A partnership is formed between two or more professionals where the partners work together to achieve and share profits and losses.
Partnerships have certain default characteristics relating to both the relationship between the individual partners and the relationship between the partnership and the outside world. The former can generally be overridden by agreement between the partners, whereas the latter generally cannot be done. The assets of the business are owned on behalf of the other partners, and they are each personally liable, jointly and severally, for business debts, taxes or tortious liability . For example, if a partnership defaults on a payment to a creditor, the partners' personal assets are subject to attachment and liquidation to pay the creditor.
General Partnership and Unlimited Liability
As in sole proprietorships, partnerships have unlimited liability. There are different kinds of partnerships, each with its own benefits and shortcomings.
By default, profits are shared equally among the partners. However, a partnership agreement will almost invariably expressly provide for the manner in which profits and losses are to be shared. Each general partner is deemed the agent of the partnership. Therefore, if that partner is apparently carrying on partnership business, all general partners can be held liable for his dealings with third persons. By default, a partnership will terminate upon the death, disability, or even withdrawal of any one partner. However, most partnership agreements provide for these types of events, with the share of the departed partner usually being purchased by the remaining partners. By default, each general partner has an equal right to participate in the management and control of the business. Disagreements in the ordinary course of partnership business are decided by a majority of the partners, and disagreements of extraordinary matters and amendments to the partnership agreement require the consent of all partners. However, in a partnership of any size, the partnership agreement will provide for certain electees to manage the partnership along the lines of a company board. Unless otherwise provided in the partnership agreement, no one can become a member of the partnership without the consent of all partners, though a partner may assign his share of the profits and losses and right to receive distributions. A partner's judgment creditor may obtain an order charging the partner's "transferable interest" to satisfy a judgment.
Advantages of Partnerships
- Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement
- With more than one owner, the ability to raise funds may be increased
- The profits from the business flow directly through to the partners' personal tax returns
- Prospective employees may be attracted to the business if given the incentive to become a partner
- Usually the business will benefit from partners who have complementary skills