In 1977 Wyoming became the first state to pass legislation permitting Limited Liability Companies (LLCs). Since then, an additional 24 states have passed similar legislation. LLCs have often been compared to regular partnerships. It now seems appropriate to review the rules about partnerships.
A partnership is defined as an association of individuals who agree to carry on as co-owners of a business for profit. Merely owning property together doesn't constitute a partnership. The owners must provide a service or otherwise function as a business. While oral or "handshake agreements" are sufficient to bind partners together, a written agreement should be drawn between the partners. This contract should spell out what the firm will do and who the partners are, what each partner contributes, how profits and losses will be distributed and what to do when the partnership changes.
Partnerships are relatively easy to form and to run and allow individuals to amass greater amounts of talent and capital than an individual could alone. Its primary value is that the firm itself is not taxed. All income is passed through to the partners on the business return.
Characteristics of Partnerships
There are four primary characteristics of a partnership, three of which are considered disadvantages of this business form! A partnership is a separate economic entity and as such its assets, liabilities and transactions are kept distinct from those of the owners. Once assets are transferred from the owners to the partnership the assets are co-owned by all the partners. While each partner has a claim against assets of the firm equal to the balance in his/her capital account, that claim is not related to a specific asset.
Mutual agency allows any partner to bind the partnership to a contract as long as the act is within the scope of the partnership's field of business. Thus, a partnership whose business it is to build boats would be obligated to honor a contract to build a sailboat entered into by one of the partners (even if that action exceeded the authority of that partner) while a partnership of veterinarians would not be bound to the same contract.
The lifetime of a partnership is limited by the lifetime of each of the partners. So long as the original partners continue to be bound by the partnership agreement, the partnership lives. However, once a new partner is accepted or a partner withdraws or dies, the partnership is dissolved.
Another characteristic of...