§9.1 - Introduction

• Jurisdiction: Washington

§9.1 INTRODUCTION

General partnerships, as a form of business organization, historically precede corporations, limited partnerships, limited liability companies, business trusts, and virtually every other form of business structure except for the sole proprietorship. The earliest form of partnership recognized under English law was that of joint merchants. Francis M. Burdick, The Law of Partnership (2d ed. 1906). Such relationships existed for the sole purpose of pecuniary gain and not that of a charitable, benevolent, or moral reform institution. Id.

General partnerships differ from other business relationships or organizations in a number of significant ways. For example, a general partnership is more aptly described as a business relationship, because it is not reflective of an actual entity formed under state law as is a corporation or limited liability company. It may or may not be the same as a joint venture. See §9.4. Moreover, absent an agreement to the contrary, each general partner has equal rights in the management and conduct of the partnership's activities. And finally, each general partner is jointly and severally liable with all other general partners for all obligations of the partnership, unless agreed to by the claimant or otherwise provided by law.

Although general partnerships have somewhat lost their appeal in favor of the more comprehensive liability protection and flexibility of limited liability companies, they still play a significant role in overall business planning and choice-of-entity evaluations. For example, certain types of partnerships have been used as an investment vehicle whereby the federal income tax consequences of a business enterprise are passed through to the underlying partners via a more informal business relationship than a corporation or limited liability company. Moreover, the fact that a general partnership may be created without the legal formality of a registration or filing with a governmental agency makes such informality attractive to those seeking such a business structure.

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(1) Aggregate versus entity theories

As more fully discussed below, a partnership in its simplest form will exist whenever two persons or parties cooperate in a joint commercial project with an objective to profit from such endeavor. This definition, however, fails to address all aspects (legal or tax) of such a business relationship. The question then becomes whether the partnership is a legal entity analogous to a corporation or merely a group or aggregate of individuals. Jeremy E. Goldstein and John Goode, Entity and Aggregate Theories of Partnership: The Need for Clarification, 1 Prob. & Prop. 15 (1987). In other words, it means determining whether the "entity theory" or the "aggregate theory" applies with respect to the partnership for purposes of general legal issues or tax law.

Under the aggregate theory, a partnership is not considered a party separate from the partners themselves, and each partner is treated as the owner of a direct and undivided interest in partnership assets, liabilities, and operations. Int. Rev. Serv., Partnerships, Audit Technique Guide (ATG) 3 (2002). Under the entity theory, a...