Tuesday, September 6, 2022

Can parties contract out of the general partnership form of business organization, even if their conduct would otherwise establish a partnership? Although a recent judicial decision suggests that they can, treating contractual disclaimers of partnership as dispositive is inconsistent with modern statutes. More importantly, permitting parties to contract out of partnership imposes substantial costs by undermining the protections of fiduciary duty, creating uncertainty about the operating rules for the business, and threatening to deny the rights of third parties. These costs outweigh the benefits of promoting freedom of contract and providing certainty on the partnership formation question, particularly because such benefits can largely be captured within existing partnership and LLC law.

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