Partnerships

Partnerships

A partnership is an agreement between two or more persons to do 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), while 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 Berger Law Group, P.A. in Charlotte, North Carolina.

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 to create a written agreement between the partners. Like any association, whether personal or business, the relationship among partners is subject to problems and potentially, an end to the partnership. For this reason, it is important that each partner protect him or herself by defining the terms of the partnership in writing. This should include the distribution of responsibilities and profits, as well as a plan of action if one of the partners dies or decides to leave.

A partnership is not treated as a separate entity for tax purposes. Under subchapter K of the Internal Revenue Code, partnership income, gains, losses, deductions and credits pass through the partnership and are accounted for by individual partners on their individual tax returns. Even though the partnership is not taxed, it must file informational tax returns and provide partners with information they need to file their personal tax returns.

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." 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 business and that a partner can be held fully liable for the wrongdoings of his or her partner. Further, each partner is considered an agent of the partnership, so 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 (LLP)

Beginning in the early 1990s, all states amended their general partnership laws to provide for registered limited liability partnerships (LLP). LLPs are partnerships in which partners, with some exceptions, are not liable for damages caused by tortious acts or misconduct by the other partners. Professional partnerships, such as law 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

Conclusion

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 Berger Law Group, P.A. in Charlotte, North Carolina, who has experience advising clients about partnership laws, can help you fully understand the various partnership types and help you implement one.

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DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

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