On April 23, 2008, the Ohio House of Representatives and the Ohio Senate concurred on amendments to Substitute House Bill 332 ("the Bill"). The Governor signed the legislation on May 7, 2008. The Bill adopts a version of the Revised Uniform Partnership Act (1997) ("RUPA"). Bill sponsor, Senator Mark Wagoner and other proponents have commented that RUPA resolves the confusion of current general partnership law by setting clear rules and serving as a default statute for matters not covered in the partnership agreement. Thirty-five states have adopted RUPA in large part, thus, Ohio's adoption of RUPA (subject to some modifications) also allows for more uniformity with other jurisdictions.
While partnerships are relatively "out of favor" and recommended much less frequently by attorneys than other entity forms (such as limited liability companies), they can arise in the absence of a written agreement and even if not intended (the Act defines a partnership as "an association of two or more persons to carry on as co-owners of a business for profit"), and the new statute presents significant improvement over prior general partnership law in Ohio. Codified as the new Ohio Revised Code Chapter 1776, and cited as the Ohio Uniform Partnership Act (1997) ("the Act"), the legislation "streamlines the fundamentals of partnership law to reflect modern business practices" through five principle goals. Sen. Wagoner, House Civil and Commercial Law (First Hearing, Oct. 17, 2007). The five principal goals are:
- To create a more flexible structure for Ohio partnerships;
- To allow partners to change partnership rules by agreement under certain basic standards set forth in the Act;
- To classify a partnership as an entity, not as an aggregate of separate persons;
- To spell out the clear authority for property transfers; and
- To change the law on dissolution and continuity of partnerships.
To achieve the first two principal goals, the Act allows partners to contractually define their relationships to each other and to the partnership in a partnership agreement. Its provisions largely act as default rules for matters not addressed by partners in the partnership agreement. This gives partners the freedom to customize the terms of their business relationship to meet their individual or collective needs. The Act does contain certain provisions, however, that a partnership agreement may not alter or completely eliminate. For instance, partnership agreements cannot entirely eliminate certain fiduciary duties of the partners or unreasonably restrict a partner's right to access the books and records of the partnership. The Act contains a complete, detailed list of the items that cannot be entirely eliminated or modified in the partnership agreement.
One of the most significant changes by the Act is that it defines a partnership as an entity, not as an aggregate of separate persons. The impetus behind this change is to align Ohio's partnership law with RUPA. As an entity, a partnership: (1) is treated as a distinct body which is placed between the partners and the partnership assets; and (2) may sue and be sued in the partnership name. As a result, no one partner has an interest in specific property of the partnership. Moreover, a partnership is a debtor in a bankruptcy and the creditors of a particular partner may attach the interest of such partner, but may not attach specific partnership property. Entity status, however, does not affect the treatment of a partnership under Ohio's tax laws. Also, the Act defers to the existing Ohio merger provisions for partnerships, which are superior to RUPA.
The Act clarifies the law regarding partnership property ownership and transfers and systemizes partnership property records. Property acquired by a partnership is deemed to be owned by the partnership entity, and not by the partners personally, if the property is acquired in the partnership's name or in the name of one or more partners when the instrument passing title indicates the transferee holds the property in his/her capacity as a partner. A partner is not a co-owner of partnership property and has no interest in partnership property that may be transferred. The Act also creates a presumption that property purchases with partnership assets are partnership-owned property.
The Act also establishes clear rules for partnership property transfers. Provisions in the Act allow partnership property to be transferred by an instrument executed by the person that currently "holds" the property. These provisions apply to partnership property "held" either in the partnership's name, held in the name of one or more partners, or held by a non-partner. The Act also states the conditions under which partnership property may be recovered from a subsequent transferee where the transferor lacked authority to bind the partnership. Finally, the Act allows partnerships to file statements with the Secretary of State relating to property transfers; thus creating a public record of the partnership's property ownership.
The Act's fifth goal is to change the rules regarding the dissociation of partners and the continuation and dissolution of Ohio partnerships. A partner may dissociate from the partnership at will by giving notice to the partnership or on the occurrence of an event agreed to in the partnership agreement. If a partner's dissociation at will is deemed "wrongful," then the dissociating partner is liable to the partnership for any damages that may result from the wrongful dissociation. Under certain conditions, a partner may be dissociated from the partnership upon expulsion by a unanimous vote of the partners or by court order. Partnerships must purchase the partnership interests of a dissociating partner, and the dissociating partner may maintain an action to enforce this right.
The Act's provisions relating to the continuation and dissolution of a partnership state that the partnership is not dissolved merely because a partner transfers its economic interest. Even partnerships intended to continue until the happening of an event or for a specific duration are not automatically dissolved upon the happening of the event or the expiration of the term. In such cases, the partnership continues "at will" until the occurrence of a dissolution event.
The various dissolution events are set forth in great detail in the Act, and only a few examples are described here. A partnership at will may be dissolved upon a partner's notice of dissociation. Partnerships for a definite term or a particular undertaking will dissolve (1) within 90 days of the wrongful dissociation or death of a partner where half of the partners agreed to dissolve, (2) upon unanimous consent of the partners, (3) where the term has expired or the undertaking has been completed, (4) if the continuation of the partnership would be somehow unlawful, and (5) under certain circumstances by court order. The Act also provides that the partnership shall be continued beyond dissolution for the purposes of winding of the partnership's affairs.
Further, in accordance with the five principal goals outlined above, the OSBA Partnership Law Subcommittee adopted and recommended the following provisions based on Delaware variations, which have been incorporated into the Act:
- Service of process on the partnership or a liquidating trustee;
- Use of the term "economic interest" rather than "transferable interest," as used in the RUPA;
- Overriding provisions of Article 9 of the Uniform Commercial Code that render provisions in an agreement ineffective if they attempt to prohibit, restrict or require the consent of the "account debtor" to the assignment of transfer of a payment intangible;
- Expressly allowing the partnership agreement to provide penalties or consequences for failure to make a required contribution;
- Added a definition of "tribunal" to clarify that certain matters can be properly submitted to arbitration or other non-judicial dispute resolution.
Effective January 1, 2009, the Act will govern new partnerships and existing partnerships that elect on and after that date to be governed by the Act. Effective January 1, 2010, the Act will govern all Ohio partnerships.