Partnerships and Joint Ventures

Sherrie Bennett

Email this article Print this page

A partnership is an arrangement involving two or more persons who have agreed to undertake a business venture as co-owners, with the intent to make a profit. The simplest type of partnership is known as a "general" partnership.

A joint venture is another type of partnership, formed either for a specific, limited purpose or for a limited period of time. For example, technology companies often form joint ventures to fund research and development of a particular item useful for their respective businesses (such as a specialized computer chip) when development might be too expensive for either company to fund alone.

Statutes in the state where the partnership is formed typically govern the rights and duties of the partners, if these aren't spelled out in a partnership agreement between the partners. In most states, partnerships aren't required to file any certificates or other organizational documents with local, county, or state authorities, but usually must file a "trade name certificate."

Advantages

• The arrangement of duties and benefits are flexible. Members of the partnership can structure the partnership according to their agreement. In a partnership, distributions of profits, losses and capital gains don't have to be directly proportional to the percentage interests held by the partners.
• Under buy-sell provisions of a partnership agreement, a partnership interest can be transferred to another person or to the partner's heirs or estate when he dies or becomes disabled. These buy-sell provisions usually give the partnership and the existing partners a "right of first refusal" when a partner wants to transfer his interest in the partnership, even if the transfer is to a member of the partner's immediate family.
• General partnerships are more attractive to lenders because the lender can look to the accumulated net worth of all the partners when loaning money.

Disadvantages

• Each partner in a partnership is liable for at least his pro rata share of the partnership debt. Under some circumstances, each partner may be liable for the entire amount of all partnership debts and other obligations.
• Under the partnership statutes of most states, partnerships usually terminate upon the death or withdrawal of any partner unless the partners agree to continue the partnership.
• If there is only one partner left, the partnership will be dissolved unless an additional partner (or partners) is admitted to the partnership within a certain time period.
• General partners don't have the right to act alone in making partnership decisions. But partnership agreements often give designated partners the authority to make specific kinds of agreements.
• General partnerships are limited in their ability to get financing other than "debt financing."

Tax Treatment of General Partnerships

One of the advantages of a general partnership is that, like a sole proprietorship, the business is not taxed. Income, losses and gains are passed through to the general partners according to the partnership agreement. If there is no partnership agreement, income, losses and gains will be allocated in proportion to the partnership interests of each partner. Partners can agree among themselves as to how income, losses, and gains are divided among the partners. The partners then report the amount allocated on their own income tax returns and pay tax accordingly.

Sherrie Bennett is the former director and staff attorney at the University of Washington Student Legal Services in Seattle.

Business Organizations Message Board for more help