PARTNERSHIPS

The Uniform Partnership Act (UPA) defines a partnership as "an association of two or more persons who operate as coowners a business for profit." The creation, organization, and dissolution of partnerships are governed by state law. Many states have adopted the UPA. Partnerships that are created under the UPA are referred to as general partnerships. Business partners are fiduciaries to each other under the UPA. The law recognizes the partnership to be all of the partners acting together and does not recognize it as a separate distinct entity. It is a form of business enterprise.

PARTNERSHIP AS DISTINGUISHED FROM OTHER ENTITIES

General partnerships are distinguished from other types of entities. It is an association between two or more people who are seeking a profit. The partners share ownership, profits, losses, and liability. The partners decide who will manage the day-to-day affairs of the partnership. Each shares equally in the profits, losses, and liability for damages that may be incurred by employees or members of the partnership. Equal shares are assumed by the partners unless there is a written agreement that designates it differently.

Common law partnerships, joint ventures, and business trusts are examples of for-profit unincorporated associations. Nonprofit associations include benevolent associations, religious entities, and other organizations/associations that are organized for charitable, humanitarian, or educational purposes. A nonprofit organization focuses upon providing services to the general public, often while relying on government grants, private grant money, and/or donations from businesses or individuals—such as, for example, the American Red Cross. Non-profit organizations have to register with the government as they do not have to pay taxes because of the benefits they contribute to society. They do not make any profits from this type of business and are usually run by a board of directors.

A partnership can be created by an express agreement or can be created on an informal basis based upon a handshake agreement. In civil law, partnership is a contract between individuals who agree to carry on an enterprise, combine their assets, and share the profits.

There are two types of partners. General partners have joint liability depending upon circumstances whereas liability of limited partners is limited to their investment in the partnership.

GENERAL PARTNERSHIPS

As stated previously, general partnerships can be formed with little formality. As more than one person is involved in this type of business, it is suggested that one should have a written partnership agreement which stipulates the terms of the partnership; authority of the partners; dissolution of the partnership; distribution of the profits and/or losses; amount of each partner's investment in the business whether it is cash, property, or services; and how disputes will be resolved. General partners are subject to unlimited personal liability with regard to the obligation of the partnerships. The partners are liable for any debts that may occur and any legal actions. The partnership can be created by agreement, proof of existence, and estoppels.

A partnership can be formed with an oral or written agreement. In order to avoid any misunderstandings among the partners, a written agreement is recommended. All powers, liabilities, and authorities of the partners are limited and controlled by the partnership agreement. Provisions are provided by the UPA, which governs the relationship of the partners to each other. These provisions can be in writing or inferred from a course of dealings. It is strongly recommended that the partners have a partnership agreement outlining the duties and responsibilities for each of the partners, how decisions will be made, and the dissolution of the partnership. For example, two individuals may enter a partnership by beginning to make dolls in their basement, selling the dolls to others, and splitting the profits and expenses. They have formed a partnership, even if neither of them has ever uttered the word partnership. The partnership agreement outlines the responsibilities and rights of the individual partners and is therefore considered a contract.

Unlike the other for-profit entities, no organizational documents must be filed with a public office, and the partnership agreement is not a public document. The only public documents that need to be filed by the partners are the registration of the business name. This requirement applies only if a name is used other than the real names of the partners.

PARTNERSHIPS AS A DISTINCT ENTITY

In most states, a partnership is a distinct entity. A partnership may sue, may be sued, and may own, hold, and/or convey real or personal property. The U.S. Bankruptcy Code treats partnerships as distinct entities. All forms of partnerships share some tax advantages as in many cases profits and losses can be passed directly to the partners without being taxed at the partnership level. For purposes of federal income tax, the partnership is not a distinct entity. Even though the partnership is required to file a federal tax return for informational purposes only, the partnership has no federal tax liability.

LIABILITY OF PARTNERS

Under a general partnership, each partner is liable for debts of the business. Based upon the percentage of ownership of each partner, all profits are taxed to the individual partners. Each partner is liable for debts, obligations, acts, or omissions of the other partners. The main drawback to a general partnership is the unlimited liability of each partner for the acts of the other.

Each partner may be held jointly liable for another partner's wrongdoing or tortuous act; an example is the misapplication of another person's money or property. If a partnership's assets are insufficient to satisfy a creditor's claim, the partners' personal assets are subject to attachment and the possibility of liquidating the business to pay off the business debts. Therefore, each partner is deemed the agent of the partnership and is held liable for a partner's debts.

DUTIES AND LIABILITY OF PARTNERS

Each partner has an equal right to participate in the management of the partnership and control of the business. Partners transact with one another and are not considered to be individuals but to be fiduciaries of one another. Any decisions and actions made should be agreed to by all partners. Each partner owes the other partners the obligation to act in good faith and loyalty. Every partner is an agent of the partnership; therefore, the acts and words of a partner may be imputed to the partnership.

DISSOLUTION OF THE PARTNERSHIP

Unless there is a partnership agreement outlining the circumstances on how the partnership comes to an end, a partnership will automatically terminate under the following conditions:

the term fixed for existence expires
a partner gives notice of his/her intention to dissolve the partnership
a partner becomes insolvent or dies
the court orders it to do so under certain circumstances of the UPA

Generally speaking, when any of the individuals of the partnership ceases to be associated with the partnership, the partnership is dissolved. This can be triggered by withdrawal, retirement, death, disability, or bankruptcy of a general partner. If there is a partnership agreement, the agreement will stipulate for these types of events with the share of the departed partner being purchased by the remaining partners in the partnership.

LIMITED PARTNERSHIPS

Limited partnerships are an association of one or more general partners and one or more limited partners with limited liability and with little or no managerial control. The limited partner is an investor only. The limited partners have limited liability as they are only liable to the extent of their investments. Limited partnerships must have at least one general partner who is responsible for all debts, liabilities, and any other obligations of the partnership. A limited partnership is a creation of the legislature and each state has statutes that permit and govern them. Limited partnerships are required to file documents with the state government, similar to the filing documents of a corporation. In most states, organization of a limited partnership requires statutory formalities and execution and filing of a certificate with the appropriate state authorities.

An advantage of a limited partnership over a general partnership is that partners limit their liability while preserving their rights to participate in profits and/or tax advantages. The statute shields a general partner's personal assets from obligations arising from the acts, omissions, or negligence of other partners and/or employees of the partnership. The limited partners may not participate in the management of the limited partnership, but they receive limited liability protection.

LIMITED LIABILITY PARTNERSHIP

The limited liability partnership (LLP) is a form of business organization combining elements of partnerships and corporations. Each individual state has its own laws governing the formation of LLPs. LLPs are available only in some states and only to professionals such as engineers, physicians, architects, lawyers, and accountants.

The liability of a LLP varies from state to state. The UPA, Section 306(c), serves as a guideline upon which many state laws are based, granting LLPs a form of limited liability similar to that of a corporation. Partners in an LLP can personally be liable for contract and intentional tort claims brought against the LLP. Profits of an LLP are distributed among the partners for tax purposes and the LLP is not taxed separately.

CONCLUSION

Partnerships offer a variety of structures to meet a variety of individual needs in organizing a business. Studying individual needs to best determine which partnership structure best fits for the situation is crucial in both organizing and building the business.