Starting a Business: Partnerships

There are four basic forms of business organizations available: limited liability companies (LLCs), partnerships, sole proprietorships, and corporations. This post deals with partnerships.
The proper choice of the form of business operation will affect your business for a long time. Obtaining my assistance or the assistance of another attorney who is knowledgeable in this practice area is critical to your success.
Here is some information about the different types of partnerships, as well as a couple of the considerations when selecting which form of business operation is best for you.
What is a Partnership?
A partnership is the association of two or more people, i.e. co-owners, who carry on a business for profit. There are three types of partnerships: a general partnership, limited partnership and limited liability partnership.
What are the different types of partnerships?
A General Partnership grants each of the partners an equal voice in the management and authority to operate the business. Each general partner may bind the company and other partners.
While a written partnership agreement is not required, I strongly recommend having me draft you a partnership agreement which will set forth the partners’ rights and duties, but more importantly in my opinion, it will also set forth the rights to transfer a partnership interest or restrict transfers to family members or those approved of by the non-transferring partners.
The partnership agreement does not need to filed or recorded with the state. There are no state filings required for a general partnership.
A Limited Partnership has two types of partners, at least one general partner and at least one limited partner, each type with different jobs and duties and rights under state law. The partner who manages the business is called the general partner. The general partner may withdraw at any time and has full liability for all operations of the business while the general partner.
Only the general partners have authority to bind the partnership. The limited partners are not allowed to withdraw from the partnership and have very limited rights to manage the partnership. Limited partners are similar in nature to an investor.
To form a limited partnership, a Certificate of Limited Partnership must be filed with the state and a fee paid. You should always have a Limited Partnership Agreement to set forth the rights and duties of each of the partners and the rights to transfer limited partnership interests.
This form of partnership is used as a family estate planning tool. See the discussion under advanced estate planning techniques for more information on how a family limited partnership may be beneficial in the context of family wealth transfer.
A Limited Liability Partnership is a form of a general partnership. Under this form, each of the partners are treated like general partners and can bind the partnership and the other partners and each has unlimited liability for their own actions in dealing with partnership business.
However, in a limited liability partnership, each partner is not liable for the actions of the other partners.
To form a limited liability partnership, a registration statement must be filed with the state and a fee paid. Again it is very important to have partnership agreement for this form of partnership.
Tax Issues:
A partnership must have a federal tax identification number. The partnership does not pay taxes itself but does file an income tax return.
The partnership merely passes the income and expense items through to its partners’ individual income tax returns. Each partner reports his or her share of the income and expenses on Schedule E of their personal income tax return (Federal Form 1040). Amounts distributed to partners of a partnership do not reflect or coincide with the partner’s share of taxable income.
If a distribution to a partner is for personal services rendered to the partnership, the distribution is subject to self-employment taxes.
If the partnership has employees, the partnership must withhold taxes and pay the employer taxes just like a corporation or LLC does.