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Unknowingly Creating a Partnership

In Pennsylvania, a partnership is defined as “… an association of two or more persons to carry on as co-owners a business for profit.”  15 Pa.C.S.A. § 8311(a).  In plain language, when you join with one or more persons in order to make some money, you are in a partnership.  The type of partnership you have created is called a general partnership.  While these partnerships work perfectly well, they leave open the possibility that one partner can be liable for the other partners’ mistakes.  See 15 Pa.C.S.A. §§ 8325 – 8327.  Because of this possibility, many people prefer to create other corporate forms, such as a limited partnership (15 Pa.C.S.A. § 8501 et seq.), a limited liability partnership (15 Pa.C.S.A. § 8201 et seq.), or a limited liability company (15 Pa.C.S.A. § 8901 et seq.).  However, each of these latter forms requires a specific filing in order to create this corporate form.

Sometimes when initially speaking with clients, I ask them what type of corporate form they have.  Generally, the clients know the answer to the question but far too often, they leave the filing of forms and legal maintenance of the partnership to another partner.  This is not a bad practice but if you do not pay attention to the happenings of your partnership, you can run into trouble.

One example that comes to mind is a client that was involved in a limited partnership.  This limited partner had been a member of the partnership for many years and had never paid much attention to the partnership.  Recently, the client wanted to become more active in the partnership so he requested the partnership documents and following receipt, sent them to me for review. 

While most of the documents were, on their face, in order, one thing that became obvious was the maintenance of the limited partnership.  According to the original certificate of limited partnership as well as the partnership agreement, the limited partnership was to have dissolved almost two years prior to the filing of an amendment which continued the existence of the partnership.  During that two year period between the date of dissolution and the amendment to extend the life of the partnership, no documents of formation had been filed with the Department of State. 

The question became, what did this mean for my client as well as the other limited partners?  Based on my review of the law, it appeared as though the limited partnership ended on the date when the original certificate stated that it did and that a new partnership was formed.  However, because no documents had been filed stating that this was a limited partnership, the new entity was a general partnership, creating joint and several liability for all those involved.  I, therefore, advised my client to contact the general partner about this fact immediately.

While this situation is probably not the norm, it does offer a cautionary tale, which is to stay on top of your corporate documents, even if you are not the partner in charge.  Even if you are not the partner in charge, creating a redundant system in place to protect against these document mishaps will allow for a successful business to continue into the future.  After all, if you created a business in order to receive liability protection, you should make sure that the protection remains in place for the life of your business.

If you have a business in Delaware, Montgomery, or Philadelphia Counties and would like a review of your corporate documents, contact Sallen Law, LLC.