Who Can Be a Partner in a Partnership
Asking who can be a partner in a partnership is a common question of entrepreneurs. In a partnership, two or more persons co-own the business and share profits.3 min read
1.1. General Partnership1.2. Joint Venture1.3. Limited Partnership2. Limited Liability Partnership
3. Complications of LLPs
4. How is a Partnership Created?
Asking who can be a partner in a partnership is a common question for business owners wanting to form a partnership. Particularly, a partnership is a business structure in which two or more persons co-own the business and share profits.
Types of Partnerships
There are 3 unique kinds of partnerships:
- General partnership
- Joint venture
- Limited partnerships
General partnerships are owned and operated by partners who have equal responsibilities in management, oversight, and profits. There is no favor given to one partner over the other. Therefore, while the partners share in the profit, that means that they also share in the losses, including personal liability for the outstanding debts of the business.
Such partnerships have no ownership restrictions, meaning that the owners can be people, corporations, LLCs, or any other kind of business. For tax purposes, the owners will report the profits and losses on their own individual tax returns. As such, Schedule K-1 is the form that must be filled out and given to all partners. This form will identify the portion of the company’s profits and losses that each member will have to report.
The joint venture is similar to the general partnership except that the partnership only exists for a specific period of time, or for a particular project. After the project ends, the joint venture is terminated.
Limited partnerships are owned and operated by two or more partners, some of whom are limited partners and others who are general partners. The limited partners are generally those who simply invest money into the business but have no oversight in the operations of the company. However, general partners have active responsibilities for overseeing the business, and thus, have greater responsibilities and liability in terms of the business’s debts and obligations.
Limited Liability Partnership
A limited liability partnership (LLP) starts out as a general partnership and then registers to become an LLP. The general partnership has joint and several liability for all partners; the limited partnership has at least one general partner. However, the LLP has no general partners. Thus, all partners will have limited liability. It is more difficult to establish an LLP, as some states might allow only those in certain industries to form an LLP, i.e., attorneys, accountants. When operating an LLP, the owners can be individuals or other corporations. In fact, an LLP can consist of partners that all operate as corporations. After registering as an LLP, you must file a renewal every year thereafter to avoid losing your status. For any time that lapses after renewal must be filed, the partners all become general partners and thereby, fully liable for the partnership debts.
Complications of LLPs
While there are many benefits to operating an LLP, particularly due to liability protection, there are also some complications that might occur. In addition to the ongoing requirements of operating an LLP, most LLP owners must hold additional licensing, so the other owners must ensure that all owners properly register and renew such licensing when required. An example of this would be a law firm whereby 4 attorneys oversee the business. All attorneys must remain compliant with the state’s bar requirements, paying fees bi-annually and participating in ongoing educational CLE requirements.
How is a Partnership Created?
There are no specific formalities when it comes to creating a partnership as there are with corporations and LLCs. So long as two or more people carry out business activities together, (i.e., enter into an agreement with one another), a partnership has been formed. Even if they don’t intend on entering into a partnership, it might be viewed as such. While no written contract is required, it’s advisable to have one, so to prevent potential legal issues down the line. In addition, a written agreement will solidify the partnership and ensure that all owners involved fully understand their rights and responsibilities.
An LLP does in fact require a written agreement. This is because there is an additional requirement for entering into an LLP. Since the LLP must formally register as such, the business owners must draft a written agreement indicating how the business will be operated and managed.
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