Partnership is a legal form of business which requires few legal formalities to form and operate. Merely the intention to jointly operate a business by two or more persons is enough to form a partnership. State laws govern the formation, operation and dissolution of partnerships. All states have adopted the Uniform Partnership Law but with a few variances in each state. If a question arises as to the legal existence of a partnership, the law looks for certain aspects of the business such a:
1) the intention to jointly operate
2) sharing of profits or losses
3) joint control and ownership of property.
In a partnership, unless expressly stated otherwise all partners have equal rights and responsibilities. All partners have equal right to a share in profits and are personally and jointly responsible for all the activities of the partnership at its agents. However, the rights and responsibilities of each partner can be specified through a partnership agreement. The partners can state the capital contribution of each partner, the resultant share in profits, operational responsibility of each partner, any special consideration payable to a partner for a business expertise that partner contributes to the business and such other terms and conditions of the partnership business. An important point to note here is that regardless of any stipulations in a written partnership agreement, all partners are still personally liable to the business debts and obligations without any limit. If a claim arises out of the business and one of the partners is personally not able to pay, the other partner or partners have to settle the claim with their personal assets and then sue the defaulting partner to compensate.
There some forms of partnership that limits the personal liability of partners such as a limited partnership or limited liability partnership. Despite the similarity in name, both forms are distinct in its nature. A limited partnership has a general partner and one or more limited partners. Only the general partner is active in business operations and has complete decision making power and is personally responsible for the partnership’s activities. The limited partners have a share of business but have no active involvement in the operations. Generally this form is used in a family limited partnership to protect joint family property. The dominant member of the family acts as the general partner and other members as limited partners. In a Limited Liability Partnership, all partners have limited personal liability to the partnership activities. This form is used in professions where misconduct or negligence of one partner may affect the whole partnership and to protect other partner or partners for being personal responsible for such misconduct or negligence.
It is imperative that you have a legal form for your business. It provides a separate existence to the business from your person. The common legal business forms are Sole proprietorship, Partnerships, Corporations and Limited Liability Companies. Each business forms have benefits and risks associated with it. Choosing the appropriate business form for your business is dependent on the type of business you operate and its related risks. Sole proprietorship and partnership are the easiest business forms to adopt as no legal formalities and procedures involved in forming and operating (other than required business permits and licenses). Formation of Corporations and Limited Liability Companies require lengthy procedures and formalities and is comparatively expensive.
When two or more persons are engaged jointly in business, a partnership is the appropriate business form to adopt. Before you enter into a partnership and operate a business, understand the basics of a partnership business. Partnership law stipulates that all partners are jointly and severally liable for the debts and obligations of the business. Severally means that the liability is not in proportion to the partner’s interest in the business but for all of the debts. If one partner is unable to meet his or her part of the liability, other partner or partners have to make good for it. Even after the dissolution of the partnership the liability continues for deeds during the existence of the partnership. Keep this in view always when you constitute a partnership and do business.
A valid partnership can be formed without any formal documents, merely the intent to carry on any trade or business jointly by two or more persons will constitute a partnership. But, as the business activity is conducted by two or more persons, difference of opinion is a strong possibility. The importance of have a written partnership agreement is that it is prudent to have everything in black and white to avoid any future disagreements or misunderstandings. The partnership agreement should clearly state all critical matters such a:
1) capital contribution by each partner
2) the business to be carried on
3) each partner’s rights and responsibilities
4) profit or loss sharing ratio.
If only one partner is active and other partners are dormant investors, a limited partnership can be formed. The active or general partner is then liable for the business debts and dormant partner’s liability is limited to their capital contribution. Generally this form is used for a family limited partnership where the dominant member operates the business and other family members do not actively get involved in business decisions or operations.
Forming a business partnership does not involve any legal or statutory formalities and can be done any time you wish. However, before you decide on your business structure, consider the risks and benefits of business partnerships or other legal business structures. The common business-for-profit structures are Sole Proprietorship, Partnership, Corporations and Limited Liability Companies. Each structure has its own benefits and risks. Sole Proprietorship and Partnership are easy to form and have high flexibility in management and control. The risks in these structures are that the business owners are personally liable for the business obligations. LLC and Corporations limits business owner’s personal liability but are expensive to form and operate and the legal formalities are comparatively cumbersome.
Partnership being a mutual agreement between two or more owners, is easy to form and does not necessitate any legal formalities. The basic types of partnerships are general partnerships and limited partnerships. General partnerships are more common because it provides all the partners an opportunity to contribute to the business and control the business activities. The downside is that each partner is personally liable for all the business obligations and liabilities. This means that if a claim or liability arises out of the partnership business activity, each individual partner is liable to pay it in full regardless of that partner’s interest in the partnership. If one partner’s personal assets are not enough to meet that partner’s share of the liability, the other partners have to make good for it.
Limited partnerships are also used as a structure for-profit business. Such partnerships has a general partner who is responsible for the overall business operations and limited partners who invest in the business but has no particular say in the business operations. The general partner is personally liable for all the business obligations and debts. The personal liability of the limited partner is limited to a pre agreed amount. These are generally used in family business where family property needs to be protected and the general partner needs freedom to act. A family limited partnership gives flexibility to the dominant family member to operate the business and help protect the family property from business claims and liabilities.
The creation, organization and dissolution of partnerships are governed by the state laws. Partnership is a business association between two or more persons and as the state laws broadly define “business” and “persons’, specific partnership law or acts are not enacted by the State or Federal governments. For state and federal tax purposes, partnership is not a tax classification, the individual partners file the profit or loss from business along with their personal tax returns.
Business can be conducted through different entities. Sole proprietorship, Partnerships, Limited Partnerships, Corporations for profit or not for profit, Limited Liability companies are the main type of business entities. In these the Limited Liability Company or LLC is a relatively new addition in many states. The type of entity for doing business in any state should be chosen as to get the maximum benefit and carry minimum risk for the business owner.
A partnership business is where two or more individuals join together to run a business for profit. There are no formal filing requirements for a partnership business. But as it is a joint business between two or more individuals it is prudent to have a written understanding between for any eventuality. In partnership, all the partners and their personal assets are liable for business debts and obligations. This means that a partner’s property and cash can be attached or liquidated for payment to a creditor or lender if the partnership business defaults in paying such obligations. The exception to this is the limited partnership.
Limited partnerships limit the liability of some partners to a pre agreed amount in case of a business failure. Only the general partner who is responsible for running the business is personally liable for the business obligations. Family limited partnership is only an extension of this. The only difference is that, in a family limited partnership, the partners are all members of the family. Usually the generally partner is either of the parents or the dominant member of the family and others limited partners. Family limited partnerships are formed to protect the assets of the family from the obligations and debts of family business. These partnerships are preferred by established family concerns to that of a small business incorporation as most of the advantages and few of the disadvantages of a corporation is present in limited liability partnerships.
Most states have adopted the Uniform Partnership act and the partnership law is governed by the state laws. Forming a partnership does not involve the formalities need to start a corporation. A partnership is usually the result of an implied or express contract between partners and requires no formal documentation. A court may decide on the existence of the partnership based on the primary intention of the parties, profit or loss sharing, investments by partners, control or administration of the business or joint ownership of business assets.
A family limited partnership is similar to a limited liability partnership; they are both made up of general and limited partners. The one difference that makes a family limited partnership different from a limited liability partnership is the fact that all of the partners are family members, instead of friends or investors.
When it comes to forming a family limited partnership, the steps you need to take to form the partnership are going to be the same steps you would take to form a limited liability partnership, with a few exceptions. The first thing that you will need to do when forming a family limited partnership is prepare the Certificate of Limited Partnership. This certificate is going to ask for the name of the limited partnership and the name of the Agent for the Service of Process. The agent can be any family member that currently resides in the state, the agent needs to reside in the state because they will be the ones being served papers in case the limited family partnership is sued. You will also need to include the names and addresses of all of the general partners; the limited partners do not need to be included. Once you have properly filled out the Certificate of Limited Partnership you will need to file it with the Secretary of State’s office and pay a filing fee of $85 to $125, depending on the state that you reside in.
Once you have filed the Certificate of Limited Partnership your family limited partnership is considered legally formed, even though more steps should be followed to fully form your family limited partnership. After filing the certificate with the Secretary of State’s office you will want to request a certified copy with the filing date stamped open it. Having this copy will enable you to open a business banking account in your partnership’s name; this will also help you to get partnership cards for your business.
Once you have completed the Certificate of Limited Partnership you will need to prepare a written partnership agreement. The partnership agreement does not have to be filed with the Secretary of State’s office in most states, but you will want to check with your state’s filing requirements. Even if the partnership agreement does not need to be filed, it still needs to be prepared because the partnership agreement is going to act similar to the articles of incorporation for a corporation. The partnership agreement is going to govern the rules that your partnership is going to follow, if the rules are not clearly stated in a partnership agreement than state partnership laws will prevail.
When preparing a written partnership agreement for a family limited partnership, certain provisions must be made so that you can protect your assets that belong to your estate. If you do not pay close attention to these provisions, you are not going to be able to accomplish your objectives that are set forth for the family limited partnership. The special provisions that you make in the partnership agreement need to be designed so that a creditor can never gain any influence over the partnerships affairs, but you also want to make sure that you and your spouse, as the general partners, always have complete control over the assets of your partnership.
One thing to remember is that many times family limited partnerships are used for estate planning, so special attention is paid to the family limited partnership by the IRS.
