General Partnership Law
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A general partnership is a statutory entity generally defined as an association of two or more persons to carry on as co-owners of a business for profit. No filings with the Secretary of State are required. Typically, each partner of a general partnership contributes money, property, or labor to the partnership and in turn expects to share in the partnership’s profits or losses. A general partnership may exist perpetually, for a fixed term, or for the duration of a particular undertaking. It may be based on a verbal or written agreement. Written partnership agreements, of course, are much more likely to help the partners avoid disagreements over the actual nature of their relationship, particularly when structured with the help of a competent business attorney. However, even the best-written partnership agreement may not be enough to save a general partnership in the event that the partners’ disagreements become personal.
The principle advantage of a general partnership is its ease in forming and it flexibility. To form a partnership, no special forms are required to be filed with the Secretary of State’s office and partners may structure their relationship to each other (including their relative management duties and their relative profit or loss sharing) in almost anyway they wish. In some instances a partnership is treated as an entity separate from the partners, such as in its right to hold property, enter into contracts, sue or be sued, or make or take out loans in the partnership name. For liability and tax purposes, however, a partnership is generally not perceived as existing separately from the partners.
As with all business forms, partners in a partnership are always personally liable to third parties for their own acts of negligence and omissions (acts of negligence and omissions are commonly referred to as “torts”). This personal liability for one’s own acts of negligence or omissions holds true for every business owner in any business entity who provides personal services to his or her business. However, unlike with a corporation or limited liability company, every partner in a partnership also has unlimited “joint and several” liability to third parties for the: (1) torts committed by the partnership’s employees and agents in carrying out the partnership’s activities; (2) torts committed by the other partners in carrying out the partnership’s activities, and (3) the contractual obligations and debts of the business. In other words, each and every partner is fully liable for 100% of the debt of the partnership, even if resulting from actions taken by another partner or partners.
Moreover, partners have rights and duties in relation to each other which cannot be eliminated or modified by agreement. For example, every partner must account to the partnership for any benefit derived by the partner for any transaction connected with the activities and purposes of the partnership.
Partnership interests may be transferred to third parties, usually upon the approval of the other partners. However, the transfer of 50% or more of any partnership interest within a 12 month period results in a deemed dissolution of the partnership for federal tax purposes. Similarly, when any general partner withdraws from a general partnership, the partnership is “dissolved” by statute. Upon dissolution, the partnership is not immediately terminated, but continues until the then present business affairs have been completed.
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