This will be the first post in a series regarding partnerships. First, I will begin with an overview of what a partnership is and how it is formed. The next post in the series will address partnership agreements. Stay tuned!
1. What is a partnership?
A partnership is when two or more persons enter into business together to make a profit. (California Corporations Code Section 16101(9).)
An oversimplified example: If you and your sister decide to open a clothing store together, you would be operating as a partnership.
2. Are there different types of partnerships?
There are two types of partnerships, General Partnerships and Limited Partnerships.
In a general partnership all partners are personally liable for the debts and liabilities of the partnership. In a limited partnership, the limited partners have limited liability and in exchange do not participate in the day-to-day management of the partnership.
3. How do you form a partnership?
General partnerships do not have any formal filing requirements with the Secretary of State. Limited partnerships do have formal filing requirements with the California Secretary of State. The forms can be found here.
4. Benefits of forming a Partnership
–Minimal formalities for formation.
-Profits are not double taxed like in a corporate setting.
-Minimal reporting requirements to government agencies.
-Losses can be reported on individual income tax returns.
-No limits on the number of partners.
-Limited partners can enjoy limited liability and make equity investments. The general partners get the advantage of the additional capital without giving up managerial control.
5. Disadvantages of forming a Partnership
-If one partner dies, the partnership may terminate.
-Potential deadlock in 50/50 decision-making situations.
-Personal liability for partnership’s debts and obligations, unless you are a limited partner.
-Limited partners give up management and control for the limited liability, which means they have may have no say in the possible mismanagement of their investment in the partnership.
-Limited partnerships do have formal requirements for formation.
-The pass-through taxation may be subject to self-employment taxes and may increase tax liability at the end of the year.
by Attorney Judith Elaine Hoover on 08/08/12
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