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PARTNERSHIP

Partnership 73

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In the words of the Uniform Partnership Act, a partnership is "an association of 2 or more persons to bear on as Co-owners of a business for profit." The essential characteristics of this business course, then, are the collaboration of two or more owners, the carry of business for profit (a nonprofit cannot be designated every bit a partnership), and the sharing of profits, losses, and avails by the joint owners. A partnership is non a corporate or separate entity; rather it is viewed as an extension of its owners for legal and tax purposes, although a partnership may own property as a legal entity. While a partnership may exist founded on a uncomplicated agreement, fifty-fifty a handshake between owners, a well-crafted and carefully worded partnership agreement is the all-time way to brainstorm the business organization. In the absence of such an agreement, the Compatible Partnership Human action, a set of laws pertaining to partnerships that has been adopted by most states, govern the business.

In that location are ii types of partnerships:

GENERAL PARTNERSHIPS In this standard form of partnership, all of the partners are equally responsible for the business'southward debts and liabilities. In addition, all partners are allowed to be involved in the direction of the company. In fact, in the absence of a statement to the contrary in the partnership agreement, each partner has equal rights to control and manage the business. Therefore, unanimous consent of the partners is required for all major actions undertaken. Exist brash, though, that any obligation made past i partner is legally binding on all partners, whether or not they accept been informed.

Limited PARTNERSHIPS In a limited partnership, one or more than partners are full general partners, and one or more are express partners. General partners are personally liable for the business'southward debts and judgments against the concern; they tin also be directly involved in the management. Limited partners are essentially investors (silent partners, so to speak) who do not participate in the company's management and who are also not liable beyond their investment in the business organization. Country laws determine how involved limited partners can be in the 24-hour interval-to-solar day business of the firm without jeopardizing their limited liability. This business organization form is particularly attractive to real estate investors, who benefit from the taxation incentives available to limited partners, such every bit being able to write off depreciating values.

ADVANTAGES OF FORMING A PARTNERSHIP

Collaboration. Equally compared to a sole proprietorship, which is essentially the aforementioned business organization course but with only one owner, a partnership offers the advantage of allowing the owners to describe on the resources and expertise of the co-partners. Running a business organization on your own, while simpler, tin can besides be a constant struggle. But with partners to share the responsibilities and lighten the workload, members of a partnership frequently detect that they take more time for the other activities in their lives.

Tax advantages. The profits of a partnership pass through to its owners, who written report their share on their private tax returns. Therefore, the profits are only taxed once (at the personal level of its owners) rather than twice, as is the case with corporations, which are taxed at the corporate level so again at the personal level when dividends are distributed to the shareholders. The benefits of single tax can besides be secured by forming an S corporation (although some ownership restrictions utilize) or by forming a limited liability company (a new hybrid of corporations and partnerships that is still evolving).

Simple operating structure. A partnership, as opposed to a corporation, is fairly uncomplicated to establish and run. No forms demand to be filed or formal agreements drafted (although it is appropriate to write a partnership agreement in the result of hereafter disagreements). The most that is ever required is perhaps filing a partnership certificate with a state part in social club to register the business organization'south proper noun and securing a business organisation license. As a issue, the annual filing fees for corporations, which can sometimes be very expensive, are avoided when forming a partnership.

Flexibility. Considering the owners of a partnership are usually its managers, especially in the instance of a minor business, the company is fairly easy to manage, and decisions can be fabricated apace without a lot of bureaucracy. This is not the case with corporations, which must accept shareholders, directors, and officers, all of whom have some caste of responsibility for making major decisions.

Uniform laws. One of the drawbacks of owning a corporation or limited liability company is that the laws governing those business entities vary from land to country and are irresolute all the time. In dissimilarity, the Compatible Partnership Act provides a consistent gear up of laws almost forming and running partnerships that go far easy for small business owners to know the laws that affect them. And because these laws have been adopted in all states but Louisiana, interstate business concern is much easier for partnerships than it is for other forms of businesses.

Acquisition of capital. Partnerships generally have an easier fourth dimension acquiring capital than corporations because partners, who employ for loans as individuals, can usually get loans on better terms. This is because partners guarantee loans with their personal avails likewise as those of the business organization. As a result, loans for a partnership are subject to state usury laws, which govern loans for individuals. Banks too perceive partners to be less of a risk than corporations, which are just required to pledge the business's assets. In addition, by forming a express partnership, the concern can attract investors (who volition not be actively involved in its management and who will savor limited liability) without having to course a corporation and sell stock.

DRAWBACKS OF FORMING A PARTNERSHIP

Conflict with partners. While collaborating with partners tin be a corking advantage to a small business concern owner, having to actually run a business from mean solar day to day with one or more partners can be a nightmare. First of all, you accept to give up absolute control of the business and larn to compromise. And when large decisions accept to be fabricated, such as whether and how to aggrandize the business, partners often disagree on the best course and are left with a potentially explosive state of affairs. The all-time way to deal with such predicaments is to conceptualize them by drawing upwardly a partnership agreement that details how such disagreements volition be dealt with.

Authority of partners. When one partner signs a contract, each of the other partners is legally bound to fulfill it. For example, if Anthony orders $10,000 of computer equipment, it is as if his partners, Susan and Jacob, had also placed the gild. And if their business cannot beget to pay the nib, and so the personal assets of Susan and Jacob are on the line as well as those of Anthony. And this is true whether the other partners are enlightened of the contract or not. Fifty-fifty if a clause in the partnership agreement dictates that each partner must inform the other partners before any such deals are made, all of the partners are still responsible if the other political party in the contract (the computer company) was not aware of such a stipulation in the partnership agreement. The only recourse the other partners take is to sue.

The Compatible Partnership Act does specify some instances in which full consent of all partners is required:

Selling the busigood will
Decisions that would compromise the busiability to function normally
Assign partnership property in trust for a creditor or to someone in commutation for the payment of the partnership'southward debts
Admission of liability in a lawsuit
Submission of a partnership claim or liability to arbitration

Unlimited liability . Every bit the previous case illustrated, the personal assets of the partnership's members are vulnerable considering there is no separation between the owners and the business. The master reason many businesses cull to incorporate or form express liability companies is to protect the owners from the unlimited liability that is the main drawback of partnerships or sole proprietorships. If an employee or client is injured and decides to sue, or if the business runs upwardly excessive debts, and so the partners are personally responsible and in danger of losing all that they own. Therefore, if considering a partnership, determine your assets that volition be put at risk. If you possess substantial personal assets that you will not invest in the company and practise not want to put in jeopardy, a corporation or limited liability company may be a better choice. But if you lot are investing almost of what you own in the business, so you don't stand to lose any more than if y'all incorporated. And so if your business is successful, and you discover at a subsequently date that you lot now possess extensive personal assets that you would like to protect, you can consider changing the legal condition of your business organisation to secure express liability.

Vulnerability to death or deviation. Unlike corporations, which exist perpetually, regardless of buying, general partnerships dissolve if one of the partners dies, retires, or withdraws. (In limited partnerships, the decease or withdrawal of the limited partner does not bear upon the stability of the business.) Even though this is the police governing partnerships, the partnership agreement tin can contain provisions to continue the business. For example, a provision tin can be fabricated assuasive a buy out of a partner's share if he or she wants to withdraw or if the partner dies.

Limitations on transfer of ownership . Unlike corporations, which be independently of their owners, the existence of partnerships is dependent upon the owners. Therefore, the Uniform Partnership Act stipulates that buying may not be transferred without the consent of all the other partners. (Once again, a limited partner is an exception: his or her interest in the company may be sold at volition.)

CHOOSING A PARTNER

Because of the demand for compromise and the dynamics of shared potency that come along with sharing a business, partnerships can be very difficult to maintain and run efficiently. Therefore, the single well-nigh important decision a small business owner has to make when forming a partnership is the choice of a partner. In fact, warns Edward A. Haman, in How to Write Your Own Partnership Agreement , "yous should but have on a partner if you admittedly need that person's coin or expertise." Every bit an culling, he advises, yous could try to "get the money as a loan, or hire the person as a consultant to get the expertise." But if you decide that forming a partnership is the best choice, consider the following when selecting a partner (anyone may become a partner, except minors and corporations):

Avails

How much does your partner own in personal assets? If y'all own much more than your partner, so creditors will come up after you in the result of extensive debts.

PERSONALITY

Do yous possess compatible personality types?
How practise yous each bargain with stress?
How do you make decisions? Does your prospective partner tend to talk things through with others or make impulse decisions?

ROLES

What part do each of you lot intend to take in the business? Are these roles uniform? Do you both hope to be in accuse of the accounts or dealing with vendors, for example? Or tin you separate up the duties in a way that satisfies both of you?

SHARING RESPONSIBILITIES

How much fourth dimension will your partner contribute to the enterprise?
Can you count on yous partner to show up to work on time? Or yous will be expected to embrace for him?
Is your prospective partner a hard worker, or will he or she routinely leave tasks for you to complete?

GOALS FOR THE BUSINESS

How do each of you envision the future of the business concern? Do you hope to build up a solid concern and and then expand to other locations? Does your partner share that vision or does he or she hope merely to exist able to brand a decent living out of one concern with fewer responsibilities than would be required if running a concatenation of stores?

FORMING A PARTNERSHIP

RESERVING A NAME The first step in creating a partnership is reserving a proper name, which must be done with the secretarial assistant of land's office or its equivalent. Most states require that the words "Company" or "Associates" be included in the proper noun to bear witness that more than i partner is involved in the concern. In all states, though, the name of the partnership must not resemble the proper noun of any other corporation, limited liability company, partnership, or sole proprietorship that is registered with the state

THE PARTNERSHIP Agreement A partnership can be formed in essentially two ways: by exact or written understanding. A partnership that is formed at will, or verbally, can also exist dissolved at will. In the absence of a formal agreement, state laws (the Uniform Partnership Human action, except in Louisiana) will govern the business. These laws specify that without an agreement, all partners share equally in the profits and losses of the partnership and that partners are not entitled to compensation for services. If you would like to structure your partnership differently, yous volition need to write a partnership agreement.

It may be advisable to consult a lawyer before drafting the agreement, only yous should at least research the event on your ain. A thorough partnership agreement should generally cover the following areas:

Name and address
Duration of partnership—You lot tin specify a finite engagement on which all business will terminate or you tin can include a general clause that explains the partnership will exist until all partners agree to dissolve it or a partner dies.
Purpose of business
Partners' contributions—These may be in cash, belongings or services. Be sure to decide the value of all non-cash contributions.
Partners' compensation—Determine how profits will be split up and how often. Also decide if any of the partners volition receive a salary.
Management Authorization—Will partners be able to make some decisions on their own? Which decisions volition require the unanimous consent of all partners?
Piece of work hours and vacation
Kinds of outside business concern activities that will be allowed for partners
Partner withdrawal—Decide how the decease, retirement, withdrawal, disability, or death of a partner will exist handled through a purchase-sell understanding. Also decide whether or non a partner who has only withdrawn will be immune to operate a competing business.
Disposition of the partnership's name if a partner leaves
How to handle disputes—Make up one's mind whether or non arbitration or arbitration will be provided for in the case of disputes that cannot be resolved among the partners. This is a style to avoid plush litigation.

RIGHTS AND RESPONSIBILITIES OF PARTNERS

The Uniform Partnership Human action defines the basic rights and responsibilities of partners. Some of these can be changed by the partnership agreement, except, equally a general dominion, those laws that govern the partners' relationships with third parties. In the absence of a written agreement, then, the following rights and responsibilities apply:

RIGHTS

All partners have an equal share in the profits of the partnership and are equally responsible for its losses.
Any partner who makes a payment for the partnership across its capital, or makes a loan to the partnership, is entitled to receive involvement on that money.
All partners have equal property rights for property held in the partnership's name. This means that the apply of the belongings is equally bachelor to all partners for the purpose of the partnership's business.
All partners have an equal interest in the partnership, or share of its profits and assets.
All partners accept an equal right in the management and acquit of the business.
All partners accept a correct to admission the books and records of the partnership's accounts and activities at all times. (This does not utilize to express partners.)
No partner may be added without the consent of all other partners.

RESPONSIBILITIES

Partners must written report and turn over to the partnership whatsoever income they have derived from use of the partnership's holding.
Partners are not immune to conduct business that competes with the partnership.
Each partner is responsible for contributing his or her full fourth dimension and free energy to the success of the partnership.
Any property that a partner acquires with the intention of it being the partnership's holding must exist turned over to the partnership.
Whatever disputes shall exist decided by a majority vote.