Understand the legal aspects of partnerships and independent contractors in your practice

Should I take on a partner or associate? For those just starting out and want to minimize risk or expand their practice, this is an important question. Although each state has different laws governing partnerships, there are general terms you should know about the different types of partnerships and independent contractors, and how they are formed.

General Partners
General partnerships are two or more individuals or co-owners of a business for profit. Each general partner assumes management duties and full personal liabilities of the debts of the partnership. The two main elements of a partnership include:

1) Community interest in the business and sharing of profits—A partnership ordinarily engages in a continuous business for a definite period of time, usually more than 1 year. This should not be confused with a joint venture, in which owners share profits like a general partnership. A joint venture is usually formed for a single transaction or a specific period of time and is more limited in its scope. It can become a partnership with no real consequences, as the rights and liabilities of the partners are the same as general partnerships in all important aspects.

2) Considered aggregates of the individual partners—State laws differ in that some treat the partnership as an entity, apart from the individual partners. Others hold that a partnership can be sued as an entity, but not in the firm name. Some allow partners to be sued as individuals of the partnership, while other states allow partnerships to be sued in the firm’s name. Generally, if the firm is sued, the individual partners will also be named in the suit.

Formation of a general partnership. Property rights, unless agreed upon, will be the property of the partnership. The chief criteria for property in the partnership are whether the partner intended to devote the property to the partnership. Any and all property agreed to, originally brought into the partnership, acquired, or purchased is partnership property.

Each partner has certain rights: specific property, interest in the partnership, and participation in management decisions. Each partner has equal rights of possession of property, which is usually not assignable, except to other partners. A partner’s interest in the general partnership are sharing of profits, and assuming liabilities/debts of the partnership if all are general partners. Creditors of individual partners generally have no right to attach partnership assets.

A written agreement is usually not necessary to form a partnership. However, certain written agreements are required for the partnership to be effective: 1) An agreement for mandatory continuance of the partnership for a period of 1 year or longer. Usually the period of more than 1 year is for contractual and enforcement reasons; and 2) An agreement authorizing partners to deal in real property and contract issues. If the partnership has a fixed term that is agreed upon, then the partnership is valid until the expiration of the specific term. If there is any prior dissolution of the partnership in bad faith before the end of the term, it is considered a breach of the partnership. If a new partner is going to be considered to join, all partners must agree.

Sometimes disputes arise in partnerships as to whether or not there is a partnership. In such cases, the courts attempt to find the intent of the parties as expressed by their acts or agreements. Joint ownership of property is not necessary to establish a partnership, but the profits shared by the use of the property is. The contribution of capital or sharing gross income may not form a partnership, but the sharing of profits from the partnership is strong evidence that a partnership may exist. There are exceptions to sharing of profits that are not evident of a partnership, such as bonuses or wages to employees, rent to landlords, interest on loans or consideration for sale, and the goodwill of the partnership.

Each partner has a fiduciary duty to each other in the areas of accounting in any profits derived personally from transactions connected with the formation, conduct, and liquidation of the partnership. Each partner does not have the right to engage in any competitive business without the consent of all partners. Each must devote full time and exclusive services to the business, as the partner’s time is considered an asset of the partnership.

Most partner disputes arise over accounting issues. Generally, there can be no action by law by one partner against another. The individual partner can bring an equitable suit for dissolution and/or accounting. However, there are a few exceptions in which a suit may be filed, such as 1) if there are no complex accounting issues involving partnership transactions; 2) the suit is not related to partnership business; 3) fraud by partners; and 4) conversion of assets by a partner of the partner.

Dissolution of a general partnership. The dissolution of a partnership is defined as any change in the relationship of any partner ceasing to be associated with the partnership. However, the partnership continues until all affairs have been completed or the end of the partnership term has expired.

The causes for dissolution of a partnership are: 1) expiration of the term; 2) expulsion of a partner for bad faith as set forth in the agreement; 3) choice of partner to dissolve the partnership in good faith; 4) death or bankruptcy of any partner; and 5) court decree, insanity, or misconduct by breach of the agreement.

Limited Partnerships
Limited partners make a contribution of cash or other property to the partnership, but have no active management, and whose liabilities for debts are limited to their contribution. Maximum loss of a limited partnership in the business is usually in the amount of their investment. If a limited partner takes on any management role, they become liable like a general partner.

Limited partners’ rights are essentially the same as general partners, except they have no rights in regards to management decisions and no access to books and records, or any accounting business. A limited partner may lend money to the partnership and transact business with the partnership. Unlike a general partner, a limited partner’s interest in the business may be assignable. The assignee has all the rights to income and distribution of assets, but does not have the right to inspect the books.

Formation of a limited partnership. A limited partnership is set up a little differently than a general one. A limited partnership must execute a certificate outlining the partnership name, address, all partners’ names, and capital and property contribution. The certificate must designate which partners are general or limited and their respective rights and duties. A copy must be filed with the clerk of the court in the county where the business is located. In some cases, a copy must be filed with the Secretary of State’s Office in the state the business is located. In addition, the necessary paperwork has to be filed with the Internal Revenue Service. The purpose of the certificate is to give all potential creditors notice of the limited liability of the limited partners.

Dissolution of a limited partnership. Dissolution occurs upon insanity, death, or retirement of any of the general partners. Death of a limited partner does not dissolve the partnership. Instead the decedent’s executor is given all the rights of the limited partner to settle the estate.

Independent Contractors
An independent contractor (IC) is one who renders services in the course of an independent occupation that has contracted with an employer only as to the results to be accomplished. Primary characteristics of an IC are the employer has no right of control over how the contracted work is performed. Tort liability of the employer for employee conduct usually does not apply to ICs, with a few exceptions. An employer may be held liable for the results ordered from an IC, and many times, the extent of control by the employer is disputed or unclear.

These factors are relevant to the determination of an IC: 1) the extent of control the employer has over the IC; 2) whether the IC is engaged in an occupation or business distinct from that of the employer; 3) whether the work is usually done under the direction of the employer without supervision; 4) whether the employer supplies the tools and a place for the IC to work; 5) length of time of employment; 6) method of payment (by time or job); and 7) degree of skill of the IC.

Frequent problems occur when chiropractors are hired by the employer to treat a third party, the patient. If the IC is negligent, the employer is liable. When the services of a chiropractor are primarily for the benefit of the employer rather than the treatment of a third party, the chiropractor is still considered an employee, not an IC with the employer liable for the actions of the employee. Both these are considered an employee-employer relationship where the employer is liable.

Most courts hold that doctors or lawyers are IC even though employed by an employer. The rationale is that the practice of chiropractic is a skilled art, and it would be incompatible to say that chiropractors are subject to control of another. If the doctor is an IC, and the employer is not liable for a negligent act of the IC, some courts have held the employer is liable in the selection of the chiropractor to perform the services or job if he commits a negligent act.

Kenneth S. Ross, DC, JD, MBA, LHRM, is a retired criminal law enforcement officer and practices chiropractic in Orlando, Fla. He is a faculty member of Texas Chiropractic College and conducts a national expert witness certification course. He can be reached at 866-225-5055, or via website: www.medtechusa.net.

Due to varying differences from state to state concerning partnerships, the information in this article is not intended or construed as legal advice. Check your state laws governing partnerships.