Page 603 - Encyclopedia of Business and Finance

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Partnerships

GENERAL PARTNERSHIPS federal tax return for informational purposes only, the
As stated previously, general partnerships can be formed partnership has no federal tax liability.
with little formality. As more than one person is involved
in this type of business, it is suggested that one should LIABILITY OF PARTNERS
have a written partnership agreement which stipulates the Under a general partnership, each partner is liable for
terms of the partnership; authority of the partners; disso- debts of the business. Based upon the percentage of own-
lution of the partnership; distribution of the profits ership of each partner, all profits are taxed to the individ-
and/or losses; amount of each partner’s investment in the ual partners. Each partner is liable for debts, obligations,
business whether it is cash, property, or services; and how acts, or omissions of the other partners. The main draw-
disputes will be resolved. General partners are subject to back to a general partnership is the unlimited liability of
unlimited personal liability with regard to the obligation each partner for the acts of the other.
of the partnerships. The partners are liable for any debts Each partner may be held jointly liable for another
that may occur and any legal actions. The partnership can partner’s wrongdoing or tortuous act; an example is the
be created by agreement, proof of existence, and estoppels. misapplication of another person’s money or property. If a
A partnership can be formed with an oral or written partnership’s assets are insufficient to satisfy a creditor’s
agreement. In order to avoid any misunderstandings claim, the partners’ personal assets are subject to attach-
among the partners, a written agreement is recommended. ment and the possibility of liquidating the business to pay
All powers, liabilities, and authorities of the partners are off the business debts. Therefore, each partner is deemed
limited and controlled by the partnership agreement. Pro- the agent of the partnership and is held liable for a part-
visions are provided by the UPA, which governs the rela- ner’s debts.
tionship of the partners to each other. These provisions
can be in writing or inferred from a course of dealings. It DUTIES AND LIABILITY OF
is strongly recommended that the partners have a partner- PARTNERS
ship agreement outlining the duties and responsibilities
Each partner has an equal right to participate in the man-
for each of the partners, how decisions will be made, and
agement of the partnership and control of the business.
the dissolution of the partnership. For example, two indi-
Partners transact with one another and are not considered
viduals may enter a partnership by beginning to make
to be individuals but to be fiduciaries of one another. Any
dolls in their basement, selling the dolls to others, and decisions and actions made should be agreed to by all
splitting the profits and expenses. They have formed a partners. Each partner owes the other partners the obliga-
partnership, even if neither of them has ever uttered the tion to act in good faith and loyalty. Every partner is an
word partnership. The partnership agreement outlines the agent of the partnership; therefore, the acts and words of
responsibilities and rights of the individual partners and is a partner may be imputed to the partnership.
therefore considered a contract.
Unlike the other for-profit entities, no organizational
DISSOLUTION OF THE
documents must be filed with a public office, and the
PARTNERSHIP
partnership agreement is not a public document. The only Unless there is a partnership agreement outlining the cir-
public documents that need to be filed by the partners are cumstances on how the partnership comes to an end, a
the registration of the business name. This requirement partnership will automatically terminate under the follow-
applies only if a name is used other than the real names of ing conditions:
the partners.
• the term fixed for existence expires
PARTNERSHIPS AS A DISTINCT • a partner gives notice of his/her intention to dissolve
ENTITY the partnership
In most states, a partnership is a distinct entity. A partner- • a partner becomes insolvent or dies
ship may sue, may be sued, and may own, hold, and/or
• the court orders it to do so under certain circum-
convey real or personal property. The U.S. Bankruptcy stances of the UPA
Code treats partnerships as distinct entities. All forms of
partnerships share some tax advantages as in many cases Generally speaking, when any of the individuals of the
profits and losses can be passed directly to the partners partnership ceases to be associated with the partnership,
without being taxed at the partnership level. For purposes the partnership is dissolved. This can be triggered by with-
of federal income tax, the partnership is not a distinct drawal, retirement, death, disability, or bankruptcy of a
entity. Even though the partnership is required to file a general partner. If there is a partnership agreement, the

580 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION