What is and what is not a partnership?
A partnership is a form of business organization where two or more people carry on a business as co-owners. A partnership is not and does not create a legal entity different from the partnership members. When it comes to partnerships, it is important to understand that under U.S. laws a partnership can exist without an express agreement. When two or more people share costs and profits, interact equally with customers and third-parties, make no express limitations of authority, and share equal responsibility for the business, a partnership exists.
What types of partnerships exist?
Under a partnership, business partners can have limited or unlimited liability. This means that they can restrict their responsibility to the amount contributed to the partnership or be subject to full liability responding with their personal assets. Accordingly, there are unlimited and limited partnerships.
A limited partnership must be registered with the secretary of state to be properly formed. The certificate of partnership states the name and the address of the partners, their principal office's address, the purpose of the partnership, and the address for the process of service. Then, the limited partnership must register with the IRS and local and/or state revenue agencies, file for a taxpayer identification number, and file annual reports for the partnership with the secretary of state.
In a limited partnership, general partners own, operate, and assume the liabilities of the partnership, the limited partners serve as passive investors and have no control over the company. For this reason, the partnership agreement is an extremely important document, and each of the partnership contributions, rights, and responsibilities should be properly detailed. Some of the most important issues a partnership agreement deal with are:
- What is each partner's investment?
- How will profits and losses among partners be shared?
- What are the responsibilities and duties of each partner?
- What happens if a partner becomes disabled?
- What happens if a partner dies or wants to exit the partnership?
- What restrictions do the partners want to place on the transfer of partnership interests?
General partners manage the company and assume responsibility for the partnership debts and obligations equally, regardless of their individual efforts. As a consequence, unless otherwise clearly stated in a partnership agreement, profits, liabilities, and management rights are presumed to be equal amongst all partners.
What are the risks associated with partnerships?
Unlike other forms of business organization, partnerships may offer no limited liability to the partners involved. Accordingly, those involved in a partnership should have in writing an effective agreement addressing the different sources of risk associated with a partnership. Partnerships are usually associated with joint ventures.
A joint venture exists when two or more entities/persons want to engage in a mutually beneficial commercial collaboration or otherwise bring together their collective resources to pursue a common goal. Joint ventures offer their participants the opportunity to develop a business enterprise with much less capital and risk than other types of transactions, as the parties share the costs, profits, and losses of their joint endeavor while maintaining their existing business operations.
Although the advantages of joint ventures are numerous, they are not without potential drawbacks. Participating in a joint venture may limit the corporate opportunities that each party can pursue independently while increasing their exposure to potential liability. To deal with those potential risks, it is a good practice to enter into preliminary agreements. These preliminary agreements can serve important functions in the structuring and negotiation of joint ventures. Additionally, since a joint venture can be very complex, it may be useful for the parties should enter into a clear agreement that establishes a common understanding of the basic terms of the transaction and facilitate negotiations. The key provisions of this agreement include:
- Parties and Contributions.
- Scope and Purpose.
- Capital Structure and Ownership.
- Business Plan and Budget.
- Capital Contributions and Non-Cash Contributions.
- Distributions and Dividends.
- Transfers of Interests.
- Termination and Exit.
- Conflicts, Corporate Opportunity, and Competition.
- Interested Party Transactions.
- Dispute Resolution.