Rights of partners in management

Once you have become a partner or co-owner in the business, how are decisions to be made?  The answer to this question lies in the operating agreement of the business or the partnership agreement of the partners, or the structure of the organization which has been formed.  These documents will delineate who makes regular business decisions, and who can bind the company.

Absent specific direction, differences that arise as to the ordinary matters of the business must be decided by a majority of those voting.  Lets take a partnership for example (but this concept can be applied to most similarly situated organizations like LLCs, etc):  If the partnership agreement is silent as to which partner shall make the decisions, or who will bind the partnership, every partner is an agent of the partnership for the purpose of its business, and any act that a partner makes in the ordinary course of business will bind the partnership.  All partners have equal authority and right to manage and conduct the affairs of the partnership.  If in a partnership of three people, a decision made by any two of the partners will bind all three.

 

Suppose Jane, John and Jim have formed a partnership in a small automobile business.  In the past, John has gone to auctions and purchased vehicles for sale on their used car lot, but his purchases have not always turned out to be beneficial to the business.  In a meeting of the partners, Jane and Jim could decide to no longer allow him to purchase the cars at auction for the partnership.  If, the following week, John slips off to the auction without their knowledge, and purchases more vehicles in the partnership’s name, will the partnership be liable?

 

It depends on whether the partnership has let the auction house know of the partnership’s decision regarding John.  If Jane and Jim notified the auction house that John has no more authority to bid for car’s in the partnership’s name, then John personally or the auction house will be liable for the purchases he made.  If no notification was given, the partnership would still be liable to the auction house for John’s purchases.  Third parties must be made aware of decisions made by the partnership that alter the authority of existing partners.  Had the partnership only been between John and Jim, Jim would have no ability to limit John’s purchasing authority, absent consent from John to do so. Half the votes of the partnership do not constitute a majority.

 

Thus, this is one more reason to make sure that, 1) you choose the right partners with which to go into business, and 2) make sure that the operating agreement of your business spells out exactly what you intend, and who has authority to do what within the business.

 

Photo By: Bo Insogna