Can a Partnership Be Incorporated: Everything to Know
A partnership can be incorporated and you can incorporate a general partnership and form a business entity with limited liability.3 min read
Updated November 3, 2020:
If you're wondering, can a partnership be incorporated, the answer is yes. You can incorporate a general partnership and form a business entity with limited liability.
What Is a Partnership?
A partnership is a form of business where there is more than one owner and the business is not operated as a corporation or a limited liability company (LLC). The partners share the profits and liabilities of the business. A partnership can be formed between individuals, trusts, corporations, other partnerships, or any of these entities.
Should You Have a Partnership Agreement?
A partnership is formed as soon as you start a business activity with another person, irrespective of whether or not you have executed a written agreement. However, it's always better to have a written partnership agreement setting out the terms for conducting the business together. The agreement should also be clear on the matter of distributing profits and losses of the business. In the absence of a written agreement, the partnership laws of the state govern the partnership business.
Partnership vs. Sole Proprietorship
A partnership is like a sole proprietorship business except that it has more than one owner. It shares the following similarities with a sole proprietorship structure:
- Business income is taxed in the hands of the owners.
- The business benefits from the talent and skills of the owners.
- It is easy to start and terminate.
- It has limited formalities with which to comply.
- The owners are personally responsible for liabilities of the business.
- It has a limited duration since it is dependent on the life of the owners.
- It is difficult to raise capital.
Can a Partnership Be Incorporated?
A general partnership is an unincorporated entity. It is a simple business structure with two or more owners in which the owners are fully exposed to business liabilities. For example, if the business takes a property on lease, each of the partners will be personally liable for the payment of rent and damages to the property.
Moreover, each partner acts as a representative of the business, and their actions bind the company without the approval of the other partners. Thus, you would be responsible even for the actions and omissions of your partners, making you vulnerable to lawsuits. As a greater implication, creditors can pursue your personal assets irrespective of which partner created the liability.
Creating a separate business entity offers various benefits, the major ones being those of limited liability and taxation. You can convert a general partnership into a distinct business entity by forming a corporation, LLC, or a limited partnership.
Incorporating a partnership firm protects the owners from the liabilities of the business. It also makes it much easier to raise funds from outside investors. However, you should closely consider the form of incorporation while converting an existing partnership since the method used has a significant impact on taxation.
Methods of Incorporating an Existing Partnership
Under Revenue Ruling 84-111, there are basically three ways of incorporating an existing partnership:
- Assets-over: The assets of the partnership are transferred to the new corporation.
- Assets-up: The partnership is liquidated and the assets are distributed among the partners. A new corporation is formed by a fresh contribution of assets by owners.
- Interests-over: Ownership interests in the partnership are transferred to the new corporation, and stock is issued in return.
You should consider the tax consequences and identify the most favorable method.
Steps in Incorporating a Partnership Business
- Go through the partnership agreement, and see whether it contains any specific method to be followed for converting the partnership into a corporation.
- If the partnership agreement so requires, hold a meeting of partners and pass a resolution to dissolve the partnership and form a corporation. If the partnership agreement does not provide any specific process for incorporation, dissolve the partnership according to the law of your state. In most of the states, all the partners must agree to dissolve the partnership.
- Wind up the partnership business, and settle all the debts.
- Distribute the partnership assets among the partners according to the partnership agreement.
- File the articles of incorporation with the appropriate state agency, which is usually the secretary of state. Most of the states will also require you to pay a filing fee.
- Write the corporate bylaws for internal governance of the company and get them approved by shareholders.
- Appoint the board of directors with the approval of shareholders.
- Allot shares of the corporation to the partners according to their ownership interest in the company.
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