Part­ner­ships, explained

Every company founder is faced with the question of which legal form is the right one for their company. In principle, the first choice is between a cor­po­ra­tion and a part­ner­ship. As in the case of cor­po­ra­tions, there are also different legal forms for part­ner­ships. Here, you can find out what a part­ner­ship is and what dis­tin­guish­es it from a cor­po­ra­tion. We also explain the ad­van­tages and dis­ad­van­tages of the different types of part­ner­ships.

A part­ner­ship is the merger of several “legal entities” that pursue a common goal. Depending on their legal form, these legal entities can be natural persons, legal bodies (usually cor­po­ra­tions), or other part­ner­ships. A char­ac­ter­is­tic feature of this kind of company is the close re­la­tion­ship between the company and the share­hold­ers. This is mainly due to the fact that these partners are usually per­son­al­ly liable without lim­i­ta­tion, and this clearly dis­tin­guish­es a part­ner­ship from a cor­po­ra­tion.

The part­ner­ship has legal capacity, i.e. it can acquire property and also appear in court. Unlike a cor­po­ra­tion, however, it is not a legal entity. This means that it does not legally exist in­de­pen­dent­ly of its share­hold­ers. As the name suggests, the focus is on people involved, and the share­hold­ers and company are never com­plete­ly separated from each other.

Another dif­fer­ence between a part­ner­ship and cor­po­ra­tion is the generally simpler legal framework for the formation and operation of a part­ner­ship. This makes it an at­trac­tive choice for start-up teams and project groups in par­tic­u­lar.

In contrast to a cor­po­ra­tion, the legal oblig­a­tion of partners for the li­a­bil­i­ties of a part­ner­ship is not limited to their re­spec­tive capital par­tic­i­pa­tion. Rather, as a rule, they are per­son­al­ly liable, without limits. On the other hand, a part­ner­ship does not require a minimum con­tri­bu­tion from the share­hold­ers when it is formed.

If you make the decision to choose a part­ner­ship structure for your business, you may be saving money on reg­is­tra­tion and setup costs, but you will be taking a greater financial risk than with a cor­po­ra­tion. In a limited part­ner­ship, some partners are liable as limited partners only up to their capital con­tri­bu­tion. However, there also must be one or more general partners, who, if necessary, are fully liable for the company’s li­a­bil­i­ties.

In a part­ner­ship, the partners manage the business them­selves (though this role is usually assigned to just one or two of them). In contrast, this is not nec­es­sar­i­ly the case with limited companies: outsiders can also take over the man­age­ment of the company (as a so-called foreign entity). In part­ner­ships, this is not only possible in the form of rep­re­sen­ta­tion.

There are a number of different types of part­ner­ship your business can take within the US. These different types have their own char­ac­ter­is­tics, relating to mem­ber­ship and liability. The following list will cover all you need to know about the different kinds of part­ner­ship options out there. Here is a list of part­ner­ship examples:

Although this business legal structure is not a part­ner­ship, it is worth noting that being a sole pro­pri­etor does not always mean what the name implies: a sole pro­pri­etor means there is just one owner of a business, who is entitled to any and all profits and liable for any and all losses. However, there is one caveat to this: if you are married, you and your marital partner may jointly own a business as a single legal entity. This legal structure is the easiest to start up and run, and has fewer legal and tax oblig­a­tions. However, it is not clas­si­fied as a part­ner­ship and is only suited to a married couple looking to go into business.

General part­ner­ships are the simplest, most common part­ner­ship structure. A general part­ner­ship consists of two or more general partners who are re­spon­si­ble for providing capital and equipment to start the business, and also share man­age­ment of the business. They are all involved in all aspects of the business and are all liable for any debts incurred. The degree to which each person is involved and liable is usually set out in a part­ner­ship agreement before the business is formed. General part­ner­ships also have important tax struc­tures. In a general part­ner­ship, the in­di­vid­ual partners are taxed sep­a­rate­ly, rather than the business itself.

Once you and your partners have decided to form a general part­ner­ship, you will need to choose a name for your business and check your chosen name’s avail­abil­i­ty with the local county registrar and the Secretary of State’s office. It is also worth con­sid­er­ing whether you want to register your company’s name with the US Patent and Trademark Office to guarantee its pro­tec­tion.

There are a few bu­reau­crat­ic steps to take before you can open for business. You will need to register your business with the Secretary of State office to ensure that you have given public notice of your company’s general in­for­ma­tion. Your next step is to register with the Internal Revenue Service (IRS) to get your federal tax iden­ti­fi­ca­tion number (EIN). You will need this to open a business bank account for your company. Contact your bank ahead of time to find out if there are ad­di­tion­al documents you require to open an account. Some banks ask for a fic­ti­tious name cer­tifi­cate (if the business’s name is not the name of the partners) or a copy of the part­ner­ship agreement.

In terms of taxation, general part­ner­ships have two oblig­a­tions: state and federal taxes. You will need to register your business for sales tax with your local au­thor­i­ties. If your business intends to operate in more than one state, you will have to register with each state. You will also be required to register for federal taxes through the Elec­tron­ic Federal Tax Payment System. This is necessary for filing em­ploy­ment and payroll taxes if you have employees.

Your final step is to ensure that you have obtained any and all relevant required local and state licenses to operate your business. These vary depending on the type of business you have and which states you operate in, so be sure to consult with your local Secretary of State office to ensure that you have the right licenses.

As always, if you are unsure or have any questions about setting up your general part­ner­ship, con­sult­ing with a legal tax pro­fes­sion­al is the best course of action. This will guarantee that you have all your permits in order and are legally wa­ter­tight in terms of business op­er­a­tions and taxation.

A limited part­ner­ship is defined as a part­ner­ship in which not all share­hold­ers are per­son­al­ly liable for the company’s li­a­bil­i­ties. What makes them different is that they are made up of general partners and limited partners. Their rights in terms of the company are limited, and they are usually not allowed to par­tic­i­pate in man­age­ment. They are simply there as silent investors, and are only liable up to the amount of their in­vest­ment (capital con­tri­bu­tion). There is no minimum amount for a capital con­tri­bu­tion, unless otherwise stated in the part­ner­ship agreement.

Like general partners, limited partners are legal entities, which may consist of persons, cor­po­ra­tions, or other part­ner­ships. Since limited partners are only liable for the sum of their in­vest­ment, this makes the limited part­ner­ship an easy business structure to raise capital with.

The procedure for setting up a limited part­ner­ship is similar to a general part­ner­ship, except that all limited part­ner­ships are required to register with the Secretary of State (in some states, general part­ner­ships are not required to register before becoming legal busi­ness­es). Limited part­ner­ships are also required to have a reg­is­tered agent (legal rep­re­sen­ta­tive for limited part­ner­ship) and provide their name and address publicly so that you have a ver­i­fi­able point of contact. Different states have different in­for­ma­tion re­quire­ments, so contact your Secretary of State office to find out if any ad­di­tion­al in­for­ma­tion about your reg­is­tered agent is necessary.

In nearly all states, you are required to file a cer­tifi­cate of limited part­ner­ship, signed by all partners. This cer­tifi­cate normally includes the limited part­ner­ship’s name, office address, reg­is­tered agent in­for­ma­tion, purpose of the limited part­ner­ship, value of al partners’ capital con­tri­bu­tion, and the names and addresses of all partners.

A rel­a­tive­ly new form of part­ner­ship is the limited liability part­ner­ship (LLP). This is a part­ner­ship where all the partners have limited liability, i.e. there are no true general partners. In this regard, although an LLP has a part­ner­ship structure, it in­cor­po­rates aspects of a cor­po­ra­tion (par­tic­u­lar­ly limited liability cor­po­ra­tions).

LLPs appeared in the US in the 1990s. Due to the collapse of many banks and saving in­sti­tu­tions in the 1980s, attempts were made to hold lawyers and ac­coun­tants who had advised these in­sti­tu­tions fi­nan­cial­ly liable. As a result, LLPs were in­tro­duced that would protect partners who were not involved from the li­a­bil­i­ties of others in their company.

However, there are sometimes re­stric­tions on what pro­fes­sion­al uses an LLP may be used for. They are par­tic­u­lar­ly popular for lawyers, ac­coun­tants, and ar­chi­tects – busi­ness­es where in­di­vid­ual rep­u­ta­tion is paramount. In some states, LLPs may only be formed for these pro­fes­sions. The amount of liability each partner in an LLP is re­spon­si­ble for also depends on the state. Federal leg­is­la­tion reg­u­lat­ing the formation and running of LLPs was passed in 1994 in the Revised Uniform Part­ner­ship Act.

If you are in­ter­est­ed in forming an LLP, the procedure is similar to a general or limited part­ner­ship, again with a few changes. First off the bat, you will need to ensure that your business qualifies to be an LLP. Some states (New York, Oregon, Cal­i­for­nia) place re­stric­tions on what pro­fes­sions may form an LLP.

You may need to file a cer­tifi­cate of limited liability part­ner­ship – and each state allows LLPs to establish their own re­quire­ments for filing a cer­tifi­cate of limited liability part­ner­ship. This is a more general version of your limited liability part­ner­ship agreement. Filing fees range between $50 and $500, depending on the state. Some states also require that LLPs acquire certain kinds of insurance for the business, such as worker’s com­pen­sa­tion insurance or mal­prac­tice liability insurance. Some states require you to announce your LLPs formation publicly. Consult with your Secretary of State office or De­part­ment of In­dus­tri­al Relations to confirm whether both of these steps are necessary in your state.

One of the reasons that part­ner­ships are such a popular business form is because of their taxation structure. Part­ner­ships are clas­si­fied as “flow through” entities for taxation purposes. This means that rather than having the business taxed itself, any income “flows through” to the partners and they are taxed on it as part of their in­di­vid­ual tax returns. This means that the business is not liable for cor­po­ra­tion tax.

Partners in a business part­ner­ship are required to file their profits as part of their in­di­vid­ual tax return using form 1065, Return of Part­ner­ship Income. While the business is not required to pay tax on profits itself, it may be liable for em­ploy­ment taxes if you have any employees. If so, you will need to file form 941, Employer’s Quarterly Federal Tax Return. Depending on the kind of business the part­ner­ship is, it may also be liable for excise tax for goods purchased.

Company founders can choose from a range of legal forms, depending on the pre­con­di­tions and pref­er­ences of their part­ner­ships. Here is an overview of the relevant ones:

If you have decided to form a part­ner­ship when setting up your company, further criteria come into play when choosing the right legal form. These include the type of activity, the size of the planned company, the partner’s personal pref­er­ences, the par­tic­i­pa­tion of other companies, and more. Here, you will find an overview of the typical ad­van­tages and dis­ad­van­tages of the various legal forms, which can help you in your choice of part­ner­ship.

Click here for important legal dis­claimers.