A partnership is a form of business where two or more parties join together for a business purpose. Partners can be individuals, corporations, trusts, limited liability corporations, and other types of organizations.
Partnerships are governed by the Massachusetts Uniform Partnership Act or for limited partnerships by the Massachusetts Limited Partnership Act. Partnerships can be formed by explicit or implied agreements as determined by the conduct of the partners, the sharing of profits and losses, common ownership of property, investment in the business, and control of the business operations.
Each of the partners shares in the operation and administration of the business and are responsible for its liabilities. If any one partner is sued, all partners are liable. These types of partnerships are usually not favored.
Formation documents for limited partnerships do need to be filed with the Secretary of State. In this type of partnership, there are general and limited partners, with limited partners as investors who do not participate in the daily operations or administration and only share in the profits. This limits their liability.
Limited Liability Partnerships (LLP)
These entities are more akin to limited liability corporations (LLC). All partners have limited liability and are immune from the tortious, negligent, or wrongful acts of other partners. These types of partnerships are the most common and favored.
Partnerships are not taxed separately although it does have to file a Form 1065 to show income, expenses and deductions. Also, the partnership files a Schedule K-1 that discloses the income for each partner who is taxed on his, her or its share of the income or loss. The income taxed is that of the distributable income, meaning that it need not have been distributed to any partner to be taxed.
Also, each partner is considered to be self-employed and pays self-employment taxes that is included on each partner’s 1040 form. Of course, the partnership can have employees for whom it must pay withholding and reporting of various taxes such as FICA, workers’ compensation, Social Security, and Medicare.
The Partnership Agreement
Snook Law will help draft a partnership agreement for you. You will want typical terms and conditions and other provisions that are tailored to your particular business or enterprise that often include:
Organization—name, date of formation, statute or laws under which it was formed, and if it is to conduct business under other names
Term of the partnership—if it is to be terminated upon completion of the project or enterprise
Purpose—state its specific purpose and a general one, such as to carry on any other business activity that a limited partnership may be authorized to perform under state law
Partner contributions—the manner of contribution from each partner such as cash, property or services; will there be a deferred contribution and in what amount; the commitments each partner will make; and what happens if a partner fails to abide by the stated commitment
Capital accounts, distributions, profits and losses—separate capital accounts are set up for each partner; state how profits and losses are allocated, and the distribution of income
Salaries—how are they determined for partners and non-partners
Management—do you vest management responsibilities in one partner or in a management group; who is the authorized signatory that commits the partnership to contractual obligations?
Work or pay inequality
Failure of fiduciary duties
Ruining company goodwill
These are a few of the numerous issues found in any partnership arrangement, including internal disputes, that Snook Law has successfully handled with our partnership clients, and which we can address in your particular business. Call Snook Law if you are considering a partnership or need knowledgeable and experienced legal counsel for any of your partnership matters.