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Legal Reference
Business Types: Partnership

A Partnership is an association of two or more persons to carry on, as a co-owners, a business for profit. A partnership can be a general partnership, a limited partnership, a limited liability partnership or a limited liability limited partnership. A general partnership is one which all the partners are equally liable for all partnership debts, while a limited liability partnership is one which some of the owners of the partnership are liable for partnership debts while other owners are not. A limited partnership is one which there are general partners and limited partners. In the limited partnership the general partners are liable for the partnership's obligations, while the limited partners are not. If the general partners in a limited partnership want the partnership to be liable for its obligations, then such partners can file to become a limited liability partnership.

A general partnership can be formed simply by a handshake. This can occur because a partnership is generally not required to produce a written agreement, nor is it required to publicly file any document other than an assumed name certificate which may be required. Therefore, a partnership can be formed inadvertently when there is an association of two or more persons to operate, as co-owners, a business for profit regardless of whether they intended to form a partnership or not. This, however, does not apply if the association was formed under another statute, e.g., formed as a corporation. The general rule does not apply in the formation of a limited liability partnership, however, since such partnerships are required to file a registration statement with the Secretary of State.

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Although a written agreement is not required for a general partnership, partners generally will execute a written agreement outlining the party's duties and relationship to the general partnership. Such an agreement is useful for the following reasons: it may avoid further disagreements over what the arrangement really is; a written agreement is readily proved in court while proof of an oral agreement may involve substantial factual controversy; a written agreement may focus attention on potential trouble spots in a relationship, which may be unnoticed if the partners proceed on a "handshake" deal; the IRS treatment of partnerships permits partnerships by agreement to allocate the tax burdens among themselves within the limits, and a written agreement is clearly desirable where advantage of such provision is taken; a partner may wish to lend, rather than contribute, specific property to a partnership and written agreement identifies which property is contributed and which is loaned; where real estate is to be contributed as partnership property or the agreement includes a term of more than one year, a written agreement may be necessary to comply with the statute of frauds; and a written partnership agreement can set forth what will happen upon the death or retirement of partner.

One important issue in partnership law is how the profits and losses of the partnership are to be shared among the partners. Absent an agreement, each partner shall share equally in the profits and surplus remaining after all liabilities. Also, each partner shall contribute towards losses sustained by the partnership according to his share in the profits. These general rules, however, can be changed by a partnership through execution of an agreement between the partners.

Another important issue in partnership law is the duties and liabilities of the partners. Generally a partnership is bound by a partner's wrongful act, where by the wrongful act or omission of any partner acting within the ordinary course of business of the partnership or with the authority of his partners, loss or injury is caused to any person, the partnership is liable to the same extent as the partner committing the act. Furthermore, a partnership is bound to make good the loss where one partner acting within his scope of apparent authority misappropriates funds from a third person and where the partnership in the course of its business misappropriates funds from a third person. Therefore, all partners are liable jointly and severally for anything chargeable to the partnership as discussed above and jointly and severally liable for all other debts and obligations of the partnership, but any partner may enter into a separate obligation to perform a partnership contract.

A limited liability partnership is formed by delivering to the Secretary of State a registration statement for filing. The registration of a limited liability partnership is effective upon the effective date set forth in the filed registration statement.

The most notable difference between a general partnership and a limited liability partnership is the liability incurred by the partners. An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort or otherwise, is solely the obligation of the partnership. In other words, a partner is not personally liable for any obligations of the partnership. However, in order to take advantage of the limited liability partnership, such partnership must file the appropriate documents with the state in order to put the general public on notice that the partnership is a limited liability partnership.

A limited partnership is a partnership formed by two or more persons, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership. Two or more persons desiring to form a limited partnership shall sign and swear to a certificate having various provisions which are required by statute. Such certificate is filed with the Secretary of State and upon such filing date the limited partnership is formed unless there is a specified date of formation in the certificate not to exceed ninety days after filing.

When a limited partnership is formed, the surname of a limited partner shall not appear in the partnership name unless it is also the surname of a general partner or prior to the time when the limited partner became such, the business had been carried on under a name in which his surname appeared. If a limited partner's name, not falling under one of the exceptions, appears then such partner is liable as a general partner to partnership creditors who extend credit to the partnership without actual knowledge that he is not a general partner. Otherwise, the limited partner is not liable as a general partner unless he is also a general partner or takes part in the control of the business. If the limited partner does take part in control of the business, the limited partner is liable only to persons who transact business with the limited partnership reasonably believing, based on the limited partner's conduct, that the limited partner is a general partner at the time the liability is incurred.

The profits and losses of a limited partnership shall be allocated among the partners, and among the classes of partners, in the manner provided in writing in the partnership agreement. If the partnership agreement does not so provide in writing, profits and losses shall be allocated on the basis of the value of the contributions made by each partner. The same general rule is applied to distributions of cash or other assets of a limited partnership.

A limited partnership may become a limited liability limited partnership by delivering to the Secretary of State a registration statement for filing. The registration shall be effective upon the effective date of the registration statement. Such registration statement may be combined with or stated in the certificate of limited partnership. The registration statement shall be approved in the manner provided in the partnership agreement or, if not so provided shall be approved by all of the general partners.

When a limited partnership becomes a limited liability limited partnership the obligations incurred by the partnership after such effective date becomes the liability of the partnership and not the individual general partners. In other words, the general partners are not personally liable for any obligations which are incurred after the formation of the limited liability limited partnership since such obligations have become the liability of the partnership itself.



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