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What Is a Partnership?

March 27, 2012 | Comments: 0 | Views: 182

A partnership is created when two or more people carry on a business for profit. A partnership is created even when there is no written partnership agreement between the parties. As soon as the parties get together to form the partnership and begin carrying on the business for profit, a partnership is created, even if it was not the intent of the parties to form a partnership. The partnership is governed by the laws of the state in which it is formed.

Formalities A partnership, unlike a corporation, is not required to follow many formal procedures such as: meetings, preparation of minutes, election of officers, or issuance of stock certificate. Unless otherwise specified in a partnership agreement, partners will equally share in the management of such partnership, management of profits and losses, and equal responsibility of its debts and liabilities.

Written Agreements Though a written agreement for every partnership is not required by law, it is still wise to have one. Without a partnership agreement, the partnership will be governed by the State's default rules which may not reflect the wishes of the parties.

Taxation The Partnership profits "pass through" to the partners and the partners then pay income tax on the monies they receive.

Liabilities Partnerships not only share profits and responsibilities equally, but they also share in liability for business debts. Unlike corporations and limited liability companies whose owners are not personally liable for business debts, owners of partnerships are personally liable for business debts or business-related obligations. Any creditor can come after the personal assets of a partner in order to satisfy the debts of the business. Further, partners are liable for the torts committed by their partners if committed within the scope of their business duties.

Partnerships vs. LLCs Unlike with a partnership, limited liability company (LLC) business owners need to file articles of organization with their state's LLC filing office and comply with other state filing requirements in order to become an entity. Also, while partners in a partnership are liable for the debts of the business, members or owners of an LLC are not personally liable for the company's debts and liabilities.

The one similarities that an LLC and a partnership do share is that that owners of both business income or losses on their individual tax returns; the partnership or LLC itself does not pay taxes.

Limited Partnership Limited partnership has at least one general partner who controls the company's day-to-day operations and is personally liable for business debts; they also have passive partners called limited partners. Limited partners are contributes capital to the business but has minimal control over daily business decisions or operations. Because they are not involved in the day to day operations, the limited partner's liability is capped at the amount of his or her investment. But, a limited partner who starts tinkering with the management of the business can quickly lose limited liability status.

Taleed El-Sabawi Managing Attorney Kersey & Sabawi, PC

Source: EzineArticles
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