What is a Partnership?

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Updated for 2012

What Is a Partnership?

Section 6 of the Uniform Partnership Act defines a partnership as an association of two or more persons to carry on as co-owners a business for profit.

Forming a Partnership:

Forming a partnership is a voluntary act not one imposed by law.

A partnership is easy to form. As long as two or more people agree to operate a business for profit, a partnership exists.

As a general rule, a partnership agreement doesn't have to be in writing, however, a written agreement is highly recommended.

Having to rely on, "I thought we agreed..." when a problem arises is just not very wise.

Having a written document to refer to for resolving future situations that could have been anticipated makes sense.

For example, what if a partner dies or wants to sell his/her interest? How will these situations be handled? Get it in writing!

Types of Partnerships:

General Partnership:
- A general partnership is created for the general conduct of a particular kind of business.
- It is governed by the Uniform Partnership Act.
- Each partner is personally liable for partnership debts.
- Each partner is jointly and severally (separately) liable for all torts committed by employees or any partner in the scope of partnership business.

Tort: A private or civil wrong resulting from the breach of a legal duty owed to someone.

Limited Partnership:
- A limited partnership is created by statute (the Uniform Limited Partnership Act).
- Limited partners only invest capital in the partnership and expect a return on their investment.
- A limited partner's liability for partnership debts is limited to his/her investment.
- Limited partners are not allowed to actively participate in the management of the partnership.
  - If they do, they risk losing their limited liability protection.

All states have adopted the Uniform Partnership Act and Uniform Limited Partnership Act. As a result, state laws governing partnerships are similar.

There is no federal partnership law.

Partnership Interest:

Each partner owns a fractional interest in the partnership.

Partners will generally agree on the percentage of their individual interest based on the amount of capital they contribute and/or the level of expertise provided to the business.

Charging order:

If a partner is sued, a plaintiff cannot proceed against any specific items of partnership property.

The plaintiff can only proceed against the partner's interest in the partnership. This is done by applying to a court for a charging order.

This procedure allows:

Payment of the debtor-partner's share of any profits to be paid to a receiver on behalf of the creditor, or
The court may direct the sale of the debtor-partner's interest in the partnership.

Articles of Partnership:

Articles of Partnership (also called, partnership agreement) set forth each partners rights and obligations to the partnership. It is highly desirable to have a written agreement.

A written document, with agreed upon procedures for handling anticipated points of dispute, will come in handy for resolving them, should any arise, and provide for a more harmonious working relationship among the partners.

Workers' Compensation Insurance:

State law requires all businesses with employees to carry workers' compensation insurance.

However, since partners are not employees of the business, they are not covered under workers' compensation insurance.

workers' compensation insurance covers employees injured on the job, even if the employee caused the injury.

Insurance premiums vary, depending on the level of risk for injury associated with the employee's job.

Partnerships: How Partners Are Taxed; Licensing Requirements; Tax Identification Number for a Partnership; Reporting Income and Losses of a Partnership

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