According to the Uniform Partnership Act, a general partnership is a voluntary association of two or more persons to carry on a for-profit business as co-owners. One of the "persons" involved in a business partnership can be an entity other than an individual. For example, a partnership may include a partner that is a corporation, a trustee or even another partnership.
A Business Partnership is Easy to Form
Business partnerships in the United States are governed by state law, and in most states, a partnership is easy to form. Formation of a partnership may be by oral or by written agreement (although a written agreement is advisable). A partnership may also be created by operation of law, if necessary to protect the rights of third parties. A partnership formed by operation of law is called a "partnership by estoppel."
Generally, the partnership is not required to file any forms with a state agency unless the partners decide to operate the business under a fictitious name. If the business owners wish to give the business a name other than their own names, they may have to file a "DBA" ("doing business as") certificate with the appropriate state agency.
Single Taxation is an Advantage of the Business Partnership
Perhaps the biggest advantage of the partnership form of business organization is "flow-through" taxation, in which the partnership does not pay taxes on income. Rather, the owners pay tax on their distributive share of the partnership's taxable income. This is somewhat similar to the single taxation afforded by the sole proprietorship and the S-corporation.
Joint and Several Liability Can be a Disadvantage
In a general partnership, every partner is an agent for the partnership, and, with some exceptions, every partner's conduct that is within the scope of the business will bind the partnership. Thus, each partner is liable for the decisions of the other partners, and liability can go beyond one's interest in the partnership to include one's personal assets.
Furthermore, the partnership can become liable for one partner's tort committed during the course of the business. With joint and several liability, each partner is liable for all the plaintiff's personal injuries, and the plaintiff can sue any or all of the defendants until he or she recovers 100% of his or her damages. In a partnership, an innocent partner may be vicariously liable for the torts of another partner.
A Limited Partner May Avoid Personal Liability
To avoid personal liability, an investor may choose to enter into a limited partnership. A limited partnership is very similar to a general partnership, except that it must have at least one general partner and one limited partner. It is formed by agreement of the partners and by filing a certificate of limited partnership with the appropriate state agency.
The limited partner's liability is limited to his or her investment in the limited partnership. That is, the limited partner does not incur personal liability for the expenses of the business beyond his or her investment and will not be jointly and severally liable for the torts of his or her partners. The trade-off is that the limited partner may not participate in the management decisions of the business.
Related Article: Forming a Limited Liability Company
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