A partnership is an agreement between two or more persons to engage in business, for profit, on negotiated and mutually agreed upon terms.
There are two main types of partnerships: general and limited. General partnerships are generally governed by state laws based on the Uniform Partnership Act (UPA) or Revised Uniform Partnership Act (RUPA); limited partnerships are governed by state laws based on the Uniform Limited Partnership Act (ULPA) or Revised Uniform Limited Partnership Act (RULPA). Partnerships have distinct advantages and disadvantages. To learn more about partnerships, contact a business attorney at SODEN & STEINBERGER, APLC in SAN DIEGO, CA.
Like a sole proprietorship, a partnership often does not need to fill out any paperwork with the government in its formation, but it is advisable for the partners to create a written agreement. Like any association, whether personal or business, the relationship among partners is subject to problems up to and including termination of the partnership. For this reason, it is important that each partner protect him or herself by defining the terms of the partnership in writing. Partnership agreements should at least describe the distribution of responsibilities and profits and a plan of action if one of the partners dies or decides to leave the partnership.
A partnership is not treated as a separate entity for tax purposes. Subchapter K of the Internal Revenue Code makes it clear that partners, not the partnership, are subject to tax: “A partnership as such shall not be subject to the income tax imposed by this chapter. Persons carrying on business as partners shall be liable for income tax only in their separate or individual capacities.” 26 U.S.C. § 701.
General partnerships
The Uniform Partnership Act defines partnership as “an association of two or more persons to carry on as co-owners a business for profit.” Uniform Partnership Act 1997 § 101(6). In a general partnership, all general partners are personally liable for debts and obligations of the partnership, unless liability is limited by contract. This means that general partners are jointly and severally liable for all debts and liabilities of the partnership and that a partner can be held fully liable for the wrongdoings of any other partner. Further, each partner is considered an agent of the partnership; this means all of the partners can be held responsible for fulfilling the obligations that one partner may have to a third party. Unless there are agreements to the contrary, general partners share responsibility for management and control and share all profits equally. A general partnership is legally dissolved upon the withdrawal, retirement, disability, death or bankruptcy of a general partner.
Limited partnerships
Limited partnerships must be formed in accordance with state statutory requirements, and it is necessary to file a certificate of limited partnership with the appropriate state authority. Limited partnerships consist of one or more general partners and one or more limited partners. Limited partners have limited liability. They are generally only liable for partnership debts and obligations to the extent of their contributions to the partnership. Limited partners typically do not participate in the management and control of the business. General partners in a limited partnership have unlimited liability and similar responsibilities to those of general partners in a general partnership.
Registered limited liability partnerships (LLPs)
Beginning in the early 1990s, all states amended their general partnership laws to provide for registered limited liability partnerships (LLPs). LLPs are partnerships in which partners, with some exceptions, are not liable for damages caused by the tortious acts or misconduct of other partners. Professional partnerships, such as law firms and accounting firms, often elect to become LLPs because of the additional liability protections this structure provides, while still being able to take an active role in managing the partnership.
Advantages and disadvantages of partnerships
A partnership offers certain advantages, including:
- Ease of formation and operation
- Ownership by more than one person
- Partnership losses can be used to reduce a partner’s taxable income
- Ability to pool skills and resources of multiple partners
- Avoidance of double taxation
Disadvantages of the partnership model include:
- Unlimited personal liability for general partners
- Legal dissolution of the partnership if one of the general partners withdrawals or dies
- General partnership interest may not be sold or transferred without consent of all partners
Speak to a business law attorney
The type of business structure that you decide to use greatly affects the amount of liability that you will face and how you will pay taxes. An attorney at SODEN & STEINBERGER, APLC in SAN DIEGO, CA, who has experience advising clients about partnership laws, can help you fully understand the various partnership types and help you implement one.
