… means part­ners share prof­its and responsibilities

A part­ner­ship is a busi­ness in which part­ners (own­ers) share the prof­its or losses of the busi­ness. Part­ner­ships are often bet­ter than cor­po­ra­tions for tax­a­tion, because the part­ner­ship does not gen­er­ally incur a tax on prof­its before it is dis­trib­uted to the part­ners (i.e. there is no div­i­dend tax levied). How­ever, depend­ing on the part­ner­ship struc­ture and the juris­dic­tion in which it oper­ates, own­ers of a part­ner­ship may be exposed to greater per­sonal lia­bil­ity than they would as share­hold­ers of a cor­po­ra­tion.

In civil law sys­tems, a part­ner­ship is a nom­i­nate con­tract between indi­vid­u­als who, in a spirit of coöper­a­tion, agree to carry on an enter­prise; con­tribute to it finan­cially or by com­bin­ing prop­erty, knowl­edge or activ­i­ties; and share in its profit. Part­ners may have a part­ner­ship agree­ment, or dec­la­ra­tion of part­ner­ship and in some juris­dic­tions such agree­ments may be reg­is­tered and avail­able for pub­lic inspec­tion. In many coun­tries, a part­ner­ship is also con­sid­ered to be a legal entity, although dif­fer­ent legal sys­tems reach dif­fer­ent con­clu­sions on this point.

Under com­mon law legal sys­tems, the basic form of part­ner­ship is a gen­eral part­ner­ship, in which all part­ners man­age the busi­ness and are per­son­ally liable for its debts. Two other forms which have devel­oped in most coun­tries are the lim­ited part­ner­ship (LP), in which cer­tain lim­ited part­ners relin­quish their abil­ity to man­age the busi­ness in exchange for lim­ited lia­bil­ity for the partnership’s debts, and the lim­ited lia­bil­ity part­ner­ship (LLP), in which all part­ners have some degree of lim­ited liability.

There are two types of part­ners. Gen­eral part­ners have an oblig­a­tion of strict lia­bil­ity to third par­ties injured by the Part­ner­ship. Gen­eral part­ners may have joint lia­bil­ity or joint and sev­eral lia­bil­ity depend­ing upon cir­cum­stances. The lia­bil­ity of lim­ited part­ners is lim­ited to their invest­ment in the partnership.

A silent part­ner is one who still shares in the prof­its and losses of the busi­ness, but who is unin­volved in its man­age­ment, and/​or whose asso­ci­a­tion with the busi­ness is not pub­licly known.

The fed­eral gov­ern­ment of the United States does not have spe­cific statu­tory law gov­ern­ing the estab­lish­ment of part­ner­ships. Instead, the sev­eral com­pos­ite states of the coun­try each con­tain their own statu­tory and com­mon law gov­er­nance of part­ner­ships. These states largely fol­low gen­eral com­mon law prin­ci­ples of part­ner­ships whether a gen­eral part­ner­ship, a lim­ited part­ner­ship or a lim­ited lia­bil­ity part­ner­ship. In the absence of applic­a­ble fed­eral law, the National Con­fer­ence of Com­mis­sion­ers on Uni­form State Laws has issued non-​binding mod­els laws (called uni­form act) in which to encour­age the adop­tion of uni­for­mity of part­ner­ship law into the states by their respec­tive leg­is­la­tures. This includes the Uni­form Part­ner­ship Act and the Uni­form Lim­ited Part­ner­ship Act. Although the fed­eral gov­ern­ment does not have spe­cific statu­tory law for estab­lish­ing part­ner­ships, it has an exten­sive and hyper­de­tailed statu­tory scheme for the tax­a­tion of part­ner­ships in the Inter­nal Rev­enue Code. The IRC is Title 26 of the United States Code wherein Sub­chap­ter K of Chap­ter 1 cre­ates tax con­se­quences of such great scale and scope that it effec­tively serves as a fed­eral statu­tory scheme for gov­ern­ing part­ner­ships.

Gen­eral Partnerships

In the com­mer­cial and legal par­lance of most coun­tries, a gen­eral part­ner­ship or sim­ply a part­ner­ship, refers to an asso­ci­a­tion of per­sons or an unin­cor­po­rated com­pany with the fol­low­ing major features:

• Cre­ated by agree­ment, proof of exis­tence and estoppel.
• Formed by two or more persons
• The own­ers are all per­son­ally liable for any legal actions and debts the com­pany may face

In a gen­eral part­ner­ship, part­ners share equally in both respon­si­bil­ity and liability.

Lim­ited Part­ner­ship (LP)

A lim­ited part­ner­ship is a form of part­ner­ship sim­i­lar to a gen­eral part­ner­ship, except that in addi­tion to one or more gen­eral part­ners (GPs), there are one or more lim­ited part­ners (LPs). It is a part­ner­ship in which only one part­ner is required to be a gen­eral partner.[1]

The GPs are, in all major respects, in the same legal posi­tion as part­ners in a con­ven­tional firm, i.e. they have man­age­ment con­trol, share the right to use part­ner­ship prop­erty, share the prof­its of the firm in pre­de­fined pro­por­tions, and have joint and sev­eral lia­bil­ity for the debts of the partnership.

As in a gen­eral part­ner­ship, the GPs have actual author­ity as agents of the firm to bind all the other part­ners in con­tracts with third par­ties that are in the ordi­nary course of the partnership’s busi­ness. As with a gen­eral part­ner­ship, “An act of a gen­eral part­ner which is not appar­ently for car­ry­ing on in the ordi­nary course the lim­ited partnership’s activ­i­ties or activ­i­ties of the kind car­ried on by the lim­ited part­ner­ship binds the lim­ited part­ner­ship only if the act was actu­ally autho­rized by all the other part­ners.” (United States Uni­form Lim­ited Part­ner­ship Act § 402(b).)

Like share­hold­ers in a cor­po­ra­tion, LPs have lim­ited lia­bil­ity, mean­ing they are only liable on debts incurred by the firm to the extent of their reg­is­tered invest­ment and have no man­age­ment author­ity. The GPs pay the LPs a return on their invest­ment (sim­i­lar to a div­i­dend), the nature and extent of which is usu­ally defined in the part­ner­ship agreement.

Lim­ited part­ner­ships are dis­tinct from lim­ited lia­bil­ity part­ner­ships, in which all part­ners have lim­ited liability.

Lim­ited Lia­bil­ity Part­ner­ship (LLP)

A lim­ited lia­bil­ity part­ner­ship (LLP) is a part­ner­ship in which some or all part­ners (depend­ing on the juris­dic­tion) have lim­ited lia­bil­ity. It there­fore exhibits ele­ments of part­ner­ships and corporations.[1] In an LLP one part­ner is not respon­si­ble or liable for another partner’s mis­con­duct or neg­li­gence. This is an impor­tant dif­fer­ence from that of a lim­ited part­ner­ship. In an LLP, some part­ners have a form of lim­ited lia­bil­ity sim­i­lar to that of the share­hold­ers of a corporation.[2] In some coun­tries, an LLP must also have at least one “gen­eral part­ner” with unlim­ited lia­bil­ity. Unlike cor­po­rate share­hold­ers, the part­ners have the right to man­age the busi­ness directly. As opposed to that, cor­po­rate share­hold­ers have to elect a board of direc­tors under the laws of var­i­ous state char­ters. The board orga­nizes itself (also under the laws of the var­i­ous state char­ters) and hires cor­po­rate offi­cers who then have as “cor­po­rate” indi­vid­u­als the legal respon­si­bil­ity to man­age the cor­po­ra­tion in the corporation’s best inter­est. An LLP also con­tains a dif­fer­ent level of tax lia­bil­ity than a corporation.

Lim­ited lia­bil­ity part­ner­ships are dis­tinct from lim­ited part­ner­ships in some coun­tries, which may allow all LLP part­ners to have lim­ited lia­bil­ity, while a lim­ited part­ner­ship may require at least one unlim­ited part­ner and allow oth­ers to assume the role of a pas­sive and lim­ited lia­bil­ity investor. As a result, in these coun­tries the LLP is more suited for busi­nesses where all investors wish to take an active role in management.

There is con­sid­er­able con­fu­sion between LLPs as con­sti­tuted in the U.S. and that intro­duced in the UK in 2001 and adopted else­where — see below — since the UK LLP is, despite the name, specif­i­cally leg­is­lated as a Cor­po­rate body rather than a Partnership.

–Infor­ma­tion from Wikipedia​.com

Books from Amazon:

There are many good books on start­ing part­ner­ships. We have linked to a few here for you at Ama­zon. We are Ama­zon Asso­ciates and funds derived from the sale of books directly go towards keep­ing this Start Your Busi­ness blog going and pro­vid­ing much needed infor­ma­tion and resources to those seek­ing it.

The Part­ner­ship Char­ter: How To Start Out Right With Your New Busi­ness Part­ner­ship (or Fix The One You’re In) by David Gage (Paper­back — Jun 29, 2004)

Form a Part­ner­ship: The Com­plete Legal Guide by Ralph Warner Attor­ney and Denis Clif­ford Attor­ney (Paper­back — Jun 25, 2008)

Strate­gic Part­ner­ships: An Entrepreneur’s Guide to Joint Ven­tures and Alliances by Robert Wal­lace (Hard­cover — Sep 1, 2004)

Agency, Part­ner­ships, And LLC’s (Exam­ples & Expla­na­tions) (Exam­ples & Expla­na­tions) by Daniel S. Klein­berger (Paper­back — Sep 3, 2008)

Fed­eral Income Tax­a­tion of Part­ners and Part­ner­ships in a Nut­shell (Nut­shell Series) by Karen C. Burke (Paper­back — Jul 30, 2005)

Black Let­ter Out­line on Cor­po­rate and Part­ner­ship Tax­a­tion by Stephen Schwarz and Daniel J. Lath­rope (Paper­back — Aug 6, 2008)

Part­ner­ship Income Tax­a­tion (Con­cepts and Insights) by Alan Gunn and James R. Repetti (Paper­back — Mar 1, 2005)

Public-​Private Part­ner­ships: Prin­ci­ples of Pol­icy and Finance by E. R. Yescombe (Hard­cover — May 1, 2007)

LLC OR CORPORATION? How to Choose the Right Form for Your Business by Anthony Man­cuso Attor­ney (Paper­back — Dec 8, 2008)