Chapter 11 Business Organizations November 10th 2014 11 2 Partnership Learning Objectives Learn about how general and limited partnerships are formed Explore the major differences between general and limited partnerships Understand major advantages and disadvantages to doing business as general or limited partnerships Partnerships Allow multiple individuals to conduct business together General Partnership Association of two or more persons in an unincorporated entity to do business and share profits and losses o Articles of partnership Voluntary contract typically written in which two or more persons decide to conduct business together and share profits and losses Known as partnership agreement General Partnerships Do not involve the state as there is no separation from the business and the partners End of termination of agreement to share profit and losses Those with more than two persons the remaining partners can reconstitute partnership without the old partner o Buy Sell Agreement Agreement between partners to value and sell a partner s portion of the business in the event the partner withdraws or dies Consider as a disregarded entity for tax purposes o Disregarded Entity For tax purposes an entity that does not need to file its own tax return or pay taxes partners must file Schedule K on their personal tax returns File information return the taxing authority o Information Return Tax return that provides information only to Every partner is jointly and severally liable for the partnership s debts and obligations o Join and Several Liability Creditors or other claimants can pursue their entire against one several or all possible defendants leaving defendants to sort out their respective proportions of liability and payment Summary of a General Partnership A partnership is a for profit business established and run by two or more individuals The individuals are known as partners and serve as co owners of the business Each partner is responsible for the business Each partner shares the business profits liabilities and losses Partnerships are a popular form of business They are one of the oldest types of business and are typically easy and inexpensive to form There are no formal or legal requirements necessary when forming a partnership However it s advisable for partners to execute a partnership agreement This is a written agreement stating the terms of operation for the partnership A partnership agreement serves to protect the interests of each partner as well as the business It must be in writing and signed by all partners in order to be enforceable A partnership agreement should include How business decisions will be made How the partners will resolve disputes How the partners will divide profits How the partners will cover losses Who can legally bind the business through contracts How ownership changes will be handled How to dissolve the partnership Limited Partnerships Formed in compliance with state law that provides limited liability to certain limited partners who agree to refrain from management of the businesses Limited partners are prohibited from participating in day to day management of the business o They are meant and intended to be passive investors only o Involvement in management decisions will void their limited liability Summary of Limited Partnership While the most common type of business partnership is a general partnership there are other types of partnership that limit a partner s personal liability One of these is called limited partnership It s a business partnership where at least one owner is a general partner and at least one owner is a limited partner The general partners make everyday business decisions and are personally liable for business debts However the limited partners simply invest in the business and have little control over business operations
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