PARTNERSHIPS
What are
partnerships?
Partnerships are business
entities run by two or more persons. There
are two types of partnerships, general partnerships and limited partnerships (limited liability partnerships).
What are general
partnerships?
In general partnerships, all partners have
unlimited liability for the partnership's debts and can incur obligations on the
partnership's behalf within the scope of the business, thus they are called
"general partners." Each partner therefore is an agent for the other partners
and the partnership.
What are limited
partnerships?
Limited partnerships
are also known as limited liability partnerships. They are composed of one or
more "general partners" with the same powers and obligations as in general
partnerships, and one or more "limited partners," whose liability is no more
than the amount of capital he invested in the partnership.
Limited partners'
rights and obligations
Limited partners
cannot run the business, otherwise they will become subject to the same
liability as general partners.
Duration or
life-span of partnerships
Unlike a corporation, the death or
withdrawal of a partner dissolves the partnership. Other than liquidation, the
partnership agreement may provide for other alternatives like, buyout of a
deceased or withdrawn partner, election of a new general partner, and
continuation of the business by the remaining partners. However, the death or
withdrawal of a limited partner usually does not dissolve a partnership. The
deceased or withdrawn limited partner's interest may be passed on to his heirs
or successors.
Laws governing partnerships may
generally be overridden by the partners as they establish their own arrangements
in the partnership contract or agreement. In lieu of any provision to the
contrary, partners divide profits and losses evenly.
How to form partnership?
In general partnership,
no written agreement or contract is necessary. A mere intent and general understanding
between the partners is enough to start a partnership.
However, in a limited
partnership, the partners must file a certificate and a written partnership agreement with the secretary of state.
Partners should create
detailed written partnership agreements to protect their
interests, without which state partnership laws will govern a partnership.
The default provisions of the law may yield unfavorable results, such as equal shares of profits and losses regardless of original capital contributions. A written agreement can define the term of the partnership's existence, how profits and losses will be divided, each partner's duties, salaries and capital withdrawals, and what happens when a partner dies or leaves the partnership. It can also provide a mechanism for resolving disputes between partners. Since partnership agreements can vary widely, it takes more time and expense to form a partnership than a corporation, which is governed by statute.
A partnership pays no income tax. Profits and losses are reported on each partner's individual tax return.
A partnership's capital usually comes from the partners or lenders. Here
are the reasons why:
-
raising funds in public
offerings would subject the partnership to being taxed as corporations
-
tax-exempt investors in
many venture capital funds would face unfavorable tax treatment if
they invested in a partnership
-
foreign investors may be
subjected to US taxation on any income from the business.
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