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.
Limited Liability Partnership is a legal business form wherein the personal liability of all partners is limited for any act of the partnership whether in tort or contract unlike that of a general partnership where all partners equally and individually liable for the partnership’s obligations. Even if the general partnership is governed by a partnership agreement that specifies differential partnership interest, all partners are equally responsible and liable for the partnership’s business activities and debts.
Although all the states have adopted the Revised Uniform Partnership act, there are variances in the statute as passed by various states. Some states give the limited liability shield to partners only in negligence cases and not in contract or tort. Limited Liability partnerships are preferred by professional organizations as it provides the limited liability feature of a corporation and flexibility of operations as in a partnership. In a limited liability partnership, claims due to negligence, misconduct or breach of contract by one partner does not affect the personal assets of other partners. This protection does not extend to the partner whose misconduct or negligence instigated the claim. In some states only professional organisations such as lawyers or accountants can form limited liability partnership.
The framework of Partnership laws in each state is based on the Revised Uniform Partnership Act which all states have adopted. Formation of Limited Liability partnership may differ from state to state. In all states a certificate of registration is required to register a limited liability partnership. The application for registration of LLP must disclose the names and addresses of all partners, the Doing Business As name and the principle place of business, purpose of the LLP etc among other things. Some states stipulate that the LLP has a minimum capital infusion during formation and buy enough insurance coverage to face any eventualities.
You can convert your existing general partnership or limited partnership to limited liability partnership by filing a change request with the state. If you have an existing partnership agreement, no major changes are required to it unless you want to change existing partner’s rights and responsibilities. You have to add the words ‘Registered Limited Liability Partnership’ or ‘Limited Liability Partnership’ or an abbreviation such as LLP or RLLP to the name of your firm. You have to pay a filing fee to register the LLP with the state. This again varies from state to state. Some states charge filing fees according to the number of partners.
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.
