If you plan to conduct business with one or more persons then a partnership may be an appropriate entity for you to choose. A partnership occurs when two or more persons conduct a business or venture. If you conduct business with another person and have not officially formed a partnership or other entity, the law will most likely recognize your business relationship as a partnership and look to partnership law to define the legal rights and obligations of you and your associates. There are three types of partnerships:
- General Partnership – A general partnership is an association of two or more persons to carry on as co-owners and general partners of a business for profit.
- Limited Partnership – A limited partnership is an association of two or more persons who carry on a business for profit that has both general partners and limited partners.
- Limited Liability Partnership – A limited liability partnership is a general partnership with the added feature of limited liability of the partners for specific debts and obligations. Under current law, organizing a limited liability partnership is only available to attorneys, accountants and architects.
Some of the key characteristics of a partnership are:
- Formation – The partnership is formed when you and your partners enter a formal agreement outlining your rights and obligations. If you intend to form a limited partnership or limited liability partnership then a certificate must be filed with the state.
- Ownership – The partnership is owned by the partners based on the provisions and percentages of ownership negotiated the agreement.
- Management– A general partnership and limited liability partnership is managed equally by all of the partners unless you and your partners agree otherwise. In a limited partnership management is conducted by the general partner.
- Personal Liability – Partners of a general partnership are personally liable for all of the debts and obligations of the partnership including claims resulting from the actions of one of the partners while acting in the course of the partnership. In a limited partnership only the general partner is liable for the debts and obligations and limited partners are liable to the extent of the investment they made in the partnership. However, if a limited partner engages in management of the business then they may lose their limited liability. If professionals elect to practice under a limited liability partnership then generally they are not personally liable for the debts and obligations as well as claims arising from the conduct of their partners except that the licensing authority which issues their license may require minimum thresholds of liability. A professional will remain personally liable for their own negligent acts.
- Taxation – A partnership is not subject to either federal or state taxation. Rather, the profits or losses are “passed through” to the partners based on their percentage of ownership and taxes are paid on the partners individual tax returns. Limited partnerships and limited liability partnerships must pay an annual minimum franchise tax (currently $800.00). Furthermore, if the partnership has employees other than the partners then employment taxes and workers compensation must be paid.
Under the right circumstances a partnership can be a good choice to operate a business with another. However, careful consideration must be given to the fact that you may be personally liable for the debts and obligations of the business and that perhaps an entity with some liability protection such as the corporation or limited liability company might be the wiser choice.