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Partnerships
Partnership is one of the oldest forms of business organization. Historically, this form required no special establishment procedures, but could arise simply by virtue of two or more people acting in concert with a profit motive. Even today, individuals can face liability as partners based on their actions even though they never intended to formalize a partnership relation. Increasingly, however, partnership laws employ formal requirements and protections in addition to retaining some of the form's traditional flexibility.
There are three modern partnership forms: General partnerships, limited liability partnerships, and limited partnerships. A general partnership involves two or more owners carrying out a business purpose. General partners share equally in the right and responsibility to manage the business, and any individual partner can bind the entire group to a legal obligation. Each individual partner assumes full responsibility for all of the business's debts and obligations. Although this liability is daunting, it has a tax advantage: partnership profits are not taxed to the business, but pass through to the partners, who include the gains on their individual tax returns at a lower rate.
Limited liability partnerships retain the tax advantages of the general partnership form, but offer some personal liability protection for participants. Individual partners to a limited liability partnership are not responsible for the wrongful acts of other partners or for the debts or obligations of the business. Because this form changes some of the fundamental aspects of the traditional partnership, some state tax authorities may subject the entity to non-partnership tax rules. The Internal Revenue Service views these businesses as partnerships, however, and allows partners to use the pass through technique.
A limited partnership allows each partner to restrict his or her liability to the amount of his or her business investment. Not every partner can benefit from this limitation. At least one participant must accept general partnership status, exposing himself or herself to full liability. The general partner retains the right to control the business, while the limited partner does not participate in management decisions. Both types of partners benefit from business profits.
The unique liabilities of partnership businesses cause partners to maintain a more personal relationship to each other and to the organization. Partnership agreements recognize this issue and help these businesses run smoothly. Such agreements settle management and operational issues, capitalization requirements, and partnership limits.
| Example: Smith, Smithe & Smythe is a real estate management partnership. During a lull in demand, the partnership experiences some losses. Smith calls for each partner to contribute additional money to keep the business going. Smithe believes that the partnership should cut its losses and terminate. Smythe feels that the partnership should admit a new member to infuse some fresh cash reserves. The partners cannot agree on the proper course of action. A well-drafted partnership agreement would set limits on additional capital contributions, termination standards, and new member admissions. |
Like other businesses, a partnership must obtain necessary licenses, tax I.D. numbers, and permits to operate legally. Many professional businesses operate in a partnership arrangement, and specific legal standards may apply to those cases. To best investigate partnership options, businesses should seek professional advice. Business lawyers can explain the partnership options available in a particular state, and direct clients to the most appropriate form.
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