Types of Business Partnerships
A People’s Choice can save you hundreds of dollars by preparing your California partnership agreement and other business organizational documents instead of an expensive attorney!
A partnership is created when two or more people establish a business with the intent to share in the business profits and losses. In a partnership, each person contributes something to the business. The individual contribution can be a variety of things such as property, money, services, ideas or any combination. The right to manage the business, each individual’s share of profits and their individual personal liability may vary, depending on the type of partnership that is established.
The four typical types of partnerships are a general partnership, limited partnership, limited liability partnership (LLP) or joint venture. Below are basic summaries of these main types of business partnerships.
A General Partnership is a form of business entity in which two or more co-owners engage in business for profit. For the most part, the partners own the business assets together and are personally liable for business debts.
- Sharing Profits: In the absence of a partnership agreement, profits are shared equally among the partners. A partnership agreement, however, will usually provide for the way gains and losses are to be shared.
- Unlimited Personal Liability for Losses: Each partner is, jointly and severally, personally liable for debts and taxes of the partnership. For example, if the partnership assets are insufficient to satisfy a creditor’s claims, the partners’ personal assets are subject to attachment and liquidation to pay the business debts.
- Liability for a co-partner’s debts: Each general partner is deemed the agent of the partnership. Therefore, if that partner was apparently carrying on partnership business, all general partners can be held liable for his dealings with third persons.
- Liability for a co-partner’s wrongdoing: Each partner may be held jointly and severally liable for a co-partner’s wrongdoing or tortuous act (e.g. the misapplication of another person’s money or property).
- Duration: Technically, a partnership terminates upon the death, disability, or withdrawal of any one partner. However, most partnership agreements provide for these types of events with the share of the departed partner being purchased by the remaining partners in the partnership.
- Management and Control: Lacking a partnership agreement, each general partner has an equal right to take part in the management and control of the business. A majority of the partners decides disagreements in the ordinary course of partnership business. Disagreements of extraordinary matters and amendments to the partnership agreement require the consent of all partners.
- Transferability: Unless otherwise provided in the partnership agreement, no one can become a member of the partnership without the consent of all partners. However, a partner may assign his share of the profits and losses and right to receive distributions (“transferable interest”). Further, a partner’s judgment creditor may get an order charging the partner’s “transferable interest” to satisfy a judgment.
In a Limited Partnership, one or more “general” partners manage the business while “limited” partners contribute capital and share in the profits, but take no part in running the business. General partners remain personally liable for partnership debts while limited partners incur no liability for partnership obligations beyond their capital contributions. The purpose of this form of business is to urge investors to invest without risking more than the capital they have contributed.
- Duration: Death, disability, or withdrawal of a general partner dissolves the partnership unless the partnership agreement provides otherwise or all partners agree, in writing, to substitute a general partner. (Note: Death or incompetence of a Limited Partner has no effect on the partnership.)
- Formalities: The formalities of setting up and operating a limited partnership are very similar to that of starting a small, for-profit corporation. The California Limited Partnership Act, for example, requires the filing of a certificate with the Secretary of State, applies restrictions on the use and availability of partnership names, contains statutory requirements with respect to the manner of calling and holding meetings, and contains many corporation-like requirements.
A Limited Liability Partnership (also known as an LLP) is essentially a General Partnership but each partner is not liable for certain acts of other partners. This formation is a General Partnership that elects to be treated as an LLP by registering with the Secretary of State. Many attorneys and accountants find the LLP a very attractive alternative since it shields the partners from vicarious liability, can operate more informally and flexibly than a corporation, and is given full partnership tax treatment. (Note: In California, with certain exceptions, the LLP is only available to attorneys and accountants.)
A Joint Venture is a General Partnership typically formed to undertake a particular business transaction or project and not one intended to continue indefinitely. Most often, joint ventures are used in real estate matters where 2 or more persons undertake to develop a specific piece of real property.
A People’s Choice can save you hundreds of dollars by preparing your California partnership and other business organizational documents instead of an expensive attorney!