Considerations in Forming a General Partnership
General partnerships are made up of the two or more persons, called general partners, who enter an agreement to conduct business for a profit. General partners have a fiduciary duty of loyalty and trust to the other partners and must subordinate their personal interests to those of the partnership.
For most of its basic characteristics, a partnership is similar to a sole proprietorship; yet in other respects it is similar to a corporation. Under state and federal tax law, a partnership has the following characteristics:
- A partnership may be created without formalities, much like a sole proprietorship. Two people merely need to agree to own and conduct a business together to create a partnership.
- Partners each have unlimited liability for the obligations of the business. If the business becomes insolvent, business creditors may require a partner to pay a partnership liability from his individual assets, such as his house and his bank accounts. However, a partner's personal creditors have first priority to that partner's assets, while partnership creditors have first priority to partnership assets.
- A partner, merely by being an owner of the business, has a right to manage the business of the partnership. He is an agent of the partnership and may make the partnership liable for contracts, torts, and crimes. Because partners are liable for all obligations of the partnership, in effect, each partner is an agent of the other partners. Each partner may hire agents, and every partner is liable for the agents' authorized contracts and for the liabilities that the agents incur in the course of their employments.
- A partnership is not an employer of the partners, for most purposes, as a result, for example, a partner who leaves a partnership is not entitled to unemployment benefits.
- Partners are fiduciaries of the partnership. They must act in the best interests of the partnership, not in their individual interests.
- The profits or losses of the business are shared by the partners, who report their shares of the profits or losses on their individual income tax returns, because the partnership does not pay income taxes. Nonetheless, a partnership does keep its own financial records and must file an information return with the Internal Revenue Service. (The federal income tax return filed by a partnership is merely an information return, in which the partnership indicates its gross income and deductions and the names and addresses of its partners. I.R.C. 6031. The information return allows the Internal Revenue Service to determine whether the partners accurately report partnership income on their individual returns.)
- A partnership may own property in its own name.
- A partnership usually may not sue or be sued in its own name. The partners must sue or be sued.
- A partner may not sue his partners. His sole remedy is to seek an accounting between the partners.
- A Partner's ownership interest in a partnership is not freely transferable. The purchaser of a partner's interest does not become a partner, but is entitled to receive the partner's share of the partnership's profits.
- Generally, a partnership has no life apart from its owner. If a partner dies, the partnership dissolves and may be terminated. Under certain circumstances, however, the partnership may continue after the death of a partner.
Creating a Partnership
No formalities are necessary to create a partnership. Two persons may become partners in accordance with a written partnership contract or partnership agreement. They may agree orally to be partners, or they may become partners merely by arranging their affairs as if they were partners. If partners conduct business under an assumed name, they must file the name with the Utah Division of Corporations and Commercial Code in compliance with Utah statute requiring the registration of fictitious business name (Title 42-2 UCA ).
When people decide to become partners, they should employ a lawyer to prepare a written partnership agreement. Although such an agreement is not required to form a partnership, it is highly desirable for the same reasons that written contract are generally preferred. In addition, the Statute of Frauds requires a writing for a partnership having a term exceeding one year.
When there is no written partnership agreement, a dispute may arise over whether persons who are associated in some enterprise are partners. For example, someone may assert that he is a partner and therefore, claim a share of a successful business. More frequently, an unpaid creditor may seek to hold a person liable for a debt incurred by another person in the same enterprise. To determine whether there is a partnership in the absence of an express agreement, the courts in Utah use the definition of partnership in Utah statute (Title 48-1d UCA ).