I advise John that he and Michael have effectively entered into a general partnership agreement, and that Florida law does not require their agreement be in writing. I advise John, however, that their agreement needs to be in writing, to more completely set forth the parameters of their understanding, thereby avoiding many of those disputes which occur with oral agreements. I also advise John that all property acquired by the partnership should be vested solely in the partnership’s name, in order to avoid any claims of creditors against either of the partners in their individual capacities. I told John to consider the following scenario.
Two partners buy a parcel of land. Immediately after closing, one of the partners unexpectedly has to leave the state to deal with a family emergency. The second partner undertakes all the necessary improvements to the property in partner one’s absence, and upon his return the two partners sign a contract to sell the property. At closing, Second Partner insists that he be paid a greater share of the profits since he had been the only partner to work on the house. He also “reminds” his partner that they once had a phone discussion in which they had both agreed that there may be circumstances in which one partner may provide more services than the other, and that the profits would need to be adjusted accordingly. Partner One says he does not remember that conversation, and that if Partner Two refuses to split the profits evenly that he will file a lawsuit to “clear up the record.” Unless the partners can come to an amicable resolution, not only will this matter end up in court, but realistically the partnership agreement will come to an end. A properly drafted written partnership agreement could have addressed this situation, and the partners could then have looked to the partnership agreement to address their differences.
A General Partnership is defined in chapter 620 of the Florida Statutes as “an association of two or more persons to carry on as co-owners a business for profit.” Unlike most business entities that must register with the Florida Department of State, there is no registration requirement for a General Partnership. These business entities, whether oral or written, are governed in Florida by the Revised Uniform Partnership Act (“RUPA”). Under RUPA, the general partners share both the profits and the obligations of the general partnership, and each partner is jointly and severally liable for all obligations of the partnership. A person who is later admitted as a general partner, however, will not be personally liable for any partnership obligation incurred before that person’s admission as a partner.
The manner in which title is vested in the general partnership will impact the enforceability of judgments against real property owned by the partners and the partnership. The general rule is that judgments against a person who is a partner of a partnership do not attach to property vested in the partnership. Partnership property is viewed as separate and distinct from the interests of the individual partners. As a result, if John Smith and Michael Jones create the JSMJ General Partnership (“JSMJ”), and title is vested in JSMJ, a duly perfected judgment against JSMJ will be enforceable against the real property owned by that partnership. A judgment against John Smith as one of the principals of that partnership, however, would not attach to the partnership’s property.
It is therefore important to properly vest title in the partnership name, and not in the individuals creating the partnership. Let’s assume that John Smith and Michael Jones have created the JSMJ General Partnership to buy Whiteacre. Title to Whiteacre, however, is mistakenly vested in their individual names, and not in the name of the partnership. A certified copy of a $50,000.00 judgment against Michael Smith is then recorded in the public records of the county in which Whiteacre is located. The Smith judgment will then automatically attach to Michael Smith’s one-half interest in the investment property. If title had been vested in the JSMJ General Partnership, the judgment against Michael Smith would not have attached to Whiteacre.
What if a partner does not want to be personally liable for the debts of the partnership, while sharing in the profits of the business? Florida law permits the formation of a Limited Partnership, which is a form of legal entity by which there may be one or more general partners and one or more limited partners. Unlike a general partnership, a limited partnership cannot legally exist unless it is in writing and registered with the Florida Department of State. The name of the partnership itself must also end with the words “Limited Partnership”, “L.P.”, “Ltd.” or “LP”. In a validly formed limited partnership, each of the general partners will have the same rights and obligations of general partners in a general partnership. The limited partners however are passive investors (similar to shareholders in a corporation). The limited partner has no control over the partnership business, and also has no personal liability for any of the acts of the partnership. The Limited Partnership is generally the preferred form of partnership agreement for those investors who do not want to be held liable for the debts and obligations of the partnership.
Judgments against limited partnerships attach to all real property titled in the partnership name. Judgments against a person who may be either a general or limited partner in the partnership will not attach to the property that is vested in the limited partnership’s name.
In future articles we will discuss other forms of legal entities which can acquire real property, and the impact that judgment liens may have on those particular forms of ownership and their respective principals.
This Article is not a substitute for hiring an independent attorney to assist in the determination of the appropriate legal entity by which a purchaser should acquire title to real property.
Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank’s legal practice has concentrated on complex real estate, tax and corporate transactions throughout Central Florida. Frank has been involved in the Central Florida community for more than thirty years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M from New York University School of Law in 1980.
