Who Can Be a Partner in a Partnership?

The business management structure that a new business owner chooses when registering their company will determine many of the operating factors, as well as how the business will be taxed. Some business management structures require that its owners comply with certain formational rules.

An example of this would be how in a limited partnership, there must be at least one general partner who is assigned to manage the entire business, and at least one limited partner in order to continue operating as a lawful limited partnership.

Additionally, the business management structure determines factors such as:

• How much money business owners can collect from investors;
• The number of members who are allowed to sit on a company board; and/or
• The way in which the business will be taxed, as was previously mentioned.

Some of the factors that a new business owner should consider when selecting a business management structure include:

• The number of owners that are forming the business;
• Whether they want the ability to issue stocks and raise money from investors;
• Both federal and state tax laws, in order to evaluate the tax incentives that each business management structure offers;
• How much control the owner wants over company decisions and assets;
• The amount of money that the owner is willing to spend in order to register their business; and/or
• The potential risks and liabilities that they are willing to incur both personally and professionally. An example of this would be how a person who wants to protect their personal assets from creditors should choose to form an LLC.

Additionally, new business owners should consider:

• Wind-up or termination procedures;
• The rights that they want to possess if they decide to sell or expand on the business; and
• Their comfort level in terms of having company details exposed to the general public.

What Are The Different Types Of Business Management Structures?

There are many different types of business management structures that new business owners can choose from when forming a company. The most common ones can be found on the U.S. Small Business Administration (“SBA”) website. Because the type of business management structure dictates how a business will be taxed, less common alternatives can be found under specific state business laws.

Generally speaking, the most popular types of business management structures include:

• Sole Proprietorships: Businesses that can be formed by a single owner. It does not need to be registered with the state; however, it is considerably easy to set up, should the owner choose to do so. The general lack of paperwork and minimal procedural requirements make sole proprietorships a simple, inexpensive option.
  • As there is only one owner of a sole proprietorship, they are solely responsible for all management aspects of the company. Additionally, sole proprietors can be held liable for any risks or liabilities that are incurred by the business.
• Corporations: A legal entity that is regulated by state law. Because a corporation is considered to be separate from its owners, meaning the shareholders, only the corporation itself can be held liable for debts and liabilities. There are many different types of corporations classified according to specific factors such as their purpose, the number of shareholders, the amount of stock that is to be issued, and their overall tax structure. Some standard forms of corporations include:
  • C corporations;
  • S corporations;
  • Professional corporations;
  • Foreign corporations;
  • Non-profit corporations; and
  • B corporations.
• General Partnerships: Formed by two or more individuals who wish to be co-owners of a for-profit business. As long as both parties intended to make money from a product or service that they offer, they are considered to have entered into a general partnership. General partners can be held both individually and jointly liable for any losses or debts incurred by the partnership. Additionally, they can be liable to the other partners if they breach their fiduciary duty to the business, as well as to third parties;
• Limited Partnerships: A limited partnership has considerably stricter requirements than a general partnership. To reiterate, limited partnerships must include at least one general partner to oversee and manage the company, as well as at least one limited partner. As such, limited partners will have limited authority over this type of partnership, and can only be held liable to the extent of their investment. Similar to general partnerships, the general partners in a limited partnership can be held both jointly and individually liable for company debts and risks;
• Limited Liability Partnerships: Limited liability partnerships provide its partners with the same obligations and financial rights as those provided by general partnerships. However, the partners are required to register the business with the state. While limited liability partnerships offer the benefit of being free from the debts and liabilities of other parties and the partnership itself, each partner will remain liable for their own actions or any conduct that they personally supervise or demand;
• Limited Liability Limited Partnerships: The rarest forms of business management structures, because these organizations are not recognized by every state. Limited liability partnerships can only be formed in compliance with a state statute, and in states where they are recognized, they are largely chosen for tax purposes. These structures have similar requirements to those of limited partnerships, the defining difference being that general partners cannot be held personally liable under this formation; and
• Limited Liability Companies: Limited liability companies combine the tax arrangements and management styles of partnerships, with the liability benefits found under a corporation. Members of a limited liability company cannot be held responsible for debts incurred by the business, and members may choose how they wish to be taxed.

Who Can Be A Partner In A Partnership?

In a partnership, each partner is allowed a certain amount of control over the partnership operations, as well as the business profits. However, they may also be subject to equal business risks, unless it is a:

• Limited partnership;
• Limited liability partnership; or
• Limited liability limited partnership.

Generally speaking, any person can be a partner in a partnership. As was previously mentioned, a partnership is formed when two or more people agree to do business together for profit. People can become business partners either by:

• Formal written and signed partnership agreements;
• Oral agreements; or
• By default, such as when their actions legally define their status as business partners.

Corporations can also become partners, as state laws allow corporations to act as individuals.

Each partnership is different in terms of the privileges and duties of each party. These terms should be specifically dictated in the partnership agreement; in general, duties of partners include:

• Managing the day-to-day affairs of the business;
• Ensuring that the business remains profitable;
• Contributing property and assets to the business as required; and
• Being liable for losses incurred by the partnership.

Privileges of partners generally include:

• Having a share in the profits of the partnership activities;
• Being able to contribute to important business decisions; and
• Receiving shares of the overall asset and property distribution when dissolving a general partnership.

In terms of tax liability and duties, each partner is generally individually responsible for paying taxes on their own separate shares of income from the partnership activities. What this means is that the partnership does not pay taxes as an entity.

Do I Need A Lawyer For Help With Partnership Issues?

You should consult with a qualified corporate lawyer in your area if you need help with any partnership issues.

Your business attorney can help you understand your legal rights and options under your state’s specific business laws, and will also be able to represent you in court, as needed, should any legal issues arise.