BEFORE You Partner Up: Legal Basics You Need-to-Know Before Agreeing To A Business Partnership
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Types of Partnerships
General Partnership
General Partnerships are governed by The Uniform Partnership Act of 1994 (RUPA).?Under RUPA, a partnership is defined as an association of two or more people (or entities) to carry on as co-owners of a business for profit. The partnership itself is considered to be a business entity separate from the partners. Therefore, all partnership property is owned by the partnership, not the partners. Additionally, the partnership itself is not subject to income taxation; similar to the S-corporation, the partnership's income and losses flow through to the partners, who will individually pay taxes on their share of profits.
Partnerships generally do not require the formalities that are required for corporations.?Each partner is considered an agent of the partnership and can conduct business on behalf of the partnership. When it comes to liability, each partner is held personally liable for the obligations of the partnership. Forming a partnership is advantageous if you want a less formal entity, have a type of business that does not raise concern for the potential risk of personal liability, or if you can easily obtain related liability insurance.
No written agreement is required to form a partnership. However, a written agreement for any business relationship is always a good idea because it provides both a clear understanding of what is expected and protection for the parties involved.
If you decide to work with someone on a temporary project, forming a partnership may not be necessary. A more convenient option may be a joint venture. A joint venture is almost identical to a general partnership. However, the joint venture is formed only for a temporary or limited business purpose and has an “end date.”
Limited Partnership
A limited partnership is different from a general partnership. A general partnership’s structure is proportional for each partner in regard to personal liability, control of the partnership, and the right to conduct business on behalf of the partnership. In contrast, the structure of a limited partnership is based on the classification of the partner. For instance, a general partner may be responsible for conducting all business on behalf of the partnership and is held personally liable for business obligations, while a limited partner may only be responsible for contributing to the business financially, does not participate in the control of the business, is not held personally liable for business obligations or his/her liability may be limited to contribution and distributions received by the limited partner from the partnership.
Limited Liability Partnership
A Limited Liability Partnership (LLP) is a type of general partnership that, at a minimum, must be registered with the California Secretary of State. Depending on the type of business, additional steps may also be required to properly form an LLP.?An LLP is an entity essentially designed for certain professionals such as accountants, engineers, architects, land surveyors, lawyers, etc.?The most attractive characteristic of an LLP to business owners is its elimination or minimization of the personal liability of partners for the obligations of the partnership. However, it’s important to understand that although under this entity, a partner will not be held liable for the negligence or wrongful acts of other partners, employees, or agents of the LLP, each partner is liable for any damages that result from their own negligence or wrongful, or those acting under their direct supervision.