A partnership is a type of business entity in which partners/owners share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners i.e. there is no dividend tax levied. However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.
In partnerships there are two types of partners:
1. General partners are those who have an obligation of strict liability to third parties incurred by the Partnership. General partners may have a joint liability or a joint and several liabilities depending upon circumstances. The liability of limited partners is limited to their investment in the partnership.
2. A silent partner is one who still shares in the profits and losses of the business, but who is uninvolved in its management, and/or whose association with the business is not publicly known.
CIVIL LAW AND PARTNERSHIP
In civil law systems, a partnership is a nominate contract between individuals who, in a spirit of cooperation, agree to carry on an enterprise, contribute to it by combining property, knowledge or activities, and share its profit. Partners may have a partnership agreement or declaration of partnership and in some jurisdictions such agreements may be registered and available for public inspection. In many countries, a partnership is also considered to be a legal entity, although different legal systems reach different conclusions on this point.
COMMON LAW AND PARTNERSHIP
Under common law legal systems, the basic form of partnership is a general partnership, in which all partners manage the business and are personally liable for its debts. Two other forms which have developed in most countries are the limited partnership (LP), in which certain “limited partners” relinquish their ability to manage the business in exchange for limited liability for the partnership’s debts, and the limited liability partnership (LLP), in which all partners have some degree of limited liability.
i. GENERAL PARTNERSHIP
In the commercial and legal parlance of most countries a general partnership, or simply a partnership, refers to an association of persons or an unincorporated company with the following major features:
§ It is formed by two or more persons
§ The owners are all personally liable for any legal actions and debts the company may face
§ It is created by agreement, proof of existence and estoppels.
Characteristics
Partnerships have certain default characteristics relating to both (i) the relationship between the individual partners which can generally be overridden by agreement and (ii) the relationship between the partnership and the outside world which cannot be generally overridden by agreement.
The assets of the business are owned on behalf of the other partners, and they are each personally liable, jointly and severally, for business debts, taxes or tortuous liability. For example, if a partnership defaults on a payment to a creditor, the partners’ personal assets are subject to attachment and liquidation to pay the creditor.
By default, profits are shared equally amongst the partners. However, a partnership agreement will almost invariably expressly provide for the manner in which profits and losses are to be shared.
Each general partner is deemed the agent of the partnership. Therefore, if that partner is apparently carrying on partnership business, all general partners can be held liable for his dealings with third persons.
By default a partnership will terminate upon the death, disability, or even withdrawal of any one partner. However, most partnership agreements provide for these types of events, with the share of the departed partner usually being purchased by the remaining partners in the partnership.
By default, each general partner has an equal right to participate in the management and control of the business. Disagreements in the ordinary course of partnership business are decided by a majority of the partners, and disagreements of extraordinary matters and amendments to the partnership agreement require the consent of all partners. However, in a partnership of any size the partnership agreement will provide for certain electees to manage the partnership along the lines of a company board.
Unless otherwise provided in the partnership agreement, no one can become a member of the partnership without the consent of all partners, though a partner may assign his share of the profits and losses and right to receive distributions (“transferable interest”). A partner’s judgment creditor may obtain an order charging the partner’s “transferable interest” to satisfy a judgment.
ii. LIMITED PARTNERSHIP
A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs).
iii. LIMITED LIABILITY PARTNERSHIP
A limited liability partnership (LLP) has elements of partnerships and corporations. In an LLP, all partners have a form of limited liability, similar to that of the shareholders of a corporation. However, unlike corporate shareholders, the partners have the right to manage the business directly.
ENDING A PARTNERSHIP
One disadvantage of partnerships is that when one partner wants to leave the company, the partnership generally dissolves. In that case, the partners must fulfill any remaining business obligations, pay off all debts, and divide any assets and profits among themselves.
To prevent this kind of ending for a business, a buy-sell agreement or buyout agreement should be shaped which can be included as part of the partnership agreement. A buy-sell/buyout agreement helps partners decide and plan for what will happen when one partner retires, dies, becomes disabled, or leaves the partnership to pursue other interests. For example, such an agreement might allow the partners to buy out a departing partner’s interest, so business can continue as usual.
Filed under: Business
