PARTNERSHIPS

Definition of "Partnership":

• An association of two or more people to engage in a business venture for profit.


• There are two kinds: General Partnerships and Limited Partnerships

Characteristics of General Partnership

• Equal Sharing of Profits (unless the partnership agreement provides otherwise)


• Associational: partners have a reciprocal consent relationship. You can not become or remain a partner unless all of the other partners agree.


• Co-ownership of Partnership Property and Business: each partner has an equal right to vote in management and control.


• Potential unlimited personal liability:


• Each partner can be held personally liable for the entire partnership debt. Any and all partners can be sued for partnership debts. The creditor can choose to sue only one partner and the court can award a judgment for the entire partnership debt (not just that particular partner's share of the debt).


• Agency Power of Each Partner to Bind Partnership.


• Fiduciary Duty: A legal duty of care and fair dealing owed by each member of the partnership to the other members.

Enforcement of Partnership Obligations

• Generally: Law suits by or against partnership must name all partners individually.


• Procedurally: the partners named in the lawsuit can have the courts bring in the unnamed partners as "necessary party defendants"


• Satisfaction of Judgments Against Partners Named in Law Suit: Partnership creditors may satisfy their judgments from the following sources:


• First, by property belonging to the partnership entity


• then, by the individual assets of the partners named in the lawsuit (e.g. car, boat, vacation home, etc.)


• Priority Between Creditors:


• Partnership creditors must first go after partnership property. After this is exhausted, they may then go after the personal assets of the partners.


• Creditors of individual partners must first go after and exhaust individual assets before they would be allowed to go after assets belonging to the partnership.

Rights, Duties, and Privileges of Partners (among themselves)

• Equal Voice in Mgm't and Control


• No partner can be excluded from participation in partnership management.


• Partners have no right to receive compensation. The partnership agreement must specifically provide for salaries. A share of the profits is normally the only compensation.


• Absolute Inspection Rights of all partnership books and records


• Duty of Full and Complete Disclosure of Information to any partner.


• Among themselves, Partners are Accountable as a "Fiduciary"


• Each partner owes a duty of utmost good faith, fairness, loyalty, and full disclosure.


• The only legal remedy of a one partner against the others is a lawsuit in equity for an "accounting" (with or without dissolving the partnership).


• Equal sharing of profits: Unless the partnership agreement provides otherwise, profits and losses are shared equally, even if partners contributed unequal amounts of capital.

Dissolution, Winding Up, and Termination

• Key Terms


• "Dissolution": The triggering event


• "Winding Up": The actual process of liquidating the partnership and paying off the creditors and distributing the net proceeds to the p'tners.


• "Termination": The point in time that the winding up is complete.


• Five Kinds of Triggering Events


• Normal Dissolution: in conformity with partnership agreement (or, if no agreement, when one partner desires to terminate).


• Wrongful Dissolution: a dissolution in contravention of the partnership agreement. A court can award damages against the guilty partner(s).


• Dissolution because of the death of a partner (where partnership agreement has no continuity provision). There must be an accounting within a reasonable time of the death.


• Dissolution by bankruptcy: If any of the partners declare bankruptcy the partnership automatically dissolves.


• Dissolution by court decree

Limited partnerships

• A limited partnership is a type of partnership wherein qualified silent partners are allowed to enjoy limited liability similar to shareholders of a corporation while at the same time enjoying the partnership treatment by the IRS (that is, the partnership itself is not taxed and all tax gains and losses are reported on the individual tax returns of the individual partners).


• Limited Partnerships are typically used as a vehicle to attract investors to their multi-family projects that qualify for the Low Income Housing Tax Credit. Limited partnerships allow the tax "goodies" to pass through to the investors.


• The Partners: Every limited partnership must have one or more general partners and one or more "limited partners"


• General Partner: As all of the attributes of a normal general partner, including unlimited liability.


• Limited Partner: A so called silent partner who invests capital only, and does not render services. There is no joint and several liable for partnership debts if the partnership has filed a certificate with the state to become a "limited partnership".

Tax Consideration:

Corporations are a taxable entity. Tax credits and deductions belonging to the corporation do not pass through to the shareholders (except in Sub Chapter S corporations).  Shareholders, however, enjoy limited liability (they only stand to lose the amount of their investment if things go bad)..

All tax "goodies" (and "badies") pass through to the partners in a general partnership (and they have unlimited personal liability for partnership debts)

What Every Investor Wants:  Every investor wants to have the limited liability of a corporation but to be taxed like a partnership.

Corporate attributes:  The IRS will treat the entity as a corporation rather than a partnership (and all tax "goodies" will be lost) if it has three of the four corporate characteristics listed below.

• limited liability
• continuity of existence
• centralized management
• free transferability of ownership

If three of these corporate attributes exist, IRS will hold it to be a corporation. If two or less, it will be treated as if it were a partnership.  Usually limited partnerships try to qualify by not having "continuity of existence" (i.e. by having a set date for dissolution) and by not having "limited liability" (by having a general partner who has unlimited liability).

Publicly traded limited partnerships are taxed as corporations even if the meet all of the other attributes of "partnerships"

Net Worth Requirement for General Partner:

• In order to avoid being taxed like a corporation, most limited partnerships must have at least one "general partner" who has unlimited liability.


• If the general partner(s) has a low net worth, the IRS may hold that the general partner really has limited liability.


• IRS Rev. Ruling 72-13 provides guidelines as to net worth of general partner. The net worth (which can not include general partner's partnership contribution) is figured as a percentage of the general partner's partnership contributions.


• The partnership agreement should specify that any corporate general partners must maintain a certain net worth.

Number of Investors:

• There should be a limited number of investors in order to avoid securities problems down the road.

Participation in Management:

Under the Uniform Limited Partnership Act, limited partners can now participate in management but the can't tell others or hold themselves out to third parties that he is a general partner