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.
Business partnerships are basically of two types, General Partnerships and Limited Partnerships. In a general partnership all partners are equally responsible for the management of the business and share of profits unless otherwise stated in a partnership agreement. Business partnerships are easy to form and operate. There are no legal or statutory formalities involved in the formation of a business partnership. Likeminded people can get together and start a business. When the partnership business is by intent, all partners are considered equal in rights and responsibilities. Regardless of what each partner has invested in the business, all partners have equal right to the profits and are personally liable to all business obligations and debts. General partnership interests can be structured in any way the partners have mutually agreed to or set down in a partnership agreement.
Most states follow the Revised Uniform Partnership Act in the matters of business partnership law. As partnerships are formed between persons for profit-for-businesses and as state and federal laws broadly define “business” and “persons”, the partnership business operations are supposed to be adequately covered under those laws. Specific partnership laws or acts have not been enacted due to this reason.
The advantages of a business for profit partnership are that it involves no formalities in formation and have great flexibility in organization and management. If your business is small and does not involve too many potential risks, partnership is an ideal business structure for two or more persons to jointly do business. It offers benefits in taxation and other statutory formalities also.
The main disadvantage of a partnership business is that the business owners are personally open to all business risks and obligations of the partnership except in a limited partnership. All partners are jointly and severally liable to settle all business obligations and debts of the partnership. They will be held equally responsible for the partnership activities regardless of anything to the contrary in the partnership agreement. If the partnership defaults payments to its creditors and lenders or if a liability or claim arises due to an action or inaction of the partnership, every partner’s personal assets can be appropriated to settle the creditors or the claim. Another disadvantage of a partnership is the continuity of the business. If any of the partners become disabled or deceased, the partnership will get automatically dissolved.
Now the reasons for why incorporate will be apparent. Personal liability and continuity of the business is at risk in a business partnership. The personal liability of shareholders in a corporation is limited and does not affect personal property. Corporations are “forever’ meaning it is not dependent on its shareholders for its continuity.
