Partnerships

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General Partnership

All you have to do to start a general partnership is agree with one or more individuals or organizations to jointly own and share the profits and losses of a business. In addition, there is no limit on the number or type of partners (i.e., individuals, other partnerships or corporations).

Unless you have specified otherwise in your partnership agreement, all general partners have equal control and management rights. This means that all of the partners must agree to every decision impacting the partnership.

Liability
A partnership can own property and conduct business as a separate legal entity. But the general partners are liable together, and each partner can be held individually liable for all of the partnership’s obligations. In addition, all of the partners can be held responsible for a tort committed by one partner or employee in the course and scope of the partnership’s business.

Any partner can generally bind the partnership and individual partners to contracts or legal obligations, even without the approval of the other partners. Ordinarily, a partner’s personal property cannot be tapped until the partnership runs out of assets. In addition, insurance coverage may be obtainable to protect your individual property against partnership obligations.

Before you decide to enter into a general partnership agreement, make sure you and your partners can afford to share the losses. If you are the only one with any money, you could be left paying the tab if and when creditors come knocking on the door.

Continuity
A partnership will exist as long as the partners agree that it will and as long as they all remain in the partnership. If one of them leaves, the partnership dissolves, and the assets of the partnership must be sold or distributed. Creditors are paid first and then the partners.

The death or disability of a partner may stop operations and may require renegotiations of the partnership agreement. However, your partnership agreement can provide for the continuation of the business by the remaining partners so the business would not have to be sold when a partner leaves.

Transferring ownership
Your partnership agreement should state if a partner could sell his or her share. In many states, the sale or transfer of a partnership share cannot take place without the consent of all of the other partners. Even if a partner does transfer a share of the partnership, he or she will remain personally liable for business losses incurred prior to the sale.

Taxes
Just as with a sole proprietorship, the partnership itself does not pay taxes on its profits. A partnership income tax return is filed, but only for informational purposes. The profits and losses pass from the partnership to the individual partners based on share of ownership. Partners must also pay self-employment tax on their share of partnership income.

A general partnership could benefit the owners of a new business that is expected to have large start-up losses. These losses, as well as other deductions and credits, would pass through to the partners and be reported on their personal income tax returns.

Limited Partnership

A limited partnership has one or more general partners and one or more limited partners. The general partners manage and control the business.

Liability
The general partners have unlimited liability for the firm's actions, and other partners' actions and their own actions conducted in the course and scope of the limited partnership’s business. A separate corporation is often formed to act as the general partner as a way to reduce the unlimited liability risk to the general partner.

The limited partners ordinarily do not have any liability as long as they are passive investors and do not have an active role in the operation or management of the business. Their potential loss is generally limited to the amount of their original investment.

State laws often restrict the amount of control limited partners can have without jeopardizing the partnership’s status, and these restrictions must be closely followed. These restrictions can make administration of the limited partnership more complicated than a general partnership.

Investors have been attracted to limited partnerships in real estate, oil and gas, and other highly leveraged businesses. They are able to have partial ownership without the responsibilities and potential liabilities. General partners benefit because they can raise capital without giving up control.

Limited Liability Partnership

A limited liability partnership (LLP) is a form of a general partnership that is established by either:

LLPs have most of the characteristics of general partnerships with one distinct difference – liability.

Liability
Unlike a general partnership, the partners of a limited liability partnership are not responsible for the debts, obligations, or liabilities of the partnership resulting from negligence, malpractice or wrongful acts, or misconduct by another partner, employee, or agent of the partnership. However, they are usually liable for other partnership debts and obligations, their own actions, and those of any person under their direct supervision and control.

State LLP laws are not uniform and have important variations. Some have:

Regardless of these variations, an LLP is an attractive alternative to a general partnership or a corporation since an LLP can shield the partners from secondary liabilities, can operate more informally than a corporation, and is given full partnership tax treatment.

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