In New Jersey, a general partnership is a legal arrangement between two or more people, by which they agree to share certain aspects of a jointly-owned commercial enterprise, including assets, liabilities and profits.1 General partnerships are customarily easy to create, requiring no registration or filings with governmental entities and, thus, can be a popular choice of entity formation.2 While there is generally no legal requirement that the parties have a partnership agreement, entering into one is highly recommended.3
One prominent financial benefit of partnerships in New Jersey is that they are not taxed at the business level.4 This means that all income passes through to partners, which are to be reported on their personal income returns.5 Moreover, there is generally little to no annual compliance required with governmental agencies, which makes this a very manageable entity choice for first time business owners. With respect to profits, a partner has a right to receive his or her share of partnership profits and losses.6 Further, a partner has a right to receive his or her share of partnership distributions equal to his or her ownership interest in the partnership.7
Under New Jersey law, a partner is not a co-owner of partnership property and has no transferable interest or right in partnership property individually or corporately as a member of the partnership. While partnerships serve several benefits to business owners, general partners in a New Jersey partnership must be wary of their potential liability. One of the biggest drawbacks of a general partnership is the unlimited personal liability of each partner.8 Under the New Jersey general partnership statute, partners of a general partnership are jointly and severally liable for tort liabilities of the partnership and jointly liable for all partnership debts and other partnership obligations.9 Individual partner liability, by virtue of various agency law principals, may be imputed to a partner from actions of any of the other partners or agents or employees of the partnership.10 However, the individual assets of partners are not at risk for the contract debt(s) of the partnership unless, and until, the partnership cannot satisfy the debt from partnership assets or funds.11
Partnerships can also face stability issues, as the departure of a partner can effectively terminate the partnership. When a partnership dissolves prior to the term specified in the partnership agreement because of a breach of the partnership by a partner, a co-partner may bring a lawsuit against the breaching partner for damages caused by his or her breach.12 Similarly, a lawsuit for damages may be brought by the remaining partners against a partner who wrongfully dissociates from the partnership under the Uniform Partnership Act, which NJ has adopted.13
It is important to be wary of all the benefits and risks when forming a partnership in New Jersey.
Footnotes
1. https://business.nj.gov/pages/general-partnership?locale=en
2. https://law.justia.com/codes/new-jersey/2013/title-42
3. https://business.nj.gov/pages/general-partnership?locale=en
4. N.J. Stat. § 42:1A-18
5. Id.
6. https://bk-lawgroup.com/blog/distribution-of-profits-and-losse
7. N.J. Stat. § 42:1A-18
8. https://www.hnwlaw.com/new-jersey-partnership-attorney/partnership-and-limited-partnership-differences/
9. Id.
10. Id.
11. https://business.nj.gov/pages/general-partnership?locale=en
12. N.J. Stat. 42 § 1A-31
13. Id.
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