Partnerships are the oldest legal form of business. In modern business, the traditional partnership is fraught with legal risk. Learn how to organize and manage partnerships.
Partnerships provide pass-through tax status for the partners. There is no double taxation of partnership profits. Pass-through tax status is the hallmark of partnerships, limited liability companies, and S corporations.
The challenge for the traditional partnership, unmodified by agreement or statute, is joint and several liability4 Most types of partnership are designed to address this issue with partnerships.
Partnerships as group have grown in popularity as part of the class of pass-through entities.5.
There are four types of partnership:
Each type of partnership has its own requirements and tradeoffs, which are discussed in those articles.
After you form a partnership, you must maintain it to keep it in compliance. Track the following information for a partnership:
This table summarizes the types of partnership documents and filings:
|Organizational filings||at formation||No|
|Partnership agreement||at formation||No|
|Partnership tax returns||ongoing||No|
|Capital account||at formation||No|
Management and ownership structures depend on the partnership agreement, types of partnership, and state law.
General partnerships, for example, separate ownership from management with a class of limited partners who do not manage the business. The general partners manages the business.
People often serve more than one role so it is important to list roles and who serves those roles. In the long run, it is also helpful to track terms of service for each role and person.
Here is the information to track for officers and directors:
Please note that a person can have two different roles with very different terms of service.
Partnership owners are called "Partners" or "General Partners". Ownership interests are called "partnership interests".
You should capture the name of the owner and the percentage of ownership at a minimum.
To preserve the benefits of your legal entity, effective ongoing maintenance is critical.