A partnership involves people carrying on a common business for profit. Partners in a general partnership are fiduciaries to each other. This relationship means that they owe each other, and the business, certain basic duties.
What Is a Fiduciary?
A fiduciary is a person who acts on behalf of another person or entity and is obligated to protect the interests of that other person or entity. A trustee is a fiduciary—the trustee manages assets on behalf of the beneficiaries of the trust. An entity, such as a bank or a financial services company, can also be a fiduciary.
General Partners Are Fiduciaries
All partners in a general partnership and general partners in a limited partnership are fiduciaries to the partnership and the other partners. The partnership relationship is supposed to be one of honesty, good faith, fairness, and loyalty. It imposes upon the partners:
- the highest standards of care
- the duty to act for the common benefit of all partners in transactions relating to the business, and
- the duty to refrain from taking advantage of one another by any misrepresentation, concealment, threat, or pressure relating to the partnership and its business.
Partners must always place the interest of the partnership above their own personal or business interests.
A General Partner’s Fiduciary Duties
The key fiduciary duties owed by a partner to the partnership and the other partners are:
- the duty of good faith and fair dealing
- the duty of loyalty
- the duty of care, and
- the duty of full disclosure
Duty of Good Faith and Fair Dealing
The obligation of good faith and fair dealing begins even before the partnership is formed when the potential partners are negotiating the partnership arrangement. It continues throughout the life of the business and beyond.
The duty of good faith and fair dealing continues after the dissolution of the partnership, through the winding up and final settlement of all partnership business and affairs.
Duty of Loyalty
Partners must always place the interest of the partnership above their own personal or business interests. As part of the duty of loyalty, partners must avoid self-dealing conflicts of interest between their duties as partners and their own personal or business interests. If a conflict arises, partners have a duty to:
- disclose the conflict to the other partners, and
- either refrain from the activity or transaction or obtain the other partners’ consent before proceeding.
The duty of loyalty ends when a partner leaves the partnership unless the parties have entered into an agreement extending the time frame.
When it comes to partnership business, partners are insiders. They conduct business on behalf of the partnership and they might see opportunities to gain personally from partnership transactions. Partners aren’t allowed to take advantage of their position and engage in any partnership-related transaction where they stand to gain a benefit unless they fully disclose the relevant information to the other partners and get their consent to proceed. It’s a breach of the duty of loyalty for a partner to make a secret profit from partnership-related business.
Duty of Care
General partners in a partnership are in charge of the partnership's business activities. The duty of care requires them to act in a reasonably prudent manner with regard to their responsibilities for carrying out the partnership’s business and activities. In other words, the partners must act reasonably, in good faith, and without any conflict of interest when making business decisions for the partnership.
Duty of Full Disclosure
Partners are required to fully disclose to other partners any information relating to the partnership and its business that could affect a partner’s interest in the partnership. Required disclosures include any information regarding:
- potential business opportunities
- contributions made to the partnership
- contracts entered into, and
- partnership finances and operations.
Partners also have a duty to disclose a potential conflict of interest where they could personally benefit from a transaction with the partnership. For example, let’s say that Patty is a partner in Company A and also owns an interest in Company B. Company A is considering using Company B as a supplier. Patty must disclose her ownership interest in Company B to her partners in Company A because she stands to gain if Company A chooses to do business with Company B.
Changing Partners’ Fiduciary Duties
Statutes and case law determine the fiduciary duties of partners. Partners can change their fiduciary duties in the partnership agreement, as long as the changes are reasonable and allowed under state law. Under most state partnership laws, the duties of good faith and fair dealing, loyalty, and care can be modified or limited, but not eliminated entirely.
Before modifying partners’ fiduciary duties in your partnership’s partnership agreement, be sure to check your state law.
Consulting a Business Attorney
If you have any questions about what you legally can or cannot do as a partner, or face any sort of dispute involving a possible breach of fiduciary duty, consider consulting a business attorney for guidance.