Partnership Lawyer in San Diego
San Diego Partnership Attorney providing information about general partnerships and limited partnerships.
Common Law Partnership
At common law a partnership was defined as an association of two or more persons who carry on a business for profit. Although there are many different types of partnership agreements the two most basic partnerships are the general partnerships and what’s known as a limited partnership. A general partnerships is what the state of California defines the default to persons carrying on a business for profit, it can be created by oral agreement or written agreement. A limited partnership has to separate classes of partners who are treated differently in the partnership agreement with different management responsibilities and liability.
Feel free to call 619-800-0676 or e-mail attorney to schedule an initial consultation with a business lawyer to discuss your interest in drafting a general or limited partnership agreement.
Long ago when two or more persons engaged in profit sharing, it was considered a partnership by default. Each was referred to as a general partner and both were expected to partake equally in the business. This was common law and it carries on today because forming a general partnership never requires any special annual formalities, like corporations.
Rather forming a general partnership only requires a simple agreement of the parties, which can even be inferred from their business activities and conduct.
The resulting default contract can be oral without issue. Of course written contracts are better but this means that there need not be any annual minutes, election of shareholders, election of officers, or anything like limited liability companies or corporations. However, similar to sole proprietorships, general partnerships are at a big disadvantage to corporate forms in that the business owners are subject to significant personal liability for both the contractual obligations of the business and any resulting personal injuries or other liabilities against the business itself.
California Partnership Law
In California and limited partnership is a legal fiction in that the legislature long ago created a statute which recognized the existence of a new corporate form known as the limited partnership. The limited partnership is much more formal than the general partnerships. In most states limited partnerships are required to file a certificate of limited partnership with the secretary of state.
In a general partnerships each partner is equally responsible for the management of the company unless those responsibilities are limited by the partnership agreement. This means that each general partner is both required to and entitled to participate in all management matters of the partnership. General partners are fiduciaries to one another. The addition of a new partner is a question that must require unanimous consent, unless the agreement says otherwise. If one partner dies or another partner decides to retire or sell his interest this will technically cause dissolution of the partnership. The partnership may dissolve upon the occurrence of any other event as well, so long as it is stated in the agreement.
Limited partnerships, like general partnerships, consists of general partners who carry on the business profit but they also include other limited partners who may have other contributions yet may not have any management participation.
Limited partners are usually passive investors who invest or provide access for company use. While the general partners have all the rights to exercise all degrees of control the partnership, limited partners have few of these rights. Limited partners enjoy their restricted participation because they are simply investors and their interests are freely transferable and their death, retirement, or selling of their interests has no effect on the operation or existence of the company itself.
Advantages of Partnerships
There are major advantages to operating a business is the partnership. The moment the partnership is formed, a big advantage is that there is no immediate recognition of taxable gain. Also, after you sell your partnership you only recognize gain if the amount that you receive exceeds your basis in the partnership. When property is distributed at liquidation it does not result in taxation. You must understand how this differs from corporations. Corporate forms, by contrast, are taxed at all stages of distributions including property distributions to the extent that exceeds the shareholders basis in shares of stock. When a corporation is sold there is to levels of taxation once at the corporate level and then again at the distribution level to the shareholders.
Another great advantage to operating as a partnership is that the can agree to whatever arrangement and form whatever type of agreement they wish. Partnerships are in some ways without limitations. Even if there are losses and unequal profits each partner, that may be the agreement that must be adhered to. Sometimes one partner takes on the entire tax burden, and this is perfectly within the confines of their partnership agreement. This cannot happen in a corporation because those relationships are defined by the classes of stock which had been issued. Similarly, in an S-Corporation, there is only one class of stock permitted, and thus allocations must be strictly in accordance with the percentage ownership of the company. In a partnership are free to develop their own style for the management and their own structure for decision-making, and our free to do a lot more liberally.
Another advantage of operating a partnership is that it is a flow-through entity. For tax purposes this means that the business profits income and losses flow directly to the partners. The above reference double taxation problem is completely avoided with partnerships. Also all sorts of deductions are maintained in partnerships for the benefit of the partners. This means that if a partner takes a loss on and accept or some deduction from the partnership company itself then it may be deducted directly by all the partners.
Disadvantages to Partnerships
The biggest disadvantage to operating as a partnership is that the general partners are all liable for the company activities, including debts. This significant liability extends not only to the partner’s interest in the company, but to the partners personal assets. This means the partners home, boat, car, or other personal assets. Some insurance policies cover catastrophic events, but the risks of operating a partnership are always very significant. The operation of the limited partnership aspect affords some flexibility to circumvent this disadvantage.
Many disadvantages to operating as a partnership exists in the form of taxes. Partners will be taxed on their share of income even if the partnership does not even distribute any funds. This may seem weird, but what happens is that taxes are paid by the partners themselves, or the company is forced to liquidate assets. Although there are alternatives, certain health, plans life insurance plans, employee benefit plans, and other deferred compensation plans are not available to partnerships.
When there are large number of investors in the company to the partnership form is not very attractive for a number of persons. The first is transferability. Investors don’t like partnerships because transferring interests can be difficult they much prefer corporations and limited liability companies. In addition limited liability interests are considered securities and must be reported as such.
Breach of Partnership Agreement
Sometimes a general partner acts in violation of a partnership agreement. This leads to a cause of action for breach of contract. Partners have made certain agreements with each other and when a disagreement exists, the resolution boils down to what the contract stated or what the oral agreement was.
Who May Bind the Partners?
Partnership laws usually allow all the general partners to enter into agreements on behalf of the company. This means they are mutual agents of each other and of the partnership and therefore variable to bind the partnership as a company in contracts with third parties. Each partner is entitled to exercise managerial control over the business, however in order for the other persons in the company could be liable the acts attributable to the company by the partner must be acts made within the scope of the partners authority.
Partnerships and Taxes
The beauty of a partnership is that taxes are passed through to the partners. However it is well known that if a distribution lacks substantial economic effect, the IRS has the power to reallocate partnership assets and distributions in accordance with the partners deemed economic interest in the partnership. In the end a partnership is not an actual taxable entity and does not incur direct tax liability. The computation of income, gains, deductions, credits, and losses are filed on behalf of the partnership but each partner must calculate their distributive share with respect to each individual tax item. Each individual partner reports on their individual tax would turn whether they receive any income from the partnership.
Article and Video By Attorney Christopher Canton Email: firstname.lastname@example.org