KY Partnership Law Brought into the 21st Century
At 92, the business law governing Kentucky's general partnerships has gotten more than a little long in the tooth.
"The old law ... was written in 1914 by some incredibly smart people," said Thomas E. Rutledge, a Stoll Keenon Ogden attorney who focuses on business organizations. "It's a fine law," but it's "getting old ... getting creaky," he said. The business world has changed, and the partnership law "just hadn't kept track."
That's set to change today, when Gov. Ernie Fletcher is scheduled sign into law a bill updating the state's general and limited partnership regulations. Under House Bill 234, Kentucky will adopt the new uniform partnership act drafted by the National Conference of Commissions of Uniform State Laws.
The result should be stronger, more useful partnership laws that restore general partnerships as an attractive business structure, said Kentucky Secretary of State Trey Grayson.
"The last couple of years, general partnerships have not been used as much," Grayson said. Businesses used the limited liability company as their organizational framework, even when a partnership might in some ways be a better match.
About 34 states have already adopted the act, but Kentucky's "been really behind," Grayson said. Kentucky must keep pace if it wants to promote itself as attractive to business, said the bill's sponsor, Rep. Scott Brinkman, R-Louisville, who practices law with Rutledge.
The new law "is important because it brings our law into line with other progressive states. It improves the business climate," said Allan Vestal, dean of the University of Kentucky law school and a national expert in partnership law. Matching Kentucky's law to those of other states may also make it easier for businesses seeking to relocate or expand into Kentucky, according to Grayson.
Among the changes under the new law:
General partnerships will be able to file organization documents with the secretary of state's office, providing official recognition of the company.
Such filing will be optional, but for many partnerships, it could make conducting business easier -- especially if they choose to disclose partner names and their roles.
For example, a bank considering whether to lend money to a general partnership under the current law can't know for sure who is in the partnership or even whether it's dealing with an approved representative, Grayson said. People trying to buy a company can't be certain that they're dealing with someone authorized to conduct the transaction. Such uncertainties can hinder business operations.
Through the public filing, the new law provides "the comfort of knowing who is the appropriate party," Grayson said.
The new law allows general partnerships, limited partnerships and LLCs to convert from one structure to another. It also offers greater opportunities for mergers with other types of organizations.
The secretary of state's office is developing the forms for registration and other filings and will have them in hand before the law takes effect July 15, spokesman Les Fugate said.
Companies already organized under the present partnership law can continue to operate under their old rules or can switch to the new regulations.
The law gives partnerships more latitude to tailor a business agreement that best suits their company. "It allows the partners to have an agreement that crafts the partnership law to their specific circumstances. It was never clear under the old act how much the partners could modify the statutory provisions. Under the revised act, it's clear that they can," Vestal said.
A partnership gains more identity "not just as a sum of the partners, but as an entity unto itself," Grayson said. That means general partnerships will be able to take legal action and can acquire property in their own name.
Under the old rules, if a partnership wanted to file suit, "it was really a lawsuit filed by all of the partners," Rutledge said. "Under the new rule, the partnership sues."
In addition, under the old rules, if one of the partners in a general partnership drops out, "the partnership at that point ceased to exist, and you have to reorganize every single time. Under the new act, you'll just settle up, but you won't cease to exist," Grayson said.
Limited liability partnerships -- a special type of general partnership -- will offer better protection for their partners from debts and obligations of the company.
It took four years to get the "lengthy and fairly tedious" partnership update through the Kentucky General Assembly, Brinkman said. "We had to go through several years trying to convince the co-chairs" of the House and Senate judiciary committees "that this was worth the effort."