A Partnership Without a Partnership Agreement: The Default Rules

Forming a partnership in Illinois is exceedingly simple; that is the main draw of this kind of business organization.  There are typically no formalities required; rather, a partnership is presumed whenever two or more parties come together in business with an implied or express agreement to share the profits that the business generates.  Unlike other business formations, such as LLCs and corporations, a partnership does not need to file anything with the Illinois Secretary of State to be “official.”

Due to the ease with which a partnership is formed and can begin operations, many partnerships often hit the ground running without first establishing a written partnership agreement.  Though a formal written agreement is not required, it is advisable so that all parties are on the same page with respect to the bounds of the business and their respective rights and duties. Nevertheless, certain default statutory rules apply when an Illinois partnership does not have a written partnership agreement.

The Uniform Partnership Act, 805 ILCS 206 et. seq., provides the default rules that govern partnerships in Illinois.  Most of the rules therein can be overridden by a written partnership agreement, though a few are non-waivable. Some of the most pertinent default rules are discussed below.

Profits, Losses, and Liabilities

Without a written agreement stating otherwise, the default rule is that each partner in a partnership is entitled to an equal share of the partnership profits.  While this may be intended when each partner contributes similar value to a partnership, it can be less than ideal where the contributions are asymmetrical. A partner’s share in the partnership’s losses is of the same proportion as that partner’s share in the partnership profits.  In other words, where the default applies and partners share profits equally, they will also share losses equally.

In a general partnership, the default rule is that all partners are personally jointly and severally liable for the obligations of the partnership.  This means that a single partner could be held liable and have to pay up  from his or her personal finances for the entirety of a partnership loss, if the other partners are financially unable to help make the partnership whole.

Acts of the Partners

If there is not a partnership agreement laying out which partners are authorized to undertake what acts, then each partner is considered an unrestricted agent of the partnership, and each partner has the authority to bind the partnership in the same way.  The entire partnership is liable for any actionable conduct of any partner, if that partner is acting in the ordinary course of the business of the partnership.

Rights of the Partners

By default, every partner has an equal right in the management of the partnership, and differences of opinions are settled by a majority vote.  Regardless of a partner’s role, however, no partner is automatically entitled to compensation for the services he or she performs for the partnership.  Such compensation must be set by an agreement of the remaining partners.

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These are just a few of the default provisions contained in the Uniform Partnership Act.  While these rules are grounded in common sense, they may not be the best fit for any given partnership, which is why drafting a partnership agreement that is tailored to your partnership is the best bet.

If you are looking for assistance with forming a partnership or drafting a partnership agreement, contact our law office and schedule a consultation.