Business Partnership

New business owners will need to choose the right type of business management structure when registering their business. This decision is imperative to operating a successful business because it can have a substantial impact on the future of the company.

There are many different business management structures that new business owners can choose from, such as:

• A C Corporation;
• General partnership; or
• Limited liability company, or “LLC.”

Some business management structures require that its owners comply with specific formational rules. An example of this would be if you choose to create a limited partnership. The rules for a limited partnership dictate that there be at least one general partner who is assigned to manage the entire business, and at least one limited partner who is assigned to continue operating as a lawful limited partnership.

Specific business management structures can also determine matters such as:

• How much money business owners can collect from investors;
• The number of members that are allowed to sit on the company’s board; and/or
• How the business will be taxed.

A business partnership is a specific arrangement in which one or more people join together in order to conduct business activities. A partnership may be formed for a new business that does not yet exist, and will be run by only a few persons; or, the partners. Alternatively, a partnership can be created between two existing businesses that wish to accomplish a specific goal. An example of this would be when two brand name companies work together to market a single product.

According to the model statute The Revised Uniform Partnership Act (RUPA), a partnership is an association of two or more people in order to carry on as co-owners of a business for profit. It does not matter whether the individuals were attempting to create a partnership on purpose; rather, it only matters that the parties intended to carry on as co-owners of a business for profit. This fact can be determined by whether they share in the profits earned, and whether they have a right to control the business.

An example of this would be if two people open a coffee shop. They split the profits, and make joint decisions regarding the coffee shop. Although the two do not refer to themselves as partners, their relationship meets the requirements to form a partnership.

Business partnership laws generally vary from state to state. Some states have considerably flexible partnership requirements, making it simple for a business to be registered as a partnership.

What Is a General Partnership?

A general partnership can be considered as the most basic type of partnership. In a general partnership, each partner will be liable for the debts and losses that may be incurred by the partnership. In exchange for this liability, which will be further discussed below, they will also be able to exercise a certain amount of control in terms of management of the business.

In comparison, a limited partnership involves considerably less risk for the individual partners involved. Limited partners are generally only held liable for that portion of the business which originated from them, or which they contributed in the beginning.

The amount of liability that an individual may have as part of a partnership is directly based on the type of partnership that was formed:

1. General Partnership: General partners are individually and jointly responsible for any losses or debts incurred by the general partnership. They are also liable to third parties in tort or contract law claims against the partnership, as well as to the other partners in the event of a breach of their fiduciary duties to the partnership;
2. Limited Liability Partnership (“LLP”): An LLP allows the individuals to be free from the debts and liabilities of all the other parties. They are also free from certain debts and liabilities of the partnership. Partners to an LLP have all of the same financial rights and obligations as a general partnership; however, forming an LLP does require filing with the state. Partners in an LLP are not generally held liable for partnership obligations of any kind, although every partner does remain liable for their own acts. This includes any acts that they supervise or direct. Unlike general partners, they are not exposed to unlimited legal liability; and
3. Limited Partnership: A limited partnership has general and limited partners. There may be one or more for each type of partner, but there must be at least one partner selected to be a general partner. This general partner makes management decisions, while a limited partner does not. Limited partners have limited authority over the partnership. General partners are both individually and jointly responsible for any liabilities or debts incurred by the limited partnership. However, limited partners are only liable to the extent of their investment that they contributed to the limited partnership.

How Are Business Partnerships Terminated?

Terminating or dissolving a partnership may occur for a number of reasons. Some common examples include, but may not be limited to:

• One of the partners becomes deceased, incapacitated, or has filed for bankruptcy;
• Disputes arise between the partners, and those disputes cannot be resolved;
• One of the partners has already retired, or is planning to retire;
• Specific terms set out in the partnership agreement provide for a termination date; and/or
• By operation of law, meaning that the partnership is engaging in illegal activity and must be dissolved.

The way in which a partnership is officially terminated could depend on the state laws governing the partnership, as well as the type of partnership it is and whether it is an actual dissolution or a disassociation. Dissolution refers to the termination of the entire partnership, whereas a disassociation is only used when one partner is attempting to end its association with the partnership.

Generally speaking, a disassociation terminates the partner’s legal relationship with the partnership. This would include any rights and profits. If the partnership continues in the absence of this partner, the partnership must buy out the dissociating partner’s interest.

In terms of the dissolution process, any partner may dissolve the partnership at any time. This is accomplished by providing a notice of dissolution. The partnership must then “wind up” its business activities and distribute its assets. Winding up refers to the methods that are used to distribute or liquidate any property or assets that remain after the dissolution of a partnership.

The money resulting from the wind up stage is first used to pay off any debts the partnership may still have. The remaining funds will be distributed to the partners individually. This amount is generally based on their ownership interest in the partnership; meaning, if one partner has more ownership interest, they will receive a larger portion.

The partnership should notify state and federal tax authorities of the dissolution, as well as creditors and clients.

Do I Need An Attorney For Issues Involving Business Partnership?

If you are considering entering into a business partnership, or you are involved in a business partnership and are facing issues, you should consult with an experienced and local corporate lawyer.

An attorney will help you understand your state’s specific laws regarding business partnerships, and how your legal rights and options will be affected by those laws. Finally, an experienced business attorney will also be able to represent you in court, as needed.