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.
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.
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.
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.
According to partnership law, a partnership is an association of two or more people doing business together, but they have to have the goal of earning a profit. Under partnership law, a partnership is considered the same with its owners, there is no distinction between the partnership and the owners. Under this partnership law if your business owes any debts, you and your partner are going to be held personally responsible for the debt. If you do not have the money to pay off the debt you can lose your house or other personal assets, all that matters is that the business debts are satisfied.
When it comes to liability in a partnership there are rules set forth to help determine the amount of liability that each partner has. The only time these rules do not allow to partnership laws is if it is a limited partnership, in that case limited partnership law applies. According to partnership law, every partner is going to be liable for his or her own actions. Partners are also liable for the actions of the other partners if it is related to the partnership. Finally, every partner in the business is liable for the actions of the partnerships employees, even if you did not want to hire that employee in the first place. For example, if you are in a partnership with one other person and during the course of delivering something for work, they hit a bus you and your partner are jointly and severally liable for any damage that is caused. If your employee got into an accident during work hours while doing a personal errand the partnership is not liable, you and your partner would only be liable if the accident happened while the employee was doing something work related.
Under partnership laws, you will also want to file a partnership agreement. A partnership agreement document can be found online or books that talk about how you go about forming a partnership. The partnership agreement is what the partnership uses to set forth the partnership laws, such as who the partners are, how much of the business each partner owns, where the business will be doing business, and anything else that relates to the partnership.
While most partnership laws are directed towards general partnerships, there is also limited partnership law. With a limited partnership one partner has unlimited liability and the other partner has limited liability, usually the limited partner is only liable for their investment in the company. Limited partnerships are different from general partnerships because they are created by statue, not by the partners’ intentions. Limited partnerships also differ from general partnerships because they have the ability to override the partnership agreement, which would make them immune to general partnership laws.
Both general and limited partnerships have pass through taxation. Under the partnership laws a partnership is a tax-reporting entity, not a tax-paying entity like a corporation is. With general and limited partnerships according to partnership laws profits are passed through to the owners and are then divided between the partners based on the partnership agreement. The difference between a general partnership and a limited partnership is that in some cases a limited partnership can be considered a tax-paying entity because it meets the criterion that deems it is to be taxed as a corporation.
Partnership laws are created to help reduce the chances of disputes between partners, which is another reason that a written partnership agreement should be put into place before starting a partnership.
