution of the partnership is another area in which selection of entity versus aggregate theory makes a big difference. Dissolution will be discussed a little later, but dissolution occurs whenever a partner disassociates under the 1914 Act, but not necessarily every time he or she dissociates from the entity under UPA (1994). Partnerships based upon aggregate theory are simply more fragile than partnerships based upon entity theory.

Creation of a Partnership

Creation of a partnership requires association of two or more persons to do business for profit. The concept is not materially different between the 1914 Act and UPA (1994). What UPA (1994) does is to put expressly what has been regarded as implied in the 1914 Act. By and large the rules of the 1914 Act have been regarded as default rules, rules that apply in the event that there is no express provision in the partnership agreement. The reliance upon implication leaves certain gray areas that have caused problems. How far can a partnership agreement go in abrogating the fiduciary responsibilities of a partner to other partners, for example?

UPA (1994) clearly expresses the primacy of the partnership agreement. The agreement applies, and the rules of UPA (1994) are regarded as default rules, with the exception of certain rules that protect partners. For example, a partner's duties of loyalty and good faith cannot be abrogated by agreement. The agreement cannot take away a partner's right of access to the partnership books. In general, however, the partnership agreement expressly controls over the language of the statute in UPA (1994).

Statement of Authority

A partnership is created anytime individuals associate together to do business. Under UPA (1994) the partnership formed is an entity, not an aggregation of individuals. UPA (1994) makes it clear the partnership is controlled by the agreement of the partners. But the partnership must function to do business, and the 1914 Act treats partners as co-equal in the conduct of that business. Any partner is an agent of the partnership. Any partner has the capacity to transfer property on the partnership's behalf. Any person doing business with a partnership is entitled to rely upon these basic rules to bind the partnership. To a large extent, these rules continue to apply in UPA (1994).

But UPA (1994) adds a new partnership capacity to the rules of the 1914 Act. The adoption of entity theory, again, provides some different perspective. Entities such as corporations and limited partnerships are founded upon the filing of a certificate in the appropriate state office. UPA (1994) does not require filing a certificate to found a partnership, preserving the availability of the partnership form of organization to both large and the small entities. However, it permits the filing of a statement of partnership authority. The statement can be used to limit the capacity of a partner to act as an agent of the partnership, and limit a partner's capacity to transfer property on behalf of the partnership. The statement is voluntary. No partnership need file such a statement, nor is the existence of the partnership dependent upon the filing of any statement. But the statement, if filed, has an impact upon a third party dealing with the partnership.

The main effect is to assure any third party that the business of the partnership can be conducted and the partnership will be bound, if the third party deals with a partner with authority provided in a statement. Any limitation upon a partner's authority, however, does not affect any third party who does not know about the statement, except as to real estate transactions. If there is a limitation in a filed statement, that is also filed in the real property records of the locale, then a third party dealing with that partner in a real estate transaction is held to know of the limitation.

Other Statements Available

UPA (1994) provides for other statements that may be filed, as well, pertaining to the partnership. A partner may file a statement of denial respecting facts, including limitation upon partnership authority, found in a statement of partnership authority. A partner or the partnership may file a statement of dissociation for the partner. And there is a statement of dissolution that may be filed when a partnership is dissolving. Each of these statements has a notice function. Third parties are held to have knowledge of these last two statements 90 days after they are filed.

If there is a merger, a statement also may be filed. A merger statement establishes the property relationships of the new entity with respect to property of the merged entities.

Although these statements are not essential to either the creation or dissolution of a partnership, they have impact upon third parties transacting business with a partnership. They give necessary flexibility to the partnership in the conduct of business, and are important advances over the 1914 Act for that reason. They are also artifacts of the overall shift to entity theory in partnership law, the essential underlying shift in UPA (1994) over the 1914 Act.

Fiduciary Responsibilities

When a partnership is viewed as an aggregate of interests and an organization in which every partner is absolutely able to conduct the business of the partnership with third parties, and is able to conclude the partnership by any act of withdrawal, express treatment of partners' responsibilities to each other in the conduct of business may not be so important. All partners are assumed to be participating in the conduct of the business with knowledge of what other partners are doing on a daily basis.

The 1914 Act has very little to say about a partner's responsibilities to the other partners. A partner is a fiduciary who "must account to the partnership for any benefit, and hold as a trustee for it any profit derived by him without the consent of the other partners..." There is a full duty of disclosure between partners, but the 1914 Act is otherwise silent on the fiduciary responsibilities of each partner to the other partners.

UPA (1994) is not so silent. It articulates duties of loyalty and care to which each partner is to be held. There are baseline standards of conduct, therefore, that a partner has to meet. No agreement can abrogate these baselines. In addition, there is an express good faith obligation to which each partner is subject.

The duty of loyalty includes the duty expressed in the 1914 Act, but adds to it. There is a duty not to do business on behalf of someone with an adverse interest to the partnership's. A partner must refrain from business in competition with the partnership.

The standard of care with respect to other partners is gross negligence or reckless conduct. A partner would be liable to another partner for such conduct, but not for ordinary negligence. The good faith obligation simply requires honest and fair dealing.

A partner may be sued more broadly in UPA (1994) than is the case in the 1914 Act. The earlier Act limited legal action to an action for an accounting.

Dissolution

A partnership dissolves under the 1914 Act upon the happening of specific events, either the end of the prescribed term of the partnership, as agreed by the partners, or when a partner dissociates, rightfully or wrongfully, from the partnership. At dissolution, the business of the partnership has to be wound up and fruits of the enterprise distributed to the partners -- after the creditors are paid, of course.

Automatic dissolution of the partnership after dissociation of a partner does not take place under UPA (1994). In a partnership at will only a partner who dissociates with notice of "express will" to dissolve causes the dissolution of the partnership. Thus, if a partner is simply bought out, there is not automatic dissolution.

In a partnership for a term or for a particular purpose, dissolution and winding up are required unless a majority in interest of the remaining partners agree to continue the partnership within 90 days after a partner's triggering dissociation before the expected expiration of the term of the partnership. Again, a dissociation that triggers a buy out of the dissociating partner's interest does not imperil the partnership with dissolution.

Of the changes that UPA (1994) makes over the 1914 Act, these rules may be the most significant. The ordinary dissociation of a partner does not mean the dissolution of the entity. It takes something more under UPA (1994).

Dissociation normally entitles the partner to have his or her interest purchased by the partnership, and terminates his or her authority to act for the partnership and to participate with the partners in running the business. Otherwise the entity continues to do business without the dissociating partner. No other characteristic of a partnership under UPA (1994) better illustrates the adoption of entity theory.

Conversion and Merger

UPA (1994) has absolutely new provisions on "conversion" and "merger." A partnership may convert to a limited partnership or a limited partnership may convert to a partnership under these new statutory rules. A partnership may merge with another partnership or limited partnership, forming an entirely new entity, under the new rules of UPA (1994).

Since a partnership is really a matter of agreement of the partners, there is no absolute barrier to either conversion or merger for a partnership under the 1914 Act. It would require unanimous consent of the partners, and a winding down process for the prior partnership or partnerships. What the statutory provisions of UPA (1994) do is to provide a process, and to permit agreement to less than unanimous consent of all partners to accomplish either conversion or merger. Under UPA (1994), a partnership agreement can specify that either conversion or merger can be accomplished with less than unanimous consent. The agreement controls.

Conclusion

These are some of the principal advances of UPA (1994) over the 1914 Act. Partnership, as a fundamental form of business organization, needs to be updated for the next century. UPA (1994) provides the needed update.