A partnership is an association of two or more persons to carry on as co-owners of a business for profit. This means that a partnership can often arise automatically when you and one or more co-venturers start conducting business together. In most cases, you will want to spell out the rights and obligations between you and your partners in a legal document known as a partnership agreement. For example, the partnership agreement will provide that each partner is entitled to a certain percentage of the profits and/or losses from the business.
In general, as a partner, you can sell or assign your interest in the partnership, and that transfer does not cause the partnership to dissolve. However, the transferee of your interest does not automatically become a partner. Rather, the transferee is merely entitled to a share of the profits and certain rights upon liquidation. To replace you in the partnership, that transferee must be admitted as a partner, usually by vote of the remaining partners. Interesting partnership issues can arise in the context of intellectual property protection. For example, where one partner invents certain patentable technology, absent an agreement to the contrary, it is not entirely clear whether the partnership itself is entitled to use the technology. This could potentially result in one partner having unforeseen leverage over his co-owner(s).
Nearly all partnerships are non-taxable entities; that is, while the partnership files certain tax returns, the partnership itself does not pay any federal, Indiana, or local taxes. What is more, you can typically make contributions to and take distributions from the partnership in a tax-free manner. For this reason, many business owners will choose the simplicity of the partnership form over a corporation.
A general partnership will not provide you or your partners with liability protection. Creditors can and often do look to the assets you own individually to satisfy liabilities. However, there is a special type of partnership known as a limited partnership. In this type of partnership, there are two types of partners; the general partners, who manage the affairs of the partnership, and the limited partners, who do not participate in the management. In a limited partnership, the general partners’ individual assets are subject to creditor claims, but the limited partners enjoy liability protection. Absent unusual circumstances, the most a limited partner stands to lose in the business enterprise is the partner’s capital investment.
A limited partnership is subject to a slightly higher degree of formality in that it must file a certificate of limited partnership with the Indiana Secretary of State before it can be formed.
My entrepreneurial law / start-up law practice helps clients choose the appropriate type of partnership, form partnerships, and draft partnership agreements. Contact Indianapolis business attorney Brian Powers for help with your partnership.