BASIC INFORMATION

ADVANTAGES AND DISADVANTAGES OF PARTNERSHIPS

STARTING YOUR PARTNERSHIP

TAXES AND OTHER LEGAL CONSIDERATIONS

AMENDING A PARTNERSHIP

DISSOLVING A PARTNERSHIP

BASIC INFORMATION

What is a Partnership?

A partnership is a voluntary association of two or more persons to carry on, as co-owners, a business for profit.

What Terms do I Need to be Familiar with in Regard to Partnerships?

To understand the terminology associated with LLCs, you need to understand the following: General Partnership; Limited Partnership; Limited Liability Partnership; Partnership Agreement; UPA; and RUPA.

What are the Basic Types of Partnerships?

Generally, there are three basic types of partnerships:
• General Partnership;
• Limited Partnership; and
• Limited Liability Partnership.

What is a General Partnership?

A General Partnership is a business owned by two or more people, who share in the prof¬its or losses. It is the simplest form of partnership. However, because it does not offer any form of liability protection for its partners the General Partnership has fallen out of favor.

What is a Limited Partnership?

A Limited Partnership is a special type of partnership in that has two classes of partners.

The first class is that of the General Partners. General Partners run the business and share in profits or losses the same as in a regular or General Partnership.

The second class is that of Limited Partners. Limited Partners contribute capital (I.e., money) but do not have a say in how the business is run. Generally, Limited Partners are only liable for losses up to the amount of capital they contributed to the partnership.

Example: Suppose there are three General Partners and five Limited Partners. Each of the eight partners put in $1,000 for a total of $8,000. If the Limited Partnership loses $10,000 only the three General Partners are responsible to pay that loss over the amount of the contributions from the Limited Partners.

Of note, a Limited Partnership Agreement can be written to require that Limited Partners contribute additional money under certain circumstances.

What is a Limited Liability Partnership?

A Limited Liability Partnership, also known as an LLP, operates much like a Limited Partnership except that it gives each partner in the LLP protection from personal liability excepting only the extent of their investment in the LLP.

Generally, partners in a Limited Liability Partnership are not responsible for another partner’s debts, obligations, or liabilities resulting from negligence, malpractice or misconduct. Of note, there is only one class of partner.

Be aware that the degree of liability limitation for a Limited Liability Partnership varies from state to state. While some states provide a limitation of personal liability that is similar to a corporation, others only limit personal liability for the negligence of a partner. Other states take a middle ground and limit personal liability for a partner’s negligence as well as for partnership contracts and other debts.

ADVANTAGES AND DISADVANTAGES OF PARTNERSHIPS

What are the Advantages of a General Partnership?

Generally, having a partner or partners means that you have the ability to rely on others equally interested in making the business successful in terms of financial obligations, work load, and expertise.

Compared to a Limited Partnership, a General Partnership is simpler to operate and requires less government formality in terms of state filings.

Compared to a Corporation, the primary advantage of a General Partnership is the lack of double taxation that occurs in reference to corporate profits.

What are the Disadvantages of a General Partnership?

Initially, the primary advantage of a General Partnership often can turn into the primary disadvantage: having partners. Partners can sour over time and a person that once may have been an asset to the business can become a distraction or even a liability.

General Partners may be held liable for unlimited liability for debts incurred in the course of the General Partnership. It cannot be overstated what a potentially dangerous situation unlimited liability is for business owners.

If your business faces a lawsuit, unpaid debts, or even failed obligations by business partners, a general partner could lose his or her personal savings, home, and even retirement to pay off the debts of the General Partnership. For this reason, the General Partnership is rarely used in today’s business world.

What are the Advantages of a Limited Partnership (LP)?

In a Limited Partnership, the General Partners are still personally liable for the debts of the business but the Limited Partners are not. Limited Partners also do not have any say in how the company is run which typically makes decisions easier to make.

A Limited Partnership is also generally cheaper and easier to set up than a corporation.

What are the Disadvantages of a Limited Partnership (LP)?

Unlike a properly structured Corporation or LLCS a Limited Partnership does not offer all of its partners liability protection. Additionally, it is generally easier to transfer ownership interest in a corporation or an LLC than it is in a Limited Partnership.

What are the Advantages of an Limited Liability Partnership (LLP)?

An LLP is uniquely designed to limit malpractice claims against partners who are not involved in the claim. Thus, professional organizations such as medical, legal, and accounting practices often form as LLPs. Each partner is generally only liable for debts and obligations created as a result of his or her own negligence, malpractice or misconduct, as well as negligence, malpractice or misconduct by any person under that partner’s direct supervision.

What are the Disadvantages of an Limited Liability Partnership (LLP)?

Unlike a Limited Partnership in which there are two classes of partners, a Limited Liability Partnership has only one class meaning that all partners have a say in how the business is run. This may make operating the business more complicated as more voices have a say in how it is to be run.

Also, some states recognize LLPs formed in other states but some do not. this may affect the LLP’s limitation of liability in another state that does not recognize other states’ LLP structures.

Ultimately, although an LLP offers some limits on liability it is not as comprehensive as the limitations provided by a Corporation or a Limited Liability Corporation (LLC).

STARTING YOUR PARTNERSHIP

How Do I Form a Partnership?

A General Partnership exists when two or more persons carry on a business for profit as co-owners even if they do not take the necessary formal steps to form a partnership. Generally, no formal documentation is required to be filed with a state agency to form a General Partnership. However, it is always a good idea to have all partners to a General Partnership execute a Partnership Agreement.

Unlike a General Partnership, Limited Partnerships and Limited Liability Partnerships are typically created by statute. As such, to form a Limited Partnership or Limited Liability Partnership documents forming the same need to be filed with the appropriate state government office.

Once you are ready to form your Limited or Limited Liability Partnership chose from one of TTC Business Solutions’ Partnership Filing Services.

Are there any Requirements when Naming a Partnership?

To identify your business, you will either use the names of the partners (e.g., King and Cusler) or a business name (e.g., Castle Rock Entertainment).

Originally, the business of the partnership had to be conducted in the names of all of the partners and title to any property was held by the partners in their personal names.

Today, however, under the partnership laws of all fifty states and the District of Columbia, a business name may be used and title to property may be held in the name of the business.

What if the Partnership Uses a Business Name and Not the Name of the Partners?

In most states, if you use a business name other than the names of the partners you will need to register it with a local or state agency. This is commonly referred to as a Fictitious Business Name.

The purpose of a Fictitious Business Name is to allow those with whom your partnership does business to know who the partners are.
Of note, use of a Fictitious Business Name does not protect your business name. You may find there is someone else in your area using the same name for his or her business.

Should I Run a Name Availability and Trademark Search before Naming the Business?

Yes. Prior to adopting and using the name of your partnership you should always check to make sure that the name is available with your state’s Secretary of State. You should also run a state and federal trademark search to clear use of the same as well as well as any advertising slogans, product or service names you intend to use.
TTC Business Solutions offers a Free Business Name Availability Check as well as trademark Research Report Services to determine if your Partnership’s name is available.

TAXES AND OTHER LEGAL CONSIDERATIONS

Do Partners in a Partnership Pay Federal Taxes?

Generally, yes. Partners pay taxes on their share of the profits of the partnership. This should be reported on an IRS Form 1065.

The partnership itself, however, is not taxed. Instead, the distributed partnership income of each partner is taxed to that partner. Of note, the partnership will need to file a partnership tax return for informational purposes, but no tax will be paid.

Each partner will generally report his or her share of the distributed income on his or her individual tax return and pay any tax that may be due. Exactly what is considered distributed to each partner is a matter of tax law and IRS rules. It may even include money kept by the partnership after all expenses are paid.

For specific application of the laws to your particular situation it is recommended that you seek the advice of a qualified attorney or CPA familiar with the tax laws concerning partnerships.

Do Partners in a Partnership Pay State Taxes?

Probably. In general, there may be state tax laws which will need to be understood and followed.. These can include such things as income taxes, inventory taxes, sales or excise taxes, and license and filing fees.

Again, for specific application of the laws to your particular situation it is recommended that you seek the advice of a qualified attorney or CPA familiar with the tax laws concerning partnerships.

What Laws Govern the Structure and Management Requirements for Partnerships?

State laws govern how partnerships are structured and managed. The laws generally include:

• The partner’s authority within the partnership;
• Liability protection, if any, for the partners or partnership;
• How new partners can be added, or how current partners can leave the partnership;
• If ownership in the partnership can passed on to heirs or benefactors;
• What the partnership can be named, and;
• How the partnership will pay state and federal taxes.

Each state is different, however, so refer to the partnership laws in your state for more details or consult a qualified lawyer to assist you if you have specific questions thereon.

Are there Any General Partnership Laws that Apply in All States?

Yes. All states, except Louisiana, have adopted either the Uniform Partnership Act (UPA) or the subsequent Revised Uniform Partnership Act (RUPA).

What are the UPA and RUPA?

The UPA and, thereafter, the RUPA, were written by lawyers with the idea of enacting standardized laws regarding General Partnerships throughout the United States. The UPA was the original act. The RUPA was subsequently written and designed as an improvement over the original UPA.

In general, the UPA and the RUPA define the basic legal rights and obligations of partnerships and their partners. Many of these are general rules of law that apply unless your partnership agreement provides for something different. Of note, the law cannot be changed by a partnership agreement with respect to certain matters.

These issues generally relate to dealings with third parties and not to dealings between the partners.

What do the UPA and RUPA Cover?

The UPA and RUPA generally cover the following areas:
• Definition of Relevant Partnership Terms;
• When a Partnership Exists;
• Registration of the Partnership with a State Agency;
• The Relationship of the Partners with Each Other;
• The Relationship between the Partnership and Third Parties; and
• Changing and Terminating the Partnership.

Generally, When Does a Partnership Legally Exist?

As stated before, a General Partnership exists when two or more persons carry on a business for profit as co-owners even if they do not take the necessary formal steps to form a partnership.

What is Meant by the Relationship of the Partners?

The relationship of the partners includes matters such as decision-making, how a partner may sell his or her interest in the business, how new partners may join the partnership, and what happens if a partner dies. It also includes how the partnership may be ended and what a partner may or may not do without the agreement of the other partners.

What is Meant by the Relationship of General Partners to Third Parties?

In a General Partnership each partner has the authority to act for the entity. Each partner is responsible for the acts of the other partners. This means that one partner can enter into contracts, open bank accounts, buy and sell partnership property, create partnership debts, file lawsuits, and generally conduct business for the partnership for which all partners in the General Partnership are responsible.

As a partner in a General Partnership you will be personally obligated for the actions of your partners the same as if you had done them yourself. In other words, your personal possessions such as your bank accounts, home, car, or other effects may be taken to satisfy the obligations of a General Partnership.

Are there Any Limitations on the Liability that Can be Imposed by One Partner on a General Partnership?

Yes. Unless the partnership agreement provides otherwise, the agreement of all of the partners in a General Partnership is required to do any of the following:
• Assign partnership property in trust for a creditor;
• Assign partnership property to someone in return for that person’s promise to pay debts of the partnership;
• Sell or transfer the goodwill of the business;
• Do anything that would make it impossible to carry on normal business of the partnership;
• Confess a judgment (i.e., admitting to liability in a lawsuit); or
• Submit a partnership claim or liability to arbitration.

Additionally, no partner in a General Partnership can act in violation of a restriction on his or her authority. If such a restriction is violated, the General Partnership is not liable for the act as to third persons who know about the restriction.

What Laws Apply to Partnerships in My State?

All states, except Louisiana, have adopted the UPA or RUPA. Note, some states have adopted UPA or RUPA but have made changes thereto. But generally the provisions of UPA and RUPA apply in all states but Louisiana even if a specific state may have rearranged the order of the sections without changing the substance of the act or acts. To determine the specific law as enacted by your state, you must read your state’s version of the UPA or RUPA or seek assistance from a qualified attorney to do so.

AMENDING A PARTNERSHIP

Can a Partnership Change its Members Once Formed?

Yes. The UPA and RUPA govern how partners are added and dropped. Depending on the type of partnership, this may occur in various ways. Each of these situations will be handled differently.

How Should a Partnership Allow for the Entry of New Partners?

In general, an incoming partner’s relationship to the original partners should be covered by an amendment to the original Partnership Agreement. At a minimum, any amendment to the original Partnership Agreement to add a new partner should provide the contribution of the new partner and the share of profits and losses and percentage of ownership interests of all partners following the addition of that new partner. It should also contain a provision that the new partner agrees to be bound by all of the terms of the original Partnership Agreement.

How Can a Partner Leave the Partnership?

When a partner decides he or she no longer wishes to remain part of a partnership or if the remaining partners and he or she decide to otherwise terminate the relationship that partner’s interest should be bought out by the remaining partners or partnership. This often occurs when a partner and the partnership agree to separate, if a partner gets an offer to purchase and the partnership exercises its right to purchase, or if a partner if expelled according to the terms of the Partnership Agreement.

If the Partnership Agreement is drafted well and covers this situation a new agreement may not be necessary. However, it is always a good idea to prepare a partnership buy-out agreement to make sure that everyone is in agreement. You also may need a buy-out agreement vary the buy-out terms from those in your Partnership Agreement.

Can a Partner Sell His or Her Interest in the Partnership to Another?

Generally, yes. However, one partner selling his or her interest to a new party may often only done so with the agreement of the other partners. Otherwise, the other partners could invoke a right of first refusal if there is such a provision in the Partnership Agreement. If there is not such a provision, the remaining partners agree to the new person purchasing into the partnership, or the remaining partners do not want the new person to buy into the partnership but cannot afford to purchase the share themselves there can simply be an agreement between the buyer and seller outlining the terms of the sale. In such cases, however, generally the new partner is not entitled to full participation in the business. The original remaining partners will generally need only pay the purchaser his or her appropriate share of the profits.

It’s is therefore a good idea to always maintain a written Partnership Agreement, signed by all partners, which sets forth the rights and obligations of the partners in the partnership and addresses the situation of when a partner sells his or her interest in the partnership.

Thus, when there is a purchase of a partner’s interest there typically will be two agreements: one between the buyer and seller and an amendment or addendum to the original Partnership Agreement. The agreement between the buyer and seller should generally state the terms of the sale, a description of the seller’s interest in the partnership, the purchase price, and how and when the purchase price is to be paid.

DISSOLVING A PARTNERSHIP

Can a Partnership be Closed or Ended?

Yes. At some point you and your partners may decide to end your partnership. This is called dissolving the partnership.

When Can a Partnership be Dissolved?

Generally, whenever the partners no longer wish to be in business together, when one or more partners wish to retire, when the business is no longer profitable, or for any other reason.

Do the UPA and the RUPA Set Forth Rules in Regard to Dissolution?

Yes. The UPA and the RUPA state the events that will trigger the dissolution of a partnership and the disassociation of a partner. Of note, dissolution does not necessarily discontinue the business. However, it does require there to be a settlement of financial affairs with the departing partner.

The UPA and RUPA set forth how the financial affairs will be settled unless there is an Partnership Agreement to the contrary.
Where there is an agreement, the agreement will control. The partnership agreement should be written so it covers the buy-out of a departing partner’s interest by the partnership.

What Should be Done to Dissolve a Partnership?

Dissolving a partnership generally involves four steps:
1. Stop doing business;
2. Sell the partnership assets;
3. Pay off all creditors; and
4. Divide the balance of any remaining equity between the partners and/or make final contributions to the partnership to pay off existing debts according to the liabilities of the partners as set out in the type of partnership and Partnership Agreement.

Should a Written Agreement be Signed when Dissolving a Partnership?

Generally, yes. This will make sure that the partners are in agreement as to the dissolution, the steps to accomplish the same, and the rights and liabilities which will be retained by the individual partners upon dissolution of the partnership.