Business Law

A partnership is a for-profit business organization comprised of two or more persons. State laws govern partnerships. Under various state laws, “persons” can include individuals, groups of individuals, companies, and corporations. As such, partnerships vary in complexity.

Each partner shares directly in the organization’s profits and shares control of the business operation. The consequence of this profit sharing is that partners are jointly and severally liable for the partnership’s debts.

There are three relatively common partnership types: general partnership (GP), limited partnership (LP) and limited liability partnership (LLP). A fourth, the limited liability limited partnership (LLLP), is not recognized in all states.

General Partnership (GP)

• Ease of creation. No state filing is required. The partnership is created when the partners begin business activities.
• Low cost of operation. Because general partnerships are not formed by means of a state filing, they are not required to pay a formation filing fee, ongoing state fees or franchise taxes. The partnership must still obtain the business licenses and permits required for operation however.
• Few ongoing requirements. Unlike corporations, general partnerships are not required to hold annual meetings of the owners, issue partnership interest, and keep personal asset separate from business assets. Having a partnership agreement that outlines how the partnership will be managed, the roles of each partner, and what events will cause the partnership to end operations is recommended.

Limited Partnership (LP)

• Unlimited liability for general partners only. In a limited partnership (LP), at least one partner has unlimited liability—the general partner(s). The other partners (limited partners) have limited liability, meaning their personal assets typically cannot be used to satisfy business debts and liabilities. The amount of their liability is limited to their investment in the LP.
• Limited partners are not involved in management. The general partners oversee the day-to-day operations of the LP. Limited partners are basically silent investors.
• Short-term projects/ventures. LPs are often the business type of choice for special situations versus true businesses. For example, films are often formalized as LPs and family estate planning often utilizes LPs.

Limited Liability Partnership (LLP)

• Professional service businesses. Limited liability partnerships (LLPs) can only be created by certain types of professional service businesses, such as accountants, attorneys, architects, dentists, doctors, and other fields treated as professionals under each state’s law.
• Personal asset protection. The personal assets of the partners in an LLP typically cannot be used to satisfy business debts and liabilities. The LLP does not shield the partners for liability for their personal acts. Put simply, the LLP cannot limit the liability of owners for their own malpractice.

There are four main types of business formations, and each one has its own advantages and disadvantages. Some are easy and inexpensive to form while others provide you limited liability protection that protects your personal assets from creditor claims and lawsuits stemming from your business operations. Some business owners start off using one type of business formation and then change to a different form as their businesses grow.

Sole Proprietorship

A sole proprietorship is the simplest and least expensive type of business to form. There are no incorporation documents to file or business notices to run in the newspaper. You may have to get a state or local business license depending on your occupation. A sole proprietorship has only one owner. You can do business under your own name or apply for a “doing-business-as” name to give your business a distinctive name, but the business and the proprietor remain one entity. You have no protection from lawsuits or creditor claims. Your personal assets can be used to satisfy a business debt or legal judgment. You report your business income and expenses to the Internal Revenue Service on Schedule C, which is filed with your individual income tax return.

Partnership

In a partnership, there are no documents to file with your state. However, partners usually have a partnership agreement drawn up between them stating how the partnership operates and how the profits and losses are shared. Most states hold that each partner has unlimited liability for business debts, the actions of the other partners and lawsuits. The business profits and losses flow through the partnership and are reported on each partner’s individual income tax return. The partnership must file a partnership information return with the IRS every year.

Limited Liability Company

If your state statues allow it, you can file articles of organization or a certificate of formation to form a limited liability company. LLCs provide their owners, who are known as members, with limited liability protection. When you open a business bank account or take on debt, the LLC is responsible for the accounts instead of the individual members. LLC profits and losses flow through the company to each member. LLC members must decide if they want to be taxed as a partnership or a corporation. LLCs taxed as partnerships file the partnership tax return and LLCs taxed as corporations must file either a C corporation or S corporation tax return.

Corporation

Corporations are the most formal and expensive of the different business formations. You form a corporation by filing the Articles of Incorporation with your state’s department of corporations. Corporations provide limited liability protection for their owners. C corporations retain their profits and losses at the corporate level but have double taxation. They are taxed on their earnings, and shareholders are taxed on their corporate dividends. With S corporations, profits and losses flow through the business to the owners. Both C and S corporations must file corporate tax returns, file annual reports with their incorporating state, conduct annual meetings and meet federal and state record-keeping obligations.

A business contract is a legally binding agreement between two or more persons or entities. They are enforceable in a civil court of law as long as they follow specific contract laws. There are several business contract types that businesses need and may use daily during normal operations.

The term “business contract” is a broad term that describes any legally binding document used to govern transactions in a business context. The contracts used will vary according to state, country, industry, and transaction type. However, some contracts are used more often than others. Types of business contracts include:

• Sale contract
• Service contract
• Employment contract
• Commercial lease
• Business partnership agreements
• Joint venture agreements

Contracts can also be verbal (spoken), or a combination of both verbal and written. Some types of contract such as those for buying or selling real estate or finance agreements must be in writing.

Written contracts may consist of a standard form agreement or a letter confirming the agreement. Verbal agreements rely on the good faith of all parties and can be difficult to prove. It is advisable (where possible) to make sure your business arrangements are in writing, to avoid problems when trying to prove a contract existed. Regardless of whether the contract is verbal or written, it must contain four essential elements to be legally binding.

Partnership disputes may involve contract disputes, fraud, management disputes, breach of fiduciary duty claims, partnership dissolution and winding up a business, removing a partner, the alleged misappropriation or misuse of funds, disputes arising from divorce or probate, and disputes related to compensation.

A partnership disputes lawyer helps partners who own a company together to find ways to come to consensus when a disagreement arises. A conflict among business partners could impact normal business operations in adverse ways and could be detrimental to the short-term and long-term success of the business. Finding ways to resolve the conflict amicably is important.