Some Basic NJ Partnership Terms to Understand
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, New Jersey Partnership Attorney
Vocabulary words have meaning both in your business life and in the law. Below I have listed the most frequent terms used in this website and what each word means. The terms are listed in alphabetical order. I am certain this glossary will be of assistance to you in your reading.
If we at Hanlon Niemann & Wright can be of assistance to you now or in the future, please do not hesitate to contact me (855) 376-5291 or e-mail me at firstname.lastname@example.org.
Glossary of NJ Partnership Terms
A General Partner: Is the person in the partnership who is actively engaged in the day-to-day operations of the partnership and often assumes the title and represents himself/herself as “general partner” to the public and to creditors.
A Partner: Is an agent, meaning he or she is a legal representative of the partnership and of his or her co-partners, in its business activities. A partner can legally commit a partnership when acting on behalf of the partnership. A partner’s statements (written or verbal) may be imputed to and be binding upon the partnership.
A Secret or “Silent” Partner may take an active role in the operation of the partnership but is not known to the public in any way as a partner. This “secretness” does not affect his/her liability as a partner for partnership obligations. If found out, he or she can be sued individually.
A Silent or Limited Partner: He or she does not share in the day-to-day operation and management of the partnership’s business and may or may not be known to the public as a partner, thus, the term “silent partner”. See also “A Secret Partner” above.
Bankruptcy: If a partner is declared in law as unable to pay their debts, they are bankrupt. This will result in the dissolution of the partnership, unless a partnership agreement specifies otherwise.
Capital: The money or assets partners or members put into the partnership.
Capital Account: The part of the balance sheet of a partnership that sets out the partners’ or members’ capital. This is generally the “seed money”, equity investment and/or capital infusion into the account.
Class of Partner: There can be many different classes of partner or member in an LLC and Limited Liability Partnerships. These include equity partners, fixed share partners or fixed share members and salaried partners or salaried members. Often specific names are given to classes, for example founding members, partner(s), initial members, full members, full partners, associate members, all of whom can give different voting rights, different shares of profits and different retirement provisions.
Corporate Partner: A company that is a partner in a partnership. A corporate partner takes its share of profits like any other partner, and pays corporation tax on those drawings. An LLP can also be a partner in a partnership.
Current Account: A current account is used to keep a record of shares of profits credited to a partner or member and drawings or other deductions they have taken. At the end of each year the balance of the current account will usually be transferred to the capital account.
De-equitisation: This is the process where, under a partnership agreement or LLP agreement, equity is taken away from equity partners or equity members, usually because of a lack of performance. The process needs careful handling to ensure that no claims for discrimination arise.
Default Provisions: The default provisions in the N.J. Uniform Partnership Act set out how a partnership is to be governed if it does not have a partnership agreement. Because of the default provisions, a partnership agreement is crucial.
Dissolution: Dissolution is the process of ending a partnership. The assets are collected in and the liabilities discharged and any surplus goes to the partners and any deficit is owned by the partners. If a partnership does not have a partnership agreement, any partner can dissolve the partnership. That is not beneficial for those partners who want to continue in business together.
Draws: Partners or members are not employees, but are self-employed. They do not have a salary or wages, but receive a share of the profits and are responsible for losses. When they are paid a share of their profits, these are called draws. Most partnerships and LLPs agree that partners or members can take anticipated drawings each month so they do not have to wait until formal (or wherever agreed upon) accounts are prepared annually to be paid.
Employment: Employment is when an individual is employed by a partnership, or company. Employment is governed by N.J. Employment and other laws. The tests as to who is employed are complex. Employees have employment rights, whereas partners and members are protected only by worker’s rights, which means, for example, that they cannot claim for unfair dismissal, but can claim for discrimination.
Equity: The value of a partner or member’s share of a business not reflected in his or her capital.
Equity Partner: A partner who has a share in the profits of the partnership and full voting rights.
Expulsion: Expulsion is the process where a member is expelled from a partnership. Neither the Partnership Act nor the Default Provisions allow for expulsion. A LLP agreement or partnership agreement is required and needs careful drafting to ensure that it is enforceable. Although partners and members are not employees, expulsion where it is discriminatory is covered by employment rights.
Fixed Share Member: A member who receives a fixed share of the profits of a partnership. He or she is self-employed and can only draw those profits if there is sufficient money in the partnership.
Fixed Share Partner: See Salaried Partner.
Limited Liability Company: A limited liability company is governed by the N.J. RULL Act 2014 and, like a partnership or LLP, is a separate legal entity. It is owned by its members and managed by its managing members, members or officers. In “C” or “S” companies shareholders and directors are often referred to while a partnership is identified a separate legal entity; the partners together have joint and several liability – meaning they are each individually responsible for all the liabilities of the partnership.
There are pros and cons to different business structures – partnerships and LLCs are tax transparent, but a limited liability partnership has limited liability for its members, but certain documents including an annual return and accounts must be filed. A company or corporation pays a corporation tax its directors can be paid salaries and its shareholders are paid dividends.
Limited Liability Partnership: A partnership formed under the Limited Liability Partnership Act of N.J. It has the flexibility of a partnership but some of the structure of a company and is often seen as a halfway house. It’s not so much a partnership with limited liability, as a company with a different tax regime. It has members who are self-employed and who share profits as they decide in an LLP agreement or under the default provisions. If the members do not enter into an LLP Agreement, the default provisions will apply. There is no distinction between ownership and management in an LLP. An LLP is commonly used for professional practices and consulting businesses, but can equally be used for any business or for joint ventures.
Limited Partnership: A limited Partnership is formed under the Limited Partnership Act and has general member(s) and limited member(s). The limited member(s) have no liability so long as they do not take part in the management of the limited partnership. These are rare and should not be confused with limited liability partnerships.
Liquidation: The process by which a Partnership or LLP is wound up.
LLP: See Limited Liability Partnership.
LLP Agreement: An LLP agreement is the agreement that regulates the relationship between an LLP and its members. It is different to a partnership agreement (between partners) as it includes the LLP. It will also exclude the default provisions which is crucial for virtually all LLPs. It sets out matters involving appointing new members, classes of members, capital, drawings, retirement and expulsion among other things.
Minimum Number of Partners: A partnership must have at least two partners. Similarly an LLP must have at least two members.
Partner: A partner is one of two or more people or who together run a partnership. Partners are self-employed. See also different classes of partner.
Partnership: Partnership occurs whenever two or more people go into business together with a view to making a profit. There does not need to be an intention to create a partnership; it just occurs if the criteria of (1) two or more people (2) go into business (3) to make a profit are met. There is no need for a formal partnership agreement and if one is not entered into the partnership is governed by the terms of the Partnership Act 1890.
Partnership Agreement”: This is the foundation document which sets forth in writing the partners’ rights and obligations, supplemented by NJ law and the NJ Partnership Act. A partnership agreement technically does not have to be in writing (unless it falls within the Statute of Frauds).
Partnership Dissolution: The winding up and settling the financial affairs of the partnership when it will no longer operate for the purposes it was formed.
Partnership Property consists of all things of value contributed at the time of partnership organization or subsequently acquired in the business of the partnership or paid for by partnership funds. Real estate and other property purchased by a partnership in NJ may be acquired in the name of the New Jersey partnership.
Partnership Tax: Partners and members are taxed as individuals on their share of profit in the partnership or LLP. They are taxed on their share of the profit not on their drawings. If they leave money in the business it will be taxed. A LLC company pays tax on its profits.
Retirement: Retirement is the technical name given for someone leaving a partnership or LLP. It is not the same as the word “retirement” in general usage in that it has no connotations of stopping work, gardening and slippers! Most partnership agreements and LLP agreements will include retirement provisions otherwise a separate retirement agreement needs to be drawn up. Both these will include how the retiring partner or retiring member will get back their capital and whether they are paid anything for their equity.
Salaried Partner: A salaried partner is an employee who is given the title ‘partner’. They do not share in the profits of the partnership, but they are liable for the liabilities of the partnership. They should have an indemnity from the equity partners.
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