PARTNERSHIPS

Partnerships can take the form of GENERAL PARTNERSHIPS or LIMITED PARTNERSHIPS. The two forms of partnerships differ considerably in regard to legal requirements and the rights and liabilities of partners.

GENERAL PARTNERSHIP

A partnership is a joint undertaking that arises from an agreement, express or implied, between two or more persons to carry on a business for profit. Partners are co-owners of a business and they have joint control over its operation and the rights to share in its profits. No particular form of partnership agreement is necessary for the creation of a partnership, although the partners should normally put their agreement in writing. Both partnerships and sole proprietorships are creatures of common law rather than of statute. Basically, the partners may agree to almost any terms when establishing the partnership so long as they are not illegal or contrary to public policy.

A partnership is a legal entity only for limited purposes, such as the partnership name and title of ownership property. The partners are subject to personal liability for partnership obligations, and partnership itself is not subject to levy for federal income taxes, although an information return must be filed. That is, the partnership as an entity only reports (does not pay taxes on) the income received by the partnership. A partner's profit from the partnership (whether distributed or not) is taxed as individual income to the individual partner.

LIMITED PARTNERSHIPS

A special and quite popular form of partnership is limited partnership, which consists of at least one general partner and one or more limited partners. The general partner or partners run the business and are subject to personal liability for partnership debts and obligations. The limited partner or partners, however, have limited liability, both with respect to lawsuits brought against the partnership and money at risk. The maximum money at risk is defined by the limited partnership agreement, which specifically states how much each limited partner must contribute to the partnership.

A limited partnership is a creature of statute. If the statute is not followed almost to the letter, the courts will hold that a general partnership exists instead. Then those who thought their liability was limited by their investment will be held generally liable to the full extent of their personal net worth. The exemptions from personal liability of the limited partners rest on their not participating in management. A violation of this provision renders the limited partner just as liable as a general partner to any creditor who does not know that he or she is a limited partner. Note that no law expressly bars the participation of limited partners in the management of the partnership. Rather, the threat of personal liability normally deters their participation.

Partnership | Limited Liability Company | S Corporation

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