Formation of Partnership

Partnership Attorneys Helping Form Partnerships

What most business leaders fail to realize, is that if there is any agreement to do anything whatsoever between two or more people, then you have what’s called a de facto partnership. While this means it’s very easy to create a partnership, simply by agreeing to do something, what is often overlooked is that without more, you’re setting yourself up for significant problems down the road.

It’s Important to Formalize a Partnership

When conducting business with others, without formalizing your partnership into a formal entity, you run the risk of the following:

• Personal liability, should one of your partners get into trouble, do something stupid or hurt someone while performing duties on behalf of the partnership.
• Criminal liability should one of your partners commit a crime in furtherance of your business, mishandle taxes, or not comply with legal requirements of the business.
• Disputes with your partners, relating to ownership, letting in other partners, leaving the partnership, being bought out, and a million other issues unique to you, your business and your partners.

As a consequence, Business Law Southwest strongly recommends that business leaders form an entity to define, manage and conduct business. Contact us to talk about entities, formation of the entity, and appropriate partnership agreements.

Limited Liability Companies (or LLC’s)

LLC’s are easy and inexpensive to setup and operate, and therefore, preferred by most business owners. They may not be the best type of entity structure for certain types of businesses, such as business operating under certain professional licensures, or companies that wish to go public.

LLC’s are owned by “members,” and can be managed by the members or the members can elect one or more “managers” who run the day-to-day affairs of the LLC.

LLC’s can be taxed in one of four different ways: (1) Disregarded tax status is for sole-member LLC’s or LLC’s owned by only a husband and wife, and all profits and losses flow through to the owner’s Schedule C for tax purposes; (2) Partnership is passthrough for multimember LLC’s, where the LLC issues a K-1 apportioning profits and losses to the members; (3) S-Corporation is another passthrough for multimember LLC’s, again where the LLC issues K-1’s apportioning profits and losses to the members according to their respective ownership interests; and (4) C-Corporation is not a pass-through form of taxation, and instead the LLC is taxed as on its own.

Corporations

Corporations are the traditional form of business entity, and have a much more formal and ridged structure. As such, they tend to be a bit more complicated to setup and a bit more expensive to operate. They can accommodate pretty much any type of business need, except for instances where a “Professional Corporation” is needed for companies operating under a professional licensure.

Owners in a corporation are called “shareholders,” and corporations require articles (which are submitted to the state) and bylaws. Furthermore, it is advisable (although not required) to have a shareholder agreement and possibly a buy-sell agreement in place between the partners.

From a tax perspective, corporations are either S-Corporation or C-Corporation, and don’t have the ability to be “partnership” or “disregarded” as LLC’s are.

Partnerships

There is an entity type called “Partnership,” and it is not dissimilar to a “sole proprietorship” except that it involves more than one person. They are frowned upon, because of the personal liability that attaches to all the partners in a partnership, and without a good partnership agreement, they are frequently subject to dispute amongst partners.

Therefore, if you want a partnership without forming a LLC or Corporation, we would strongly advise you to form and execute a strong partnership agreement between the partners, as well as obtain strong commercial-grade insurance for your business and the individual partners.