“Business partnerships are in many ways an upgraded version of sole proprietorships. They offer combining the resources and expertise put into it by its partners for achieving great business success. However, on the downside, business partnerships involve legal technicalities where only a partnership dispute attorney can help you.”
Partnerships are perhaps one of the simplest and easiest to construct forms of business entities after sole proprietorships. So simple that business partnerships can even exist in the absence of any written agreement, or oral consent. Any for-profit business entity meeting the basic criteria of a partnership business model can be merely implied as a partnership.
Still, despite all this, business partnerships could sometimes turn out to be complex structures. Business partnership matters such as its creation, organization, management, and dissolution often involve legal technicalities. This is the reason why hiring an attorney that specializes in business partnership matters should always be preferred.
But to help you get started, this article covers a detailed summary of some important concepts related to business partnerships. Once you are done reading this article, you can always call for an appointment with one of our attorneys at Attorneys Real Estate Group. Our team would love to assist you in planning your next move.
What is a partnership?
A partnership is a formal arrangement between two or more persons who agree to conduct business activities and share its profits and losses.
While a partnership agreement prescribes the exact responsibilities of each partner, capital employed, and percentage of sharing profit and loss, it could also be otherwise. In general cases, all partners in a business partnership equally share any profits and losses incurred by it.
Nonetheless, business partnerships can take several forms or types of organization. Each of these business partnerships then defines each partner’s involvement in the partnership’s business as well as exposure to liabilities.
Laws that govern partnerships – Federal, State or both
When it comes to governing the different stages of business partnerships, in most cases it is usually the state law that prevails. State laws govern the creation, organization, and dissolution of partnerships. However, because most states today have adopted the Uniform Partnership Act, they tend to be almost the same in these states.
The extent of federal statutes governing partnership laws remains quite minimal, at least in a majority of cases. The only exceptions where the federal law addresses matters related to a business partnership are –
- In the case of diversity actions. Diversity action is a type of civil procedure in a civil case that involves parties that are either citizens of different states within the US or are non-US citizens at all.
- The partnership agreement contains a provision that specifically by choice designates the implementation of federal law.
- For federal tax purposes and their application to a partnership.
Characteristics of a partnership
The definition of a partnership as stated in the Uniform Partnership Act (UPA) clearly mentions its characteristics. The Uniform Partnership Act (UPA) defines partnership as –
“An association of two or more persons to carry on as co-owners of a business for profit formed under this act…”.
Thus, a partnership is –
- A relationship between two or more persons.
This means that any business owned by a single person can be anything but not a partnership. For a partnership, having at least two persons is mandatory.
- They aim to carry on as co-owners.
In other words, this simply means becoming joint owners, sharing control, and having joint authority to conduct various business affairs. This characteristic of becoming co-owners also extends to being jointly and severally liable for the debts of the partnership.
- Business for profit.
The main purpose of forming a partnership is to engage in for-profit activities. This means that a not-for-profit entity or organization can never be formed as a partnership. Further, this part of the definition emphasizes only profit sharing. There are exceptions to sharing a partnership’s liabilities and losses in some cases.
What is a ‘Person’?
A person, as mentioned in the definition of partnership, can include –
- An individual,
- Any group of individuals,
- A company or companies, and
- A corporation or corporations.
Purpose of a partnership agreement
Business partnerships are simple to form. A simple handshake or a mere oral agreement can initiate a partnership between two or more persons.
But business partnerships aren’t separate entities from their owners. Due to this reason, all partners can jointly and severally be liable for all its actions. This means that any act, good or bad, of one partner alone, is binding on the entire partnership or all the other partners. In some instances, this can create complex situations as well as disputes between the partners.
To avoid such issues, a well-drafted partnership agreement becomes necessary. A formal partnership agreement or partnership contract serves as a legally binding agreement between the partners. It is a framework that defines, establishes, and governs the rights and responsibilities of each partner in a partnership concern.
In the absence of a formal partnership agreement or contract, the Uniform Partnership Act (UPA) regulations govern the partnership.
While there is no legal requirement to have a formal partnership agreement nor is it required to register a partnership, a formal partnership agreement can be useful for other purposes as well. For example, it can be used to obtain any specific license or permission to conduct any specific type of business.
Partner relationship – Express or Implied
A partner relationship can be formed in either of the two ways. It can be either express or implied.
An express relationship is when two or more persons form a partnership either because of an oral and/or written agreement.
Partnership through an implied relationship exists even in the absence of any explicit terms or statements. An implied relationship exists because –
- the parties either assumed or their actions presumed the presence of a business relationship between them, and
- a denial of such a relationship could result in the infringement of the rights of one party.
Determining the existence of a partnership
To determine whether a partnership relationship exists or not between any two or more persons, a court will consider all the following prerequisites –
- The intention of the parties involved,
- Sharing of profits and losses by the partners,
- Joint control and organization of the business affairs,
- Amount of capital invested by each partner, and
- Common ownership of assets and property.
Types of partnerships
Four types of partnerships exist in the US. These are –
- Limited partnership (LP)
- General partnership
- Limited liability partnership (LLP)
- Limited liability limited partnership (LLLP)
1. General partnership
The general partnership is the simplest of all other types of partnerships that exist. Just signing a simple partnership agreement could create a general partnership. Although it is easy to create and dissolve, the administrative part of it can be very complex.
This is because in a general partnership unless the partnership agreement states otherwise, all partners equally own the business. This means having an independent authority to bind the firm. Consequently, it creates a huge responsibility on each partner as well. Even a slightly wrong decision or miscalculation of risks could create trouble for all the other partners of the firm.
As for the profits, the general rule is that all partners equally share in the profits made by the business. For the liability part, each partner has total liability in a general partnership. In simple words, each partner is personally liable for any debts and other obligations incurred by the partnership.
2. Limited partnership (LP)
A limited partnership is a partnership model that includes a combination of general and silent partners. At least one of the partners among others should be a general partner. Similarly, at least one of the partners among others including a general partner should be a silent partner.
A general partner is one who actively participates in managing the affairs of the partnership business. He holds full personal liability for all and any of the actions done to conduct the business.
The partner whose interest in the partnership is limited to the amount of investment or capital induced in the business is known as a silent partner. Silent partners are not responsible for the debts and liabilities of the business. This is because they do not take active control or participate in the day-to-day affairs of managing the partnership business.
3. Limited liability partnership (LLP)
Certain professionals such as lawyers, accountants, and doctors, can offer their services through a limited liability partnership.
A limited liability partnership is formed and operated much like a general partnership model but with a slight difference.
While all partners hold managing rights of the business and share full responsibility for its debts and liabilities, no partner holds responsibility for any of the wrongdoings and misconduct of any other partner.
Not all states in the US allow the creation of limited liability partnerships. Those who do, allow it to be used as business entities for some specific professions only.
4. Limited liability limited partnership (LLLP)
A limited liability limited partnership model isn’t a very old partnership model. For this reason, it isn’t currently authorized in all states of the US.
An LLLP has at least one general partner that holds managing rights to conduct the day-to-day business affairs of the partnership. However, in an LLLP model, each partner including the general partner holds limited liability.
A partnership dispute attorney can help you with understanding whether or not forming an LLLP will suit your business purpose.
Types of partners in business partnerships
Not all partners in a business partnership concern hold the same designations, ownership control, rights, responsibilities, and liabilities. These things depend on the type of partnership model employed by the partners for conducting their business.
A partnership can have the following types of partners –
- General partner
- Silent partner (Limited partner)
- Partners by level
1. General partners
General partners are the ones who actively take control and participate in the daily affairs of the partnership’s business. Due to this, they hold full personal liability for all debts, liabilities, and other legal obligations of the partnership firm. However, some partnership types may restrict a general partner’s liability in some cases.
2. Silent partner
A silent partner or a limited partner is the one who holds limited liability in a partnership. His interest or liability in the partnership is restricted to the amount of his investment only. He does not hold any rights to manage or actively control any of the affairs of the partnership.
3. Partners by level
In some limited liability partnerships, especially those run by certain professionals such as doctors, accountants, and lawyers, partners may be separated by their levels.
The designation of a partner’s level could be based on several factors. These can include –
- His/her experience and/or seniority in the firm classifying him/her as a junior or senior partner.
- Amount of capital employed, or clients brought into the firm by a partner classifying him/her as a profit-sharing partner.
- A salaried partner which in most cases is referred to as an associate partner. As the name suggests, salaried partners receive salaries and other benefits they are entitled to as employees of the firm. They do not share the profits of the partnership.
Remember that a partner can hold various multiple levels at the same time. For instance, there can be senior partners who receive a salary or a junior partner who shares in the profits of the firm.
Tax treatment of business partnerships
The IRS does not exclusively tax the income of a partnership concern. This, however, does not mean that a partnership does not have any reporting and form filing requirements as well.
Income tax treatment for business partnerships
A partnership does not pay income taxes directly. Instead, its profits or losses pass through to its partners. This way, each partner reports its share of profit or loss from the partnership on its personal tax return.
Reporting and form filing by business partnerships
For tax reporting and form filing purposes, a partnership concern is separate from its partners.
For a business partnership as an entity itself,
- It must file an annual information return form. This form mentions the income, deductions, gains, losses, etc. incurred by the partnership during the year.
- It may need to file forms for the annual return of income, employment taxes, and/or excise taxes.
For an individual in a business partnership,
they may need to file forms for –
- income tax,
- self-employment tax,
- estimated tax, and/or
- international tax.
Partnership disputes and partnerships dissolution attorney near me
Partnerships tend to be very fragile nature business entities. Various reasons and changes of circumstances can result in unanticipated and untimely cessation of either some business activities or an overall termination of the partnership.
Some examples where a partnership needs to be dissolved are,
- A federal or state ban on the type of business conducted by the partnership concern.
- The partnership not being able to renew a license that is essential to continue all or any specific segment of its business.
- Any partner seeking withdrawal, passing away, becoming unable or incapacitated.
- New partner joining into an existing partnership.
- Partnership declaring bankruptcy.
- Partnership merging with another business entity.
- A likely change in partnership agreement such as a general partner becoming a silent partner and vice versa.
Therefore, whether you are planning to form a partnership, or going through any partnership dispute and planning a partnership dissolution, seeking the professional expertise of a partnership dispute lawyer is a must. Luckily for you, Attorneys Real Estate Group has a team of highly capable partnership dispute attorneys.
Our partnership dispute lawyers specialize in settling complicated partnership disputes and creating feasible partnership dissolution agreement that favor each partner.
Simply, give us a call at 916-702-8443 or visit our website at Attorneysre.com. You can also get free legal consultation by filling in the form at this link. One of our attorneys will get back to you as quickly as possible and will be glad to assist you. We look forward to welcoming you soon.