Partnerships Text Size:

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. There are three types of partnerships that are commonly used today:

• General Partnerships, which are also commonly called just a "partnership"
• Limited Partnerships
• Joint Ventures

In addition, in some states you can form a limited liability partnership (LLP), but this type of partnership usually can be used only by certain professionals, like attorneys and accountants.

Each partnership form - general, limited or joint venture - has advantages and disadvantages, and each works differently. In addition, things like how partnerships are formed and how they're ended or "dissolved" are governed almost entirely by the laws of the state where the partnership is formed.

So, if you're considering a partnership as the form for your new small business, be certain to check the laws in your area, or consider getting help from an experienced business law attorney.

Some Initial Things to Know

Regardless of whether we're talking about a general or limited partnership or a joint venture, there are some things that they all have in common.

A partnership agreement is usually written by the partners, and it sets out the details of how the business will be run, including things like which partners have what management responsibilities, and how the profits and losses of the business will be divided among or between the partners. You don't have to have a partnership agreement, but it's generally a good idea to have one.

Generally, partnerships are all taxed in the same way: the partnership itself does not pay taxes, but rather the business profits and losses "pass through" to the partners in percentages that are set out in the partnership agreement, and if there's no agreement, in proportion to each partner's investment in the partnership. Each partner then includes this information on his or her individual tax return.

In most states, partnerships usually end or "dissolve" upon the death, withdrawal or retirement of any partner. Partnership agreements can be valuable here. In the agreement, the partners can agree that the partnership can continue on even if a partner dies or retires. In addition, the agreement can contain a "buyout" provision, which governs whether a departing partner's interest can be sold, and if so, to whom and for how much.

An important aspect about dissolving any partnership is this: the partnership continues until its business is wound-up. Winding-up business includes such things as paying off partnership debts, collecting sums owed to it, and liquidating partnership assets.

General Partnerships

General partnerships are the simplest of partnerships: two or more owners agree to do business together. Each partner shares equal rights and responsibilities in running the business. There are two major disadvantages to the general partnership form:

• Each partner is personally liable for the partnership's debts and liabilities, so if your partnership defaults on a bank loan, the bank can come after your house and belongings to satisfy the debt, and
• Each partner can bind all other partners to contracts and other obligations, so your co-partner can sign a two-year telephone service contract for the partnership, and if the partnership defaults, you can be personally liable on it

For general partnerships, there usually are not a lot of papers to file with any state or local government agency. As soon as you and a co-partner start doing business together, a partnership is formed. However, you might have to register a "fictitious" name when the business will be operated under a name that does not contain all of the partners' names. So, if you and your co-partner are named Joe Smith and Mike Brown, but you want your business to be called "S & B Imports," you'll have to register that name with the county (and maybe the state) in which the partnership is located.

Limited Partnerships

A limited partnership (LP) is a lot like a general partnership, but with one major distinction: there is at least one "limited" partner, and at least one general partner. The limited partner enjoys limited liability for the debts and obligations of the partnership and has no responsibilities for the day-to-day management of the business. In short, limited partners give money or other assets to the partnership in exchange for a share in the partnership's profits, all without risking being liable for the partnership's debts. The general partner(s) run the business and are fully responsible for its debts.

Unlike general partnerships, you have to file several documents with state and/or local governments when you form an LP. Usually, you have to file a "certificate" or "statement" of partnership with the secretary of state of the state where the partnership is located. The contents of the certificate vary from state to state, but you usually must give the partnership's name, where it's located, and the partners' names.

In addition, as with general partnerships, you'll have to register your LP's name if it's a fictitious name.

Joint Ventures

A joint venture is the same thing as a general partnership, with the difference being that a partnership is usually a continuing or on-going business, but a joint venture is formed either for a specific, limited purpose or project, or for a limited amount 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.

Questions for Your Attorney

• My friend and I want to form a limited partnership, but neither of us wants to have the liability of a general partner. What's are best solution?
• Can general partnership "A" be a limited partner in limited partnership "B"?
• How much does it cost to form a general or limited partnership?
• If I enter a partnership as a general partner, can I switch to being a limited partner, or will that cause the partnership to dissolve?

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