Partnership

The partnership is a popular and useful form of business organization and is noted for its simplicity and ease of formation. A partnership is an association of two or more persons formed to carry on a business for profit. As such, it is a special form of business entity separate from the individuals (partners) and is owned by two or more persons each of who has a specified ownership interest. A general partnership can be formed with nothing more than a verbal agreement.  Nothing has to be filed with the state and freedom of contract is the governing principle.  The down side is that the partners are joint and severally liable.  This means that each partner is fully liable for the actions of the other partner.

With very limited exceptions, a partnership is not an income tax paying entity. All profits and losses pass through to the partners' individual tax returns in proportion to their respective ownership interests. Unless continuity of the partnership is provided for in the partnership agreement, a partnership is dissolved upon the death or withdrawal of one of the partners. Unless the partnership debt to asset ratio is very low, borrowing usually requires loan documentation signed by all partners and their respective spouses (if any).

No public notice of the partnership agreement is required at the time of formation of a general partnership ? public notice may be required if a partner subsequently is added to the partnership. Public notice of the formation of a limited partnership must be given through registration with the Corporation Division of the Secretary of State's office.

Limitations of a partnership:

Partnerships have a number of limitations with important implications for the partners and members of their families. These include, but are not restricted to:

• In a general partnership all assets of each partner are at risk while in a limited partnership, all assets of the general partner are at risk and capital invested by the limited partners is at risk.
• Any partner in a general partnership and the general partner of a limited partnership can enter into contracts and incur obligations that are binding on all partners.
• Unless the partnership agreement contains specific provisions authorizing continuation, a general partnership ends upon the death of any partner ? usually resulting in disruption of ongoing business arrangements.
• Any general partner can require dissolution of the partnership at any time.
• Partners holding a minority interest can be alienated if general partners holding a majority of the ownership interest consistently vote as a block and the interests of minority partners are ignored.
• Unless succession is carefully planned, each generation must purchase or inherit the interests of each partner ? subject to associated estate and inheritance tax costs.
• Division of management responsibility among the partners can result in no one having an overall understanding of the financial standing of the partnership.
• For a number of social and economic reasons, it may be difficult to enter an existing partnership.
• It may be very difficult to get out of a partnership without undue financial loss and/or interpersonal conflict with the other partners.
• Conflicts or disagreements among the partners can immobilize business decision making causing loss of productivity and profitability.

A carefully drafted partnership agreement can reduce or avoid many of these limitations. However, a partnership agreement cannot alter the financial responsibilities that accompany being a general partner or a limited partner as they are defined by statutes and court decisions.