Partnerships

There are alternative forms of business organizations that are generally available that can suit your business needs. A popular form of organization is the corporation. But what about partnerships? There are two forms of partnerships. One can form a general partnership or a limited partnership.

A general partnership is an unincorporated legal entity of two or more persons created to carry on as co-owners a business for profit. No written document is required, however I strongly advise one if this form of entity is chosen since it is desirable to define clearly the rights and duties of the partners. No formal filing is required, except for fictitious names.

Each partner is fully responsible for all liabilities. Each partner is an agent of the partnership for the purpose of its business. Each partner has the right to manage, and is usually controlled by an agreement among partners. This being the case, it may be wise to put in the partnership agreement what the partners will do if and when disputes arise.

A general partnership terminates on a date set forth in any written partnership agreement or upon the occurrence of a specific event as provided by the laws of Massachusetts, specifically M.G.L. c. 108A. Interest is assignable by the terms of any written partnership agreement and the provisions chapter 108A, however without the agreement of the other partners, the assignment does not entitle the assignee to participate in the management of the partnership. The partnership is easily relocated, as long as the general partners are willing to relocate.

When a partner ceases to be a member of the general partnership, the partnership automatically dissolves, although it is customary to provide in the partnership agreement that the remaining partners will continue the business of the partnership.

Upon dissolution of a general partnership each partner remains liable for the partnership’s obligations. A general partner is also liable for the wrongful acts of his partners.

A limited partnership is also a legal entity formed by two or more persons, having as members one or more general partners and one or more limited partners. A limited partnership is formed only upon the filing of a certificate of limited partnership with the state of formation. In Massachusetts, limited partnerships are governed by M.G.L. c. 109. Only the general partners are fully liable for the acts and obligations of the partnership. The limited partners are at risk only to the extent of their investment. The general partners retain control of management of the limited partnership.

If a limited partner becomes involved in the management of the partnership that person may lose his/her limited liability status. The limited partnership terminates on the date set forth in the written limited partnership agreement or upon the occurrence of a specific event as provided by M.G.L. c. 109. The transferability of interest is governed by the terms of the written agreement. For relocation of the business, it is treated just like a general partnership. Since the management of the partnership is at the general partner’s level, any dispute at the limited partner’s level is, virtually, limited to allegations of fraud and deceit or acts by the general partners which amount to unfair trade practices. However, if the general partners themselves have a dispute, there should be some provision in the partnership agreement which will resolve the matter.

Profits and losses of a limited partnership are allocated, and cash and other assets are distributed, among the general partners and limited partners of a limited partnership in the manner provided in the partnership agreement. Except as provided in the partnership agreement, a limited partner’s economic interest in a limited partnership is transferable, but an assignee may become a substituted limited partner only if given that right by the assignor and only if all other partners agree.

In summary, in a general partnership, the personal liability of the individual partners generally is unlimited; both their business assets and their personal assets are subject to the claims of all creditors. Liability for debts incurred in the business generally is not limited to the amount of capital contributed to the business.

Provided that they do not participate in the actual control or management of the limited partnership, limited partners in a limited partnership are not liable for the debts and liabilities of the limited partnership in excess of their capital contributions to the limited partnership. General partners of a limited partnership, however, generally are subject to the same level of liability as are the partners in a general partnership.

In deciding which business entity to select, it is wise to consult the advice of an attorney and an accountant (for tax consequences).