July 17, 2024

Obligate Law

Professional Law Makers

Partnership – Definition of Partnerships

3 min read
Partnership – Definition of Partnerships

Friendship is essentially a partnership. – Aristotle

[Partnership] – There are advantages and disadvantages to every business structure. Partnerships are not exactly the same as forming corporations or companies. Each partnership is defined through an agreement. Once you have decided on this business structure it is important to know the differences. This article will define the different partnership structures. These structures are: (1) Partnership, (2) Limited Partnership, and (3) Limited Liability Partnership.

Partnership – voluntary association of two or more persons as co-owners in a business for profit.

A partnership can be formed voluntarily by direct action of the parties, such as through a partnership agreement or articles of partnership, or its formation can be implied by the ongoing conduct of the parties. Funding for a partnership comes from the partners who initially contribute property, cash, or services to the partnership accounts. Each partner is both a principal and agent to the other partners and is liable both for the acts of others and to the others for individual acts. A partnership does not pay taxes. It simply files an informational return. Each partner has a duty to contribute time to manage the partnership, unless agreed otherwise. A partner cannot transfer their partnership status without the unanimous consent of the other partners. When a partner leaves, retires, or dies, the partnership is dissolved, though not terminated.

Limited Partnership is a slight variation in the liability of those involved. The types of partners in a limited partnership include at least one general partner and one limited partner.

The certificate of limited partnership is simply public disclosure of the formation and existence of the limited partnership; it does not deal with the many more rights and obligations that the partners may agree on among themselves. Both the general and limited partners make contributions upon entering the partnership. The principal advantage of a limited partnership is the limited personal liability. Limited partnerships are taxed the same way as general partnerships. The authority of the general partner in a limited partnership is the same as the authority of the partners in a general partnership. Transfer restrictions are placed on limited partner’s interests. Upon dissolution, a partnership can continue (assuming a general partner remains); but the partnership can also be terminated after dissolution.

Limited liability partnership – newest form of business organization, in which partners’ liability is limited.

State statutes for a LLP are strict with formal requirements for creation. As in partnerships and limited partnerships, LLP partners make capital contributions. In most of the states with LLP statutes, partners are shielded from liability for the negligence, wrongful acts, or misconduct of their partners. All LLP income is a flow-through or pass-through to partners. Partners can manage without risking personal liability exposures because the LLP is identified as such and registered with the state. The transferability is restricted and governed by the same principles of transfer for limited partnerships. Dissolution and termination are similar to the grounds for the dissolution of limited partnerships with a requirement to notify the state.

Partnerships are relatively simple to set up and partners can share the start-up cost. It is important that you define what type of partnership you want to have and take the time to develop a legal partnership agreement with a clear exit strategy. Understanding the differences is a step into the right direction of setup the structure that works best for you while “Creating Your Own Lane” in business success.

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